Chapter 24(9): Differential Analysis, Product Pricing, and Activity-Based Costing
107.
What is the contribution per machine hour for Wales?
a. $35
b. $28
c. $17
d. $7
108.
Assuming that Widgeon Co. can sell all of the products it can make, what is the maximum contribution margin
it
can earn per month?
a. $49,000
b. $70,000
c. $56,000
d. $34,000
109.
Assume that Widgeon produced enough product with the highest contribution margin per unit to use 1,000 hours
of
machine time. Product demand does not warrant any more production of that product. What is the maximum
additional contribution margin that can be realized by utilizing the remaining 1,000 hours on the product with
the
second highest contribution margin per hour?
a. $35,000
b. $1,400
c. $4,000
d. $28,000
Chapter 24(9): Differential Analysis, Product Pricing, and Activity-Based Costing
Miramar Industries manufactures two products: A and B. The manufacturing operation involves three overhead
activities—production setup, material handling, and general factory activities. Miramar uses activity-based
costing
to allocate overhead to products. An activity analysis of the overhead revealed the following estimated
costs and
activity bases for these activities:
Activity
Cost
Activity Base
Production setup
$250,000
Number of setups
Material handling
150,000
Number of parts
General overhead
80,000
Number of direct labor hours
Each product’s total activity in each of the three areas are as follows:
Product A
Product B
Number of setups
100
Number of parts
40,000
Number of direct labor hours
8,000
110.
What is the activity rate for production setup?
a.
$2,500 per setup
b.
$833 per setup
c.
$625 per setup
d.
$400 per setup
111.
What is the activity rate for material handling?
a.
$1.50 per part
b.
$3.75 per part
c.
$7.50 per part
d.
$2.50 per part
112.
What is the activity rate for general overhead?
a.
$4.00 per direct labor hour
b.
$60.00 per direct labor hour
c.
$6.67 per direct labor hour
d.
$10.00 per direct labor hour
113.
What is the total overhead allocated to Product A using activity-based costing?
a. $194,500
b. $162,500
c. $32,000
d. $224,000
114.
What is the overhead allocated to Product B using activity-based costing?
a. $135,000
b. $175,000
c. $292,500
d. $285,500
Magpie Corporation uses the total cost concept of product pricing. Below is cost information for the production
and
sale of 60,000 units of its sole product. Magpie desires a profit equal to a 25% rate of return on invested
assets of $700,000.
Fixed factory overhead cost
$38,700
Fixed selling and administrative costs
7,500
Variable direct materials cost per unit
4.60
Variable direct labor cost per unit
1.88
Variable factory overhead cost per unit
1.13
Variable selling and administrative cost per unit
4.50
115.
The dollar amount of desired profit from the production and sale of the company’s product is
a. $175,000
b. $67,200
c. $73,500
d. $96,000
116.
The cost per unit for the production and sale of the company’s product is
a. $12.11
b. $12.88
c. $15.00
d. $13.50
117.
The unit selling price for the company’s product is
a. $15.00
b. $13.82
c. $15.80
d. $14.76
118.
The markup percentage on total cost for the company’s product is
a. 21.0%
b. 22.7%
c. 15.8%
d. 24.0%
119.
Contractors who sell to government agencies would be most likely to use which of the following cost concepts
in
pricing their products?
a.
variable cost concept
b.
product cost concept
c.
total cost concept
d.
fixed cost concept
Dotterel Corporation uses the variable cost concept of product pricing. Below is cost information for the
production
and sale of 35,000 units of its sole product. Dotterel desires a profit equal to an 11.2% rate of return on
invested
assets of $350,000.
Fixed factory overhead cost
$105,000
Fixed selling and administrative costs
35,000
Variable direct materials cost per unit
4.34
Variable direct labor cost per unit
5.18
Variable factory overhead cost per unit
0.98
Variable selling and administrative cost per unit
0.70
120.
