Name:
Class:
Date:
Indicate whether the statement is true or false.
1. Manufacturers must conform to the Robinson-Patman Act, which prohibits price discrimination within the United
States unless differences in prices can be justified by different costs of serving different customers.
a.
True
b.
False
2. Differential revenue is the amount of profit that would result from the best available alternative proposed use of cash.
a.
True
b.
False
3. The total cost method includes all manufacturing costs plus selling and administrative expenses in the cost amount to
which the markup is added to determine product price.
a.
True
b.
False
4. A cost that will not be affected by later decisions is termed an opportunity cost.
a.
True
b.
False
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.
5. The differential cost of producing Product P is $55 per pound.
a.
True
b.
False
6. If the total unit cost of manufacturing Product Y is currently $36 and the total unit cost after modifying the style is
estimated to be $48, the differential cost for this situation is $12.
a.
True
b.
False
7. In using the variable cost method of applying the cost-plus approach to product pricing, fixed manufacturing costs and
fixed selling and administrative expenses must be covered by the markup.
a.
True
b.
False
8. When a segment of a company is showing a net loss, it is always best to discontinue the segment in order not to
continue with losses.
a.
True
b.
False
9. Under the total cost method, manufacturing cost plus desired profit is included in the total cost per unit.
a.
True
b.
False
Name:
Class:
Date:
10. A bottleneck happens when a key piece of manufacturing machinery can produce 1,000 units per hour and demand for
the product supports a production rate of 1,200 units per hour.
a.
True
b.
False
11. When a bottleneck occurs in a process used in the production of multiple products, the company must determine the
contribution margin for each product and give priority to the product that has the lowest contribution margin per
bottleneck hour.
a.
True
b.
False
12. If the total unit cost of manufacturing Product Y is currently $36 and the total unit cost after modifying the style is
estimated to be $48, the differential cost for this situation is $48.
a.
True
b.
False
13. When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be based on
normal levels of performance.
a.
True
b.
False
14. The product cost method includes all manufacturing costs plus selling and administrative expenses in the cost amount
to which the markup is added to determine product price.
a.
True
b.
False
15. A bottleneck begins when demand for the company’s product exceeds the ability to produce the product.
a.
True
b.
False
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.
16. The differential cost of producing Product P is $13 per pound.
a.
True
b.
False
17. Businesses with fixed capacity will charge higher prices when demand is low in an effort to cover fixed costs.
a.
True
b.
False
18. In using the variable cost method 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.
a.
True
b.
False
Name:
Class:
Date:
19. Since the costs of producing an intermediate product do not change regardless of whether the intermediate product is
sold or processed further, these costs are not considered in deciding whether to further process a product.
a.
True
b.
False
20. Differential analysis can aid management in making decisions on a variety of alternatives, including whether to
discontinue an unprofitable segment and whether to replace usable plant assets.
a.
True
b.
False
21. When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be based on
ideal levels of performance.
a.
True
b.
False
22. Under the variable cost method, only variable costs are included in the cost amount per unit to which the markup is
added.
a.
True
b.
False
23. The costs of initially producing an intermediate product should be considered in deciding whether to further process a
product, even though the costs will not change, regardless of the decision.
a.
True
b.
False
24. The product cost method includes all manufacturing costs in the cost amount to which the markup is added to
determine product price.
a.
True
b.
False
25. Make-or-buy options often arise when a manufacturer has excess productive capacity in the form of unused
equipment, space, and labor.
a.
True
b.
False
26. Differential revenue is the amount of increase or decrease in revenue expected from a particular course of action as
compared with an alternative.
a.
True
b.
False
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.
27. The differential revenue of producing Product P is $22 per pound.
a.
True
b.
False
Name:
Class:
Date:
28. In using the total cost method of applying the cost-plus approach to product pricing, selling expenses, administrative
expenses, and profit are covered in the markup.
a.
True
b.
False
29. In a production bottleneck situation, the product with the highest contribution margin per unit should be given priority
over a product that has the highest contribution margin per bottleneck hour.
a.
True
b.
False
30. Yield pricing practices are common in low-fixed-cost service businesses.
a.
True
b.
False
31. Opportunity cost is the amount of increase or decrease in cost that would result from the best available alternative to
the proposed use of cash or its equivalent.
a.
True
b.
False
32. The revenue that is forgone from an alternative use of an asset, such as cash, is called opportunity cost.
a.
True
b.
False
33. In using the product cost method of applying the cost-plus approach to product pricing, selling expenses,
administrative expenses, and profit are covered in the markup.
a.
True
b.
False
34. A cost that will not be affected by later decisions is termed a sunk cost.
a.
True
b.
False
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.
35. The differential revenue of producing Product P is $82 per pound.
a.
True
b.
False
36. Yield pricing is a type of “accepting business at a special price” differential analysis.
a.
True
b.
False
37. In addition to the differential costs in an equipment-replacement decision, the remaining useful life of the old
equipment and the estimated life of the new equipment are important considerations.
Name:
Class:
Date:
a.
True
b.
False
38. Cost-plus methods determine the normal selling price by estimating a cost amount per unit and adding a markup.
a.
True
b.
False
39. In deciding whether to accept business at a special price, the short-run price should be set high enough to cover all
variable costs and expenses.
a.
True
b.
False
40. Discontinuing a segment or product may not be the best choice when the segment is contributing to fixed expenses.
a.
True
b.
False
41. Differential analysis only considers the short-term (one-year) effects of discontinuing a product.
a.
True
b.
False
42. The theory of constraints is a manufacturing strategy that focuses on reducing the influence of bottlenecks on a
process.
a.
True
b.
False
43. The desired selling price for a product will be the same under both the variable and total cost methods.
a.
True
b.
False
Indicate the answer choice that best completes the statement or answers the question.
Mallard Corporation uses the product cost method of product pricing. Below is cost information for the production and
sale of 45,000 units of its sole product. Mallard desires a profit equal to a 12% return on invested assets of $800,000.
