Question 1

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 cost of producing Product P is $55 per pound.

Accepted Answer

The differential cost of producing Product P is actually $13 per pound, which is the additional cost required to further process Product O into Product P.

Question 2

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.

Accepted Answer

Management needs to consider the availability of excess production capacity before deciding to make or buy a part needed for the manufacturing process. If the plant has excess capacity, then it may be more efficient and cost-effective to make the part in-house. However, if current production will need to be interrupted to manufacture the part, then it may be more practical to buy the part from a supplier.

Question 3

When evaluating whether to lease or sell equipment, the book value of the equipment is considered to be a sunk cost and not a differential cost.

Accepted Answer

The book value of the equipment is not relevant in the decision of whether to lease or sell, as it represents a historical cost that has already been incurred and cannot be recovered. Differential costs, on the other hand, represent the incremental costs and benefits of each alternative and should be considered in the decision-making process.

Question 4

In addition to the differential costs in an equipment replacement decision, the difference between the remaining useful life of the old equipment and the estimated life of the new equipment is an important consideration.

Accepted Answer

The remaining useful life of the old equipment and the estimated life of the new equipment are important factors to consider in an equipment replacement decision. If the old equipment still has significant useful life remaining, it may be more cost-effective to continue using it rather than replacing it with new equipment. Conversely, if the estimated life of the new equipment is significantly longer than the remaining useful life of the old equipment, it may be a better long-term investment to replace the old equipment.

Question 5

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.

Accepted Answer

Opportunity cost refers to the benefit that is missed or given up when an investor, individual, or business chooses one alternative over another; it is not solely about the increase or decrease in revenue but encompasses all potential benefits from the best alternative forgone.

Question 6

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

Accepted Answer

Book value represents the value of an asset on a company's balance sheet and it may not accurately reflect the cost of selling the equipment. Other factors such as depreciation, market demand, and maintenance costs should also be considered when deciding whether to lease or sell an equipment.

Question 7

Eliminating a product or segment will usually eliminates all of the product's or segment's variable costs.

Accepted Answer

Eliminating a product or segment typically results in the elimination of all variable costs associated with that product or segment, as these costs vary directly with production or sales volume.

Question 8

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.

Accepted Answer

Differential analysis involves comparing the costs and benefits of different alternatives to aid in making decisions. This can include analyzing the profitability of a particular segment and determining whether it would be more beneficial to discontinue it or continue with it. Additionally, differential analysis can also help in deciding whether to replace fixed assets, as it can compare the costs of continuing to use the existing assets versus the costs of purchasing new ones.

Question 9

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

Accepted Answer

Opportunity cost can be affected by later decisions as it involves the cost of giving up the next best alternative option. If later decisions change the availability or desirability of that alternative option, the opportunity cost may also change.

Question 10

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

Accepted Answer

Differential revenue refers to the difference in revenue between two alternatives, not the income from the best alternative use of cash.

Question 11

If the total unit cost of manufacturing Product Y is currently $40 and the total unit cost after modifying the style is estimated to be $48, the differential cost for this situation is $48.

Accepted Answer

The differential cost in this situation would be the difference between the total unit cost before and after modifying the style, which is $8 ($48 - $40).

Question 12

When eliminating a product or segment of a business, the fixed costs pertaining to the product or segment will always be eliminated.

Accepted Answer

Fixed costs are costs that remain constant regardless of a business's level of production or sales revenue. These costs cannot be directly attributed to a specific product or segment and are necessary for the overall operation of the business. Therefore, eliminating a product or segment may result in a reduction of variable costs but the fixed costs will not necessarily be eliminated.

Question 13

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 $82 per pound.

Accepted Answer

The differential revenue of producing Product P is the difference between the selling price of Product P and Product O, which is $82 - $65 = $17 per pound, not $82 per pound.

Question 14

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

Accepted Answer

Differential revenue is specifically the difference between the expected revenue from one course of action and the expected revenue from a different course of action. It is a concept used in decision-making to determine which option is more financially beneficial.

Question 15

The revenue that is forgone from an alternative use of an asset, such as cash, is called an opportunity cost.

Accepted Answer

This statement is true. Opportunity cost refers to the value of the next best alternative that must be given up in order to pursue a certain action. Therefore, the revenue that could have been earned if an asset was used in a different way represents an opportunity cost.

Question 16

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.

Accepted Answer

The differential revenue of producing Product P is calculated by subtracting the additional cost of producing Product P from its selling price, which is $82 - $13 = $69 per pound. The differential revenue of $17 per pound is higher than the differential cost of $13 per pound, indicating that it would be profitable to further process Product O into Product P.

Question 17

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.

Accepted Answer

The differential cost of producing Product P is stated as $13 per pound in the question.

Question 18

If the total unit cost of manufacturing Product Y is currently $40 and the total unit cost after modifying the style is estimated to be $48, the differential cost for this situation is $8.

Accepted Answer

Differential cost is the difference between the total unit cost of two different situations. In this case, the total unit cost before modifying the style is $40 and after modifying the style is estimated to be $48, therefore the differential cost is $8.

Question 19

When a product or segment of a business is determined to be generating a loss, the total income from operations for the company will always increase if management eliminates the product or segment.

Accepted Answer

This statement is not always true. Eliminating a product or segment may result in a decrease in total income from operations if the revenue generated by that product or segment was greater than the cost of producing it. It is important for management to carefully analyze the financial impact before making a decision to eliminate a product or segment.

Question 20

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

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered, therefore they will not be affected by future decisions.

Quiz 12: Differential Analysis and Product Pricing