Deck 24: Differential Analysis, Product Pricing, and Activity-Based Costing

Question 1

The differential revenue of producing Product P over Product O is $82 per pound.

Answer 1

False

Question 2

If the total unit cost of manufacturing Product Y is currently $36 and the total unit cost after modifying the style is estimated to be $48, the differential cost for this situation is $12.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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 of serving different customers.

Question 5

Since the costs of producing an intermediate product do not change regardless of whether the intermediate product is sold or processed further, these costs are not considered in deciding whether to further process a product.

Question 6

The differential cost of producing Product P over Product O is $13 per pound.

Question 7

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

Question 8

Differential revenue is the amount of increase or decrease in revenue expected from a particular course of action as compared with an alternative.

Question 9

The costs of initially producing an intermediate product should be considered in deciding whether to further process a product, even though the costs will not change, regardless of the decision.

Question 10

The differential revenue of producing Product P over Product O is $22 per pound.

Question 11

In deciding whether to accept business at a special price, the short-run price should be set high enough to cover all variable costs and expenses.

Question 12

If the total unit cost of manufacturing Product Y is currently $36 and the total unit cost after modifying the style is estimated to be $48, the differential cost for this situation is $48.

Question 13

Make-or-buy options often arise when a manufacturer has excess productive capacity in the form of unused equipment, space, and labor.

Question 14

The differential cost of producing Product P over Product O is $55 per pound.

Question 15

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

Question 16

Differential revenue is the amount of income that would result from the best available alternative proposed use of cash.

Question 17

The amount of income that would result from an alternative use of cash is called opportunity cost.

Question 18

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

Question 19

Differential analysis only considers the short-term
(one-year) effects of discontinuing a product.

Question 20

In addition to the differential costs in an equipment replacement decision, the remaining useful life of the old equipment and the estimated life of the new equipment are important considerations.

Question 21

The product cost concept includes all manufacturing costs in the cost amount to which the markup is added to determine product price.

Question 22

Discontinuing a segment or product may not be the best choice when the segment is contributing to fixed expenses.

Question 23

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

Question 24

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

Question 25

When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be based on ideal levels of performance.

Question 26

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

Question 27

A practical approach that is frequently used by managers when setting normal long-run prices is the cost-plus approach.

Question 28

When a bottleneck occurs between two products, the company must determine the contribution margin for each product and manufacture the product that has the highest contribution margin per bottleneck hour.

Question 29

A bottleneck begins when demand for the company's product exceeds the ability to produce the product.

Question 30

Depending on the capacity of the plant, a company may best be served by further processing some of the product and leaving the rest as is, with no further processing.

Question 31

When a segment of a company is showing a net loss, it is always best to discontinue the segment in order not to continue with losses.

Question 32

Activity-based costing provides more accurate and useful cost data than traditional systems.

Question 33

The lowest contribution margin per scarce resource is the most profitable.

Question 34

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

Question 35

When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be based on normal levels of performance.

Question 36

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

Question 37

Make-or-buy decisions should be made only with related parties.

Question 38

Activity-based costing is determined by charging products for only the services
(activities) they used during production.

Question 39

A bottleneck happens when a key piece of manufacturing machinery can produce 1,000 units per hour and demand for the product supports a production rate of 1,200 units per hour.

Question 40

Cost-plus methods determine the normal selling price by estimating a cost amount per unit and adding a markup.

Question 41

Delaney Company is considering replacing equipment that originally cost $600,000 and that has $420,000 accumulated depreciation to date. A new machine will cost $790,000. What is the sunk cost in this situation?

A) $370,000
B) $790,000
C) $180,000
D) $190,000

Question 42

The condensed income statement of Fletcher Inc. for the past year is as follows:​ Management is considering the discontinuance of the manufacture and sale of Product G 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 F and Product H. What is the amount of change in net income for the current year that will result from the discontinuance of Product G?

A) $20,000 increase
B) $30,000 increase
C) $20,000 decrease
D) $30,000 decrease

Question 43

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

Question 44

Piper Corp. is operating at 70% of capacity and is currently purchasing a part used in its manufacturing operations for $24 per unit. The unit cost for the business to make the part is $36 including fixed costs and $26 excluding fixed costs. If 15,000 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?