Fixed factory overhead cost
$82,000
Fixed selling and administrative costs
45,000
Variable direct materials cost per unit
5.50
Variable direct labor cost per unit
7.65
Variable factory overhead cost per unit
2.25
Variable selling and administrative cost per unit
0.90
44. The dollar amount of desired profit from the production and sale of the company’s product is
a.
$105,840
b.
$225,000
c.
$96,000
d.
$220,500
Name:
Class:
Date:
45. The target cost is determined by taking
a.
the expected selling price and subtracting the desired profit
b.
the expected selling price and adding desired profit
c.
the expected selling price and subtracting the budgeted standard cost
d.
the budgeted standard cost and reducing it by 10%
Mallard Corporation uses the product cost method of product pricing. Below is cost information for the production and
sale of 45,000 units of its sole product. Mallard desires a profit equal to a 12% return on invested assets of $800,000.
Fixed factory overhead cost
$82,000
Fixed selling and administrative costs
45,000
Variable direct materials cost per unit
5.50
Variable direct labor cost per unit
7.65
Variable factory overhead cost per unit
2.25
Variable selling and administrative cost per unit
0.90
46. The markup percentage on product cost for the company’s product is
a.
23.4%
b.
10.9%
c.
26.1%
d.
18.0%
Magpie Corporation uses the total cost method of product pricing. Below is cost information for the production and sale
of 60,000 units of its sole product. Magpie desires a profit equal to a 25% return on invested assets of $700,000.
Fixed factory overhead cost
$38,700
Fixed selling and administrative costs
7,500
Variable direct materials cost per unit
4.60
Variable direct labor cost per unit
1.88
Variable factory overhead cost per unit
1.13
Variable selling and administrative cost per unit
4.50
47. The cost per unit for the production and sale of Magpie’s product is
a.
$12.11
b.
$12.88
c.
$15.00
d.
$13.50
48. Which of the following methods of applying the cost-plus approach to product pricing includes selling expenses,
administrative expenses, and desired profit in the markup?
a.
total cost method
b.
product cost method
c.
variable cost method
d.
demand-based method
49. Rowan Quinn Company manufactures kitchen appliances. Currently, it is manufacturing one of its components at a
variable cost of $40 and fixed costs of $15 per unit. An outside provider of this component has offered to sell Rowan
Name:
Class:
Date:
Quinn the component for $45. Determine the best plan and compute the savings assuming fixed costs are unaffected by
the decision.
a.
$5 savings per unit if manufactured
b.
$5 savings per unit if purchased
c.
$10 savings per unit if manufactured
d.
$15 savings per unit if purchased
Stryker Industries received an offer from an exporter for 15,000 units of product at $17.50 per unit. The acceptance of the
offer will not affect normal production or domestic sales prices. The following data are available:
Domestic unit sales price
$20
Unit manufacturing costs:
Variable
11
Fixed
1
50. The amount of profit or loss from acceptance of the offer is a
a.
$97,500 profit
b.
$94,500 loss
c.
$37,500 profit
d.
$37,500 loss
51. Which of the following methods used in applying the cost-plus approach to product pricing includes only desired
profit in the markup?
a.
product cost method
b.
variable cost method
c.
sunk cost method
d.
total cost method
Widgeon Co. manufactures three products: Bales, Tales, and Wales. The selling prices are $55, $78, and $32,
respectively. The variable costs for each product are $20, $50, and $15, respectively. Each product must go through the
same processing in a machine that is limited to 2,000 hours per month. Bales take 5 hours to process; Tales 7 hours; and
Wales 1 hour.
52. Assuming that Widgeon Co. can sell all of the products it can make, the maximum contribution margin it can earn per
month is
a.
$49,000
b.
$70,000
c.
$56,000
d.
$34,000
Flyer Company sells a product in a competitive marketplace. Market analysis indicates that its product would probably
sell at $48 per unit. Flyer management desires a 12.5% profit margin on sales. Flyer’s current full cost for the product is
$44 per unit.
53. In order to meet the new target cost, how much will the company have to cut costs per unit, if any?
a.
$1
Name:
Class:
Date:
b.
$3
c.
$2
d.
$0
Rylan Corporation received an offer from an exporter for 25,000 units of product at $16 per unit. The acceptance of the
offer will not affect normal production or domestic sales prices. The following data are available:
Domestic unit sales price
$22
Unit manufacturing costs:
Variable
11
Fixed
6
54. The differential cost from the acceptance of the offer is
a.
$150,000
b.
$275,000
c.
$550,000
d.
$125,000
Dotterel Corporation uses the variable cost method of product pricing. Below is cost information for the production and
sale of 35,000 units of its sole product. Dotterel desires a profit equal to an 11.2% return on invested assets of $350,000.
Fixed factory overhead cost
$105,000
Fixed selling and administrative costs
35,000
Variable direct materials cost per unit
4.34
Variable direct labor cost per unit
5.18
Variable factory overhead cost per unit
0.98
Variable selling and administrative cost per unit
0.70
55. The unit selling price for Dotterel’s product is
a.
$16.32
b.
$13.44
c.
$12.10
d.
$13.72
Rylan Corporation received an offer from an exporter for 25,000 units of product at $16 per unit. The acceptance of the
offer will not affect normal production or domestic sales prices. The following data are available:
Domestic unit sales price
$22
Unit manufacturing costs:
Variable
11
Fixed
6
56. The amount of the profit or loss from acceptance of the offer is a
a.
$125,000 loss
b.
$25,000 profit
c.
$125,000 profit
d.
$25,000 loss
Name:
Class:
Date:
57. Mighty Safe Fire Alarm is currently buying 50,000 motherboards from MotherBoard, Inc., at a price of $65 per board.
Mighty Safe is considering making its own boards. The costs to make the board are as follows: direct materials, $32 per
unit; direct labor, $10 per unit; and variable factory overhead, $16 per unit. Fixed costs for the plant would increase by
$75,000. Which option should be selected and why?
a.
buy, $75,000 increase in profits
b.
make, $275,000 increase in profits
c.
buy, $275,000 increase in profits
d.
make, $350,000 increase in profits
58. When using the product cost method of applying the cost-plus approach to product pricing, which of the following is
included in the markup?
a.
desired profit
b.
total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit
c.
total costs plus desired profit
d.
total selling and administrative expenses plus desired profit
59. Which of the following equations best describes target costing?
a.
