Chapter 24(9): Differential Analysis, Product Pricing, and Activity-Based Costing
58.
Delaney Company is considering replacing equipment which originally cost $600,000 and which has
$420,000
accumulated depreciation to date. A new machine will cost $790,000. What is the sunk cost in
this situation?
a. $370,000
b. $790,000
c. $180,000
d. $190,000
59.
Delaney Company is considering replacing equipment which originally cost $600,000 and which has $420,000
accumulated depreciation to date. A new machine will cost $790,000 and the old equipment can be sold for
$8,000.
What is the sunk cost in this situation?
a. $172,000
b. $180,000
c. $188,000
d. $290,000
60.
Lara Technologies is considering a cash outlay of $250,000 for the purchase of land, which it could lease out for
$35,000 per year. If alternative investments are available that yield a 12% return, the opportunity cost of the
purchase of the land is
a. $35,000
b. $30,000
c. $250,000
d. $4,200
61.
Jarrett Company is considering a cash outlay of $300,000 for the purchase of land, which it could lease out for
$36,000 per year. If alternative investments are available that yield a 9% return, the opportunity cost of the
purchase of the land is
a. $27,000
b. $36,000
c. $9,000
d. $72,000
62.
Farris Company is considering a cash outlay of $500,000 for the purchase of land, which it could lease out for
$40,000 per year. If alternative investments are available that yield a 15% return, the opportunity cost of the
purchase of the land is
a. $75,000
b. $40,000
c. $44,000
d. $7,500
63.
Jacoby Company received an offer from an exporter for 30,000 units of product at $15 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 differential revenue from the acceptance of the offer?
a. $450,000
b. $630,000
c. $510,000
d. $120,000
Stryker Industries received an offer from an exporter for 15,000 units of product at $17.50 per unit. The
acceptance of the offer will not affect normal production or domestic sales prices. The following data is
available:
Domestic unit sales price
$20
Unit manufacturing costs:
Variable
11
Fixed
1
64.
What is the differential revenue from the acceptance of the offer?
a. $300,000
b. $262,500
c. $52,500
d. $250,000
65.
What is the differential cost from the acceptance of the offer?
a. $200,000
b. $262,500
c. $85,500
d. $165,000
66.
What is the amount of income or loss from acceptance of the offer?
a.
$97,500 income
b.
$94,500 loss
c. $37,500 income
d. $37,500 loss
Rylan Corporation received an offer from an exporter for 25,000 units of product at $16 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
$22
Unit manufacturing costs:
Variable
11
Fixed
6
67.
What is the differential cost from the acceptance of the offer?
a. $150,000
b. $275,000
c. $550,000
d. $125,000
68.
What is the amount of the income or loss from acceptance of the offer?
a. $125,000 loss
b.
$25,000 income
c.
$125,000 income
d.
$25,000 loss
69.
Relevant revenues and costs refer to
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
70.
Keating Co. is considering disposing of equipment that cost $50,000 and has $40,000 of accumulated
depreciation to
date. Keating Co. can sell the equipment through a broker for $25,000 less 5% commission.
Alternatively, Gunner
Co. has offered to lease the equipment for five years for a total of $48,750. Keating will
incur repair, insurance, and
property tax expenses estimated at $8,000 over the five-year period. At lease-end, the
equipment is expected to
have no residual value. The net differential income from the lease alternative is
a. $17,000
b. $7,000
c. $27,000
d. $14,500
71.
Sparrow Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing
operations for $8.00 a unit. The unit cost for Sparrow Co. to make the part is $9.00, which includes $0.60 of fixed
costs. If 4,000 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.
$12,000 cost decrease
b.
$4,000 cost increase
c.
$20,000 cost decrease
d.
$1,600 cost increase
72.
Heston and Burton, CPA’s, currently work a five-day week. They estimate that net income for the firm would
increase by $75,000 annually if they worked an additional day each month. The cost associated with the decision
to
continue the practice of a five-day work week is an example of a(n)
a.
differential revenue
b.
sunk cost
c.
differential income
d.
opportunity cost
73.
Starling Co. is considering disposing of a machine with a book value of $12,500 and estimated remaining life of
five
years. The old machine can be sold for $1,500. A new high-speed machine can be purchased at a cost of
$25,000.
It will have a useful life of five years and no residual value. It is estimated that the annual variable
manufacturing
costs will be reduced from $26,000 to $23,500 if the new machine is purchased. The total net
differential increase
or decrease in cost for the new equipment for the entire five years is
a.
decrease of $11,000
b.
decrease of $15,000
c.
increase of $11,000
d.
increase of $15,000
74.
