A business received an offer from an exporter for 10,000 units of product at $13.50 per unit.The acceptance of the offer will not affect normal production or domestic sales prices.The following data are available: ? $\begin{array}{lr} \text { Domestic unit sales price } & \$ 21 \\ \text { Unit manufacturing costs: } & \\ \text { Variable } & 12 \\ \text { Fixed } & 5 \end{array}$ ? What is the amount of the gain or loss from acceptance of the offer?

A) $75,000 loss B) $40,000 gain C) $15,000 gain D) $85,000 gain A) $75,000 loss B) $40,000 gain C) $15,000 gain D) $85,000 gain

Exam 12: Differential Analysis and Product Pricing

Pull Company is considering the disposal of equipment that is no longer needed for operations.The equipment originally cost $600,000, and accumulated depreciation to date totals $460,000.An offer has been received to lease the machine for its remaining useful life for a total of $300,000, after which the equipment will have no salvage value.The repair, insurance, and property tax expenses during the period of the lease are estimated at $75,800.Alternatively, the equipment can be sold through a broker for $230,000 less a 10% commission. ? Prepare a differential analysis report, dated June 15 of the current year, on whether the equipment should be leased or sold.

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Question 1

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? $\begin{array}{c}\text { Pull Company}\\\text { Froposal to Lease or Sell Equipment }\\\text { June 15,20 -.}\\\begin{array}{lr}\hline \text { Net revenue from leasing: } & \\\text { Revenue from lease } & \$ 300,000 \\\text { Costs associated with the lease } & 75,800\\\text { Net revenue from lease}&&\$224,200\\ \text { Net revenue from selling:}\\\text { Sales price }& \$ 230,000 \\\text { Commission expense on sale }&\$23,000\\\text { Net revenue from selling}&&207,000\\\text { Net advantage of lease alternative}&&\$17,200\end{array}\end{array}$ ?

Brickman's Pharmacy sells a variety of products.The business is divided into four segments or departments for reporting purposes.The departments and their operating results are shown below: $\begin{array}{lrrrrr}&\text { Pharmaceuticals}&\text { Cosmetics }&\text { Grocery } &\text { Household }\\\text { Sales Revenue } & \$ 600,000 & \$ 300,000 & \$ 200,000 & \$ 400,000 \\\text { Variable Costs } & 425,000 & 200,000 & 170,000 & 250,000\\\text { Contribution Margin } & \$ 175,000 & \$ 100,000 & \$ 30,000 & \$ 150,000 \\\text { Fixed Costs } & 80,000 & 60,000 & 40,000 & 80,000 \\\text { Net Income (Loss) } & \$ \mathbf{9 5 , 0 0 0} & \mathbf{\$ 4 0 , 0 0 0} & \mathbf{\$ ( 1 0 , 0 0 0 )} & \mathbf{\$} 70,000\end{array}$ The fixed costs consist of insurance, property taxes, interest, and other costs that will not be eliminated if a department is discontinued. Brickman's management is considering eliminating the grocery department.Assuming sales in the other departments will not be affected by dropping the grocery department, what will be the effect on the company's total operating income?

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Question 2

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Brickman's overall net operating income will decrease by $30,000.The sales revenue and variable costs from the grocery department will be eliminated, thus the contribution margin of $30,000 will be lost.The $40,000 in fixed expenses will remain, but will be allocated to other departments.So, operating income will decrease by the lost contribution margin.

When evaluating whether to lease or sell equipment, the book value of the equipment is considered to be a sunk cost and not a differential cost.

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Question 3

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Defense contractors would be more likely to use which of the following cost concepts in pricing their product?

(Multiple Choice)

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Question 4

A business received an offer from an exporter for 10,000 units of product at $13.50 per unit.The acceptance of the offer will not affect normal production or domestic sales prices.The following data are available: ? Domestic unit sales price \ 21 Unit manufacturing costs: Variable 12 Fixed 5 ? What is the amount of the gain or loss from acceptance of the offer?

(Multiple Choice)

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Question 5

A practical approach that is frequently used by managers when setting normal selling price is the:

(Multiple Choice)

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Question 6

In attempting to improve profitability when faced with a bottleneck related to hours that is involved in the production of two or more products, which of the following is most important for management to consider?

(Multiple Choice)

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Question 7

In deciding whether to accept business at a special price when the company is operating at full capacity, the special price should be set high enough to cover all fixed and variable costs and expenses.