Selling Price – Desired Profit = Target Cost
b.
Selling Price + Profit = Target Cost
c.
Target Variable Cost + Contribution Margin = Selling Price
d.
Selling Price = Profit – Target Variable Cost
60. Keating Co. is considering disposing of equipment that cost $50,000 and has $40,000 of accumulated depreciation to
date. Keating Co. can sell the equipment through a broker for $25,000 less a 5% commission. Alternatively, Gunner Co.
has offered to lease the equipment for five years for a total of $48,750. Keating will incur repair, insurance, and property
tax expenses estimated at $8,000 over the five-year period. At lease-end, the equipment is expected to have no residual
value. The net differential profit or loss from the sell alternative is a
a.
$17,000 loss
b.
$7,000 profit
c.
$27,000 loss
d.
$14,500 profit
61. The condensed income statement for Hayden Corp. for the past year is as follows:
Product
T
U
Sales
$ 680,000
$320,000
Costs:
Variable costs
$(540,000)
$(220,000)
Fixed costs
(145,000)
(40,000)
Total costs
$(685,000)
$(260,000)
Income (loss)
$ (5,000)
$ 60,000
Management is considering the discontinuance of the manufacture and sale of Product T 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 Product U. The
amount of change in profit for the current year that will result from the discontinuance of Product T is a
a.
$140,000 increase
b.
$5,000 increase
Name:
Class:
Date:
c.
$5,000 decrease
d.
$140,000 decrease
62. Discontinuing a product or segment is a huge decision that must be carefully analyzed. Which of the following would
be a valid reason not to discontinue an operation?
a.
Losses are minimal.
b.
Variable costs are less than revenues.
c.
Variable costs are more than revenues.
d.
Allocated fixed costs are more than revenues.
63. Yasmin Co. can further process Product B to produce Product C. Product B is currently selling for $30 per pound and
costs $28 per pound to produce. Product C would sell for $55 per pound and would require an additional cost of $31 per
pound to produce. The differential cost of producing Product C is
a.
$30 per pound
b.
$31 per pound
c.
$28 per pound
d.
$55 per pound
Widgeon Co. manufactures three products: Bales, Tales, and Wales. The selling prices are $55, $78, and $32,
respectively. The variable costs for each product are $20, $50, and $15, respectively. Each product must go through the
same processing in a machine that is limited to 2,000 hours per month. Bales take 5 hours to process; Tales 7 hours; and
Wales 1 hour.
64. The contribution margin per machine hour for Bales is
a.
$5
b.
$7
c.
$35
d.
$28
65. Sage Company is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations
for $15 per unit. The unit cost for the business to make the part is $20, including fixed costs, and $11, not including fixed
costs. If 30,000 units of the part are normally purchased during the year but could be manufactured using unused capacity,
the amount of differential cost increase or decrease from making the part rather than purchasing it would be a
a.
$150,000 cost increase
b.
$120,000 cost decrease
c.
$150,000 cost decrease
d.
$120,000 cost increase
Magpie Corporation uses the total cost method of product pricing. Below is cost information for the production and sale
of 60,000 units of its sole product. Magpie desires a profit equal to a 25% return on invested assets of $700,000.
Fixed factory overhead cost
$38,700
Fixed selling and administrative costs
7,500
Variable direct materials cost per unit
4.60
Variable direct labor cost per unit
1.88
Variable factory overhead cost per unit
1.13
Variable selling and administrative cost per unit
4.50
Name:
Class:
Date:
66. The unit selling price for Magpie’s product is
a.
$15.00
b.
$13.82
c.
$15.79
d.
$14.76
67. Delaney Company is considering replacing equipment that originally cost $600,000 and has accumulated depreciation
of $420,000 to date. A new machine will cost $790,000 and the old equipment can be sold for $8,000. The sunk cost in
this situation is
a.
$172,000
b.
$180,000
c.
$188,000
d.
$290,000
Carmen Co. can further process Product J to produce Product D. Product J is currently selling for $20.00 per pound and
costs $15.75 per pound to produce. Product D would sell for $38.00 per pound and would require an additional cost of
$8.55 per pound to produce.
68. The differential revenue of producing Product D is
a.
$6.75 per pound
b.
$22.25 per pound
c.
$18.00 per pound
d.
$6.25 per pound
69. Piper Corp. is operating at 70% of capacity and is currently purchasing a part used in its manufacturing operations for
$24 per unit. The unit cost for the business to make the part is $36, including fixed costs, and $26, not including fixed
costs. If 15,000 units of the part are normally purchased during the year but could be manufactured using unused capacity,
the amount of differential cost increase or decrease from making the part rather than purchasing it would be a
a.
$30,000 cost decrease
b.
$180,000 cost increase
c.
$30,000 cost increase
d.
$180,000 cost decrease
70. Lara Technologies is considering a total cash outlay of $250,000 for the purchase of land, which it could lease for
$35,000 per year. If alternative investments are available that yield a 12% return, the opportunity cost of the purchase of
the land is
a.
$35,000
b.
$30,000
c.
$250,000
d.
$4,200
71. Which of the following price-setting methods considers the price that other providers charge for the same product?
a.
demand-based method
b.
total cost method
Name:
Class:
Date:
c.
cost-plus method
d.
competition-based method
Widgeon Co. manufactures three products: Bales, Tales, and Wales. The selling prices are $55, $78, and $32,
respectively. The variable costs for each product are $20, $50, and $15, respectively. Each product must go through the
same processing in a machine that is limited to 2,000 hours per month. Bales take 5 hours to process; Tales 7 hours; and
Wales 1 hour.
72. Assume that Widgeon Co. produced enough product with the highest contribution margin per unit to use 1,000 hours
of machine time. Product demand does not warrant any more production of that product. The maximum additional
contribution margin that can be realized by utilizing the remaining 1,000 hours on the product with the second highest
contribution margin per hour is
a.
$35,000
b.
$7,000
c.
