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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).

  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.

  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.

  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).

Paper For Above instruction

The following paper provides a comprehensive differential analysis for each of the three cases: discontinuing a product, make versus buy decision, and sell or process further decision. Each case incorporates a detailed financial assessment based on the provided data to aid managerial decision-making.

Case A: Discontinue a Product

In evaluating whether to discontinue Product K, the focus lies on the differential impacts on revenues and costs. Revenues associated with Product K total $65,000, with variable costs of goods sold at $50,000 and variable selling expenses at $12,000. The fixed costs amount to $25,000, which are unaffected whether the product is continued or discontinued, as per the assumption. The current loss from operations is $(22,000). To assess whether discontinuing the product improves profitability, we compare the relevant differential figures.

If Product K is discontinued, revenues, variable costs, and variable selling expenses related to Product K will cease. Fixed costs, however, remain unchanged, thus irrelevant to the decision. The differential effect primarily concerns the contribution margin lost or saved. The contribution margin is calculated as revenue minus variable costs and variable expenses.

Contribution Margin = $65,000 - ($50,000 + $12,000) = $3,000 loss. Since continuing Product K results in a net loss, discontinuation could potentially improve overall profitability if fixed costs are unaffected and if the contribution margin is negative.

In this case, discontinuing Product K eliminates the operational loss associated with its contribution margin, which is negative, thereby improving the economic outcome. However, a comprehensive decision considers any potential fixed cost savings or additional revenues not specified here.

Case B: Make versus Buy

The analysis involves comparing the cost to manufacture the component internally versus purchasing it externally. The manufacturing cost per unit is $80, which includes fixed costs of $25. The external purchase price is $60 per unit plus $5 freight per unit, totaling $65 per unit. When fixed costs are unaffected by the decision, only variable costs are relevant to the make-versus-buy analysis.

If manufacturing, the relevant per-unit cost includes variable manufacturing costs and fixed overheads allocated per unit. Given fixed costs of $25 per unit, these are considered fixed and therefore irrelevant unless they change with the decision. The variable cost per unit is derived from total manufacturing costs minus fixed costs, but since fixed costs are unaffected, the focus is on any differential variable costs.

Variable manufacturing costs are not explicitly broken down beyond the total of $80 per unit. Assuming fixed costs are allocated but do not vary with decision, the relevant costs for making the component are the variable costs, which are less than the purchase cost including freight ($65). If the relevant variable manufacturing cost exceeds the purchase cost, outsourcing might be preferable.

Calculations show that purchasing the component costs $65 per unit, while manufacturing costs are $80. Therefore, buying the component reduces costs by $15 per unit, indicating a financial advantage in purchasing from the outside supplier unless other qualitative factors are considered.

Case C: Sell or Process Further

The decision involves whether to sell Product T at its current stage or process it further into Product V. The cost to produce Product T is $2.50 per gallon. Selling Product T directly yields $3.50 per gallon. Processing further incurs an additional cost of $0.70 per gallon and results in Product V, which can be sold for $4.00 per gallon.

The key is to compare the additional revenue from processing further against the additional processing costs. The additional revenue from Product V over Product T is $4.00 - $3.50 = $0.50 per gallon. The additional processing cost per gallon is $0.70. Since the additional revenue ($0.50) is less than the additional cost ($0.70), it is uneconomical to process further.

Therefore, the decision should be to sell Product T directly without further processing, as it provides higher net profit per gallon. Processing further reduces profit, confirming the choice to sell at the initial stage.

Conclusion

In all three cases, differential analysis offers a systematic approach to decision-making by focusing on relevant costs and revenues. Discontinuing Product K appears favorable given the current information, as it would eliminate losses. Outsourcing the component reduces costs, suggesting a make-or-buy decision favoring purchasing. Lastly, selling Product T without further processing maximizes profit, as processing incurs higher costs relative to the additional revenue.

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