1. UNIVERSIDAD CUAUHTEMOC
CAMPUS AGUASCALIENTES
Differential Analysis
Cost Analysis
Maestría en Administración

2. Differential Analysis Universidad Cuauhtémoc – Maestría en Administración
Contents
Leasing or Selling Equipment1
Discontinuing an unprofitable segment2
Manufacturing or Purchasing a needed part3
Replacing usable fixed assets4
Processing Further or selling and intermediate product5
Accepting additional business at a special price6

3. Differential Analysis
Decisions
Differential
Analysis
Alternative A
or
Alternative B
Differential revenue
– Differential costs
Differential income or loss
Differential Analysis Universidad Cuauhtémoc – Maestría en Administración

4. Lease or Sell Equipment
Marcus
Company
Marcus Company is considering
disposing of equipment that cost
$200,000 and that has $120,000 of
accumulated depreciation.
Differential Analysis Universidad Cuauhtémoc – Maestría en Administración

5. Lease or Sell Equipment
Marcus
Company
Sell equipment
to
Broker
The equipment can be sold
through a broker for
$100,000, less a 6%
commission.
Differential Analysis Universidad Cuauhtémoc – Maestría en Administración

6. Lease or Sell Equipment
Marcus
Company
Lease
equipment to
Potamkin
Company
ORPotamkin Company,
the lessee, has offered
to lease the equipment
for five years for a
total consideration of
$160,000.
Differential Analysis Universidad Cuauhtémoc – Maestría en Administración

7. Lease or Sell Equipment
Marcus
Company
At the end of the fifth year, the equipment is
expected to have no residual value. During
the period of the lease, Marcus Company
expects to incur repair, insurance, and
property taxes estimated at $35,000.
Differential Analysis Universidad Cuauhtémoc – Maestría en Administración

8. Proposal to Lease or Sell Equipment
January 22, 2010
Differential revenue from alternatives:
Revenue from lease $160,000
Revenue from sales 100,000
Differential revenue from lease $60,000
Lease the equipment!
Differential cost of alternatives:
Repairs, insurance, taxes $ 35,000
Commission expense on sale 6,000
Differential cost of lease 29,000
Net differential income from the lease
alternative $31,000
Differential Analysis Universidad Cuauhtémoc – Maestría en Administración

9. Discontinue
a Segment
or Product
Differential Analysis Universidad Cuauhtémoc – Maestría en Administración

10. Sales $100,000 $900,000 $1,000,000
Cost of goods sold:
Variable costs $ 60,000 $420,000 $ 480,000
Fixed costs 20,000 200,000 220,000
Total cost of goods sold $ 80,000 $620,000 $ 700,000
Gross profit $ 20,000 $280,000 $ 300,000
Operating expenses:
Variable expenses $ 25,000 $155,000 $ 180,000
Fixed expenses 6,000 45,000 51,000
Total operating expenses $ 31,000 $200,000 $ 231,000
Income (loss) from operations $ (11,000) $ 80,000 $ 69,000
Battle Creek Cereal Co.
Condensed Income Statement
For the Year Ended December 31, 2009
Should Bran Flakes be discontinued?
Differential items
Variable cost $ 60,000
Sales $100,000
Variable expenses $ 25,000
Bran
Flakes
Other
Cereals Total

11. Battle Creek Cereal Co.
Condensed Income Statement
For the Year Ended December 31, 2009
Differential items
Sales $100,000 $900,000 $1,000,000
Cost of goods sold:
Variable costs $ 60,000 $420,000 $ 480,000
Fixed costs 20,000 200,000 220,000
Total cost of goods sold $ 80,000 $620,000 $ 700,000
Gross profit $ 20,000 $280,000 $ 300,000
Operating expenses:
Variable expenses $ 25,000 $155,000 $ 180,000
Fixed expenses 6,000 45,000 51,000
Total operating expenses $ 31,000 $200,000 $ 231,000
Income (loss) from operations $ (11,000) $ 80,000 $ 69,000
Variable cost $ 60,000
Sales $100,000
Variable expenses $ 25,000
Bran
Flakes
Other
Cereals Total
If Bran Flakes is discontinued, net
income will decrease by $15,000.