$4,000
d.
$28,000
73. The product with the highest contribution margin per machine hour is
a.
Bales
b.
Tales
c.
Wales
d.
Bales and Tales have the same contribution margin.
Mallard Corporation uses the product cost method of product pricing. Below is cost information for the production and
sale of 45,000 units of its sole product. Mallard desires a profit equal to a 12% return on invested assets of $800,000.
Fixed factory overhead cost
$82,000
Fixed selling and administrative costs
45,000
Variable direct materials cost per unit
5.50
Variable direct labor cost per unit
7.65
Variable factory overhead cost per unit
2.25
Variable selling and administrative cost per unit
0.90
74. The cost per unit for the production of the company‘s product is
a.
$13.15
b.
$17.22
c.
$15.40
d.
$15.75
75. Which of the following methods of applying the cost-plus approach to product pricing includes only total
manufacturing costs in the cost amount to which the markup is added?
a.
variable cost method
b.
total cost method
c.
product cost method
d.
all of these choices
Widgeon Co. manufactures three products: Bales, Tales, and Wales. The selling prices are $55, $78, and $32,
Name:
Class:
Date:
respectively. The variable costs for each product are $20, $50, and $15, respectively. Each product must go through the
same processing in a machine that is limited to 2,000 hours per month. Bales take 5 hours to process; Tales 7 hours; and
Wales 1 hour.
76. The contribution per machine hour for Wales is
a.
$35
b.
$28
c.
$17
d.
$7
77. Falcon Co. produces a single product. Its normal selling price is $30.00 per unit. The variable costs are $19.00 per
unit. Fixed costs are $25,000 for a normal production run of 5,000 units per month. Falcon received a request for a special
order that would not interfere with normal sales. The order was for 1,500 units with a special price of $20.00 per unit.
Falcon has the capacity to handle the special order, and for this order, a variable selling cost of $1.00 per unit would be
eliminated. If the order is accepted, the differential effect on profit would be a(n)
a.
decrease of $750
b.
decrease of $4,500
c.
increase of $3,000
d.
increase of $1,500
Swan Company produces its product at a total cost of $43 per unit. Of this amount, $8 per unit is selling and
administrative costs. The total variable cost is $30 per unit, and the desired profit is $20 per unit.
78. The markup percentage on product cost is
a.
80%
b.
47%
c.
70%
d.
110%
79. Which of the following would be considered a sunk cost?
a.
purchase price of new equipment
b.
equipment rental for the production area
c.
net book value of equipment that has no market value
d.
warehouse lease expense
Carmen Co. can further process Product J to produce Product D. Product J is currently selling for $20.00 per pound and
costs $15.75 per pound to produce. Product D would sell for $38.00 per pound and would require an additional cost of
$8.55 per pound to produce.
80. The differential cost of producing Product D is
a.
$6.50 per pound
b.
$8.55 per pound
c.
$17.00 per pound
d.
$5.25 per pound
Name:
Class:
Date:
Flyer Company sells a product in a competitive marketplace. Market analysis indicates that its product would probably
sell at $48 per unit. Flyer management desires a 12.5% profit margin on sales. Flyer’s current full cost for the product is
$44 per unit.
81. If the company cannot cut costs any lower than they already are, the profit margin on sales to meet the market selling
price would be
a.
9.3%
b.
7.3%
c.
10.3%
d.
8.3%
Magpie Corporation uses the total cost method of product pricing. Below is cost information for the production and sale
of 60,000 units of its sole product. Magpie desires a profit equal to a 25% return on invested assets of $700,000.
Fixed factory overhead cost
$38,700
Fixed selling and administrative costs
7,500
Variable direct materials cost per unit
4.60
Variable direct labor cost per unit
1.88
Variable factory overhead cost per unit
1.13
Variable selling and administrative cost per unit
4.50
82. The markup percentage on total cost for Magpie’s product is
a.
21.0%
b.
22.6%
c.
15.8%
d.
24.0%
Widgeon Co. manufactures three products: Bales, Tales, and Wales. The selling prices are $55, $78, and $32,
respectively. The variable costs for each product are $20, $50, and $15, respectively. Each product must go through the
same processing in a machine that is limited to 2,000 hours per month. Bales take 5 hours to process; Tales 7 hours; and
Wales 1 hour.
83. The contribution margin per machine hour for Tales is
a.
$4
b.
$7
c.
$28
d.
$35
Magpie Corporation uses the total cost method of product pricing. Below is cost information for the production and sale
of 60,000 units of its sole product. Magpie desires a profit equal to a 25% return on invested assets of $700,000.
Fixed factory overhead cost
$38,700
Fixed selling and administrative costs
7,500
Variable direct materials cost per unit
4.60
Variable direct labor cost per unit
1.88
Variable factory overhead cost per unit
1.13
Variable selling and administrative cost per unit
4.50
Name:
Class:
Date:
b.
The additional sales will increase differential profit.
84. The dollar amount of desired profit from the production and sale of Magpie’s product is
a.
$175,000
b.
$67,200
c.
$73,500
d.
$96,000
85. The amount of increase or decrease in cost that is expected from a particular course of action as compared with an
alternative is
a.
period cost
b.
product cost
c.
differential cost
d.
discretionary cost
86. Which of the following is not a method commonly used in applying the cost-plus approach to product pricing?
a.
total cost method
b.
product cost method
c.
variable cost method
d.
fixed cost method
Swan Company produces its product at a total cost of $43 per unit. Of this amount, $8 per unit is selling and
administrative costs. The total variable cost is $30 per unit, and the desired profit is $20 per unit.
87. The markup percentage on total cost is
a.
100.0%
b.
110.0%
c.
80.0%
d.
46.5%
Stryker Industries received an offer from an exporter for 15,000 units of product at $17.50 per unit. The acceptance of the
offer will not affect normal production or domestic sales prices. The following data are available:
Domestic unit sales price
$20
Unit manufacturing costs:
Variable
11
Fixed
1
88. The differential cost from the acceptance of the offer is
a.
$200,000
b.
$262,500
c.
$85,500
d.
