Question 1

Green Co.incurs a cost of $15 per pound to produce Product X, which it sells for $26 per pound.The company can further process Product X to produce Product Y.Product Y would sell for $30 per pound and would require an additional cost of $10 per pound to be produced.The differential revenue of producing Product Y is _____.

Accepted Answer

The differential revenue is the difference in revenue between selling Product Y and Product X. Product Y sells for $30 per pound, and Product X sells for $26 per pound, resulting in a differential revenue of $4 per pound ($30 - $26).

Question 2

Differential analysis focuses on:

Accepted Answer

Differential analysis involves analyzing two or more alternative courses of action and comparing their impact on revenues and costs. It helps in identifying the most profitable option among available alternatives. Options A, B, and C are not the primary focus of differential analysis.

Question 3

The condensed income statement for a business for the past year is as follows: ? $\begin{array}{lrr}
&\text { Product } \
& \text { White } &\text { Black }\
\text { Sales } & \$ 750,000 & \$ 550,000 \
\text { Less variable costs } & \underline{400,000} & \underline{380,000}\
{\text { Contribution margin }} & \$ 350,000 & \$ 170,000\
\text { Less fixed costs } &\underline{240,000}&\underline{100,000} \
\text { Income (loss) from operations } &\underline{1 1 0 , 0 0 0} &\underline{ \$ 70,000} \
\end{array}$
 ?
Management is considering the discontinuance of the manufacture and sale of Black 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 White.What is the amount of change in net income for the current year that will result from the discontinuance of Black?

Accepted Answer

The answer of The condensed income statement for a business...

Question 4

The revenue that is forgone from an alternative use of an asset is called a(n):

Accepted Answer

The revenue forgone from an alternative use of an asset is known as opportunity cost. This cost is the benefit or value of the next best option that must be forgone to pursue a certain action or investment. Therefore, option A is the correct answer.

Option B, differential revenue, refers to the difference between two alternatives in terms of revenue generated.

Option C, sunk cost, refers to a cost that has already been incurred and cannot be recovered.

Option D, differential income, refers to the difference between two alternatives in terms of income generated.

Question 5

Topaz Company is considering replacing an old machine that originally cost $95,000.A new machine will cost $900,000, and the old machine can be sold for $25,000.What is the sunk cost in this situation?

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered. In this situation, the cost of the old machine, which was originally purchased for $95,000, is a sunk cost because it has already been incurred and cannot be recovered regardless of whether or not the company decides to replace the machine. The sale price of $25,000 for the old machine is not a sunk cost because it represents a potential future cash inflow if the company decides to sell the machine. Therefore, the best choice is to replace the old machine with the new one because the cost of the new machine is not affected by the sunk cost of the old machine.

Question 6

Green Co.incursa cost of $15 per pound to produce Product X, which it sells for $26 per pound.The company can further process Product X to produce Product Y.Product Y would sell for $30 per pound and would require an additional cost of $10 per pound to be produced.The differential cost of producing Product Y is _____.

Accepted Answer

The differential cost of producing Product Y is the additional cost required to produce it compared to the cost of producing Product X. Therefore, the differential cost of producing Product Y is $10 per pound.

Question 7

Yellco Inc., a toy manufacturer, provided the following information: $$\begin{array} { l r } 
\text { Domestic unit sales price } & \$ 50 \
\text { Unit manufacturing costs: } & \
\text { Variable } & 10 \
\text { Fixed } & 8
\end{array}$$ ? The company has received an offer from an exporter for 9,000 units of toys at $60 per unit.The additional business is not expected to affect the normal production or domestic sales prices of Yellco Inc.What is the amount of gain or loss from acceptance of the offer?

Accepted Answer

The additional revenue from the export order is $9,000 x $60 = $540,000. The additional variable costs are $9,000 x $10 = $90,000. The additional fixed costs are zero. Therefore, the additional profit from the export order is $540,000 - $90,000 = $450,000.

Question 8

Whiteville Co.can further process Product B to produce Product C.Product B is currently selling for $45 per pound and costs $30 per pound to produce.Product C would sell for $80 per pound and would require an additional cost of $18 per pound to produce.What is the differential cost of producing Product C?

Accepted Answer

The differential cost of producing Product C is the additional cost to produce it compared to producing Product B. This additional cost is given as $18 per pound. Therefore, the answer is B) $18 per pound.

Question 9

A business is considering a cash outlay of $200,000 for the purchase of land, which it could lease for $35,000 per year.If alternative investments are available that yield an 18% return, the opportunity cost of the purchase of the land is:

Accepted Answer

The opportunity cost is the return foregone by not investing in the alternative option. Here, an 18% return on $200,000 would be $36,000 ($200,000 * 0.18), which is the opportunity cost of purchasing the land instead of investing in the alternative.

