Chapter 24(9): Differential Analysis, Product Pricing, and Activity-Based Costing
144.
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 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.
Prepare a differential analysis report, dated April 21 of the current year, on the proposal to sell at the special price.
145.
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 their
costs is
as follows:
Direct materials
$2.00
Direct labor
0.50
Variable costs
1.50
Fixed costs
2.50
Total cost per unit
$6.50
Should Piper Rose Boutique accept the special order made by the college?
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% rate of 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
per unit.
(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.
Hummingbird Company uses the product cost concept 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:
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% rate of 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 your markup percentage to one decimal place, and other intermediate calculations and final answer to
two
decimal places.
$32,125 ($642,500 × 5%)
Total manufacturing costs:
Markup percentage = Desired profit + Total selling and admin. exp.
Total manufacturing costs
Markup percentage = $32,125 + $17,000 + ($0.50 × 25,000 units)
$225,000
Markup percentage = $32,125 + $17,000 + $12,500
$225,000
Markup percentage = $61,625 = 27.4%
$225,000
Cost amount per unit
Markup ($9.00 × 27.4%)
148.
The Mallory Company 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.
149.
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% rate of return on assets of
$960,000. Total
selling and administrative expenses are $105,000.
(a)
Calculate the markup percentage, using the product cost concept.
(b)
Compute the selling price per unit of the automotive product.
Round your markup percentage to one decimal place, and other intermediate calculations and final answer to
two
decimal places.
150.
The 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 concept.
151.
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?
Iced Tea:
$0.45 = $0.15 CM per bottleneck hour
$0.40 = $0.10 CM per bottleneck hour
$0.60 + $0.10
152.
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.
153.
The Eastwood Cake Factory sells chocolate cakes, birthday decorated cakes, and specialty cakes. The factory is
experiencing a bottleneck and is trying to determine which cake is more profitable. Even though the company
may
have to limit the orders that it takes, Eastwood 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)
Calculate the contribution margin per hour per cake.
(b)
Determine which cakes the company should try to sell more of first, second, and then last.
154.
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 most
profitable
product assuming the machine hours are the constraint.
155.
The Turtle Company has total estimated factory overhead for the year of $1,200,000, divided into four activities:
fabrication, $600,000; assembly, $240,000; setup, $200,000; and materials handling, $160,000. Turtle
manufactures
two products, Boogie Boards and Surf Boards. The activity-base usage quantities for each product
by each activity
are as follows:
Fabrication
Assembly
Setup
Materials
Handling
Boogie Boards
10,000 dlh
30,000 dlh
60 setups
100 moves
Surf Boards
30,000
10,000
440
700
40,000 dlh
40,000 dlh
500 setups
800 moves
Each product is budgeted for 10,000 units of production for the year. Determine (a) the activity rates for each
activity and (b) the factory overhead cost per unit for each product using activity-based costing.
Usage
Usage
156.
Yakking Co. manufactures mobile cellular equipment and develops a price for the product by using the variable
cost
concept. 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% rate of
return on
assets.
(a)
Compute a markup percentage based on variable cost.
(b)
Determine a selling price.
Round your markup percentage to one decimal place, and other intermediate calculations and final answer to
two
decimal places.
157.
The Canine Company has total estimated factory overhead for the year of $2,400,000, divided into four
activities:
fabrication, $1,200,000; assembly, $480,000; setup, $400,000; and materials handling, $320,000.
Canine
manufactures two products, Standard Crates and Deluxe Crates. The activity-base usage quantities for
each
product by each activity are as follows:
Fabrication
Assembly
Setup
Materials
handling
Standard
20,000 dlh
60,000 dlh
120 setups
200 moves
Deluxe
60,000
20,000
880
1,400
80,000 dlh
80,000 dlh
1,000 setups
1,600 moves
Each product is budgeted for 20,000 units of production for the year. Determine (a) the activity rates for each activity
and (b) the factory overhead cost per unit for each product using
activity-based costing.
