Evaluate whether to keep or drop a product line

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Reference no: EM133739283

Homework: Relevant Costs and Models for Incremental Analysis- Relevant Costs and Models for Incremental Analysis

Learning Outcomes

A. Describe incremental analysis.
B. Perform incremental analysis for outsourcing and sales mix.
C. Evaluate whether to keep or drop a product line.
D. Perform incremental analysis for constrained resources (including whether to sell a product or process further).

There are four problems for this Module's CT Homework.

Problem I

Taper Corporation is considering trading a truck with a book value of SAR 85,000 with an estimated five-year life for a new truck that would cost SAR 200,000. The old truck could be sold for SAR 75,000. The new truck has a seven-year life with no residual value. The new truck would reduce annual operating costs by SAR 20,200 per year. Required: Prepare a differential analysis on whether to continue with the old machine (Alternative 1) or purchase the new machine (Alternative 2).

Problem II

A condensed income statement by product line for Brion Sporting Goods indicated the following for Baseball Equipment for the past year:
(All amounts in SAR)

1) Sales 5,400,000
2) Cost of goods sold 3,700,000
3) Gross profit 1,700,000
4) Operating expenses 1,850,000
5) Loss from operations (150,000)

It is estimated that 15% of the cost of goods sold represents fixed factory overhead costs, and that 20% of the operating expenses are fixed. Because Almond Cookies is only one of the many products, the fixed costs will not be materially affected if the product is discontinued.

Prepare a differential analysis to determine whether Baseball Equipment should be continued (Alternative 1) or discontinued (Alternative 2). Should Baseball Equipment be retained? Explain and indicate the dollar difference in favor or against.

Problem III

Marburg Manufacturing produces various-sized plastic panels for its main product. The manufacturing cost for small bottles is SAR 200 per unit, including fixed costs of SAR 65 per unit. A proposal is offered to purchase plastic panels from an outside source for SAR 180 per unit, plus SAR 6 per unit for freight. Prepare a differential analysis to determine whether the company should make (Alternative 1) or buy (Alternative 2) for bottles, assuming fixed costs are not affected by the decision.

Problem IV

Whole milk is produced for SAR 17 per gallon. Whole milk can be sold without additional processing for SAR 24 per gallon or processed further into ice cream at an additional cost of SAR 8 per gallon. Ice cream can be sold for SAR 32 per gallon. Prepare a differential analysis on whether to sell whole milk (Alternative 1), or process further into ice cream (Alternative 2).

You must show all your work. Complete the problems in an Excel spreadsheet. Be sure to show all your work on the Excel spreadsheet to receive credit.

Reference no: EM133739283

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