Critical Thinking Assignment (120 Points): Differential Anal

Critical Thinking Assignment (120 points): Differential Analysis

There are four problems for this module’s Critical Thinking Assignment. Complete the following questions using Microsoft Excel. No other submission format is allowed. Review the grading rubric to confirm you are meeting the assignment requirements. (All amounts in SAR unless otherwise indicated.)

Paper For Above instruction

The purpose of this assignment is to perform differential analysis for various business decisions, focusing on relevant costs and benefits to guide managerial decisions. Each problem involves assessing whether to continue, discontinue, or modify a product or asset based on financial data, with the use of Excel to facilitate calculations and analysis.

Problem 1: Differential Analysis on Truck Replacement Decision

Kassel Corporation is evaluating whether to replace an existing truck with a new one. The old truck has a book value of SAR 85,000, can be sold now for SAR 75,000, and has an estimated remaining useful life of five years. The new truck is priced at SAR 200,000, has a seven-year lifespan with no residual value, and would facilitate an annual reduction in operating costs of SAR 20,200.

To analyze this, we must compare the costs and benefits of maintaining the old truck versus acquiring the new one. Since the old truck can be sold for SAR 75,000, this amount represents a salvage value that impacts the decision. The differential analysis includes the purchase price of the new truck, the sale of the old truck, and the annual operating cost savings over the relevant time period.

Conduct a detailed Excel-based analysis to determine whether Kassel Corporation should purchase the new truck or continue using the old one, considering the differential costs and benefits over the relevant period, typically five years to match the old truck's remaining life.

Problem 2: Differential Analysis for Product Discontinuation

Brion Sporting Goods’ income statement indicates that for the past year, their baseball equipment generated SAR 5,400,000 in sales, with a cost of goods sold (COGS) of SAR 3,700,000, resulting in a gross profit of SAR 1,700,000. Operating expenses totaled SAR 1,850,000, leading to a net loss of SAR 150,000. Of the COGS, 15% is fixed factory overhead, and 20% of operating expenses are fixed.

The analysis aims to evaluate whether discontinuing baseball equipment would positively or negatively impact profitability, considering fixed costs that will not be materially affected, implying they are unavoidable in the short term. The differential analysis involves calculating traceable costs and comparing the incremental benefits and costs associated with continuing versus discontinuing the product.

Prepare an Excel-based differential analysis to determine if Baseball Equipment should be continued or discontinued. Determine the direct dollar impact of discontinuation and provide a reasoned conclusion on whether to retain or eliminate the product, supported by your financial analysis.

Problem 3: Make-or-Buy Decision for Plastic Panels

Marburg Manufacturing produces various-sized plastic panels, with a manufacturing cost of SAR 200 per unit for small bottles, which includes fixed costs of SAR 65 per unit. A proposal suggests purchasing plastic panels externally at SAR 180 per unit, plus SAR 6 per unit for freight.

Since fixed costs are not affected by this decision, the analysis revolves around variable costs and additional expenses. The key is to compare the cost of manufacturing in-house versus purchasing to identify the most economical choice.

Prepare a differential analysis in Excel to evaluate whether Marburg should continue manufacturing the small bottle panels (Alternative 1) or buy the panels externally (Alternative 2). Quantify the cost difference and clarify which option provides the most financial benefit.

Problem 4: Sell or Process Further Decision on Milk and Ice Cream

Whole milk can be sold directly for SAR 24 per gallon without additional processing. Alternatively, it can be processed further into ice cream at an additional cost of SAR 8 per gallon, then sold for SAR 32 per gallon.

The decision involves comparing the revenue from selling the milk as is versus processing it into ice cream. The differential analysis considers the additional costs and revenues involved, focusing on incremental cash flows.

Develop an Excel-based analysis to determine whether the company should sell the milk directly or process into ice cream. Show all calculations clearly to support your decision, including the incremental profit from processing further.

References

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