Assembly
Setup
Total
$1,652,000
FNMN.WARD.16.24-04 – LO: 24-04
158.
Jamison Company 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.
159.
Using the variable cost concept, determine the selling price for 30,000 units using the following data: variable
cost p
unit, $15.00; total fixed costs, $90,000; and desired profit, $150,000.
160.
Jay Company uses the total cost concept 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:
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% rate of 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.
$89,600 ($640,000 × 14%)
Total costs:
Variable ($11.70 × 38,400 units)
Fixed ($80,000 + $14,000)
Total
Markup percentage
Markup percentage
Cost amount per unit
Markup ($14.15 × 16.5%)
Selling price
Bloom’s: Applying
FNMN.WARD.16.24-APP – 24-APP
161.
Moon Company uses the variable cost concept 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:
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 an18% rate of 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 calculations and final answer to two
decimal places.
162.
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% rate of return on 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 concept.
(b)
Compute the selling price of Product B.
Round your intermediate calculations and final answer to two decimal places.
Chapter 24(9): Differential Analysis, Product Pricing, and Activity-Based Costing
Match each of the definitions that follow with the term (a–e) it defines.
a.
Opportunity cost
b.
Sunk cost
c.
Theory of constraints
d.
Differential analysis
e.
Product cost distortion
DIFFICULTY: Easy
Bloom’s: Remembering
LEARNING OBJECTIVES: FNMN.WARD.16.24-01 – LO: 24-01
FNMN.WARD.16.24-03 – LO: 24-03
FNMN.WARD.16.24-04 – LO: 24-04
ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 – Managerial Accounting Features/Costs
ACCT.ACBSP.APC.33 – Incremental analysis
ACCT.IMA.14 – Decision Analysis
BUSPROG: Analytic
163.
Possible result of using an inappropriate overhead allocation method
164.
Revenue forgone from an alternative use of an asset
165.
Strategy that focuses on reducing bottlenecks
166.
Not relevant to future decisions
167.
Evaluation of how income will change based on an alternative course of action
Chapter 24(9): Differential Analysis, Product Pricing, and Activity-Based Costing
Match the definitions that follow with the term (a–e) it defines.
a.
Demand-based concept
b.
Competition-based concept
c.
Product cost concept
d.
Target costing
e.
Production bottleneck
DIFFICULTY: Easy
Bloom’s: Remembering
LEARNING OBJECTIVES: FNMN.WARD.16.24-02 – LO: 24-02
FNMN.WARD.16.24-03 – LO: 24-03
ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 – Managerial Accounting Features/Costs
ACCT.ACBSP.APC.33 – Incremental analysis
ACCT.IMA.14 – Decision Analysis
BUSPROG: Analytic
168.
Constraint
169.
Combines market-based pricing with a cost-reduction emphasis
170.
Only includes the costs of manufacturing in product cost per unit
171.
Sets the price according to competitors
172.
Sets the price according to demand
Chapter 24(9): Differential Analysis, Product Pricing, and Activity-Based Costing
Match each of the definitions that follow with the term (a–e) it defines.
a.
Engineering change order
b.
Total cost concept
c.
Variable cost concept
d.
Normal selling price
e.
Setup
DIFFICULTY: Easy
Bloom’s: Remembering
LEARNING OBJECTIVES: FNMN.WARD.16.24-02 – LO: 24-02
FNMN.WARD.16.24-04 – LO: 24-04
FNMN.WARD.16.24-APP – 24-APP
ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 – Managerial Accounting Features/Costs
ACCT.ACBSP.APC.33 – Incremental analysis
ACCT.IMA.14 – Decision Analysis
BUSPROG: Analytic
173.
A document that initiates a product or process change
174.
Includes manufacturing costs plus selling and administrative expenses
175.
Changing tooling when preparing for a new product
176.
Target selling price to be achieved in the long term
177.
Variable manufacturing costs plus variable selling and administrative costs are included in cost per unit