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Chapter 12
41. 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.
42. 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
Chapter 12
43. 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
44. 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.
Chapter 12
45. 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
considering leasing the machine. It can be leased for 4 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
Chapter 12
46. 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.
47. The condensed income statement for a business for the past year is presented as follows:
Product
F
G
H
Total
Sales
$200,000
$180,000
$320,000
$700,000
Less variable costs
120,000
160,000
200,000
480,000
Contribution margin
$ 80,000
$ 20,000
$120,000
$220,00
Less fixed costs
25,000
30,000
40,000
95,000
Income (loss) from
operations
$ 55,000
$10,000
$ 80,000
$125,000
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.
$10,000 increase
b.
$20,000 increase
c.
$10,000 decrease
Chapter 12
d.
$20,000 decrease
48. 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
Chapter 12
49. 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.
50. 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
d.
$60,000 increase
Chapter 12
51. 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
52. 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.
Chapter 12
c.
$10,000 decrease.
d.
$25,000 increase.
53. 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.
Chapter 12
54. 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.
55. 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 revenue from
the acceptance of the offer is _____.
a.
$450,000
b.
$720,000
c.
$540,000
d.
$225,000
Chapter 12
56. 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
Chapter 12
57. 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
58. 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
Chapter 12
59. 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
Chapter 12
60. 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.
61. 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
Chapter 12
62. 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
63. 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
Chapter 12
64. 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
Chapter 12
65. 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
66. 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.
Chapter 12
67. A business received an offer from an exporter for 10,000 units of product at $13.50 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
$21
Unit manufacturing costs:
Variable
12
Fixed
5
What is the amount of the gain or loss from acceptance of the offer?
a.
$75,000 loss
b.
$40,000 gain
c.
$15,000 gain
d.
$85,000 gain
68. 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.
Chapter 12
69. _____ 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
70. Target costing is arrived at by:
a.
taking the selling price and subtracting desired profit.
b.
taking the selling price and adding desired profit.
c.
taking the selling price and subtracting the budget standard cost.
d.
taking the budget standard cost and reducing it by 10%.
Chapter 12
71. Blue Lights Co. uses the total cost concept of product pricing. Given below 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
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.
Chapter 12
72. Blue Lights Co. uses the total cost concept of applying the cost-plus approach to product pricing. The costs of
producing and selling 7,700 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 amount of desired profit is $285,000, calculate the total cost markup percentage per unit. (Round answer to two
decimal places)
a.
9.30%
b.
11.10%
c.
15.70%
d.
12.86%
73. 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
