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Name:
Class:
Date:
chapter 12
Indicate whether the statement is true or false.
1. 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
2. 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
3. A practical approach that is frequently used by managers when setting normal selling price is the cost-plus approach.
a. True
b. False
4. A cost that will not be affected by later decisions is termed an opportunity cost.
a. True
b. False
5. 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
6. 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
7. 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
8. 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
9. A cost that will not be affected by later decisions is termed as sunk cost.
a. True
b. False
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10. 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
11. 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
12. 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
13. The theory of constraints is a manufacturing strategy that focuses on reducing the influence of bottlenecks on
production processes.
a. True
b. False
14. 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
15. 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
16. 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
17. 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
18. The product with the highest contribution margin per scarce resource is the most profitable.
a. True
b. False
19. Eliminating a product or segment will usually eliminates all of the product's or segment's variable costs.
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chapter 12
a. True
b. False
20. 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
21. 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
22. 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
23. 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
24. 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
25. 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
26. 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
27. The revenue that is forgone from an alternative use of an asset, such as cash, is called an opportunity cost.
a. True
b. False
28. 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.
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a. True
b. False
29. 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
30. 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
31. 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
32. 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
33. 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
34. 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
35. 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
36. 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
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37. 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
Indicate the answer choice that best completes the statement or answers the question.
38. Granger Co. can further process Product B to produce Product C. Product B is currently selling for $55 per pound and
costs $42 per pound to produce. Product C would sell for $82 per pound and would require an additional cost of $13 per
pound to produce. What is the differential revenue of producing and selling Product C?
a. $15 per pound
b. $42 per pound
c. $45 per pound
d. $27 per pound
39. 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
_____.
a. $45,000
b. $37,800
c. $47,200
d. $37,500
40. The _____ is estimated as the difference between the expected selling price and the desired profit.
a. target cost
b. product cost
c. sunk cost
d. opportunity cost
41. The condensed income statement for a business for the past year is presented as follows:
Product
F G H Total
Sales $300,000 $220,000 $340,000 $860,000
Less variable costs 180,000 190,000 220,000 590,000
Contribution margin $120,000 $ 30,000 $120,000 $270,000
Less fixed costs 50,000 50,000 40,000 140,000
Income (loss) from operations $ 70,000 $(20,000) $ 80,000 $130,000
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.
What is the amount of change in net income for the current year that will result from the discontinuance of Product G?
a. $30,000 decrease
b. $30,000 increase
c. $20,000 decrease
d. $20,000 increase
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42. Yellco Inc., a toy manufacturer, provided the following information:
Domestic unit sales price $50
Unit manufacturing costs:
Variable 10
Fixed 8
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 _____.
a. $72,000
b. $378,000
c. $153,000
d. $90,000
43. 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. $132,000
b. $102,000
c. $200,000
d. $175,000
44. Differential analysis focuses on _____.
a. setting the selling price according to the demand for the product
b. reducing the influence of constraints on production processes
c. setting the selling price according to the price offered by competitors
d. the effect of alternative courses of action on revenues and costs
45. A business 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 21% return, the opportunity cost of the purchase of the land is
_____.
a. $105,000
b. $40,000
c. $65,000
d. $8,400
46. What cost concept used in applying the cost-plus approach to product pricing includes total manufacturing costs and
total selling and administrative expenses in the "cost" amount to which the markup is added?
a. Variable cost concept
b. Total cost concept
c. Product cost concept
d. Opportunity cost concept
47. Blue Lights Co. uses the total cost concept of product pricing. The following is cost information for the production
and sale of 50,000 units of its sole product. Blue Lights desires a profit equal to a 12.6% rate of return on invested assets
of $1,000,000.
Fixed factory overhead cost $90,000
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Fixed selling and administrative costs 55,000
Variable direct materials cost per unit 6.00
Variable direct labor cost per unit 9.65
Variable factory overhead cost per unit 3.50
Variable selling and administrative cost per unit 1.20
Based on the information provided, the dollar amount of desired profit from the production and sale of the company's
product is _____.
a. $126,000
b. $67,200
c. $237,700
d. $96,000
48. 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?
a. Paul's Delivery Service should sell the truck because the differential loss from leasing is $500.
b. Paul's Delivery Service should lease the truck because the differential income from leasing is $12,200.
c. Paul's Delivery Service should lease the truck because the differential income from leasing is $300.
d. Paul's Delivery Service is indifferent as to whether the company should lease or sell the truck because there is no
differential income or loss between the alternatives.