$165,000
89. Which of the following reasons would cause a company to reject an offer to accept business at a special price?
a.
The additional sale will not conflict with regular sales.
Name:
Class:
Date:
c.
The additional sales will not increase fixed expenses.
d.
The additional sales will increase fixed expenses.
90. Jarrett Company is considering a cash outlay of $300,000 for the purchase of land, which it could lease for $36,000
per year. If alternative investments are available that yield a 9% return, the opportunity cost of the purchase of the land is
a.
$27,000
b.
$36,000
c.
$9,000
d.
$72,000
91. When using the variable cost method of applying the cost-plus approach to product pricing, which of the following is
included in the markup?
a.
total costs plus desired profit
b.
desired profit
c.
total selling and administrative expenses plus desired profit
d.
total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit
92. Contractors who sell to government agencies would be most likely to use which of the following cost methods in
pricing their products?
a.
variable cost method
b.
product cost method
c.
total cost method
d.
fixed cost method
93. Nighthawk Inc. is considering disposing of an old machine with a book value of $22,500 and an estimated remaining
life of three years. The old machine can be sold for $6,250. A new machine with a purchase price of $68,750 is being
considered a replacement. It will have a useful life of three years and no residual value. It is estimated that the annual
variable manufacturing costs will be reduced from $43,750 to $20,000 if the new machine is purchased. The three-year
differential effect on profit from replacing the machine is a(n)
a.
$8,750 increase
b.
$31,250 decrease
c.
$8,750 decrease
d.
$2,925 decrease
94. The revenue that is forgone from an alternative use of an asset, such as cash, is called
a.
differential profit
b.
sunk cost
c.
differential revenue
d.
opportunity cost
95. Using the variable cost method, the markup per unit for 30,000 units (rounded to the nearest dollar) using the
following data is
Variable cost per unit $15
Total fixed costs $90,000
Desired profit $150,000
Name:
Class:
Date:
a.
$10
b.
$15
c.
$8
d.
$23
96. Lofty Airlines has a flight for which the regular ticket price is $200 and the variable costs per passenger are $50. Fixed
costs assigned to each flight are $12,000. Each flight has a capacity of 125 seats, with an average of 95 seats sold at the
regular price. To attract customers to the last 30 unsold seats, Lofty discounts the tickets by 50% for standby passengers.
The break-even number of regular-priced seats per flight is
a.
50
b.
80
c.
95
d.
120
97. All of the following should be considered in a make-or-buy decision except
a.
cost savings
b.
quality issues with the supplier
c.
future growth in the plant and other production opportunities
d.
whether the supplier will make a profit that would no longer belong to the business
98. Using the variable cost method, determine the selling price (rounded to the nearest dollar) for 30,000 units using the
following data:
Variable cost per unit $15
Total fixed costs $90,000
Desired profit $150,000
a.
$10
b.
$15
c.
$8
d.
$23
99. Jacoby Company received an offer from an exporter for 30,000 units of product at $15 per unit. The acceptance of the
offer will not affect normal production or domestic sales prices. The following data are available:
Domestic unit sales price
$21
Unit manufacturing costs:
Variable
12
Fixed
5
The differential revenue from the acceptance of the offer is
a.
$450,000
b.
$630,000
c.
$510,000
d.
$120,000
100. The condensed income statement for a Fletcher Inc. for the past year is as follows:
Product
Name:
Class:
Date:
105. The amount of increase or decrease in revenue that is expected from a particular course of action as compared with
F
G
H
Total
Sales
$ 300,000
$ 210,000
$ 340,000
$ 850,000
Costs:
Variable costs
$(180,000)
$(180,000)
$(220,000)
$(590,000)
Fixed costs
(50,000)
(50,000)
(40,000)
(140,000)
Total costs
$(230,000)
$(230,000)
$(260,000)
$(730,000)
Income (loss)
$ 70,000
$ (20,000)
$ 80,000
$ 120,000
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.
The amount of change in profit for the current year that will result from the discontinuance of Product G is a
a.
$20,000 increase
b.
$30,000 increase
c.
$20,000 decrease
d.
$30,000 decrease
101. Delaney Company is considering replacing equipment that originally cost $600,000 and has accumulated
depreciation of $420,000 to date. A new machine will cost $790,000. The sunk cost in this situation is
a.
$370,000
b.
$790,000
c.
$180,000
d.
$190,000
102. The target costing method assumes that
a.
markup is added to total cost
b.
the selling price is set by the marketplace
c.
markup is added to variable cost
d.
markup is added to product cost
103. When using the total cost method of applying the cost-plus approach to product pricing, which of the following is
included in the markup?
a.
total selling and administrative expenses plus desired profit
b.
total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit
c.
total costs plus desired profit
d.
desired profit
Flyer Company sells a product in a competitive marketplace. Market analysis indicates that its product would probably
sell at $48 per unit. Flyer management desires a 12.5% profit margin on sales. Flyer’s current full cost for the product is
$44 per unit.
104. The desired profit per unit is
a.
$6
b.
$8
c.
$5
d.
$4
Name:
Class:
Date:
an alternative is
a.
manufacturing margin
b.
contribution margin
c.
differential cost
d.
differential revenue
106. Farris Company is considering a cash outlay of $500,000 for the purchase of land, which it could lease for $40,000
per year. If alternative investments are available that yield a 15% return, the opportunity cost of the purchase of the land is
a.
$75,000
b.
$40,000
c.
$44,000
d.
$7,500
Dotterel Corporation uses the variable cost method of product pricing. Below is cost information for the production and
sale of 35,000 units of its sole product. Dotterel desires a profit equal to an 11.2% return on invested assets of $350,000.
Fixed factory overhead cost
$105,000
Fixed selling and administrative costs
35,000
Variable direct materials cost per unit
4.34
Variable direct labor cost per unit
5.18
Variable factory overhead cost per unit
0.98
Variable selling and administrative cost per unit
0.70
107. The markup percentage for the sale of Dotterel’s product is
a.
14.0%
b.
5.6%
c.
45.7%
d.
