Exam 12: Differential Analysis and Product Pricing

Raphael Corporation uses the product cost concept of product pricing. Below is cost information for the production and sale of 50,000 units of its sole product. Raphael desires a profit equal to a 12% rate of return on invested assets of $1,000,000. \ 80,000.00 Fixed factory overhead cost 50,000.00 Fixed selling and administrative costs 5.00 Variable direct materials cost per urit 8.50 Variable direct labor cost per unit 2.50 Variable factory overhead cost per urit 1.00 Variable selling and admiristrative cost per urit Refer to the information provided for Raphael Corporation. The unit selling price for the company's product is:

The condensed income statement for a business for the past year is as follows: Management is considering the discontinuance of the manufacture and sale of Product T at the beginning of the current year. The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Product U. What is the amount of change in net income for the current year that will result from the discontinuance of Product T?

When standard costs are used in applying the cost-plus approach to product pricing, the standards should be based upon ideal levels of performance.

The product with the highest contribution margin per scarce resource is the most profitable.

Dinkins Inc. is considering disposing of a machine with a book value of $50,000 and an estimated remaining life of five years. The old machine can be sold for $15,000. A new machine with a purchase price of $150,000 is being considered as a replacement. It will have a useful life of five years and no residual value. It is estimated that variable manufacturing costs will be reduced from $70,000 to $45,000 if the new machine is purchased. The net differential increase or decrease in cost for the entire five years for the new equipment is:

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

Product J is one of the many products manufactured and sold by Gooble Company. An income statement by product line for the past year indicated a net loss for Product J of $7,250. This net loss resulted from sales of $265,000, cost of goods sold of $186,500, and operating expenses of $85,750. It is estimated that 30% of the cost of goods sold represents fixed factory overhead costs and that 40% of the operating expense is fixed. If Product J is retained, the revenue, costs, and expenses are not expected to change significantly from those of the current year. However, because of the net loss, management is considering the elimination of the unprofitable endeavor. Because of the large number of products manufactured, the total fixed costs and expenses are not expected to decline significantly if Product J is discontinued. Prepare a differential analysis report, dated February 8 of the current year, on the proposal to discontinue Product J.

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.

A business is considering a cash outlay of $500,000 for the purchase of land, which it intends to lease for $90,000 per year. If alternative investments are available that yield a 12% return, the opportunity cost of the purchase of the land is:

A business received an offer from an exporter for 5,000 units of product at $10 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: Domestic urit sales price \1 2 Unit manufactuing costs Variable 9 Fixed 1 Based on the above data, what is the amount of gain or loss from acceptance of the offer?

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

In using the variable cost concept of applying the cost-plus approach to product pricing, variable manufacturing costs and variable selling and administrative expenses must be covered by the markup.

What pricing method is used if all costs are considered and a fair markup is added to determine the selling price?

Raphael Corporation uses the product cost concept of product pricing. Below is cost information for the production and sale of 50,000 units of its sole product. Raphael desires a profit equal to a 12% rate of return on invested assets of $1,000,000. \ 80,000.00 Fixed factory overhead cost 50,000.00 Fixed selling and administrative costs 5.00 Variable direct materials cost per urit 8.50 Variable direct labor cost per unit 2.50 Variable factory overhead cost per urit 1.00 Variable selling and admiristrative cost per urit Refer to the information provided for Raphael Corporation. The markup percentage for the company's product is:

When evaluating whether to lease or sell an equipment, book value is considered to be the cost of selling the equipment.

Opportunity cost is the amount of increase or decrease in revenue that would result from the best available alternative to the proposed use of cash or its equivalent.

When deciding to make or buy a part needed for the manufacturing process, management needs to consider whether the plant has excess production capacity available to make the part or if current production will need to be interrupted to manufacture the part.

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

Hill Co. can further process Product O to produce Product P. Product O is currently selling for $65 per pound and costs $42 per pound to produce. Product P would sell for $82 per pound and would require an additional cost of $13 per pound to produce. The differential revenue of producing Product P is $17 per pound.

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