Timberlake Company owns equipment with a cost of $165,000 and accumulated depreciation of$60,000 that can be sold for $82,000 less a 6% sales commission. Alternatively, Timberlake Company can lease the equipment to another company for five years for a total of$84,600, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Timberlake Company on the equipment would total $7,950 over the five years. Prepare a differential analysis on March 23 as to whether Timberlake Company should lease (Alternative 1) or sell (Alternative 2) the equipment.

La Femme Accessories Inc. produces women’s handbags. The cost of producing 800 handbags is as follows:

$$\begin{array}{lr} \text { Direct materials } & \$ 18,000 \\ \text { Direct labor } & 8,500 \\ \text { Factory overhead } & \underline{5,500} \\ \text { Total manufacturing cost } & \underline{\underline{\$ 32,000}} \end{array}$$

The selling and administrative expenses are $17,000. The management wants a profit equal to 22% of invested assets of$250,000.

a. Determine the amount of desired profit from the production and sale of 800 handbags.

b. Determine the product cost per unit for the production of 800 handbags.

c. Determine the product cost markup percentage for handbags.

d. Determine the selling price of handbags.

Cityscape Hotels has 200 rooms available in a major metropolitan city. The hotel is able to attract business customers during the weekdays and leisure customers during the weekend. However, the leisure customers on weekends occupy fewer rooms than do business customers on weekdays. Thus, Cityscape plans to provide special weekend pricing to attract additional leisure customers. A hotel room is priced at $180 per room night. The cost of a hotel room night includes the following:

$$\begin{array}{lr} & \text{Cost per Room Night}\\ & \text{(at normal occupancy)}\\ \hline \text{Housekeeping service} & \$ 23\\ \text{Utilities} & 7\\ \text{Amenities} & 3\\ \text{Hotel depreciation} & 55\\ \text{Hotel staff (excluding housekeeping)} & \underline{42}\\ \text{Total} & \underline{\underline{\$130}} \end{array}$$

a. What is the contribution margin for a room night if only the hotel depreciation and hotel staff are assumed fixed for all occupancy levels?

b. What should be considered in setting a discount price for the weekends?

Brightstone Tire and Rubber Company has capacity to produce 170,000 tires. Brightstone presently produces and sells 130,000 tires for the North American market at a price of $175 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 20,000 tires for$116 per tire. Brightstone’s accounting system indicates that the total cost per tire is as follows:

$$\begin{array}{lr} \text { Direct materials } & \$ 56 \\ \text { Direct labor } & 22 \\ \text { Factory overhead (60\% variable) } & 25 \\ \text { Selling and administrative expenses (45\% variable) } & \underline{\hspace{10pt}26} \\ \text { Total } & \underline{\underline{\$ 129}} \\ \end{array}$$

Brightstone pays a selling commission equal to 5% of the selling price on North American orders, which is included in the variable portion of the selling and administrative expenses. However, this special order would not have a sales commission. If the order was accepted, the tires would be shipped overseas for an additional shipping cost of $7.50 per tire. In addition, Euro has made the order conditional on receiving European safety certification. Brightstone estimates that this certification would cost$165,000.

a. Prepare a differential analysis dated January 21 on whether to reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors.

b. What is the minimum price per unit that would be financially acceptable to Brightstone?

Portable Power Company expects to operate at 80% of productive capacity during July. The total manufacturing costs for July for the production of 25,000 batteries are budgeted as follows:

$$\begin{array}{lr} \text { Direct materials } & \$ 162,500 \\ \text { Direct labor } & 70,000 \\ \text { Variable factory overhead } & 30,000 \\ \text { Fixed factory overhead } & \underline{112,500} \\ \text { Total manufacturing costs } & \underline{\underline{\$ 375,000}} \\ \end{array}$$

The company has an opportunity to submit a bid for 2,500 batteries to be delivered by July 31 to a government agency. If the contract is obtained, it is anticipated that the additional activity will not interfere with normal production during July or increase the selling or administrative expenses. What is the unit cost below which Portable Power Company should not go in bidding on the government contract?

Homestead Jeans Co. has an annual plant capacity of 65,000 units, and current production is 45,000 units. Monthly fixed costs are $54,000, and variable costs are$29 per unit. The present selling price is $42 per unit. On November 12 of the current year, the company received an offer from Dawkins Company for 18,000 units of the product at$32 each. Dawkins Company will market the units in a foreign country under its own brand name. The additional business is not expected to affect the domestic selling price or quantity of sales of Homestead Jeans Co.

a. Prepare a differential analysis dated November 12 on whether to reject (Alternative 1) or accept (Alternative 2) the Dawkins order.

b. Briefly explain why accepting this additional business will increase operating income.

c. What is the minimum price per unit that would produce a positive contribution margin?