11.2%
Swan Company produces its product at a total cost of $43 per unit. Of this amount, $8 per unit is selling and
administrative costs. The total variable cost is $30 per unit, and the desired profit is $20 per unit.
108. The markup percentage on variable cost is
a.
100.0%
b.
110.0%
c.
80.0%
d.
46.5%
Stryker Industries received an offer from an exporter for 15,000 units of product at $17.50 per unit. The acceptance of the
offer will not affect normal production or domestic sales prices. The following data are available:
Domestic unit sales price
$20
Unit manufacturing costs:
Variable
11
Fixed
1
109. The differential revenue from the acceptance of the offer is
Name:
Class:
Date:
a.
$300,000
b.
$262,500
c.
$52,500
d.
$250,000
Mallard Corporation uses the product cost method of product pricing. Below is cost information for the production and
sale of 45,000 units of its sole product. Mallard desires a profit equal to a 12% return on invested assets of $800,000.
Fixed factory overhead cost
$82,000
Fixed selling and administrative costs
45,000
Variable direct materials cost per unit
5.50
Variable direct labor cost per unit
7.65
Variable factory overhead cost per unit
2.25
Variable selling and administrative cost per unit
0.90
110. The unit selling price for the company’s product is
a.
$19.35
b.
$15.75
c.
$22.05
d.
$21.25
Dotterel Corporation uses the variable cost method of product pricing. Below is cost information for the production and
sale of 35,000 units of its sole product. Dotterel desires a profit equal to an 11.2% return on invested assets of $350,000.
Fixed factory overhead cost
$105,000
Fixed selling and administrative costs
35,000
Variable direct materials cost per unit
4.34
Variable direct labor cost per unit
5.18
Variable factory overhead cost per unit
0.98
Variable selling and administrative cost per unit
0.70
111. The variable cost per unit for the production and sale of Dotterel’s product is
a.
$14.00
b.
$12.60
c.
$9.80
d.
$11.20
112. A cost that has been incurred in the past, cannot be recouped, and is not relevant to future decisions is termed a
a.
period cost
b.
differential cost
c.
sunk cost
d.
replacement cost
Flyer Company sells a product in a competitive marketplace. Market analysis indicates that its product would probably
sell at $48 per unit. Flyer management desires a 12.5% profit margin on sales. Flyer’s current full cost for the product is
$44 per unit.
Name:
Class:
Date:
113. The target cost of the company’s product is
a.
$44
b.
$42
c.
$43
d.
$40
Dotterel Corporation uses the variable cost method of product pricing. Below is cost information for the production and
sale of 35,000 units of its sole product. Dotterel desires a profit equal to an 11.2% return on invested assets of $350,000.
Fixed factory overhead cost
$105,000
Fixed selling and administrative costs
35,000
Variable direct materials cost per unit
4.34
Variable direct labor cost per unit
5.18
Variable factory overhead cost per unit
0.98
Variable selling and administrative cost per unit
0.70
114. The dollar amount of desired profit from the production and sale of Dotterel’s product is
a.
$89,600
b.
$39,200
c.
$70,000
d.
$84,000
115. Starling Co. is considering disposing of a machine with a book value of $12,500 and estimated remaining life of five
years. The old machine can be sold for $1,500. A new high-speed machine can be purchased at a cost of $25,000. It will
have a useful life of five years and no residual value. It is estimated that the annual variable manufacturing costs will be
reduced from $26,000 to $23,500 if the new machine is purchased. The five-year differential effect on profit from
replacing the machine is a(n)
a.
decrease of $11,000
b.
decrease of $15,000
c.
increase of $11,000
d.
increase of $15,000
116. Peyton Company manufactures Phone X and Phone Y. Peyton can sell all it can make of either phone. Based on the
following data and assuming the number of hours is a constraint, which of the following statements is true?
X
Y
Sales price
$48
$44
Variable cost
38
28
Time needed to process
5 hours
8 hours
a.
X is more profitable than Y.
b.
Y is more profitable than X.
c.
Neither X nor Y is profitable.
d.
X and Y are equally profitable.
117. Lofty Airlines has a flight for which the regular ticket price is $200 and the variable costs per passenger are $50.
Fixed costs assigned to each flight are $12,000. Each flight has a capacity of 125 seats, with an average of 95 seats sold at
Name:
Class:
Date:
the regular price. To attract customers to the last 30 unsold seats, Lofty discounts the tickets by 50% for standby
passengers. The contribution margin per standby passenger is
a.
$25
b.
$50
c.
$100
d.
$150
118. Grace Co. can further process Product B to produce Product C. Product B is currently selling for $60 per pound and
costs $38 per pound to produce. Product C would sell for $95 per pound and would require an additional cost of $13 per
pound to produce. The differential revenue of producing and selling Product C is
a.
$35 per pound
b.
$38 per pound
c.
$95 per pound
d.
$60 per pound
Match each phrase that follows with the term (a–e) it describes.
a.
Opportunity cost
b.
Sunk cost
c.
Theory of constraints
d.
Differential analysis
e.
Product cost distortion
119. Possible result of using an inappropriate overhead allocation method
120. Revenue forgone from an alternative use of an asset
121. Strategy that focuses on reducing the influence of bottlenecks
122. Not relevant to future decisions
123. Evaluation of how profit will change based on an alternative course of action
Match each phrase that follows with the term (a–e) it describes. Some terms may not be used and other terms may be used
more than once.
a.
Total cost method
b.
Variable cost method
c.
Normal selling price
d.
Product cost method
e.
Yield pricing
124. = Cost Amount per Unit + Markup
125. Includes manufacturing costs plus selling and administrative expenses in the total cost per unit before markup
126. A common practice in many high-fixed-cost service businesses
Name:
Class:
Date:
127. Target selling price to be achieved in the long term
128. Fixed costs are included in the markup
Match each word or phrase that follows with the term (a–e) it describes.
a.
Demand-based method
b.
Competition-based method
c.
Product cost method
d.
Target costing method
e.