49. 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. $35,000
b. $36,000
c. $1,000
d. $37,000
50. 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 _____.
a. $30 per pound
b. $15 per pound
c. $26 per pound
d. $10 per pound
51. The revenue that is forgone from an alternative use of an asset is called a(n) _____.
a. opportunity cost
b. differential revenue
c. sunk cost
d. differential income
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52. Red Co. uses the product cost concept of applying the cost-plus approach to product pricing. The following is cost
information for the production and sale of 40,000 units of its sole product. Red Co. desires a profit equal to a 15% rate of
return on invested assets of $1,200,000.
Fixed factory overhead cost $80,000.00
Fixed selling and administrative costs 140,000.00
Variable direct materials cost per unit 7.00
Variable direct labor cost per unit 11.00
Variable factory overhead cost per unit 3.00
Variable selling and administrative cost per unit 2.00
What is the markup percentage for the company's product? (Round the answer to two decimal places.)
a. 30.30%
b. 43.50%
c. 40.00%
d. 35.60%
53. In which of the following pricing methods is the markup added to manufacturing costs and selling and expenses to
determine the selling price?
a. Total cost method
b. Product cost method
c. Variable cost method
d. Fixed cost method
54. 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 _____.
a. $135,000
b. $235,000
c. $100,000
d. $46,750
55. What cost concept used in 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 concept
b. Total cost concept
c. Product cost concept
d. Opportunity cost concept
56. 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 _____.
a. $4 per pound
b. $30 per pound
c. $26 per pound
d. $5 per pound
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57. 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?
a. $30 per pound
b. $18 per pound
c. $17 per pound
d. $12 per pound
58. The markup determined by management should be sufficient to earn _____.
a. manufacturing cost plus the selling and administrative expenses
b. the desired profit plus cover any costs and expenses that are not included in the cost amount
c. only costs and expenses that are not included in the cost amount
d. only the desired profit
59. The condensed income statement for a business for the past year is as follows:
Product
A B
Sales $800,000 $550,000
Less variable costs 720,000 430,000
Contribution margin $ 80,000 $120,000
Less fixed costs 125,000 45,000
Income (loss) from operations $(45,000) $ 75,000
Management is considering the discontinuance of the manufacture and sale of Product A 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 B. What is
the amount of change in net income for the current year that will result from the discontinuance of Product A?
a. $80,000 increase
b. $45,000 increase
c. $45,000 decrease
d. $80,000 decrease
60. Blue Lights Co. uses the total cost concept of applying the cost-plus approach to product pricing. The costs of
producing and selling 5,000 units are as follows:
Fixed factory overhead cost $60,000
Fixed selling and administrative costs 120,000
Variable direct materials cost per unit 80
Variable direct labor cost per unit 150
Variable factory overhead cost per unit 50
Variable selling and administrative cost per unit 30
If the total cost markup percentage per unit is 5.5%, determine the selling price per unit of the company's product.
a. $346
b. $692
c. $365
d. $677
61. 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
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considering leasing the machine. It can be leased for four 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?
a. Lease—because differential revenues are $6,000 if Max leases rather than sells
b. Lease—because Max will lose $20,000 if it sells the equipment for less than its $110,000 book value
c. Sell—because differential income of selling rather than leasing is $6,000
d. Sell—because differential income is $1,500 if Max sells rather than leases
62. Alia Co. can further process Product X to produce Product Y. Product X is currently selling for $20 per pound and
costs $15 per pound to produce. Product Y would sell for $30 per pound and would require an additional cost of $8 per
pound to produce. What is the differential cost of producing Product Y?
a. $15 per pound
b. $23 per pound
c. $8 per pound
d. $5per pound
63. In contrast to the total product and variable cost concepts used in setting selling prices, the target cost approach
assumes that _____.
a. a markup is added to total cost
b. selling price is set by the market price
c. a markup is added to variable cost
d. a markup is added to product cost
64. 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. $25,000
b. $95,000
c. $995,000
d. $120,000
65. In using the variable cost concept of applying the cost-plus approach to product pricing, what is included in the
markup?
a. Total variable manufacturing costs, total variable selling and administrative expenses, and desired profit
b. Opportunity costs plus desired profit
c. Total sunk costs plus desired profit
d. Total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit
66. Defense contractors would be more likely to use which of the following cost concepts in pricing their product?
a. Variable cost
b. Product cost
c. Total cost
d. Fixed cost
67. In attempting to improve profitability when faced with a bottleneck related to hours that is involved in the production
of two or more products, which of the following is most important for management to consider?