12. Proposal to Discontinue Bran Flakes
January 22, 2010
Differential revenue from annual sales
of Bran Flakes:
Revenue from sales $100,000
Differential cost of annual sales of Brian Flakes:
Variable cost goods sold $60,000
Variable operating expenses 25,000 85,000
Annual differential income from sales of
Bran Flakes $15,000
Don’t discontinue!
Differential Analysis Universidad Cuauhtémoc – Maestría en Administración

13. or
Differential Analysis Universidad Cuauhtémoc – Maestría en Administración

14. Currently, a firm manufactures the dashboards that it
uses in making automobiles. The cost of
manufacturing this part is summarized below. An
outside supplier has offered to provide the part for
$240. Should the car manufacturer accept the offer?
Direct materials $ 80
Direct labor 80
Variable factory overhead 52
Fixed factory overhead 68
Total cost per unit $280
INITIAL REACTION—DON’T MAKE
INTERNALLY
Differential Analysis Universidad Cuauhtémoc – Maestría en Administración

15. Proposal to Manufacture Automobile Part
January 22, 2010
Purchase price of part $240.00
Differential cost to manufacture:
Direct materials $80.00
Direct labor 80.00
Variable factory overhead 52.00 212.00
Cost savings from manufacturing part $ 28.00
The fixed factory overhead is excluded
because it is not relevant—so continue
making the part.
Differential Analysis Universidad Cuauhtémoc – Maestría en Administración

16. Replace
Equipment
Differential Analysis Universidad Cuauhtémoc – Maestría en Administración

17. Assume that a business is considering the disposal of
several identical machines having a total book value
of $100,000 and an estimated remaining life of five
years. The old machines can be sold for $25,000.
They can be replaced by a single high-speed machine
at a cost $250,000. The new machine has an
estimated useful life of five years and no residual
value. Analyses indicate an estimated annual
reduction in variable manufacturing costs from
$225,000 with the old machine to $150,000 with the
new machine. No other changes in the
manufacturing costs or the operating expenses are
expected. Should the new machine be purchased?
Differential Analysis Universidad Cuauhtémoc – Maestría en Administración

18. Annual variable costs—present equipment $225,000
Annual variable costs—new equipment 150,000
Annual differential decrease in cost $ 75,000
Number of years applicable x 5
Total differential decrease in cost $375,000
Proceeds from sale of present equipment 25,000 $400,000
Cost of new equipment 250,000
Net differential decrease in cost, 5-years $150,000
Annual net differential—new equipment $ 30,000
Proposal to Replace Equipment
January 22, 2010
Buy the new equipment!
Differential Analysis Universidad Cuauhtémoc – Maestría en Administración

19. Process or Sell
Differential Analysis Universidad Cuauhtémoc – Maestría en Administración

20. A refinery produces kerosene
in batches of 4,000 gallons at a
processing cost of $0.60 per
gallon. Kerosene can be sold
without further processing for
$0.80 per gallon or further
processed to yield gasoline,
which can be sold for $1.25
per gallon. The additional
processing cost is $650 per
batch, and 20% of the gallons
of kerosene will evaporate
during production.
Differential Analysis Universidad Cuauhtémoc – Maestría en Administración

21. Differential revenue from further processing
per batch:
Revenue from sale of gasoline [(4,000 gallons –
800 gallons evaporation) x $1.25] $4,000
Revenue from sale of kerosene (4,000 gallons
x $0.80) 3,200
Differential revenue $800
Differential cost per batch:
Additional cost of producing gasoline 650
Differential income from further processing
gasoline per batch $150
Proposal to Process Kerosene Further
January 22, 2010
Process further!
Differential Analysis Universidad Cuauhtémoc – Maestría en Administración

22. Accept
Business at a
Special Price
Differential Analysis Universidad Cuauhtémoc – Maestría en Administración

23. The monthly capacity of a
sporting goods business is
12,500 basketballs. Current
sales and production are
averaging 10,000 basketballs
per month. The current
manufacturing cost is $20
(variable, $12.50; fixed,
$7.50). The domestic selling
price is $30.
Differential Analysis Universidad Cuauhtémoc – Maestría en Administración

24. The manufacturer receives an
offer from an exporter for
5,000 basketballs at $18 each.
Production can be spread
over three months, so these
basketballs can be
manufactured using normal
capacity. Domestic sales
would not be affected.
Should the offer be accepted or rejected?
Differential Analysis Universidad Cuauhtémoc – Maestría en Administración

25. Differential revenue from accepting offer:
Revenue from sale of 5,000 additional units at $18 $90,000
Differential cost of accepting offer:
Variable cost of 5,000 additional units at $12.50 62,500
Differential income from accepting offer $27,500
Proposal to Sell Basketballs to Exporter
January 22, 2010
Accept the offer!
Differential Analysis Universidad Cuauhtémoc – Maestría en Administración

26. UNIVERSIDAD CUAUHTEMOC
CAMPUS AGUASCALIENTES
Maestría en Administración