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Chapter 12
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.
a.
True
b.
False
2. 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.
a.
True
b.
False
Chapter 12
3. Differential revenue is the amount of income that would result from the best available alternative for the proposed use
of cash.
a.
True
b.
False
4. Differential revenue is the amount of increase or decrease in revenue expected from a particular course of action as
compared to an alternative.
a.
True
b.
False
Chapter 12
5. A cost that will not be affected by later decisions is termed as sunk cost.
a.
True
b.
False
6. 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.
a.
True
b.
False
Chapter 12
7. 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.
a.
True
b.
False
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.
a.
True
b.
False
Chapter 12
9. 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.
a.
True
b.
False
10. 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.
a.
True
b.
False
Chapter 12
11. When evaluating whether to lease or sell an equipment, book value is considered to be the cost of selling the
equipment.
a.
True
b.
False
12. 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.
a.
True
b.
False
Chapter 12
13. A cost that will not be affected by later decisions is termed an opportunity cost.
a.
True
b.
False
14. Eliminating a product or segment will usually eliminates all of the product's or segment's variable costs.
a.
True
b.
False
Chapter 12
15. 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.
a.
True
b.
False
16. When eliminating a product or segment of a business, the fixed costs pertaining to the product or segment will always
be eliminated.
a.
True
b.
False
Chapter 12
17. 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.
a.
True
b.
False
18. 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.
a.
True
b.
False
Chapter 12
19. The revenue that is forgone from an alternative use of an asset, such as cash, is called an opportunity cost.
a.
True
b.
False
20. 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.
a.
True
b.
False
Chapter 12
21. When choosing whether or not to replace an equipment, the analysis normally focuses on the costs of continuing to
use the old equipment versus replacing the equipment.
a.
True
b.
False
22. When choosing whether or not to replace a fixed asset, management will consider the price at which the asset can be
sold.
a.
True
b.
False
Chapter 12
23. 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.
a.
True
b.
False
24. In deciding whether to accept business at a special price when the company is operating below full capacity, the
special price should be set high enough to cover both the fixed and variable costs.
a.
True
b.
False
Chapter 12
25. In deciding whether to accept business at a special price when the company is operating at full capacity, the special
price should be set high enough to cover all fixed and variable costs and expenses.
a.
True
b.
False
26. A practical approach that is frequently used by managers when setting normal selling price is the cost-plus approach.
a.
True
b.
False
Chapter 12
27. The total cost concept includes all manufacturing costs minus selling and administrative expenses in the total cost
amount to which the markup is added to determine the product price.
a.
True
b.
False
28. The product cost concept includes the selling and administrative expenses in the cost amount to which the markup is
added to determine product price.
a.
True
b.
False
Chapter 12
29. The product cost concept includes all manufacturing costs in the cost amount to which the markup is added to
determine product price.
a.
True
b.
False
30. In using the total cost concept of applying the cost-plus approach to product pricing, only profit is covered in the
markup.
a.
True
b.
False
Chapter 12
31. 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.
a.
True
b.
False
32. 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.
a.
True
b.
False
Chapter 12
33. In using the variable cost concept of applying the cost-plus approach to product pricing, variable manufacturing costs
and variable selling and administrative expenses must be covered by the markup.
a.
True
b.
False
34. When standard costs are used in applying the cost-plus approach to product pricing, the standards should be based
upon normal levels of performance.
a.
True
b.
False
Chapter 12
35. When standard costs are used in applying the cost-plus approach to product pricing, the standards should be based
upon ideal levels of performance.
a.
True
b.
False
36. The theory of constraints is a manufacturing strategy that focuses on reducing the influence of bottlenecks on
production processes.
a.
True
b.
False
Chapter 12
37. The product with the highest contribution margin per scarce resource is the most profitable.
a.
True
b.
False
38. The amount of increase or decrease in revenue that is expected from a particular course of action as compared with an
alternative is termed:
a.
manufacturing margin.
b.
differential margin.
c.
deferred revenue.
d.
differential revenue.
Chapter 12
39. The amount of increase or decrease in cost that is expected from a particular course of action as compared to an
alternative is termed:
a.
period cost.
b.
product cost.
c.
differential cost.
d.
discretionary cost.
40. A cost that has been incurred in the past and is irrelevant is termed a(n):
a.
variable cost.
b.
opportunity cost.
c.
differential cost.
d.
sunk cost.
