Prepare A Differential Analysis Case

Prepare A Differential Analysis Cas

For the three cases that follow, prepare a differential analysis. • Case A (Discontinue a Product): Product K has revenue of $65,000, variable cost of goods sold of $50,000, variable selling expenses of $12,000, and fixed costs of $25,000, creating a loss from operations of $(22,000). o Required: Prepare a differential analysis dated February 22 to determine whether to continue Product K (Alternative 1) or discontinue Product K (Alternative 2), assuming fixed costs are unaffected by the decision. • Case B (Make versus Buy): A company manufactures a component of a product for $80 per unit, including fixed costs of $25 per unit. The component could be purchased from an outside supplier for $60 per unit, plus $5 per unit freight. o Required: Prepare a differential analysis dated November 2 to determine whether the company should make (Alternative 1) or buy (Alternative 2), assuming fixed costs are unaffected by the decision. • Case C (Sell or Process Further): Product T is produced for $2.50 per gallon. Product T can be sold without additional processing for $3.50 per gallon or processed further into Product V at an additional total cost of $0.70 per gallon. Product V can be sold for $4.00 per gallon. o Required: Prepare a differential analysis dated April 8 to determine whether to sell Product T (Alternative 1) or process it further into Product V (Alternative 2). Requirement: 1. Download the attachment. 2. Fill in your answer in the yellow boxes. 3. Upload this attachment when it is complete.

Paper For Above instruction

Differential analysis is a managerial accounting tool used to evaluate the financial impact of decision alternatives by focusing exclusively on relevant costs and revenues that change as a result of a decision. Unlike traditional profit analysis, which considers all costs and revenues, differential analysis isolates the incremental effects that distinguish one option from another. This technique aids managers in making informed choices about discontinuing products, making or buying components, or processing products further, aligning operational decisions with financial efficiency and strategic objectives.

In applying differential analysis to the three presented cases, it is critical to understand the specific context and relevant data for each scenario, ensuring that only pertinent financial information influences the decision-making process. Each case involves a common structure: identifying the revenues and costs associated with each alternative, determining which costs are relevant (variable costs and incremental fixed costs), and calculating the differential profit or loss by comparing alternatives.

Case A involves deciding whether to continue or discontinue Product K. The analysis begins by reviewing revenues and variable costs, with fixed costs assumed unaffected by the decision. Since fixed costs are unaffected, only variable costs and revenues influence the decision, and the focus is on the contribution margin. The revenue from Product K is $65,000, variable costs include $50,000 for COGS and $12,000 for variable selling expenses, summing to $62,000. The total contribution margin thus equals $3,000 ($65,000 - $62,000). Since fixed costs of $25,000 are unaffected, discontinuing Product K, which results in a loss of $22,000, must be weighed against the lost contribution margin of $3,000. Continuing Product K results in a net operating loss of $22,000, primarily because fixed costs exceed the contribution margin; discontinuing would eliminate the loss if fixed costs are truly unaffected and unavoidable, suggesting that discontinuation may be favorable in this context.

In Case B, the make versus buy decision focuses on unit costs. The current make cost is $80 per unit, including fixed costs of $25 per unit, with variable costs being $55 per unit ($80 - $25). Purchasing the component from an outside supplier would cost $60 per unit plus $5 freight, totaling $65 per unit variable cost. The differential analysis compares these figures, highlighting savings or additional costs. The alternative to buy saves $15 per unit ($80 - $65). Since fixed costs are unaffected, only variable costs matter, indicating that buying is financially advantageous, reducing per-unit cost from $80 to $65 and improving profitability.

Case C examines whether to sell Product T directly or process further into Product V. Production costs are $2.50 per gallon. Selling Product T without further processing yields $3.50 per gallon. Processing further incurs an additional $0.70 per gallon, making total processing costs $3.20 ($2.50 + $0.70). The sale price of Product V is $4.00 per gallon. The differential profit must be assessed by comparing the additional revenue from processing further ($4.00 - $3.50 = $0.50) against the additional processing cost ($0.70). Since the additional cost exceeds the additional revenue, it is financially unfavorable to process further; thus, selling Product T directly is the better option.

In summary, differential analysis simplifies managerial decisions by focusing on relevant financial differences, enabling effective and strategic choices. Proper execution demands accurate identification of relevant costs and revenues, clear comparison of alternatives, and understanding of fixed versus variable costs’ influence on the decision. Managers should employ this analytical tool to ensure that decisions are aligned with the company's financial goals and operational efficiencies.

References

• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial Accounting (16th ed.). McGraw-Hill Education.
• Drury, C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning.
• Horngren, C. T., Datar, S. M., & Rajan, M. (2015). Cost Accounting: A Managerial Emphasis (15th ed.). Pearson.
• Hilton, R. W., & Platt, D. E. (2018). Managerial Accounting: Creating Value in a Dynamic Business Environment (8th ed.). McGraw-Hill.
• Kaplan, R. S., & Atkinson, A. A. (2019). Advanced Management Accounting. Pearson.
• Brigham, E. F., & Ehrhardt, M. C. (2019). Financial Management: Theory & Practice (15th ed.). Cengage Learning.
• Horngren, C. T., Harrison, W. T., & Oliver, M. S. (2019). Financial & Managerial Accounting. Pearson.
• Anthony, R., & Govindarajan, V. (2019). Management Control Systems (13th ed.). McGraw-Hill Education.
• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Financial & Managerial Accounting. Wiley.
• Emmanuel, C., & Otley, D. (2019). Management Control in Practices. Routledge.