Nighthawk Inc. is considering disposing of a machine with a book value of $22,500 and an estimated remaining
life
of three years. The old machine can be sold for $6,250. A new machine with a purchase price of $68,750 is
being
considered as a replacement. It will have a useful life of three years and no residual value. It is estimated
that the
annual variable manufacturing costs will be reduced from $43,750 to $20,000 if the new machine is
purchased. The
net differential increase or decrease in cost for the entire three years for the new equipment is
a.
$8,750 increase
b.
$31,250 decrease
c.
$8,750 decrease
d.
$2,925 decrease
Chapter 24(9): Differential Analysis, Product Pricing, and Activity-Based Costing
Falcon Co. produces a single product. Its normal selling price is $30.00 per unit. The variable costs are $19.00
per
unit. Fixed costs are $25,000 for a normal production run of 5,000 units per month. Falcon received a request
for a
special order that would not interfere with normal sales. The order was for 1,500 units with a special price
of $20.00 per unit. Falcon has the capacity to handle the special order, and for this order, a variable selling cost
of $1.00 per unit would be eliminated.
75.
If the order is accepted, what would be the impact on net income?
a.
decrease of $750
b.
decrease of $4,500
c.
increase of $3,000
d.
increase of $1,500
76.
Should the special order be accepted?
a.
cannot determine from the data given
b.
yes
c.
no
d.
there would be no difference in accepting or rejecting the special order
77.
Mighty Safe Fire Alarm is currently buying 50,000 motherboards from MotherBoard, Inc. at a price of $65 per
board. Mighty Safe is considering making its own boards. The costs to make the board are as follows: direct
materials, $32 per unit; direct labor, $10 per unit; and variable factory overhead, $16.00 per unit. Fixed costs for
the
plant would increase by $75,000. Which option should be selected and why?
a.
buy, $75,000 more in profits
b.
make, $275,000 increase in profits
c.
buy, $275,000 more in profits
d.
make, $350,000 increase in profits
78.
Rowan Quinn Company manufactures kitchen appliances. Currently, it is manufacturing one of its components at
a
variable cost of $40 and fixed costs of $15 per unit. An outside provider of this component has offered to sell
Rowan Quinn the component for $45. Determine the best plan and calculate the savings.
a.
$5 savings per unit if manufactured
b.
$5 savings per unit if purchased
c.
$10 savings per unit if manufactured
d.
$15 savings per unit if purchased
79.
Discontinuing a product or segment is a huge decision that must be carefully analyzed. Which of the
following
would be a valid reason not to discontinue an operation?
a.
losses are minimal
b.
variable costs are less than revenues
c.
variable costs are more than revenues
d.
allocated fixed costs are more than revenues
80.
Which of the following would be considered a sunk cost?
a.
purchase price of new equipment
b.
equipment rental for the production area
c.
net book value of equipment that has no market value
d.
warehouse lease expense
81.
All of the following should be considered in a make-or-buy decision except
a.
cost savings
b.
quality issues with the supplier
c.
future growth in the plant and other production opportunities
d.
whether the supplier will make a profit that would no longer belong to the business
82.
Which of the following reasons would cause a company to reject an offer to accept business at a special price?
a.
The additional sale will not conflict with regular sales.
b.
The additional sales will increase differential income.
c.
The additional sales will not increase fixed expenses.
d.
The additional sales will increase fixed expenses.
83.
A practical approach that is frequently used by managers when setting normal long-run prices is the
a.
cost-plus approach
b.
economic theory approach
c.
price graph approach
d.
price skimming
84.
Which of the following is not a cost concept commonly used in applying the cost-plus approach to product pricing?
a.
total cost concept
b.
product cost concept
c.
variable cost concept
d.
fixed cost concept
85.
When using the product cost concept of applying the cost-plus approach to product pricing, what is included in
the
markup?
a.
desired profit
b.
total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit
c.
total costs plus desired profit
d.
total selling and administrative expenses plus desired profit
86.
What cost concept used in applying the cost-plus approach to product pricing covers selling
expenses,
administrative expenses, and desired profit in the markup?
a.
total cost concept
b.
product cost concept
c.
variable cost concept
d.
sunk cost concept
87.
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
88.
The target cost approach assumes that:
a.
markup is added to total cost
b.
the selling price is set by the marketplace
c.
markup is added to variable cost
d.
markup is added to product cost
Chapter 24(9): Differential Analysis, Product Pricing, and Activity-Based Costing
Mallard Corporation uses the product cost concept of product pricing. Below is cost information for the
production
and sale of 45,000 units of its sole product. Mallard desires a profit equal to a 12% rate of return on
invested assets
of $800,000.
Fixed factory overhead cost
Fixed selling and administrative costs
Variable direct materials cost per unit
Variable direct labor cost per unit
Variable factory overhead cost per unit
Variable selling and administrative cost per unit
89.
The dollar amount of desired profit from the production and sale of the company’s product is
a. $105,840
b. $225,000
c. $96,000
d. $220,500
90.
The cost per unit for the production of the company‘s product is
a. $13.15
b. $17.22
c. $15.40
d. $15.75
91.
The markup percentage on product cost for the company’s product is
a. 23.4%
b. 10.98%
c. 26.1%
d. 18%
92.
The unit selling price for the company’s product is
a. $19.35
b. $15.75
c. $22.05
d. $21.25
93.
What pricing concept considers the price that other providers charge for the same product?
a.
demand-based concept
b.
total cost concept
c.
cost-plus concept
d.
competition-based concept
Chapter 24(9): Differential Analysis, Product Pricing, and Activity-Based Costing
Flyer Company sells a product in a competitive marketplace. Market analysis indicates that its product would
probably sell at $48 per unit. Flyer management desires a 12.5% profit margin on sales. Their current full cost
for
the product is $44 per unit.
94.
What is the desired profit per unit?
a.
$6
b.
$8
c.
$5
d.
$4
95.
Which equation better describes target costing?
a.
Selling price – Desired profit = Target costs
b.
Selling price + Profit = Target costs
c.
Target variable costs + Contribution margin = Selling price
d.
Selling price = Profit – Target variable costs
Chapter 24(9): Differential Analysis, Product Pricing, and Activity-Based Costing
Flyer Company sells a product in a competitive marketplace. Market analysis indicates that its product would
probably sell at $48 per unit. Flyer management desires a 12.5% profit margin on sales. Their current full cost
for
the product is $44 per unit.
96.
If the company meets the new target cost number, how much will it have to cut costs per unit, if any?
a.
$1
b.
$3
c.
$2
d.
$0
97.
Using the variable cost concept, determine the markup per unit for 30,000 units using the following data:
Variable cost per unit
$15.00
Total fixed costs
$90,000
Desired profit
a. $10
$150,000
b. $15
c. $8
d. $23
Chapter 24(9): Differential Analysis, Product Pricing, and Activity-Based Costing
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.
98.
Determine the markup percentage on product cost.
a. 80%
b. 46.5%
c. 70%
d. 110%
Flyer Company sells a product in a competitive marketplace. Market analysis indicates that its product would
probably sell at $48 per unit. Flyer management desires a 12.5% profit margin on sales. Their current full cost
for
the product is $44 per unit.
99.
What is the target cost of the company’s product?
a. $44
b. $42
c. $43
d. $40
100.
Using the variable cost concept, determine the selling price for 30,000 units using the following data:
Variable cost per unit
$15.00
Total fixed costs
$90,000
Desired profit
a. $10
$150,000
b. $15
c. $8
d. $23
Flyer Company sells a product in a competitive marketplace. Market analysis indicates that its product would
probably sell at $48 per unit. Flyer management desires a 12.5% profit margin on sales. Their current full cost
for
the product is $44 per unit.
101.
If the company cannot cut costs any lower than they already are, what would the profit margin on sales be to meet
the market selling price?
a. 9.3%
b. 7.3%
c. 10.3%
d. 8.3%
102.
Target costing is arrived at by taking
a.
the selling price minus desired profit
b.
the selling price and adding desired profit
c.
the selling price and subtracting the budget standard cost
d.
the budget standard cost and reducing it by 10%
103.
Peyton Company manufactures Phone X and Phone Y. Peyton can sell all it can make of either. Based on the
following data, assuming the number of hours is a constraint, which statement is true?
X
Y
Sales price
$48
$44
Variable cost
38
28
Time needed to process
5 hours
8 hours
a.
X is more profitable than Y.
b.
Y is more profitable than X.
c.
Neither X nor Y is profitable.
d.
X and Y are equally profitable.
Chapter 24(9): Differential Analysis, Product Pricing, and Activity-Based Costing
Widgeon Co. manufactures three products: Bales, Tales, and Wales. The selling prices are $55, $78, and $32,
respectively. The variable costs for each product are $20, $50, and $15, respectively. Each product must go
through
the same processing in a machine that is limited to 2,000 hours per month. Bales take 5 hours to process;
Tales, 7
hours; and Wales 1 hour.
104.
Which product has the highest contribution margin per machine hour?
a.
Bales
b.
Tales
c.
Wales
d.
Bales and Tales have the same
105.
What is the contribution margin per machine hour for Bales?
a.
$5
b.
$7
c.
$35
d.
$28
106.
What is the contribution margin per machine hour for Tales?
a.
$4
b.
$7
c.
$28
d.
$35