Page 96 - DCOM206_COST_ACCOUNTING_II

Unit 5: Differential Costing

Notes

As a final step in the analysis, the city calculates the difference between the costs saved and
the costs incurred by outsourcing lawn and grounds maintenance. Subtracting the costs of
outsourcing this function from the cost savings shows that the city would save a present
value of $1,032,048 by outsourcing lawn and grounds maintenance. If more than one
vendor bid on the service, the city would repeat the last three steps for each vendor to
determine which one presented the best overall deal.
Source: http://www.gfoa.org/downloads/GFRAug04.pdf
Problem 1:
(Determination of level or production) A company’s flexible budget reveals the following
market conditions mid costs:
Output Selling Price Total Total Variable Total
(in units) per Unit Semi Fixed Cost Cost Fixed Cost
(`) (`) (`) (`)
60,000 12 1.30„000 4,18,000 1,42,000
1,20,000 11 1,50,000 8,18,000 1,42,000
1,80,000 10 1,70,000 12,71,000 1,42000
2,40,000 9 1,70,000 13,78.000 1,42.000
3.00,000 8 2,00.000 I 7,78,000 1.42.000
3,60,000 7 2,00,000 19,02,000 1.42,000

(a) Prepare a schedule showing the total differential costs and incremental revenue.
(b) At what level should the company set its level of production?

(c) What price should be established in order to obtain the most profitable operations for the
year?

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