Sample Questions - Differential / Incremental Analysis
1. What is differential or incremental analysis?
2. What are some of the costs that are not relevant or not included in differential analysis?
3. What are some of the areas where incremental analysis is useful in decision making process?
4. What is factory production capacity?
5. If you are a manager of a large company and you are faced with a decision of a very profitable investment involving some special order that could run for two months. What could you do if the special order goes over the production capacity?
Use the following information for Electroexperts Inc. to answer questions 6 and 7
Electroexperts Inc. has received a special marketing choice from one of the world's electronic suppliers. The suppliers want to sell to Electroexperts Inc. a certain electronic component for $18 per unit. Currently Electroexperts Inc. makes the part and its management is seriously considering the buying choice.
| Units manufactured | 5,000 |
| Direct materials cost | $30,000 |
| Direct labor cost | $40,000 |
| Fixed costs | $20,000 |
| Variable costs | $10,000 |
6. If Electroexperts Inc. buys the part, its fixed costs will reduce by 5% and the variable costs will be scrapped off. Perform incremental analysis and determine whether Electroexperts Inc. should buy the part or continue making the part?
7. If Electroexperts Inc. buys the part, its fixed costs will reduce by 60% and the variable costs will reduce by 95%. Perform incremental analysis and determine whether Electroexperts Inc. should buy the part or continue making the part?
Use the following information to answer questions 8 - 10
ZapaKing Limited is a manufacturing company that makes three kinds of products. The company is undergoing financial difficulties and the management have decided to scrap one of its product lines. The monthly manufacturing costs of 1,000 units for each of the product lines is given below. ZapaKing's selling prices for each of its products are: Product X= $97; Product Y= $91; Product Z= $87.50.
| Product X | Product Y | Product Z | |
|---|---|---|---|
| Direct materials cost | $50,000 | $40,000 | $35,000 |
| Direct labor cost | $20,000 | $25,000 | $30,000 |
| Variable overhead | $15,000 | $10,000 | $8,000 |
| Fixed overhead | $5,000 | $6,000 | $3,500 |
8(a). What is the unit cost for each of the product lines?
(b). What is the profit per unit for each product line?
9. What is the contribution margin per unit of each of the three product lines?
10. Discuss what product line should be scrapped from ZapaKing's manufacturing lines?