Production bottleneck
129. Constraint
130. Combines market-based pricing with a cost-reduction emphasis
131. Only includes the costs of manufacturing in product cost per unit
132. Sets the price based on the price offered by competitors
133. Sets the price based on product demand
134. Finch, Inc., has purchased a new server and must decide what to do with the old one. The cost of the old server was
originally $60,000 and has been depreciated $45,000. The company has received two offers. One offer was to lease the
equipment for $7,000 for the next five years, but the company will be required to provide maintenance and insurance
totaling $3,000 per year. The other offer was made to purchase the equipment outright for $18,500 less a 5% sales
commission. Which offer should Finch, Inc., accept? Prepare a differential analysis report to support your answer.
135. Moon Company uses the variable cost method of applying the cost-plus approach to product pricing. The costs and
expenses of producing and selling 75,000 units of Product T are as follows:
Variable costs per unit:
Direct materials
$ 7.00
Direct labor
3.50
Factory overhead
1.50
Selling and administrative expenses
3.00
Total
$15.00
Fixed costs:
Factory overhead
$45,000
Selling and administrative expenses
20,000
Moon desires a profit equal to an 18% return on invested assets of $1,440,000.
a.
Determine the amount of desired profit from the production and sale of Product T.
b.
Determine the total variable costs for the production and sale of 75,000 units of Product T.
c.
Determine the markup percentage for Product T.
d.
Determine the unit selling price of Product T.
Round your markup percentage to one decimal place and other intermediate computations and final answer to two
decimal places.
Name:
Class:
Date:
136. Jay Company uses the total cost method of applying the cost-plus approach to product pricing. The costs and
expenses of producing and selling 38,400 units of Product E are as follows:
Variable costs per unit:
Direct materials
$ 4.70
Direct labor
2.50
Factory overhead
1.90
Selling and administrative expenses
2.60
Total
$11.70
Fixed costs:
Factory overhead
$80,000
Selling and administrative expenses
14,000
Jay desires a profit equal to a 14% return on invested assets of $640,000.
a.
Determine the amount of desired profit from the production and sale of Product E.
b.
Determine the total costs and the cost amount per unit for the production and sale of 38,400
units of Product E.
c.
Determine the markup percentage for Product E.
d.
Determine the selling price of Product E.
Round the markup percentage to one decimal place and other intermediate computations and final answer to two decimal
places.
137. MZE Manufacturing Company has a normal plant capacity of 37,500 units per month. Because of an extra-large
quantity of inventory on hand, it expects to produce only 30,000 units in May. Monthly fixed costs and expenses are
$112,500 ($3.00 per unit at normal plant capacity) and variable costs and expenses are $8.25 per unit. The present selling
price is $13.50 per unit. The company has an opportunity to sell 7,500 additional units at $9.90 per unit to an exporter
who plans to market the product under its own brand name in a foreign market. The additional business is therefore not
expected to affect the regular selling price or quantity of sales of MZE Manufacturing Company.
Should MZE reject or accept the special order? Prepare a differential analysis report dated April 21 of the current year to
support your answer.
138. Diamond Boot Factory normally sells its specialty boots for $375 a pair. An offer to buy 100 boots for $275 per pair
was made by an organization hosting a national event in Norfolk. The variable cost per boot is $250, and special stitching
will add another $20 per pair to the cost. Determine the differential income or loss per pair of boots from selling to the
organization. Should Diamond Boot Factory accept or reject the special offer? Show computations, but a formal
differential analysis report is not required.
139. Jamison Company uses the total cost method of applying the cost-plus approach to product pricing. Jamison
produces and sells Product X at a total cost of $25 per unit, of which $15 is product cost and $10 is selling and
administrative expenses. In addition, the total cost of $25 is made up of $14 variable cost and $11 fixed cost. The desired
profit is $5 per unit. Determine the markup percentage on total cost.
140. Yakking Co. manufactures mobile cellular equipment and uses the variable cost method of applying the cost-plus
approach to product pricing. Yakking incurs variable costs of $1,900,000 in the production of 100,000 units, while fixed
costs total $50,000. The company employs $4,725,000 of assets and wishes to earn a profit equal to a 10% return on
invested assets.
a.
Compute a markup percentage based on variable cost.
b.
Determine a selling price.
Round the markup percentage to one decimal place and other intermediate computations and final answer to two decimal
places.
Name:
Class:
Date:
141. Using the variable cost method of applying the cost-plus approach to product pricing, determine the selling price for
30,000 units using the following data: variable cost per unit, $15.00; total fixed costs, $90,000; and desired profit,
$150,000.
142. Mallory Company uses the product cost method of applying the cost-plus approach to product pricing. It produces
and sells Product X at a total cost of $35 per unit, of which $28 is product cost and $7 is selling and administrative
expenses. In addition, the total cost of $35 is made up of $24 variable cost and $11 fixed cost. The desired profit is $8 per
unit. Determine the markup percentage on product cost.
143. Goshawks Co. produces an automotive product and incurs total manufacturing costs of $2,600,000 in the production
of 80,000 units. The company desires to earn a profit equal to a 12% return on assets of $960,000. Total selling and
administrative expenses are $105,000.
a.
Determine the markup percentage, using the product cost method.
b.
Compute the selling price per unit of the automotive product.
Round the markup percentage to one decimal place and other intermediate computations and final answer to two decimal
places.
144. Hummingbird Company uses the product cost method of applying the cost-plus approach to product pricing. The
costs and expenses of producing 25,000 units of Product K are as follows:
Variable costs per unit:
Direct materials
$2.50
Direct labor
4.25
Factory overhead
1.25
Selling and administrative expenses
0.50
Total
$8.50
Fixed costs:
Factory overhead
$25,000
Selling and administrative expenses
17,000
Hummingbird desires a profit equal to a 5% return on invested assets of $642,500.
a.
Determine the amount of desired profit from the production and sale of Product
K.
b.
Determine the total manufacturing costs and the cost amount per unit for the
production of 25,000 units of Product K.
c.
Determine the markup percentage for Product K.
d.
Determine the selling price of Product K.
Round the markup percentage to one decimal place and other intermediate computations and final answer to two decimal
places.
