Question

1. Bullwinkle Company owns equipment with a cost of $364,700 and accumulated depreciation of $54,900 that can be sold for $275,800, less a 5% sales commission. Alternatively, Bullwinkle Company can lease the equipment to another company for three years for a total of $285,200, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Bullwinkle Company on the equipment would total $16,200 over the three years.

Prepare a differential analysis on March 23 as to whether Bullwinkle Company should lease (Alternative 1) or sell (Alternative 2) the equipment. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Lease Equipment (Alt. 1) or Sell Equipment (Alt. 2)
March 23
	Lease Equipment (Alternative 1)	Sell Equipment (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs
Income (Loss)	$	$

Should Bullwinkle Company lease (Alternative 1) or sell (Alternative 2) the equipment?

2. Product T is produced for $3.42 per pound. Product T can be sold without additional processing for $4.03 per pound or processed further into Product U at an additional cost of $0.47 per pound. Product U can be sold for $4.4 per pound.

Prepare a differential analysis dated November 15 on whether to sell T (Alternative 1) or process further into U (Alternative 2). If required, round your answers to the nearest whole dollar. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Sell Product T (Alt. 1) or Process Further into Product U (Alt. 2)
November 15
	Sell Product T (Alternative 1)	Process Further into Product U (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues, per unit	$	$	$
Costs, per unit
Income (Loss), per unit	$	$	$

Should Product T be sold (Alternative 1) or processed further into Product U (Alternative 2)?
Sell Product T

3. A condensed income statement by product line for Crown Beverage Inc. indicated the following for Royal Cola for the past year:

Sales	$233,100
Cost of goods sold	111,000
Gross profit	$122,100
Operating expenses	146,000
Loss from operations	$(23,900)

It is estimated that 14% of the cost of goods sold represents fixed factory overhead costs and that 23% of the operating expenses are fixed. Since Royal Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued.

a. Prepare a differential analysis, dated March 3, to determine whether Royal Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "0". Use a minus sign to indicate a loss.

Differential Analysis
Continue Royal Cola (Alt. 1) or Discontinue Royal Cola (Alt. 2)
January 21
	Continue Royal Cola (Alternative 1)	Discontinue Royal Cola (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs:
Variable cost of goods sold
Variable operating expenses
Fixed costs
Income (Loss)	$	$	$

b. Should Star Cola be retained? Explain.

As indicated by the differential analysis in part (A), the income would   by $ if the product is discontinued.

Answer 1

1.

differential analysis is prepared to find which alternative is better among the available options.

differential Analysis
Lease Equipment (Alt. 1) or Sell Equipment (Alt. 2)
March 23
	Lease Equipment (Alternative 1)	Sell Equipment (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$285,200	$275,800	-$9,400 [275,800-285,200]
Costs	-$16,200	-$13,790($275,800*5%)	$2,410 [16,200-13,790]
Income (Loss)	$269,000	$262,010	-$6,990

company should lease the equipment as it will result into higher net income.

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