Question 1

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 two costs, therefore the differential cost in this situation would be $8 (i.e. $48 - $40 = $8).

Question 2

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 3

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 4

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 the difference between the selling price of Product P and the cost of producing it (82-13-65= $4/pound). Therefore, Hill Co. would earn an additional $4 per pound by producing Product P compared to continuing to sell Product O. Thus, it is financially advantageous for Hill Co. to further process Product O into Product P.

Question 5

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

Accepted Answer

An opportunity cost represents the benefits an individual, investor, or business misses out on when choosing one alternative over another, whereas a cost that will not be affected by later decisions is termed a sunk cost.

Question 6

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

Accepted Answer

Sunk costs are those costs that have already been incurred and cannot be recovered or changed regardless of any future decisions. They are irrelevant to future decision making because they cannot be changed.

Question 7

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 difference between the remaining useful life of old equipment and estimated life of new equipment is an important consideration in equipment replacement decisions.

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.

Accepted Answer

The differential cost of producing Product P is given as $13 per pound in the question. Therefore, it is true that the cost to produce Product P is $13 more per pound than the cost to produce Product O.

Question 9

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 is the value of an asset as it appears on a company's balance sheet and may not necessarily reflect the fair market value of the equipment. Therefore, book value is not considered to be the cost of selling the equipment.

Question 10

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 pertaining to a product or segment may include things like rent, insurance, and salaries for employees. These costs may not be specifically tied to a single product or segment and may still need to be covered even if the product or segment is eliminated.

Question 11

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

This statement is true. Management needs to assess whether the production capacity is available to make the part or if they will need to interrupt current production to manufacture the part. This decision can have consequences for both the production schedule and overall costs.

Question 12

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 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 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 14

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 15

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 16

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 a comparison of the revenue that would be earned from one choice with the revenue that would be earned from another alternative. It reflects the difference between the revenues of two options. Therefore, the given statement is true.

Question 17

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 is the difference between the two total unit costs, which is $8 ($48 - $40).

Question 18

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 a historical cost that has already been incurred and is not relevant in the decision-making process of whether to lease or sell the equipment. It is considered a sunk cost and not a differential cost. Differential costs are the costs that will differ between the two options being evaluated (leasing or selling), and should be considered when making the decision.

Question 19

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 revenues of different alternatives to determine the most profitable option. This can be used to make decisions about discontinuing unprofitable segments or replacing fixed assets by comparing the costs and benefits of each option.

Question 20

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

Accepted Answer

This is the correct definition of opportunity cost.

Quiz 12: Differential Analysis and Product Pricing