The variable cost per unit for the production and sale of the company’s product is
a. $14.00
b. $12.60
c. $9.80
d. $11.20
121.
The unit selling price for the company’s product is
a. $16.32
b. $13.44
c. $12.10
d. $13.72
122.
The markup percentage for the sale of the company’s product is
a. 14%
b. 5.6%
c. 45.71%
d. 11.2%
123.
The dollar amount of desired profit from the production and sale of the company’s product is
a. $89,600
b. $39,200
c. $70,000
d. $84,000
124.
What pricing concept is used if all costs are considered and a fair markup is added to determine the selling price?
a.
total cost concept
b.
demand-based concept
c.
variable cost concept
d.
fixed cost concept
125.
What cost concept used in applying the cost-plus approach to product pricing includes only desired profit in
the
markup?
a.
product cost concept
b.
variable cost concept
c.
sunk cost concept
d.
total cost concept
126.
When using the total cost concept of applying the cost-plus approach to product pricing, what is included in
the
markup?
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 plus desired profit
d.
desired profit
127.
When using the variable cost concept of applying the cost-plus approach to product pricing, what is included in
the
markup?
a.
total costs plus desired profit
b.
desired profit
c.
total selling and administrative expenses plus desired profit
d.
total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit
The Swan Company produces its product at a total cost of $43 per unit. Of this amount, $8 per unit is selling and
administrative costs. The total variable cost is $30 per unit and the desired profit is $20 per unit.
128.
Determine the markup percentage on total cost.
a. 100%
b. 110%
c. 80%
d. 46.5%
129.
Determine the markup percentage on variable cost.
a. 100%
b. 110%
c. 80%
d. 46.5%
130.
The Porter Beverage Factory owns a building for its operations. Porter uses only half of the building and is
considering two options for the unused space. The Popcorn Store would like to purchase the half of the building
that
is not being used for $550,000. A 5% commission would have to be paid at the time of purchase. Salty Snacks
would like to lease the half of the building for the next 5 years at $100,000 each year. Stewart would have to
continue paying $15,000 of property taxes each year and $2,000 of yearly insurance on the property, according to
the proposed lease agreement.
Determine the differential income or loss from the lease alternative.
131.
An employee of Morgan Corporation has found some partially completed units of Model X in a dusty corner of
the
warehouse. A job ticket attached to the units indicates that a total of $750 in manufacturing costs have been
used
to bring the materials to this point in the manufacturing process. The units can be sold in their current
condition for $275 to a scrap metal dealer. If Morgan spends $250 to complete the units, they could be sold for
$600.
(a)
What should Morgan do? Why?
(b)
Identify the sunk cost, if any.
132.
Lockrite Security Company manufacturers home alarms. Currently, it is manufacturing one of its components at
a
total cost of $45 which includes fixed costs of $15 per unit. An outside provider of this component has offered
to
sell Lockrite the component for $40. Provide a differential analysis of the outside purchase proposal.
133.
Crane Company Division B recorded sales of $360,000, variable cost of goods sold of $315,000, variable
selling
expenses of $13,000, and fixed costs of $61,000; creating a loss from operations of $29,000.
Determine the
differential income or loss from the sales of Division B. Should this division be discontinued?
134.
A commercial oven with a book value of $67,000 has an estimated remaining 5 year life. A proposal is offered
to
sell the oven for $8,500 and replace it with a new oven costing $110,000. The new machine has a 5-year life
with
no residual value. The new machine would reduce annual maintenance costs by $23,000. Provide a
differential
analysis on the proposal to replace the commercial oven.
135.
An unfinished desk is produced for $36.00 and sold for $65.00. A finished desk can be sold for $75.00.
The
additional processing cost to complete the finished desk is $5.95. Provide a differential analysis for
further
processing.
136.
Finch, Inc. has bought a new server and must decide what to do with the old one. The cost of the old server was
originally $60,000 and has been depreciated $45,000. The company has received two offers. One offer was made
to purchase the equipment outright for $18,500 less a 5% sales commission. The other offer was to lease the
equipment for $7,000 for the next five years but the company will be required to provide maintenance and
insurance
totaling $3,000 per year. What offer should Finch, Inc. accept?
137.
Diamond Boot Factory normally sells their specialty boots for $375 a pair. An offer to buy 100 boots for $275 per
pair was made by an organization hosting a national event in Norfolk. The variable cost per boot is $250 and
special
stitching will add another $20 per pair to the cost. Determine the differential income or loss per pair of
boots from
selling to the organization.
138.
Gull Corp. is considering selling its old popcorn machine and replacing it with a newer one. The old machine has
a
book value of $5,000 and its remaining useful life is 5 years. Annual costs are $4,000. A high school is willing
to buy
it for $2,000. New equipment would cost $18,000 with annual operating costs of $1,500. The new machine
has an
estimated useful life of 5 years.
Should the machine be replaced?
139.
Lark Art Company sells unfinished wooden decorations at a price of $15.00. The current profit margin is $5.00
per
decoration. The company is considering taking individual orders and customizing them for customers. To
finish the
decoration, the company would have to pay additional labor of $3.00 per unit, additional materials
costing an
average of $4.00 per unit, and fixed costs would increase by $1,500. If the company estimates that it
can sell 600
units for $25.00 per unit each month, should it start taking the orders?
140.
Hadley Company is considering the disposal of equipment that is no longer needed for operations. The
equipment
originally cost $600,000 and accumulated depreciation to date totals $460,000. An offer has been
received to lease
the machine for its remaining useful life for a total of $290,000, after which the equipment will
have no salvage
value. The repair, insurance, and property tax expenses that would be incurred by Hadley on the
machine during
the period of the lease are estimated at $75,800. Alternatively, the equipment can be sold
through a broker for $230,000 less a 10% commission.
Prepare a differential analysis report, dated June 15, on whether the equipment should be leased or sold.
141.
Product J is one of the many products manufactured and sold by Oceanside Company. An income statement by
product line for the past year indicated a net loss for Product J of $12,250. This net loss resulted from sales of
$275,000, cost of goods sold of $186,500, and operating expenses of $85,750. It is estimated that 30% of the cost
of
goods sold represents fixed factory overhead costs and that 40% of the operating expense is fixed. If Product J
is
retained, the revenue, costs, and expenses are not expected to change significantly from those of the current
year.
Because of the large number of products manufactured, the total fixed costs and expenses are not expected
to
decline significantly if Product J is discontinued.
Prepare a differential analysis report, dated February 8 of the current year, on the proposal to discontinue Product
J.
142.
Snipe Company has been purchasing a component, Part Q for $19.20 per unit. Snipe is currently operating at
70%
of capacity and no significant increase in production is anticipated in the near future. The cost of
manufacturing a
unit of Part Q is estimated as follows:
Direct materials
$11.50
Direct labor
4.50
Variable factory overhead
1.12
Fixed factory overhead
3.15
Total
$20.27
Prepare a differential analysis report, dated March 12 of the current year, on the decision to make or buy Part Q.
143.
Due to Medicare reimbursement cuts, Loving Home Care is considering shutting down its Certified Nursing
Assistant (CNA) Division. Fixed costs will have to be transferred to the Nursing Division if the CNA division
is
discontinued. Based on the following income statement make a recommendation to the president regarding
this
decision.
Loving Home Care
Condensed Income Statement
For the Year Ended December 31
Nursing
CNA
Total
Revenues
$3,500,000
$1,000,000
$4,500,000
Variable Costs
2,000,000
700,000
2,700,000
Fixed Costs
400,000
400,000
800,000
Net Income from Operations
$1,100,000
$ (100,000)
$1,000,000
Differential revenue from CNA
Differential variable costs from CNA
Annual differential income from CNA revenue