Exam 24: Differential Analysis and Product Pricing

Lockrite Security Company manufacturers home alarms. Currently it is manufacturing one of its components at a total cost of $45 which includes fixed costs of $15 per unit. An outside provider of this component has offered to sell them the component for $40. Provide a differential analysis of the outside purchase proposal.

The Turtle Company has total estimated factory overhead for the year of $1,200,000, divided into four activities: Fabrication, $600,000; Assembly, $240,000; Setup, $200,000; and Materials Handling $160,000. Turtle manufactures two products: Boogie Boards and Surf Boards. The activity-base usage quantities for each product by each activity are as follows:

A business is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $15 per unit. The unit cost for the business to make the part is $20, including fixed costs, and $12, not including fixed costs. If 30,000 units of the part are normally purchased during the year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease from making the part rather than purchasing it?

In using the total cost concept of applying the cost-plus approach to product pricing, selling expenses, administrative expenses, and profit are covered in the markup.

Mallard Corporation uses the product cost concept of product pricing. Below is cost information for the production and sale of 45,000 units of its sole product. Mallard desires a profit equal to a 12% rate of return on invested assets of $800,000. 0 The markup percentage on product cost for the company's product is:

A cost that will not be affected by later decisions is termed a sunk cost.

What cost concept used in applying the cost-plus approach to product pricing includes only desired profit in the "markup"?

Mallard Corporation uses the product cost concept of product pricing. Below is cost information for the production and sale of 45,000 units of its sole product. Mallard desires a profit equal to a 12% rate of return on invested assets of $800,000. The unit selling price for the company's product is:

Sensational Soft Drinks makes three products: iced tea, soda, and lemonade. The following data are available:

Which of the following reasons would cause a company to reject an offer to accept business at a special price?

A business received an offer from an exporter for 10,000 units of product at $17.50 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data is available: What is the differential cost from the acceptance of the offer?

Dotterel Corporation uses the variable cost concept of product pricing. Below is cost information for the production and sale of 35,000 units of its sole product. Dotterel desires a profit equal to a 11.2% rate of return on invested assets of $350,000. The unit selling price for the company's product is:

Heston and Burton, CPAs, currently work a five-day week. They estimate that net income for the firm would increase by $75,000 annually if they worked an additional day each month. The cost associated with the decision to continue the practice of a five-day work week is an example of:

Finch, Inc. has bought a new server and is having to decide what to do with the old one. The cost of the old server was originally $60,000 and has been depreciated $45,000. The company has received two offers that it must consider. One offer was made to purchase the equipment outright for $18,500 less a 5% sales commission. The other offer was to lease the equipment for $7,000 for the next five years but the company will be required to provide maintenance and insurance totaling $3,000 per year. What offer should Finch, Inc. accept?

Eliminating a product or segment may have the long-term effect of reducing fixed costs.

Raptor Company is considering replacing equipment which originally cost $500,000 and which has $420,000 accumulated depreciation to date. A new machine will cost $790,000 and the old equipment can be sold for $8,000. What is the sunk cost in this situation?

The target cost approach assumes that:

Partridge Co. can further process Product J to produce Product D. Product J is currently selling for $21 per pound and costs $15.75 per pound to produce. Product D would sell for $38 per pound and would require an additional cost of $9.25 per pound to produce. What is the differential revenue of producing Product D?

What pricing concept considers the price that other providers charge for the same product?

Quail Co. can further process Product B to produce Product C. Product B is currently selling for $60 per pound and costs $42 per pound to produce. Product C would sell for $92 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?