Question 1

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.

Accepted Answer

This statement is true. The decision to further process or leave the product as is will depend on the capacity and capabilities of the plant, as well as the market demand for the product in its current form or with added processing.

Question 2

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

Accepted Answer

The estimates should be based upon actual or expected levels of performance, not ideal levels. This ensures a realistic pricing strategy that covers all costs and allows for a reasonable profit margin.

Question 3

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

Accepted Answer

A bottleneck occurs when the demand for a company's product is greater than its production capacity, causing delays and lower efficiency.

Question 4

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

Accepted Answer

The cost-plus approach involves adding a percentage markup to the estimated cost of producing a product. These estimated costs should be based on normal levels of performance to ensure that the price set is reasonable and competitive in the market. Using costs that are too high or too low can result in overpriced or underpriced products, which can negatively impact sales and profitability.

Question 5

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

Accepted Answer

Make or buy decisions should involve analysis and consideration of various factors such as cost, quality, resources, expertise, and strategic goals. These factors should be evaluated objectively and independently, considering both internal and external options. Involving related parties may result in biased decisions and conflicts of interest, thereby undermining the objective evaluation process. Therefore, it is recommended to involve relevant stakeholders and experts who are not related parties to ensure unbiased and informed decision-making.

Question 6

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

Accepted Answer

Discontinuing a segment may not always be the best option. It is important to assess the reasons for the loss and consider factors such as the potential for future growth and profitability, the impact on the company's overall strategy, and the cost of discontinuing the segment. In some cases, restructuring or investing in the segment may be a better solution.

Question 7

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

Accepted Answer

The product cost concept includes all manufacturing costs, such as direct materials, direct labor, and overhead, in the cost amount. The markup is then added to this cost amount to determine the final product price.

Question 8

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.

Accepted Answer

The answer of In using the total cost concept of...

Question 9

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.

Accepted Answer

The total cost concept does include all manufacturing costs as well as selling and administrative expenses in the cost amount, which is then marked up to determine the final product price.

Question 10

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.

Accepted Answer

The product cost concept includes all manufacturing costs (direct materials, direct labor, and manufacturing overhead) but does not include selling and administrative expenses; these are considered period costs and are not included in the calculation of the product cost.

Question 11

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

Accepted Answer

The lowest contribution margin per scarce resource means that it is consuming more of that resource to generate less profit. Hence, it is the least profitable use of that resource. The most profitable use of a scarce resource would be the one that generates the highest contribution margin per unit of that resource used.

Question 12

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

Accepted Answer

Discontinuing a segment that is contributing to fixed expenses may negatively impact the overall profitability of the business. It is important to carefully consider the long-term effects before making such a decision.

Question 13

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.

Accepted Answer

In this scenario, the maximum output of the machinery is 1,000 units per hour, which means that it is the limiting factor or the bottleneck in the production process. Even if there is a demand for 1,200 units per hour, the machinery can only produce a maximum of 1,000 units per hour, creating a bottleneck in the production process.

Question 14

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.

Accepted Answer

When there is a bottleneck between two products, the company should focus on the product with the highest contribution margin per bottleneck hour. This means that the company should prioritize the product that generates more profit per unit of bottleneck time.

Question 15

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.

Accepted Answer

The answer of In using the variable cost concept of...

Question 16

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

Accepted Answer

The cost-plus approach involves adding a markup to the cost of production or acquisition to arrive at the final selling price. This approach is often used by managers when setting long-run prices.

Question 17

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

Accepted Answer

The theory of constraints is a manufacturing strategy that aims to identify and alleviate bottlenecks in a process in order to increase efficiency and productivity. By reducing the impact of bottlenecks, the overall flow of production can be improved.

Question 18

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.

Accepted Answer

In the variable cost concept of cost-plus pricing, only variable costs are considered in setting the price, and the markup is added to cover fixed costs and desired profit, not including fixed manufacturing costs and fixed selling and administrative expenses in the cost base.

Question 19

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

Accepted Answer

Activity-based costing assigns costs to specific activities and then assigns those costs to specific products or services based on the amount of resources used. This provides a more accurate picture of how costs are incurred and allows for more informed decision-making. Traditional costing systems simply allocate overhead costs based on a predetermined rate, usually based on direct labor hours or machine hours, which can lead to distorted or inaccurate cost data.

Question 20

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.

Accepted Answer

The product cost concept includes all costs related to producing and distributing the product, including selling and administrative expenses. These costs are then covered in the markup, along with profit, to determine the final selling price of the product.

Quiz 24: Differential Analysis and Product Pricing