Deck 9: Differential Analysis and Product Pricing

Question 1

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.

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

Hill Co. can further process Product O to produce Product P. Product O is currently selling for $60 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 $82 per pound.

Question 5

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

Question 6

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 7

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 8

Hill Co. can further process Product O to produce Product P. Product O is currently selling for $60 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 cost of producing Product P is $13 per pound.

Question 9

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 10

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 11

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

Question 12

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

Question 13

Hill Co. can further process Product O to produce Product P. Product O is currently selling for $60 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 cost of producing Product P is $55 per pound.

Question 14

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 15

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 16

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

Question 17

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.

Question 18

Hill Co. can further process Product O to produce Product P. Product O is currently selling for $60 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 $22 per pound.

Question 19

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

Question 20

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

Question 21

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

Question 22

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 23

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 24

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

Question 25

A bottleneck happens when a key piece of manufacturing machinery can produce 1000 units per hour and demand for the product supports a production rate of 1200 units per hour.

Question 26

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 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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 33

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 34

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

Question 35

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 36

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

Question 37

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 38

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

Question 39

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 40

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

Question 41

The condensed income statement for a business for the past year is presented 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 Products F and 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 42

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

Question 43

Raven 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. What is the sunk cost in this situation?

A) $370,000
B) $790,000
C) $80,000
D) $290,000

Question 44

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

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

Question 45

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

Question 46

A business is considering a cash outlay of $250,000 for the purchase of land, which it could lease for $35,000 per year. If alternative investments are available which yield an 18% return, the opportunity cost of the purchase of the land is:

A) $35,000
B) $45,000
C) $10,000
D) $6,300

Question 47

Pheasant Co. can further process Product B to produce Product

A) $30 per pound
B) $24 per pound
C) $28 per pound
C) Product B is currently selling for $30 per pound and costs $28 per pound to produce. Product C would sell for $60 per pound and would require an additional cost of $24 per pound to produce. What is the differential cost of producing Product C?
D) $60 per pound

Question 48

Quail Co. can further process Product B to produce Product

A) $32 per pound
B) $42 per pound
C) $50 per pound
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?
D) $18 per pound

Question 49

A business 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 $28, not including 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) $60,000 cost decrease
B) $180,000 cost increase
C) $60,000 cost increase
D) $180,000 cost decrease

Question 50

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

Question 51

A cost that will not be affected by later decisions is termed a(n):

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

Question 52

Partridge Co. can further process Product J to produce Product

A) $6.50 per pound
B) $9.25 per pound
C) $17 per pound
D) $5.25 per pound
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 cost of producing Product D?

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

Partridge Co. can further process Product J to produce Product

A) $6.75 per pound
B) $9.25 per pound
C) $17 per pound
D) $5.25 per pound
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?

Question 55

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

Question 56

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?

A) $72,000
B) $80,000
C) $88,000
D) $290,000

Question 57

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?

A) $150,000 cost increase
B) $ 90,000 cost decrease
C) $150,000 cost increase
D) $ 90,000 cost increase

Question 58

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

Question 59

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?

A) $120,000 increase
B) $250,000 increase
C) $25,000 decrease
D) $120,000 decrease

Question 60

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

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

Question 61

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 revenue from the acceptance of the offer?

A) $200,000
B) $175,000
C) $130,000
D) $140,000

Question 62

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:

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

Question 63

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) The losses are minimal.
B) The variable costs are less than revenues.
C) The variable costs are more than revenues.
D) The allocated fixed costs are more than revenues.

Question 64

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 total net differential increase or decrease in cost for the new equipment for the entire five years is:

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

Question 65

Assume that Penguin Co. is considering disposing of equipment that cost $50,000 and has $40,000 of accumulated depreciation to date. Penguin Co. can sell the equipment through a broker for $25,000 less 5% commission. Alternatively, Teal Co. has offered to lease the equipment for five years for a total of $48,750. Penguin will incur repair, insurance, and property tax expenses estimated at $10,000. At lease-end, the equipment is expected to have no residual value. The net differential income from the lease alternative is:

A) $15,000
B) $ 5,000
C) $25,000
D) $12,500

Question 66

A business received an offer from an exporter for 30,000 units of product at $16 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: What is the differential cost from the acceptance of the offer?

A) $120,000
B) $330,000
C) $300,000
D) $510,000

Question 67

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 $.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 cost decrease
B) $4,000 cost increase
C) $20,000 cost decrease
D) $1,600 cost increase

Question 68

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?

A) $200,000
B) $175,000
C) $140,000
D) $110,000

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

Mighty Safe Fire Alarm is currently buying 50,000 motherboard from MotherBoard, Inc. at a price of $65 per board. Mighty Safe is considering making its own boards. The costs to make the board are as follows: Direct Materials $32 per unit, Direct labor $10 per unit, Variable Factory Overhead $16.00, 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 71

A business received an offer from an exporter for 30,000 units of product at $16 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: What is the amount of the gain or loss from acceptance of the offer?

A) $30,000 loss
B) $40,000 gain
C) $150,000 gain
D) $50,000 gain

Question 72

Falcon Co. produces a single product. Its normal selling price is $30.00 per unit. The variable costs are $19.00 per unit. Fixed costs are $25,000 for a normal production run of 5,000 units per month. Falcon received a request for a special order that would not interfere with normal sales. The order was for 1,500 units and a special price of $20.00 per unit. Falcon Co. has the capacity to handle the special order and, for this order, a variable selling cost of $1.00 per unit would be eliminated. Should the special order be accepted?

A) Cannot determine from the data given
B) Yes
C) No
D) There would be no difference in accepting or rejecting the special order

Question 73

A business is considering a cash outlay of $300,000 for the purchase of land, which it could lease for $36,000 per year. If alternative investments are available which yield an 18% return, the opportunity cost of the purchase of the land is:

A) $54,000
B) $36,000
C) $18,000
D) $72,000

Question 74

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

Question 75

A business received an offer from an exporter for 20,000 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: What is the differential revenue from the acceptance of the offer?

A) $300,000
B) $420,000
C) $120,000
D) $240,000

Question 76

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 amount of gain or loss from acceptance of the offer?

A) $65,000 gain
B) $50,000 loss
C) $30,000 loss
D) $20,000 loss

Question 77

A business is considering a cash outlay of $400,000 for the purchase of land, which it could lease for $40,000 per year. If alternative investments are available which yield a 21% return, the opportunity cost of the purchase of the land is:

A) $84,000
B) $40,000
C) $44,000
D) $ 8,400

Question 78

Nighthawk Inc. is considering disposing of a 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 net differential increase or decrease in cost for the entire three years for the new equipment is:

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

Question 79

Falcon Co. produces a single product. Its normal selling price is $30.00 per unit. The variable costs are $19.00 per unit. Fixed costs are $25,000 for a normal production run of 5,000 units per month. Falcon received a request for a special order that would not interfere with normal sales. The order was for 1,500 units and a special price of $20.00 per unit. Falcon Co. has the capacity to handle the special order and, for this order, a variable selling cost of $1.00 per unit would be eliminated. 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 80

Super Security Company manufacturers home alarms. Currently it is manufacturing one of its components at a variable cost of $45 and fixed costs of $15 per unit. An outside provider of this component has offered to sell Safe Security the component for $50. Determine the best plan and calculate the savings.

A) $5 savings per unit - Manufacture
B) $5 savings per unit - Purchase
C) $10 savings per unit - Manufacture
D) $15 savings per unit - Purchase