A) $30,000 cost decrease
B) $180,000 cost increase
C) $30,000 cost increase
D) $180,000 cost decrease

Question 45

The condensed income statement of Hayden Corp. 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?

A) $140,000 increase
B) $5,000 increase
C) $5,000 decrease
D) $140,000 decrease

Question 46

Delaney Company is considering replacing equipment that originally cost $600,000 and that 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?

A) $172,000
B) $180,000
C) $188,000
D) $290,000

Question 47

Under the total cost concept, manufacturing cost plus desired profit is included in the total cost per unit.

Question 48

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

A) period cost
B) differential cost
C) sunk cost
D) replacement cost

Question 49

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

A) period cost
B) product cost
C) differential cost
D) discretionary cost

Question 50

Grace Co. can further process Product B to produce Product C. Product B is currently selling for $60 per pound and costs $38 per pound to produce. Product C would sell for $95 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?

A) $35 per pound
B) $38 per pound
C) $95 per pound
D) $60 per pound

Question 51

Sage Company 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 $11 excluding 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?

A) $150,000 cost increase
B) $120,000 cost decrease
C) $150,000 cost increase
D) $120,000 cost increase

Question 52

Lara Technologies is considering a cash outlay of $250,000 for the purchase of land, which it could lease out for $35,000 per year. If alternative investments that yield a 12% return are available, the opportunity cost of the purchase of the land is

A) $35,000
B) $30,000
C) $250,000
D) $4,200

Question 53

The amount of income that would result from an alternative use of cash is called

A) differential income
B) sunk cost
C) differential revenue
D) opportunity cost

Question 54

The desired selling price for a product will be the same under both variable and total costs.

Question 55

The amount of increase or decrease in revenue that is expected from a particular course of action as compared with an alternative is

A) manufacturing margin
B) contribution margin
C) differential cost
D) differential revenue

Question 56

What is the differential cost of producing Product D?

A) $6.50 per pound
B) $8.55 per pound
C) $17.00 per pound
D) $5.25 per pound

Question 57

Yasmin Co. can further process Product B to produce Product C. Product B is currently selling for $30 per pound and costs $28 per pound to produce. Product C would sell for $55 per pound and would require an additional cost of $31 per pound to produce. What is the differential cost of producing Product C?

A) $30 per pound
B) $31 per pound
C) $28 per pound
D) $55 per pound

Question 58

Under the variable cost concept, only variable costs are included in the cost amount per unit to which the markup is added.

Question 59

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.

Question 60

What is the differential revenue of producing Product D?

A) $6.75 per pound
B) $22.25 per pound
C) $18.00 per pound
D) $6.25 per pound

Question 61

Mighty Safe Fire Alarm is currently buying 50,000 motherboards from MotherBoard, Inc. at a price of $65.00 per board. Mighty Safe is considering making its own motherboards. The costs to make the motherboards are as follows: direct materials, $32.00 per unit; direct labor, $10.00 per unit; and variable factory overhead, $16.00 per unit. Fixed costs for the plant would increase by $75,000. Which option should be selected and why?

A) buy, $75,000 more in profits
B) make, $275,000 increase in profits
C) buy, $275,000 more in profits
D) make, $350,000 increase in profits

Question 62

Jacoby Company received an offer from an exporter for 30,000 units of product at $15 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$21Unit manufacturing costs:Variable12Fixed5​​What is the differential revenue from the acceptance of the offer?

A) $450,000
B) $630,000
C) $510,000
D) $120,000

Question 63

Jarrett Company is considering a cash outlay of $300,000 for the purchase of land, which it could lease out for $36,000 per year. If alternative investments that yield a 9% return are available, the opportunity cost of the purchase of the land is

A) $27,000
B) $36,000
C) $9,000
D) $72,000

Question 64

What is the differential revenue from the acceptance of the offer?

