Differential analysis Similar to Self-Study Problem 2 Homeowners Heroes Inc., manufact...

Differential analysis

Similar to Self-Study Problem 2

Homeowners Heroes Inc., manufactures household products such as windows, light fixtures, ladders, and work tables. During the year it produced 10,000 Model 10X windows but only sold 5,000 units at $40 each. The remaining units cannot be sold through normal channels. Cost for inventory purposes on December 31 included the following data on the unsold units:

Homeowners Heroes can sell the 5,000 windows at a liquidation price of $20.00 per window, but it will incur a packaging and shipping charge of $7.50 per window.

Required:

1. Identify the relevant costs and revenues for the liquidation sale alternative. Is Homeowners Heroes better off accepting the liquidation price rather than doing nothing?

2. Assume that Model 10X can be reprocessed to another size window, Model 20X, which will require the same amount of labor and overhead as was required to initially produce, but sells for only $33. Determine the most profitable course of action–liquidate or reprocess.

Reference:

Differential Analysis

Metro Industries

Samantha Spritzer, sales manager for Metro Industries, has been asked by a potential foreign customer to sell 10,000 units of a certain gear for $10 per unit. Metro normally sells this item for $15 per unit, but it has had some excess manufacturing capacity in recent months. It is anticipated that this would be a one-time-only order from this customer. The product unit cost report for this type gear is as follows:

After looking at the product cost report, Spritzer informs the customer, “I may not be an accountant, but I am smart enough to know that I will lose $3.25 per unit if I make this sale. Therefore, I must refuse your offer.”

Required:

1. From the list of costs in the product cost report, which costs would be relevant to the decision to sell at the special price?

2. What will be the amount of the total relevant cost per unit in regard to this order?

3. What would be the differential income (loss) to Metro Industries if this order were accepted?

4. Are there any nonfinancial factors that you would consider in making this decision?