a. Contribution margin per unit for each product
b. Time required for each different product passing through the bottleneck
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c. Selling price or sales revenue generated by each product produced through the bottleneck
d. Contribution margin per bottleneck hour for each product
68. A business 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 $12, not including fixed
costs. If 30,000 units of the part are normally purchased during the year but could be manufactured using unused capacity,
what would be the amount of differential cost increase or decrease from making the part rather than purchasing it?
a. $150,000 increase
b. $ 90,000 decrease
c. $150,000 decrease
d. $ 90,000 increase
69. Wyandott Co. produces two products. Both products pass through a firing process that is operating at full capacity and
is a production bottleneck. Product A requires 2 hours of processing and has a contribution margin per unit of $60.
Product B requires 1 hour of processing and has a contribution margin of $40. Which of the following provides the most
accurate assessment of the situation assuming unlimited demand for each product?
a. Production of Product B rather than Product A will generate the maximum profitability for Wyandotte.
b. Production of Product A rather than Product B will generate the maximum profitability for Wyandotte.
c. Raising the selling price of Product B by $20 will cause management to be indifferent between producing Product
A or Product B.
d. Raising the selling price of Product A by $10 will cause management to be indifferent between producing Product
A or Product B.
70. The condensed income statement for a business for the past year is as follows:
Product
White Black
Sales $ 750,000 $ 550,000
Less variable costs 400,000 380,000
Contribution margin $ 350,000 $ 170,000
Less fixed costs 240,000 100,000
Income (loss) from operations $ 110,000 $ 70,000
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?
a. $40,000 decrease
b. $180,000 decrease
c. $70,000 decrease
d. $170,000 decrease
71. _____ is a method of setting prices that combines market-based pricing with a cost-reduction emphasis.
a. Product costing
b. Target costing
c. Markup costing
d. Activity-based costing
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72. 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 _____.
a. $10,000 increase
b. $25,000 decrease
c. $10,000 decrease
d. $25,000 increase
73. A practical approach that is frequently used by managers when setting normal selling price is the _____.
a. cost-plus approach
b. economic theory approach
c. price graph approach
d. market price approach
74. Red Co. uses the product cost concept of applying the cost-plus approach to product pricing. The following is cost
information for the production and sale of 40,000 units of its sole product. Red Co. desires a profit equal to a 15% rate of
return on invested assets of $1,200,000.
Fixed factory overhead cost $80,000.00
Fixed selling and administrative costs 140,000.00
Variable direct materials cost per unit 7.00
Variable direct labor cost per unit 11.00
Variable factory overhead cost per unit 3.00
Variable selling and administrative cost per unit 2.00
The unit selling price for the company's product is _____.
a. $28
b. $37
c. $42
d. $33
75. Flourish Co. is considering replacing a machine that originally cost $850,000 and has $500,000 accumulated
depreciation to date. A new machine will cost $450,000. What is the sunk cost in this situation?
a. $250,000
b. $507,500
c. $350,000
d. $500,000
76. 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
77. The amount of increase or decrease in cost that is expected from a particular course of action as compared to an
alternative is termed _____.
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a. period cost
b. product cost
c. differential cost
d. discretionary cost
78. Yellco Inc., a toy manufacturer, provided the following information:
Domestic unit sales price $50
Unit manufacturing costs:
Variable 10
Fixed 8
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?
a. $450,000 gain
b. $162,000 loss
c. $315,000 loss
d. $162,000 gain
79. In using the total cost concept of applying the cost-plus approach to product pricing, what is included in the cost
amount to which the markup is added?
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 of manufacturing a product plus selling and administrative expenses
d. Total variable manufacturing costs, total variable selling and administrative expenses, and desired profit
80. What pricing method is most likely to be used if there are several providers in the same market and there is sufficient
demand for the product?
a. Demand-based method
b. Total cost method
c. Cost-plus method
d. Competition-based method
81. What is a production constraint?
a. The point in the manufacturing process where the demand for the company's products exceeds its ability to
produce the products
b. A manufacturing strategy used to reduce production cost by eliminating waste of inventory
c. A manufacturing strategy that focuses on increasing the influence of constraints on production processes
d. The point in the manufacturing process where total variable costs and total fixed costs equals total revenues
82. 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?
a. $60,000 decrease
b. $40,000 decrease
c. $40,000 increase
