CHAPTER 12: DIFFERENTIAL ANALYSIS AND PRODUCT PRICING
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
3. 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
4. Hill Co. can further process Product O to produce Product P. Product O is currently selling for
$65 per pound and costs $42 per pound to produce. Product P would sell for $82 per pound
and would require an additional cost of $13 per pound to produce. The differential revenue of
producing Product P is $17 per pound.
a. True
b. False
5. 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
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 cost of
producing Product P is $55 per pound.
a. True
b. False
Chapter 12: Differential Analysis and Product Pricing
7. 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
8. 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
9. 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
10. A cost that will not be affected by later decisions is termed as sunk cost.
a. True
b. False
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
13. A cost that will not be affected by later decisions is termed an opportunity cost.
a. True
b. False
Chapter 12: Differential Analysis and Product Pricing
14. Eliminating a product or segment will usually eliminates all of the product’s or segment’s
variable costs.
a. True
b. False
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
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
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: Differential Analysis and Product Pricing
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
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
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
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
Chapter 12: Differential Analysis and Product Pricing
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
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
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
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: Differential Analysis and Product Pricing
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
37. The product with the highest contribution margin per scarce resource is the most profitable.
a. True
b. False
Venus Co. can further process Product X to produce Product Y. Product X is currently selling
for $18 per pound and costs $12.50 per pound to produce. Product Y would sell for $32 per
pound and would require an additional cost of $8.75 per pound to produce.
38. Based on the information provided for Venus Co., what is the differential cost of producing
Product Y?
a. $32 per pound
b. $12.50 per pound
c. $14 per pound
d. $8.75 per pound
39. Based on the information provided for Venus Co., what is the differential revenue of
producing Product Y?
a. $14 per pound
b. $8.75 per pound
c. $7 per pound
d. $5.25 per pound
Chapter 12: Differential Analysis and Product Pricing
40. 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.
41. 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.
42. A cost that will not be affected by later decisions is termed:
a. historical cost.
b. differential cost.
c. sunk cost.
d. replacement cost.
43. 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: Differential Analysis and Product Pricing
44. 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
45. 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.
46. 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
$220,000
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
d. $20,000 decrease
Chapter 12: Differential Analysis and Product Pricing
47. The condensed income statement for a business for the past year is as follows:
Product
White
Sales
$ 750,000
Less variable costs
400,000
Contribution margin
$ 350,000
Less fixed costs
240,000
Income (loss) from operations
$ 110,000
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
48. The amount of income that would result from an alternative use of cash is called:
a. differential income.
b. sunk cost.
c. differential revenue.
d. opportunity cost.
49. 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: Differential Analysis and Product Pricing
50. Pearl Company is considering replacing equipment that originally costs $75,000. A new
machine will cost $800,000 and the old equipment can be sold for $15,000. What is the sunk
cost in this situation?
a. $15,000
b. $75,000
c. $800,000
d. $60,000
51. 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.
52. 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.
53. 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.
Chapter 12: Differential Analysis and Product Pricing
A business received an offer from an exporter for 5,000 units of product at $10 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
$12
Unit manufacturing costs:
Variable
9
Fixed
1
54. Based on the above data, what is the differential revenue from the acceptance of the offer?
a. $45,000
b. $40,000
c. $50,000
d. $60,000
55. Based on the above data, what is the differential cost from the acceptance of the offer?
a. $10,000
b. $40,000
c. $5,000
d. $45,000
56. Based on the above data, what is the amount of gain or loss from acceptance of the offer?
a. $5,000 gain
b. b. $10,000 loss
c. $5,000 loss
d. $10,000 gain
57. Relevant revenues and costs focus on:
a. activities that occurred in the past.
b. monies already earned and/or spent.
c. last year’s net income.
d. differences between the alternatives being considered.
Chapter 12: Differential Analysis and Product Pricing
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
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
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.
Chapter 12: Differential Analysis and Product Pricing
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
62. Sanchez Company is considering replacing equipment that originally cost $300,000 and has
$280,000 accumulated depreciation to date. A new machine will cost $450,000. What is the
sunk cost in this situation?
a. $150,000
b. $280,000
c. $20,000
d. $300,000
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