Exam 12: Differential Analysis and Product Pricing

When a product or segment of a business is determined to be generating a loss,the total income from operations for the company will always increase if management eliminates the product or segment.

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.

What is a bottleneck?

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.

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

The total cost concept includes all manufacturing costs minus selling and administrative expenses in the total cost amount to which the markup is added to determine the product price.

Alia Co.can further process Product X to produce Product Y.Product X is currently selling for $20 per pound and costs $15 per pound to produce.Product Y would sell for $30 per pound and would require an additional cost of $8 per pound to produce.What is the differential cost of producing Product Y?

Frank Co.is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $25 unit.The unit cost for Frank Co.to make the part is $30,which includes $3 of fixed costs.If 20,000 units of the part are normally purchased each year but could be manufactured using unused capacity,what would be the amount of differential cost increase or decrease for making the part rather than purchasing it?

The theory of constraints is a manufacturing strategy that focuses on reducing the influence of bottlenecks on production processes.

Which equation better describes target costing?

Target cost is computed by:

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?

Sanchez Company is considering replacing equipment that originally cost $300,000 and has $280,000 accumulated depreciation to date.A new machine will cost $450,000.What is the sunk cost in this situation?

is a method of setting prices that combines market-based pricing with a cost-reduction emphasis.

Granger Co.can further process Product B to produce Product C.Product B is currently selling for $55 per pound and costs $42 per pound to produce.Product C would sell for $82 per pound and would require an additional cost of $13 per pound to produce.What is the differential revenue of producing and selling Product C?

Quick Company has been purchasing a component,Part Q,for $20 a unit.Quick is currently operating at 70% of capacity and no significant increase in production is anticipated in the near future.The cost of manufacturing a unit of Part Q,determined by absorption costing method,is estimated as follows:

The revenue that is forgone from an alternative use of an asset,such as cash,is called an opportunity cost.

A cost that will not be affected by later decisions is termed an opportunity cost.

Manufacturers must conform to the Robinson-Patman Act,which prohibits price discrimination within the United States unless differences in prices can be justified by different costs.

What cost concept used in applying the cost-plus approach to product pricing includes only total manufacturing costs in the "cost" amount to which the markup is added?