(True/False)

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Question 8

Target costing is arrived at by:

(Multiple Choice)

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Question 9

The amount of increase or decrease in cost that is expected from a particular course of action as compared to an alternative is termed:

(Multiple Choice)

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Question 10

In using the total cost concept of applying the cost-plus approach to product pricing, what is included in the markup?

(Multiple Choice)

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Question 11

Soap Company manufactures Soap X and Soap Y and can sell all it can make of either.Hours available to produce the products is the constrained resources.Based on the following data, which statement is true? Sales Price \ 20 \ 25 Variable Cost 14 15 Hours needed to process 3 5

(Multiple Choice)

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Question 12

Differential analysis focuses on:

(Multiple Choice)

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Question 13

Assume that Vivid Co.is considering disposing of equipment that cost $350,000 and has $280,000 of accumulated depreciation to date.Vivid Co.can sell the equipment through a broker for $135,000 less 5% commission.Alternatively, Comet Co.has offered to lease the equipment for five years for a total of $235,000.Vivid will incur repair, insurance, and property tax expenses estimated at $60,000.At lease-end, the equipment is expected to have no residual value.The net differential income from the lease alternative is:

(Multiple Choice)

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Question 14

Paul's Delivery Service is considering selling one of its smaller trucks that is no longer needed in the business.The truck originally costed $23,000 and has accumulated depreciation of $10,000.The truck can be sold for $14,000.Another company is interested in leasing the truck.It will pay $4,800 per year for three years.Paul's Delivery Service will continue to pay the taxes and license fees for the truck, but all other expenses will be paid by the lessee.Management assumes the expenses for the taxes and license will be $300 per year.Which of the following statements is correct?

(Multiple Choice)

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Question 15

Whiteville Co.can further process Product B to produce Product C.Product B is currently selling for $45 per pound and costs $30 per pound to produce.Product C would sell for $80 per pound and would require an additional cost of $18 per pound to produce.What is the differential cost of producing Product C?

(Multiple Choice)

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Question 16

In addition to the differential costs in an equipment replacement decision, the difference between the remaining useful life of the old equipment and the estimated life of the new equipment is an important consideration.

(True/False)

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Question 17

Eliminating a product or segment will usually eliminates all of the product's or segment's variable costs.

(True/False)

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Question 18

Glover Inc.manufactures Product B, incurring variable costs of $15.00 per unit and fixed costs of $70,000.Glover desires a profit equal to a 12% rate of return on assets.Assets of $785,000 are devoted to producing Product B, and 100,000 units are expected to be produced and sold. (a)Compute the markup percentage using the total cost concept. (b)Compute the selling price of Product B.

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Question 19

Differential analysis can aid management in making decisions on a variety of alternatives, including whether to discontinue an unprofitable segment and whether to replace fixed assets.

(True/False)

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Question 20

When evaluating whether to lease or sell equipment, the book value of the equipment is considered to be a sunk cost and not a differential cost.

Defense contractors would be more likely to use which of the following cost concepts in pricing their product?

A practical approach that is frequently used by managers when setting normal selling price is the:

In attempting to improve profitability when faced with a bottleneck related to hours that is involved in the production of two or more products, which of the following is most important for management to consider?

In deciding whether to accept business at a special price when the company is operating at full capacity, the special price should be set high enough to cover all fixed and variable costs and expenses.

Target costing is arrived at by:

The amount of increase or decrease in cost that is expected from a particular course of action as compared to an alternative is termed:

In using the total cost concept of applying the cost-plus approach to product pricing, what is included in the markup?

Soap Company manufactures Soap X and Soap Y and can sell all it can make of either.Hours available to produce the products is the constrained resources.Based on the following data, which statement is true? Sales Price \ 20 \ 25 Variable Cost 14 15 Hours needed to process 3 5

Differential analysis focuses on:

In addition to the differential costs in an equipment replacement decision, the difference between the remaining useful life of the old equipment and the estimated life of the new equipment is an important consideration.

Eliminating a product or segment will usually eliminates all of the product's or segment's variable costs.

Differential analysis can aid management in making decisions on a variety of alternatives, including whether to discontinue an unprofitable segment and whether to replace fixed assets.

The Role of Accounting in Business

Basic Accounting Systems: Cash Basis

Basic Accounting Systems: Accrual Basis

Accounting for Merchandising Businesses

Internal Control and Cash

Receivables and Inventories

Fixed Assets, Natural Resources, and Intangible Assets

Liabilities and Stockholders Equity

Metric Analysis of Financial Statements

Accounting for Manufacturing Operations

Cost-Volume-Profit Analysis

Budgeting and Standard Costs

Performance Evaluation for Decentralized Operations

Capital Investment Analysis

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