Question 10

A business is considering a cash outlay of $880,000 for the purchase of land, which it intends to lease for $200,000 per year.If alternative investments are available that yield a 15% return, the opportunity cost of the purchase of the land is:

Accepted Answer

The opportunity cost of an investment is the return foregone by not investing in the next best alternative. In this case, the alternative investment yields a 15% return. Therefore, the opportunity cost of purchasing the land is 15% of $880,000, which is $132,000 (0.15 * $880,000).

Question 11

Max, Inc.can sell a large piece of machinery for $90,000.The machinery originally cost $240,000 and has accumulated depreciation of $130,000.Max will have to pay a 5% sales commission on the sale.Rather than sell, Max is considering leasing the machine.It can be leased for 4 years for $24,000 per year.Max has estimated future operating expenses to be $3,000 per year, and Max will be responsible for those expenses.Which of the following options most accurately describes the analysis and decision for Max?

Accepted Answer

To find the best choice between selling and leasing, we need to compare the differential income of each option.

Differential income of selling = Sales price - Book value - Sales commission - Operating expenses
= $90,000 - ($240,000 - $130,000) - ($90,000 x 0.05) - ($3,000 x 4)
= $90,000 - $110,500
= -$20,500 (Negative value indicates a loss)

Differential income of leasing = Lease revenue - Operating expenses
= ($24,000 x 4) - ($3,000 x 4)
= $84,000 - $12,000
= $72,000

As we can see, the differential income of selling is a loss of $20,500 while the differential income of leasing is a gain of $72,000. Therefore, the best choice is to lease the machine.

Question 12

A business is considering a cash outlay of $250,000 for the purchase of land, which it intends to lease for $40,000 per year.If alternative investments are available that yield an 15% return, the opportunity cost of the purchase of the land is

Accepted Answer

The answer of A business is considering a cash outlay...

Question 13

Frank Co.is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $25 unit.The unit cost for Frank Co.to make the part is $30, which includes $3 of fixed costs.If 20,000 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?

Accepted Answer

The differential cost increase for making the part rather than purchasing it is calculated as follows: The cost to make the part is $30, while the cost to purchase it is $25. Therefore, making the part is $5 more expensive per unit. For 20,000 units, this results in a $100,000 increase in costs. However, since $3 of the $30 cost to make the part is fixed and would not increase with production (because the company is using unused capacity), the relevant cost comparison is between $27 (the variable cost to make) and $25 (the cost to buy). This results in a $2 increase per unit, or a $40,000 increase for 20,000 units.

Question 14

Paul's Delivery Service is considering selling one of its smaller trucks that is no longer needed in the business.The truck originally costed $23,000 and has accumulated depreciation of $10,000.The truck can be sold for $14,000.Another company is interested in leasing the truck.It will pay $4,800 per year for three years.Paul's Delivery Service will continue to pay the taxes and license fees for the truck, but all other expenses will be paid by the lessee.Management assumes the expenses for the taxes and license will be $300 per year.Which of the following statements is correct?

Accepted Answer

If the truck is sold, Paul's Delivery Service receives $14,000. If leased, the total income over three years is $4,800 x 3 = $14,400, minus taxes and license fees of $300 x 3 = $900, resulting in net income of $13,500 from leasing. The difference between selling and leasing is $13,500 - $14,000 = -$500, indicating a $500 loss from leasing compared to selling.

Question 15

Assume that Vivid Co.is considering disposing of equipment that cost $350,000 and has $280,000 of accumulated depreciation to date.Vivid Co.can sell the equipment through a broker for $135,000 less 5% commission.Alternatively, Comet Co.has offered to lease the equipment for five years for a total of $235,000.Vivid will incur repair, insurance, and property tax expenses estimated at $60,000.At lease-end, the equipment is expected to have no residual value.The net differential income from the lease alternative is:

Accepted Answer

The net differential income from the lease alternative is calculated by taking the total lease income of $235,000, subtracting the expenses of $60,000, and then subtracting the net amount from selling the equipment (sale price minus commission and minus any net book value). The sale through a broker would net $135,000 - 5% of $135,000 = $128,250. The equipment's book value is $350,000 - $280,000 = $70,000. So, the gain from selling would be $128,250 - $70,000 = $58,250. The differential income from leasing instead of selling is $235,000 (lease income) - $60,000 (expenses) - $58,250 (net gain if sold) = $116,750. However, the correct calculation should consider the net income from leasing ($235,000 - $60,000 = $175,000) against the net amount from selling after commission ($128,250), not subtracting the book value again since it's a comparison of alternatives, not a gain calculation. Thus, the correct approach is to directly compare the net lease income ($175,000) with the net sale proceeds ($128,250), which was not accurately reflected in the provided options, indicating a mistake in the explanation process.

