Question

Product A is normally sold for $47 per unit. A special price of $32 is offered for the export market. The variable production cost is $26 per unit. An additional export tariff of 15% of revenue must be paid for all export products. Assume there is sufficient capacity for the special order.
Required:
A. Prepare a differential analysis dated March 16 on whether to reject (Alternative 1) or accept (Alternative 2) the special order. Refer to the list of Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
B. Should the special order be rejected (Alternative 1) or accepted (Alternative 2)?
2) Product B has revenue of $39,500, variable cost of goods sold of $25,500, variable selling expenses of $16,500, and fixed costs of $15,000, creating a loss from operations of $17,500.
Required:
A. Prepare a differential analysis as of May 9 to determine if Product B should be continued (Alternative 1) or discontinued (Alternative 2), assuming fixed costs are unaffected by the decision. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
B. Determine if Product B should be continued (Alternative 1) or discontinued (Alternative 2).

Answer 1

Answer:

A.  Differential Analysis dated March 16:

                                    Reject        Accept       Difference

                              Alternative 1  Alternative 2

Sales revenue per unit  $0             $32               $32

Variable cost per unit      0                30.80          -30.80

Contribution margin        0                 $1.20           $1.20

B. The special order should be accepted (Alternative 2).

2. A. Differential Analysis as of May 9:

                                               Continued        Discontinued

                                            Alternative 1       Alternative 2

Revenue =                                $39,500              $0

Variable cost of goods sold = $25,500                0

Variable selling expense =        16,500                 0

Total variable costs =              $42,000                 0

Contribution margin                ($2,500)              $0

Fixed costs                                15,000                15,000

Total loss from operations     $17,500              $15,000

B. Product B should be discontinued (Alternative 2).

Explanation:

a) Data and Calculations:                 Per Unit   %

Normal price of Product A per unit =  $47    100%

Variable production cost per unit =      26      55.3%

Contribution margin per unit =           $21      44.7%

Special price for export market = $32

Additional export tariff = $4.80 ($32 * 15%)

Total variable cost per exported product = $30.80 ($26 + $4.80)

Differential Analysis dated March 16:

                                    Normal        Export        Difference

Sales price per unit      $47            $32               $15

Variable cost per unit    26              30.80             (4.80)

Contribution margin    $21               $1.20          $19.80

Product B

Revenue =                                $39,500

Variable cost of goods sold = $25,500

Variable selling expense =        16,500

Total variable costs =              $42,000

Fixed costs =                              15,000

Total costs =                            $57,000

Loss from operations =           $17,500

b) Product B can only be continued if the future market possibilities will enable it to turn around and make at least a total revenue of $57,000.  But for now, it should be discontinued.