Priscilla Smiley manages a fleet of 250 delivery trucks for Daniels Corporation. Smiley must decide whether the company should outsource the fleet management function. If she outsources to Fleet Management Services (FMS), FMS will be responsible for maintenance and scheduling activities. This alternative would require Smiley to lay off her five employees. However, her own job would be secure; she would be Daniels’s liaison with FMS. If she continues to manage the fleet, she will need fleet management software that costs $9,500 per year to lease. FMS offers to manage this fleet for an annual fee of $300,000. Smiley performed the following analysis:
Retain in-house Outsource to FMS Difference
Annual leasing fee for $9,500 $9,500
Annual maintenance of
Trucks 147,000 147,000
Total annual salaries of
Five laid-off employees 185,000 185,000
Service’s annual fee $300,000 (300,000)
Total differential cost of
Outsourcing $341,500 $300,000 $41,500
1. Which alternative will maximize Daniels’s short-term operating income?
2. What qualitative factors should Daniels consider before making a final decision?
Outsourcing to FMS is the best alternative to Daniels Corporation because it costs less than in-house retaining.
Differential analysis is the technique used in the cost accounting branch to analyze the best alternative from the available alternatives. Under this analysis approach, a sunk cost is ignored while making the final decision.
According to the data mentioned above, outsourcing to FMS is the best alternative that will maximize the operating income of Daniels Corporation. Retaining in-house variable costing is $341,500, which is higher than the outsourcing to FMS, i.e., $300,000.
The following qualitative factors should be considered before making the final decision:
Elm Petroleum has spent $204,000 to refine 61,000 gallons of petroleum distillate, which can be sold for $6.30 per gallon. Alternatively, Elm can process the distillate further and produce 58,000 gallons of cleaner fluid. The additional processing will cost $1.80 per gallon of distillate. The cleaner fluid can be sold for $9.10 per gallon. To sell the cleaner fluid, Elm must pay a sales commission of $0.10 per gallon and a transportation charge of $0.16 per gallon.
1. Diagram Elm’s decision alternatives, using Exhibit 25-18 as a guide.
2. Identify the sunk cost. Is the sunk cost relevant to Elm’s decision?
3. Should Elm sell the petroleum distillate or process it into cleaner fluid? Show the expected net revenue difference between the two alternatives.
McCollum Company manufactures two products. Both products have the same sales price, and the volume of sales is equivalent. However, due to the difference in production processes, Product A has higher variable costs and Product B has higher fixed costs. Management is considering dropping Product B because that product line has an operating loss.
Month Ended June 30, 2018
Total Product A Product B
Net Sales Revenue $150,000 $75,000 $75,000
Variable Costs 90,000 55,000 35,000
Contribution Margin 60,000 20,000 40,000
Fixed Costs 50,000 5,000 45,000
Operating Income/(Loss) $10,000 $15,000 $(5,000)
94% of StudySmarter users get better grades.Sign up for free