A) $300,000
B) $262,500
C) $52,500
D) $250,000

Question 65

Rowan Quinn Company manufactures kitchen appliances. Currently, it is manufacturing one of its components at a variable cost of $40 and fixed costs of $15 per unit. An outside provider of this component has offered to sell Rowan Quinn the component for $45. Determine the best plan and calculate the savings assuming fixed costs are unaffected by the decision.

A) $5 savings per unit if manufactured
B) $5 savings per unit if purchased
C) $10 savings per unit if manufactured
D) $15 savings per unit if purchased

Question 66

Should the special order be accepted?

A) The answer cannot be determined from the data given.
B) yes
C) no
D) There would be no difference in accepting or rejecting the special order.

Question 67

Keating Co. is considering disposing of equipment with a cost of $50,000 and accumulated depreciation of $40,000. Keating Co. can sell the equipment through a broker for $25,000, less a 5% broker commission. Alternatively, Gunner Co. has offered to lease the equipment for five years for a total of $48,750. Keating will incur repair, insurance, and property tax expenses estimated at $8,000 over the five-year period. At lease-end, the equipment is expected to have no residual value. The net differential income from the lease alternative is

A) $17,000
B) $7,000
C) $27,000
D) $14,500

Question 68

Nighthawk Inc. is considering disposing of an old machine with a book value of $22,500 and an estimated remaining life of three years. The old machine can be sold for $6,250. A new machine with a purchase price of $68,750 is being considered as a replacement. It will have a useful life of three years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $43,750 to $20,000 if the new machine is purchased. The differential effect on income for the entire three years for the new machine is a (n)

A) $8,750 increase
B) $31,250 decrease
C) $8,750 decrease
D) $2,925 decrease

Question 69

Relevant revenues and costs refer to

A) activities that occurred in the past
B) monies already earned and/or spent
C) last year's net income
D) differences between the alternatives being considered

Question 70

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 workweek is an example of a (n)

A) differential revenue
B) sunk cost
C) differential income
D) opportunity cost

Question 71

Starling Co. is considering disposing of a machine with a book value of $12,500 and estimated remaining life of five years. The old machine can be sold for $1,500. A new high-speed machine can be purchased at a cost of $25,000. It will have a useful life of five years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $26,000 to $23,500 if the new machine is purchased. The differential effect on income for the new machine for the entire five years is a (n)

A) decrease of $11,000
B) decrease of $15,000
C) increase of $11,000
D) increase of $15,000

Question 72

Farris Company is considering a cash outlay of $500,000 for the purchase of land, which it could lease out for $40,000 per year. If alternative investments that yield a 15% return are available, the opportunity cost of the purchase of the land is

A) $75,000
B) $40,000
C) $44,000
D) $7,500

Question 73

Discontinuing a product or segment is a huge decision that must be carefully analyzed. Which of the following would be a valid reason not to discontinue an operation?

A) Losses are minimal.
B) Variable costs are less than revenues.
C) Variable costs are more than revenues.
D) Allocated fixed costs are more than revenues.

Question 74

If the order is accepted, what would be the impact on net income?

A) decrease of $750
B) decrease of $4,500
C) increase of $3,000
D) increase of $1,500

Question 75

What is the amount of the income or loss from the acceptance of the offer?

A) $125,000 loss
B) $25,000 income
C) $125,000 income
D) $25,000 loss

Question 76

What is the amount of income or loss from the acceptance of the offer?

A) $97,500 income
B) $94,500 loss
C) $37,500 income
D) $37,500 loss

Question 77

What is the differential cost from the acceptance of the offer?

A) $150,000
B) $275,000
C) $550,000
D) $125,000

Question 78

Sparrow Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $8.00 a unit. The unit cost for Sparrow Co. to make the part is $9.00, which includes $0.60 of fixed costs. If 4,000 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?

A) $12,000 decrease
B) $4,000 increase
C) $20,000 decrease
D) $1,600 increase

Question 79

What is the differential cost from the acceptance of the offer?

A) $200,000
B) $262,500
C) $85,500
D) $165,000

Question 80

Which of the following would be considered a sunk cost?

A) purchase price of new equipment
B) equipment rental for the production area
C) net book value of equipment that has no market value
D) warehouse lease expense