145. Gull Corp. is considering selling its old popcorn machine and replacing it with a newer one. The old machine has a
book value of $5,000, and its remaining useful life is five years. Annual costs are $4,000. A high school is willing to buy
it for $2,000. New equipment would cost $18,000 with annual operating costs of $1,500. The new machine has an
estimated useful life of five years.
Should the machine be replaced? Prepare a differential analysis report to support your answer.
146. Airflow Company sells a product in a competitive marketplace. Market analysis indicates that the product would
probably sell at $28.00 per unit. Airflow management desires a profit equal to a 20% return on invested assets of
$1,400,000. Airflow anticipates selling 50,000 units. The current full cost per unit for the product is $25.00 per unit.
Name:
Class:
Date:
$65.00. A finished desk can be sold for $75.00. The additional processing cost to complete the finished desk is $5.95.
a. What is the amount of profit per unit?
b. What is the target cost per unit if Airflow meets the market dictated price and management’s desired profit?
147. Product J is one of the many products manufactured and sold by Oceanside Company. An income statement by
product line for the past year indicated a net profit for Product J of $2,750. This net profit resulted from sales of $275,000,
cost of goods sold of $186,500, and operating expenses of $85,750. It is estimated that 30% of the cost of goods sold
represents fixed factory overhead costs and that 40% of the operating expense is fixed. If Product J is retained, the
revenue, costs, and expenses are not expected to change significantly from those of the current year. Because of the large
number of products manufactured, the total fixed costs and expenses are not expected to decline significantly if Product J
is discontinued.
Should the company continue or discontinue producing Product J? Prepare a differential analysis report to support your
answer.
148. Olsen Company produces two products. Product A has a contribution margin of $30 and requires 10 machine hours.
Product B has a contribution margin of $24 and requires 4 machine hours. Determine the more profitable product
assuming the machine hours are the constraint.
149. An employee of Morgan Corporation found some partially completed units of Model X in a dusty corner of the
warehouse. A job ticket attached to the units indicates that a total of $750 in manufacturing costs have been used to bring
the materials to this point in the manufacturing process. The units can be sold in their current condition for $275 to a
scrap metal dealer. If Morgan spends $250 to complete the units, they could be sold for $600.
a. What should Morgan do? Why?
b. Identify the sunk cost, if any.
150. Falcon Inc. manufactures Product B, incurring variable costs of $15.00 per unit and fixed costs of $70,000. Falcon
desires a profit equal to a 12% return on invested assets, $785,000 of assets are devoted to producing Product B, and
100,000 units are expected to be produced and sold.
a.
Compute the markup percentage, using the total cost method of applying the cost-
plus approach to product pricing.
b.
Compute the selling price of Product B.
Round your intermediate computations and final answer to two decimal places.
151. Eastwood Cake Factory sells chocolate cakes, birthday cakes, and specialty cakes. The factory is experiencing a
bottleneck and is trying to determine which cake is most profitable. Even though Eastwood may have to limit its orders, it
is concerned about customer service and satisfaction.
Chocolate
Cake
Birthday Cake
Specialty Cake
Sales price
$20.00
$45.00
$60.00
Variable cost per cake
$5.00
$12.00
$20.00
Hours needed to bake, frost,
and decorate
1 hour
2.5 hours
2 hours
a. Compute the contribution margin per hour per cake.
b. Determine which cakes the company should try to sell more of first, second, and then last.
152. Oficina Bonita Company manufactures office furniture. An unfinished desk is produced for $36.00 and sold for
Name:
Class:
Date:
Should the company sell unfinished desks or process further and sell finished desks? Prepare a differential analysis to
support your answer.
153. Piper Rose Boutique has been approached by the community college to make special polo shirts for the faculty and
staff. The college is willing to buy 4,000 polos with its own design for $6.00 each. The company normally sells its shirts
for $12.00 each. The company has enough excess capacity to make this order. A breakdown of the costs is as follows:
Direct materials
$2.00
Direct labor
0.50
Variable factory overhead
1.50
Fixed factory overhead
_2.50
Total cost per unit
$6.50
Should Piper Rose Boutique accept the special order made by the college? Show computations, but a formal differential
analysis report is not required.
154. Sierra Company produces its product at a total cost of $89 per unit. Of this amount, $14 per unit is selling and
administrative costs. The total variable cost is $58 per unit, and the desired profit is $28 per unit.
Determine the markup percentage using the (a) total cost, (b) product cost, and (c) variable cost methods.
155. Snipe Company has been purchasing a component, Part Q, for $19.20 per unit. Snipe is currently operating at 70% of
capacity, and no significant increase in production is anticipated in the near future. The cost of manufacturing a unit of
Part Q is estimated as follows:
Direct materials
$11.50
Direct labor
4.50
Variable factory overhead
1.12
Fixed factory overhead
3.15
Total
$20.27
Should the company make or buy the component? Prepare a differential analysis report dated March 12 of the current year
to support your answer.
156. Sensational Soft Drinks makes three products: iced tea, soda, and lemonade. The following data are available:
Iced Tea
Soda
Lemonade
Sales price per unit
$0.90
$0.60
$0.50
Variable cost per unit
(0.30)
(0.15)
(0.10)
Contribution margin per unit
$0.60
$0.45
$0.40
Sensational is experiencing a bottleneck in one of its processes that affects each product as follows:
Iced Tea
Soda
Lemonade
Bottleneck process hours per unit
3
3
4
a.
Using a theory of constraints (TOC) approach, rank the products in terms of profitability.
b.
What price for lemonade would equate its profitability (contribution margin per bottleneck
hour) to that of soda?
157. Ptarmigan Company produces two products. Product A has a contribution margin of $20 and requires 4 machine
hours. Product B has a contribution margin of $18 and requires 3 machine hours. Determine the most profitable product
assuming the machine hours are the constraint.
Name:
Class:
Date:
Name:
Class:
Date:
Name:
Class:
Date:
Name:
Class:
Date:
Name:
Class:
Date:
Name:
Class:
Date:
Name:
Class:
Date:
Name:
Class:
Date:
Name:
Class:
Date:
Name:
Class:
Date:
Name:
Class:
Date:
Name:
Class:
Date: