Deck 7: Differential Cost Analysis for Operating Decisions

Question 1

A cost or revenue is _________ if the change results in a difference between alternatives.

A)relevant
B)differential
C)effective
D)strategic

Answer 1

A

Question 2

Which of the following represent the three major influences on pricing decisions?

A)customers,competitors,and costs.
B)controls,customer,and competitors.
C)costs,competitors,and controls.
D)costs,controls,and customers.

Answer 2

A

Question 3

The Fast Trax Company manufactures adding machines.The company's capacity is 5,000 units per month;however,it currently is selling only 3,000 units per month.Company X has asked Fast Trax to sell 1,000 adding machines at $25 each.Normally,Fast Trax sells its product for $35.The company records report each adding machine's full absorption costs are $30 which includes fixed costs of $20.If Fast Trax was to accept Company X's offer,what would be the impact on Fast Trax's operating income?

A)Additional profit of $15,000
B)Additional profit of $25,000
C)A loss of $5,000 on this order
D)A loss of $10,000 on this order

Answer 3

A

Question 4

Sebastian Enterprises sells a product for $25 per unit and has the following costs for the product

The company received a special order for 100 units of the product.The order would require rental of a special tool which costs $200.What is the minimum price per unit that Sebastian Enterprises should charge for this special order if they wish to earn a $300 profit on this order? Assume there is sufficient idle capacity to accept this order.

A)$18
B)$20
C)$23
D)$25

Question 5

Short-run decisions include pricing for which of the following?

A)a special order with no long-term implications.
B)a special order with long-term implications.
C)a main product in a major market.
D)a period greater than six months.

Question 6

In the short run,which element is critical to product choice decisions?

A)Contribution margin per unit
B)Fixed costs per unit
C)Fixed costs associated with product lines
D)Contribution margin per unit of scarce resource

Question 7

What does the differential approach to pricing presume?

A)The price must be less than the differential cost of producing and selling the product.
B)The price must at least equal the differential cost of producing and selling the product.
C)The price must equal the market price.
D)The price must equal full costs plus a profit margin.

Question 8

Which statement is true concerning long-run decisions?

A)Long-run decisions include pricing a minor product in a minor market.
B)Long-run decisions include pricing a minor product in a major market.
C)Long-run decisions include pricing a main product in a minor market.
D)Long-run decisions include pricing a main product in a major market.

Question 9

The internal focus on continuous improvement is the key to which of the following?

A)cutting costs.
B)increasing employee morale.
C)profit maximization.
D)cutting profits.

Question 10

Customer costs generally fall under several categories,including

A)cost to acquire the customer and cost to provide goods and services.
B)cost to maintain customers.
C)cost to retain customers.
D)All of the answers are correct.

Question 11

Customer costs generally fall under several categories.Which is not one of these categories?

A)Cost to acquire the customer
B)Cost to provide goods and services
C)Cost to maintain customers
D)Cost to terminate customers

Question 12

Kandy Corporation sells a product for $25 per unit and has the following costs for the product

Kandy received a special order for 100 units of the product.The order would require rental of a special tool which costs $200.What is the minimum price per unit the company should charge for this special order if they wish to earn a $600 profit? Assume Kandy is currently producing and selling at maximum capacity.

A)$23
B)$24
C)$26
D)$28

Question 13

The short-run differential costs of a product are $25.Fixed costs are $5 per unit based on 10,000 units produced during this period.The company has adequate capacity to accept a special order of 1,000 units.What is the minimum price that could be charged using the differential approach to pricing?

A)$ 5.00
B)$20.00
C)$25.00
D)$30.00

Question 14

How do customers influence pricing decisions?

A)By substituting a more expensive product.
B)By using credit cards instead of cash.
C)By substituting a less expensive product.
D)None of the answers is correct.

Question 15

Short-run decisions include pricing for a special order with no long-term implications.Typically the time horizon is

A)six months or less.
B)over six months but less than a year.
C)one to two years.
D)over two years.

Question 16

Differential analysis focuses mostly on which of the following?

A)opportunity costs
B)cash outflows only.
C)both cash inflows and outflows.
D)accrual accounting.

Question 17

In considering a special order that will enable a company to make use of presently idle capacity,which of the following costs would be irrelevant?

A)Materials
B)Depreciation
C)Direct Labor
D)Variable Overhead

Question 18

A differential cost is a cost that changes (differs)as a result of changing which of the following?

A)products or levels of products.
B)departments or levels of departments.
C)batches or levels of batches.
D)activities or levels of activities.

Question 19

What is the analysis of differences among particular alternative actions called?

A)incremental analysis.
B)marginal analysis.
C)differential analysis.
D)All of the answers are correct.

Question 20

A cost that changes as a result of changing activitiesor levels of activities is called which of the following?

A)product cost.
B)department cost.
C)batch cost.
D)differential cost.

Question 21

Which product pricing factor is primarily used by the majority of Japanese,Irish,and English companies?

A)Market-based
B)Cost-based
C)Quality-based
D)Quantity-based

Question 22

In the long run,the practice of setting price so that it must at least equal the differential cost of producing and selling the product will cover all costs because

A)fixed costs are differential in the long run.
B)variable costs are differential in the long run.
C)fixed and variable costs are differential in the long run.
D)fixed and variable costs are discretionary in the long run.

Question 23

Which of the following cost allocation methods would be used to determine the lowest price that could be quoted for a special order that would utilize idle capacity within a production area?

A)Job order
B)Process
C)Variable
D)Standard

Question 24

Grizzly Company
Grizzly Company manufactures footballs.The forecasted income statement for the year before any special orders is as follows:

Refer to Grizzly Company.By what amount would operating income of Grizzly be increased or decreased as a result of accepting the special order?

A)$25,000 decrease
B)$62,500 decrease
C)$100,000 increase
D)$125,000 increase

Question 25

Which of the following is true about short-run and long-run pricing decisions?

A)Short-run decisions include pricing for a special order with no long-term implications.
B)Short-run decisions typically have a time horizon of two years or more.
C)Short-run decisions include pricing a main product in a major market.
D)Long-run decisions include pricing for a special order with no short-term implications.

Question 26

Which statement is true with regards to differential pricing?

A)Only fixed costs become differential costs in the long run.
B)Both fixed and variable costs become differential costs in the long run.
C)Fixed costs are never differential costs.
D)When considering a special order all costs become differential costs.

Question 27

The total of all the costs incurred by the activities in the value chain are

A)variable costs.
B)fixed costs.
C)total costs.
D)full costs.

Question 28

Mitch's Microbrew's regular selling price for a case of its product is $6.Variable costs are $4 per case.Fixed costs total $1 per case based on 100,000 cases,and remain unchanged within the relevant range of 50,000 cases to total capacity of 200,000 cases.After sales of 80,000 cases were projected for the year,a special order was received for an additional 10,000 cases.What is the minimum selling price for the special order?

A)$3.
B)$4.
C)$5.
D)$6.

Question 29

Using full costs for pricing decisions can be justified in which of the following circumstances?

A)When a firm enters into a long-term contractual relationship to supply a product.
B)For development and production of customized products and contracts with the government.
C)When managers initially set prices to cover full costs plus a profit then adjust to reflect market conditions.
D)All of the answers are correct.

Question 30

The value chain influences long-run pricing decisions because __________ cost is the total of all the costs incurred by the activities in the value chain.

A)differential
B)full
C)marginal
D)variable

Question 31

What costs can be justified when managers initially set prices to cover the costs plus a profit and then subsequently adjusts the prices to reflect market conditions?

A)Variable costs
B)Fixed costs
C)Full costs
D)Absorption costs

Question 32

In the short run,__________ limitations require choices among alternatives.

A)capacity
B)joint cost
C)split-off point
D)full cost

Question 33

What costs can be justified when a firm enters into agreements for the development and production of customized products with the Federal government?

A)Variable costs
B)Fixed costs
C)Full costs
D)Absorption costs

Question 34

Which of the following is true about short-run and long-run pricing decisions?

A)Short-run decisions include pricing for a special order with no long-term implications.
B)Short-run decisions typically have a time horizon of six months or less.
C)Long-run decisions include pricing a main product in a major market.
D)All of the answers are correct.

Question 35

Grizzly Company
Grizzly Company manufactures footballs.The forecasted income statement for the year before any special orders is as follows:

Refer to Grizzly Company.Fixed costs included in the above forecasted income statement are $1,200,000 in manufacturing CGS and $100,000 in selling expenses.Grizzly received a special order offering to buy 50,000 footballs for $7.50 each.There will be no additional selling expenses if Grizzly accepts.Assume Grizzly has sufficient capacity to manufacture 50,000 more footballs.The unit relevant cost for Grizzly's decision is

A)$8.00
B)$5.00
C)$8.75
D)$5.75

Question 36

In the short run,the practice of setting price so that it must at least equal the differential cost of producing and selling the product will result in which of the following?

A)predatory pricing violation.
B)anti-trust violation.
C)dumping.
D)positive contribution to covering fixed costs and generating profit.

Question 37

Which product pricing practice is used by the majority of Japanese companies in assembly-type operations (e.g.electronics and automobiles)?

A)Variable costs,only
B)Fixed costs,only
C)Full costs
D)Absorption costs

Question 38

Which product pricing factor is primarily used by the majority of American companies?

A)Market-based
B)Cost-based
C)Quality-based
D)Quantity-based

Question 39

Which of the following is false about short-run and long-run pricing decisions?

A)Short-run decisions include pricing for a special order with no long-term implications.
B)Short-run decisions typically have a time horizon of six months or less.
C)Long-run decisions include pricing a main product in a major market.
D)Long-run decisions include pricing for a special order with no short-term implications.

Question 40

Which of the following influences should not be considered in short-run pricing decisions?

A)The value customers place on the product
B)The pricing strategies of competitors
C)The costs of the product
D)Total fixed costs allocated to the specific product

Question 41

When can using full costs for pricing decisions be justified?

A)when a firm enters into a short term contractual relationship to supply a product.
B)for development and production of customized products and contracts with the government.
C)when managers initially set prices to cover development costs and then adjust to reflect market conditions.
D)for development and production of standardized commercial products.

Question 42

Predatory pricing

A)occurs when a business deliberately prices below its costs in an effort to drive out competitors.
B)occurs when a business unintentionally prices below its costs which results in driving out competitors.
C)is legal in all 50 States.
D)is generally accepted in the United States.

Question 43

What is the objective of value engineering?

A)to increase quality in order to satisfy customer needs.
B)to reduce quality while satisfying customer needs.
C)to increase profits while satisfying customer needs.
D)to reduce costs while satisfying customer needs.

Question 44

Which of the following terms describes the systematic evaluation of all aspects of research and development,design of products and processes,production,marketing,distribution,and customer service?

A)quality engineering.
B)incremental engineering.
C)systems engineering.
D)value engineering.

Question 45

Using activity-based costing to analyze customer profitability requires the analyst to determine the cost to provide goods and services,which includes such activities as

A)order processing.
B)product delivery.
C)processing returns.
D)All of the answers are correct.

Question 46

Which statement is true with regards to the product lifecycle?

A)The product life cycle is usually 10 to 20 years.
B)Life-cycle costs should never been considered in short run pricing decisions.
C)Life-cycle costs provide important information for pricing.
D)Life-cycle costs are not relevant in differential analysis.

Question 47

Using activity-based costing to analyze customer profitability requires the analyst to determine the cost to acquire the customer,which includes such activities as

A)promoting the product.
B)conducting a campaign to win back lost customers.
C)running advertising campaigns.
D)All of the answers are correct.

Question 48

Which statement is true concerning target costing?

A)Target costing is setting price below costs in the short run to drive out competitors.
B)Target costing is the systematic evaluation of all costs relevant to a decision.
C)Target costing is the concept of price-based costing.
D)None of the answers is correct.

Question 49

The product life cycle lasts from

A)obtaining financing through paying off investors.
B)product design through product termination.
C)initial research and development through termination of customer support.
D)None of the answers is correct.

Question 50

Using activity-based costing to analyze customer profitability requires the analyst to determine the cost to maintain customers,which includes such activities as

A)billing customers.
B)processing payments.
C)issuing refunds.
D)All of the answers are correct.

Question 51

Using activity-based costing to analyze customer profitability requires the analyst to determine the cost to retain customers,which includes such activities as

A)follow-up calls.
B)conducting campaign to win back customers.
C)promoting the product.
D)All of the answers are correct.

Question 52

What is the first step in value engineering?

A)an analysis of the value-chain activities.
B)developing a product that satisfies the needs of potential customers.
C)choosing a target price based on customers' perceived value for the product and the competitors' prices.
D)reducing costs while satisfying customer needs.

Question 53

When can using full costs for pricing decisions be justified?

A)when a firm enters into a long-term contractual relationship to supply a product.
B)when a firm enters into a short-term contractual relationship to supply a product.
C)for development and production of standardized commercial products.
D)when setting short-term market prices.

Question 54

When can a firm justify the use of full costs for pricing decisions?

A)when a firm enters into a short term contractual relationship to supply a product.
B)for development and production of standardized products.
C)when managers initially set prices to cover full costs plus a profit then adjust to reflect market conditions.
D)because they are required by generally accepted accounting principles.

Question 55

Under United States laws,dumping occurs when

A)when a business deliberately prices below its costs in an effort to drive out competitors.
B)when a business unintentionally prices below its costs which results in driving out competitors.
C)when a foreign company sells a product in the United States at a price below the market value in the country of its creation,and this action materially injuries (or threatens to materially injure)an industry in the United States.
D)when a U.S.company sells a product in a foreign country at a price below the market value in the U.S. ,and this action materially injuries (or threatens to materially injure)an industry in the foreign country.

Question 56

What is term used to describe the pricing practice in effect when a business deliberately prices below its costs in an effort to drive out competitors?

A)competitive pricing.
B)cost-based pricing.
C)target pricing.
D)predatory pricing.

Question 57

Target costs equal which of the following?

A)target prices minus target profits.
B)fixed costs plus variable costs.
C)prime costs plus conversion costs.
D)opportunity cost plus cost of capital.

Question 58

Which statement is true concerning target pricing?

A)Target pricing is based on customers' perceived value for the product.
B)Target pricing is illegal under Federal law.
C)Target pricing is anti-competitive.
D)Target pricing is the same as predatory pricing.

Question 59

What costs can be justified when a firm enters into a long-term contractual relationship to supply a product?

A)Variable costs
B)Fixed costs
C)Full costs
D)Absorption costs

Question 60

Using activity-based costing to analyze customer profitability requires the analyst to determine the cost to maintain customers,which includes such activities as

A)billing customers
B)follow up calls
C)process returns
D)run advertising campaigns

Question 61

A company makes two products.The company can sell all of either product it can make.The relevant data for these two products follows:

Total fixed overhead is $250,000.The company has 100,000 machine hours available for production.The company should select which product to maximize operating profits?

A)Product A because it uses less machine time.
B)Product A because its contribution margin per machine hour is $5.00.
C)Product B because its contribution margin per unit is $10.
D)Product B because its contribution margin per machine hour is $6.67.

Question 62

Which focuses on increasing the excess of differential revenue over differential costs when the firm faces bottlenecks?

A)Differential income analysis
B)Throughput analysis
C)Theory of bottlenecks
D)Theory of constraints

Question 63

Which of the following is/are examples of incorrect use(s)of accounting data by decision makers?

A)Reliance on data that include cost allocations.
B)Reliance on cost information produced by the full-absorption method of product costing,which allocates fixed manufacturing costs to units produced by manufacturing companies.
C)Reliance on full-absorption unit costs for short-run decision making.
D)All of the answers are correct.

Question 64

Which of the following is a mathematical tool for solving such multiply-constrained decision problems?

A)curvi-linear programming.
B)random number generators.
C)mini-max decision-making.
D)linear programming.

Question 65

Which of the following is the objective of the theory of constraints?

A)maximize throughput contribution while maximizing investments and operating costs.
B)minimizing throughput contribution while minimizing investments and operating costs.
C)minimizing throughput contribution while maximizing investments and operating costs.
D)maximize throughput contribution while minimizing investments and operating costs.

Question 66

What kind of unit cost data is needed for external reporting and managerial decision making?
External Reporting Managerial Decision Making

A)standard costing variable costing
B)variable costing full-absorption costing
C)full-absorption costing variable costing
D)normal costing full-absorption costing

Question 67

What does the theory of constraintsassume?

A)a short time horizon.
B)a long time horizon.
C)a short or long time horizon.
D)None of the answers is correct.

Question 68

Using activity-based costing to analyze customer profitability requires the analyst to determine the cost to acquire customers,which includes such activities as

A)process payments
B)conduct campaign to win back lost customers
C)issue refunds
D)deliver products

Question 69

The theory of constraints focuses on which of the following?

A)throughput contribution.
B)investments.
C)other operating costs.
D)All of the answers are correct.

Question 70

The objective of the theory of constraintsis to
Throughput contribution investments and operating costs

A)maximize maximize
B)minimize minimize
C)minimize maximize
D)maximize minimize

Question 71

Which of the following is an operation in which the work to be performed equals or exceed the available capacity?

A)capacity inhibitor.
B)throughput blocker.
C)bottleneck.
D)push-pull constraint.

Question 72

Which of the following would be a means of dealing with a production bottleneck?

A)Reduce the number of units produced by the machine or process constituting the bottleneck.
B)Reduce the number of workers assigned to bottleneck machines or processes.
C)Increase the number of workers assigned to bottleneck machines or processes.
D)Reduce the number of defective units produced by the machine or process constituting the bottleneck.

Question 73

Which of the following statements is true when there is only one scarce resource?

A)Choose the product that gives the largest contribution per unit of the scarce resource used.
B)Choose the product that gives the smallest contribution per unit of the scarce resource used.
C)Choose the product that gives the largest contribution per unit of all of the resources used.
D)Choose the product that gives the smallest contribution per unit of all of the resources used.

Question 74

Which of the following is/are a step in the theory of constraints?

A)Recognize that the bottleneck resource determines the throughput contribution of the product.
B)Search for and find the bottleneck resource by identifying resources with large quantities of inventory waiting to be worked on.
C)Subordinate all non-bottleneck resources to the bottleneck resource and increase bottleneck efficiency and capacity.
D)All of the answers are correct.

Question 75

The theory of constraintsfocuses on all operating costs other than short-run variable costs.These costs are incurred to earn throughput contribution and include

A)salaries and wages that are fixed costs.
B)rent and utilities.
C)depreciation.
D)All of the answers are correct.

Question 76

Using the theory of constraints,what is/are remedial action(s)that managers can take?

A)Eliminate idle time on the bottleneck operation.
B)Shift parts that do not have to be made on the bottleneck machine to non-bottleneck machines or to outside facilities.
C)Increase the capacity of the bottleneck process.
D)All of the answers are correct.

Question 77

Most managerial decision models require which costing method?

A)standard costing unit cost data.
B)variable costing unit cost data.
C)full-absorption costing unit cost data.
D)normal costing unit cost data.

Question 78

External financial reporting requires which costing method?

A)standard costing.
B)variable costing
C)full-absorption costing.
D)normal costing.

Question 79

Pete's Sports Products makes caps and uniforms.It can sell all of either product it can make.The relevant data for these two products follows:

Total fixed overhead is $240,000.The company has 100,000 machine hours available for production.The company should select which product to maximize operating profits?

A)Uniforms,because its contribution margin per unit is $16.
B)Uniforms,because its contribution margin per hour is $8.
C)Caps,because its contribution margin per hour is $16
D)Caps,because its contribution margin per unit is $8.

Question 80

The theory of constraintsfocuses on which of the following?

A)sales dollars minus short-run variable costs (e.g. ,materials,energy,and piecework labor).
B)the assets required for production and sales.
C)all operating costs other than short-run variable costs.
D)All of the answers are correct.