Question 16

Yellco Inc., a toy manufacturer, provided the following information: $$\begin{array} { l r } 
\text { Domestic unit sales price } & \$ 50 \
\text { Unit manufacturing costs: } & \
\text { Variable } & 10 \
\text { Fixed } & 8
\end{array}$$ ?? The company has received an offer from an exporter for 9,000 units of toys at $60 per unit.The additional business is not expected to affect the normal production or domestic sales prices of Yellco Inc.The company's differential cost from the acceptance of the offer is _____.

Accepted Answer

The answer of Yellco Inc., a toy manufacturer, provided the...

Question 17

Yellco Inc., a toy manufacturer, provided the following information: ? $$\begin{array} { l r } 
\text { Domestic unit sales price } & \$ 50 \
\text { Unit manufacturing costs: } & \
\text { Variable } & 10 \
\text { Fixed } & 8
\end{array}$$ ??
The company has received an offer from an exporter for 9,000 units of toys at $60 per unit.The additional business is not expected to affect the normal production or domestic sales prices of Yellco Inc.The company's differential revenue from the acceptance of the offer is _____.

Accepted Answer

The differential revenue from accepting the offer is calculated by multiplying the offer price per unit by the number of units offered. Thus, $60 per unit * 9,000 units = $540,000.

Question 18

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:

Accepted Answer

The answer of Dinkins Inc.is considering disposing of a machine...

Question 19

The condensed income statement for a business for the past year is presented as follows: ? $\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\text { Product }$$\begin{array}{lrrrr}
&\mathrm{F}& \mathrm{G} & \mathrm{H}&\text { Total}\ 
\text { Sales } & \$ 200,000 & \$ 180,000 & \$ 320,000 & \$ 700,000 \
\text { Less variable costs } & 120,000 & \underline{160,000} & \underline{200,000} & 480,000 \
\text { Contribution margin } & \$ 80,000 & \$ 20,000 & \$ 120,000 & \$ 220,00 \
\text { Less fixed costs } & 25,000 & \underline{30,000} & \underline{40,000} & \underline{95,000} \
\begin{array}{l}
\text { Income (loss) from } \
\text { operations }
\end{array} & \$ \mathbf{5 5 , 0 0 0} & \$ 10,000 & \$ \mathbf{8 0 , 0 0 0} & \$ \mathbf{1 2 5 , 0 0 0}
\end{array}$
 ??
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?

Accepted Answer

Discontinuing Product G will result in a decrease in sales revenue of $150,000 and a decrease in the cost of goods sold of $60,000, resulting in a decrease in gross profit of $90,000. Since the total fixed costs and expenses remain unchanged, the decrease in gross profit will directly result in a decrease in net income of $20,000 ($90,000 x 0.22). Therefore, the correct answer is option D, a $20,000 decrease in net income.

Question 20

The condensed income statement for a business for the past year is presented as follows: ? $\begin{array}{lccc}
&\text { Product }\
&\mathrm{F}&\mathrm{G}& \mathrm{H}&\text{Total}\
 \text { Sales } & \$ 300,000 & \$ 220,000 & \$ 340,000&\$860,000 \
 \text { Less variable costs } & 180,000 & 190,000 & 220,000&590,000 \
 \text { Contributi on margin } & \$ 120,000 & \$ 30,000 & \$ 120,000 &\$270,000\
 \text { Less fixed costs } & 50,000 & 50,000 & 40,000&140,000 \
\text { Income (loss) from operations } & \$ 70,000 & \$(20,000) & \$ 80,000&\$130,000 \

\end{array}$ ?
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?

Accepted Answer

Discontinuing Product G would result in a $30,000 decrease in net income because the contribution margin of $30,000 from Product G would be lost, while fixed costs remain unchanged.

Quiz 12: Differential Analysis and Product Pricing

Differential analysis focuses on:

The revenue that is forgone from an alternative use of an asset is called a(n) :

Topaz Company is considering replacing an old machine that originally cost $95,000.A new machine will cost $900,000, and the old machine can be sold for $25,000.What is the sunk cost in this situation?

A business is considering a cash outlay of $200,000 for the purchase of land, which it could lease for $35,000 per year.If alternative investments are available that yield an 18% return, the opportunity cost of the purchase of the land is:

A business is considering a cash outlay of $880,000 for the purchase of land, which it intends to lease for $200,000 per year.If alternative investments are available that yield a 15% return, the opportunity cost of the purchase of the land is:

A business is considering a cash outlay of $250,000 for the purchase of land, which it intends to lease for $40,000 per year.If alternative investments are available that yield an 15% return, the opportunity cost of the purchase of the land is