Rise N’ Shine Coffee Company produces Columbian coffee in batches of 6,000 pounds. The standard quantity of materials required in the process is 6,000 pounds, which cost $5.50 per pound. Columbian coffee can be sold without further processing for$9.22 per pound. Columbian coffee can also be processed further to yield Decaf Columbian, which can be sold for $11.88 per pound. The processing into Decaf Columbian requires additional processing costs of$10,230 per batch. The additional processing also causes a 5% loss of product due to evaporation.

a. Prepare a differential analysis dated October 6 on whether to sell regular Columbian (Alternative 1) or process further into Decaf Columbian (Alternative 2).

b. Should Rise N’ Shine sell Columbian coffee or process further and sell Decaf Columbian?

c. Determine the price of Decaf Columbian that would cause neither an advantage nor a disadvantage for processing further and selling Decaf Columbian.

Big Fork Lumber Company incurs a cost of $402 per hundred board feet (hbf) in processing certain “rough-cut” lumber, which it sells for$540 per hbf. An alternative is to produce a “finished cut” at a total processing cost of $523 per hbf, which can be sold for$668 per hbf. Prepare a differential analysis dated August 9 on whether to sell rough-cut lumber (Alternative 1) or process further into finished-cut lumber (Alternative 2).

Under what conditions might a company use activity-based costing to allocate factory overhead to products?

What is the appropriate measure of a product’s value when a firm is operating under production bottlenecks?

Kim Kwon Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $60,000, the accumulated depreciation is$24,000, its remaining useful life is five years, and its residual value is negligible. On May 4 of the current year, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that has a purchase price of $180,000. The automatic machine has an estimated useful life of five years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on present and proposed operations:

$$\begin{array}{lrr} & \begin{array}{c} \text { Present } \\ \text { Operations } \end{array} & \begin{array}{c} \text { Proposed } \\ \text { Operations } \end{array} \\ \hline \text { Sales } & \underline{\underline{\$ 205,000}} & \underline{\underline{\$ 205,000}} \\ \text { Direct materials } & \$\hspace{5pt}72,000 & \$\hspace{5pt}72,000 \\ \text { Direct labor } & 51,000 & - \\ \text { Power and maintenance } & 5,000 & 18,000 \\ \text { Taxes, insurance, etc. } & 1,500 & 4,000 \\ \text { Selling and administrative expenses } & \underline{\hspace{8pt}45,000} & \underline{\hspace{8pt}45,000} \\ \text { Total expenses } & \underline{\underline{\$ 174,500}} & \underline{\underline{\$ 139,000}} \end{array}$$

a. Prepare a differential analysis dated May 4 to determine whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). Prepare the analysis over the useful life of the new machine.

b. Based only on the data presented, should the proposal be accepted?

c. What other factors should be considered before a final decision is made?

On July 1, Coastal Distribution Company is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternatively, the company could use the funds to invest in $740,000 of 5% U.S. Treasury bonds that mature in 14 years. The bonds could be purchased at face value. The following data have been assembled:

$$\begin{array}{lr} \text { Cost of equipment } & \$ 740,000 \\ \text { Life of equipment } & 14 \text { years } \\ \text { Estimated residual value of equipment } & \$ 75,000 \\ \text { Yearly costs to operate the warehouse, excluding } & \\ \quad \text { depreciation of equipment } & \$ 175,000 \\ \text { Yearly expected revenues-years 1-7 } & \$ 280,000 \\ \text { Yearly expected revenues-years 8-14 } & \$ 240,000 \end{array}$$

Instructions

1. Prepare a differential analysis as of July 1 presenting the proposed operation of the warehouse for the 14 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2).
2. Based on the results disclosed by the differential analysis, should the proposal be accepted?
3. If the proposal is accepted, what is the total estimated income from operations of the warehouse for the 14 years?

On October 1, White Way Stores Inc. is considering leasing a building and purchasing the necessary equipment to operate a retail store. Alternatively, the company could use the funds to invest in $180,000 of 6% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled:

$$\begin{array}{lr} \text { Cost of store equipment } & \$ 180,000 \\ \text { Life of store equipment } & 16 \text { years } \\ \text { Estimated residual value of store equipment } & \$ 15,000 \\ \begin{array}{l} \text { Yearly costs to operate the store, excluding } \\ \quad \text { depreciation of store equipment } \end{array} & \$ 58,000 \\ \text { Yearly expected revenues-years 1-8 } & \$ 85,000 \\ \text { Yearly expected revenues-years 9-16 } & \$ 73,000 \\ \end{array}$$

Instructions

1. Prepare a differential analysis as of October 1 presenting the proposed operation of the store for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2).

2. Based on the results disclosed by the differential analysis, should the proposal b accepted?

3. If the proposal is accepted, what would be the total estimated income from operations of the store for the 16 years?

Explain the meaning of (a) differential revenue, (b) differential cost, and (c) differential income.