CHAPTER 24(9): DIFFERENTIAL ANALYSIS, PRODUCT PRICING
1.
Differential revenue is the amount of income that would result from the best available alternative proposed use
of
cash.
a.
True
b.
False
2.
Differential revenue is the amount of increase or decrease in revenue expected from a particular course of action
as compared with an alternative.
a.
True
b.
False
3.
If the total unit cost of manufacturing Product Y is currently $36 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
4.
If the total unit cost of manufacturing Product Y is currently $36 and the total unit cost after modifying the style
is
estimated to be $48, the differential cost for this situation is $12.
a.
True
b.
False
5.
The differential revenue of producing Product P is $82 per pound.
a.
True
b.
False
6.
The differential revenue of producing Product P is $22 per pound.
a.
True
b.
False
7.
The differential cost of producing Product P is $13 per pound.
a.
True
b.
False
8.
The differential cost of producing Product P is $55 per pound.
a.
True
b.
False
9.
Opportunity cost is the amount of increase or decrease in cost that would result from the best available
alternative
to the proposed use of cash or its equivalent.
a.
True
b.
False
10.
Differential analysis can aid management in making decisions on a variety of alternatives, including
whether to
discontinue an unprofitable segment and whether to replace usable plant assets.
a.
True
b.
False
11.
A cost that will not be affected by later decisions is termed a sunk cost.
a.
True
b.
False
12.
A cost that will not be affected by later decisions is termed an opportunity cost.
a.
True
b.
False
13.
The amount of income that would result from an alternative use of cash is called opportunity cost.
a.
True
b.
False
14.
Since the costs of producing an intermediate product do not change regardless of whether the intermediate
product
is sold or processed further, these costs are not considered in deciding whether to further process a
product.
a.
True
b.
False
15.
The costs of initially producing an intermediate product should be considered in deciding whether to further
process
a product, even though the costs will not change, regardless of the decision.
a.
True
b.
False
16.
In deciding whether to accept business at a special price, the short-run price should be set high enough to cover
all
variable costs and expenses.
a.
True
b.
False
17.
Differential analysis only considers the short-term (one-year) effects of discontinuing a product.
a.
True
b.
False
18.
Make-or-buy options often arise when a manufacturer has excess productive capacity in the form of unused
equipment, space, and labor.
a.
True
b.
False
19.
In addition to the differential costs in an equipment-replacement decision, the remaining useful life of the
old
equipment and the estimated life of the new equipment are important considerations.
a.
True
b.
False
20.
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 of serving different customers.
a.
True
b.
False
21.
When a segment of a company is showing a net loss, it is always best to discontinue the segment in order not
to
continue with losses.
a.
True
b.
False
22.
Discontinuing a segment or product may not be the best choice when the segment is contributing to fixed expenses.
a.
True
b.
False
23.
Make-or-buy decisions should be made only with related parties.
a.
True
b.
False
24.
Depending on the capacity of the plant, a company may best be served by further processing some of the
product
and leaving the rest as is, with no further processing.
a.
True
b.
False
25.
A practical approach that is frequently used by managers when setting normal long-run prices is the cost-
plus
approach.
a.
True
b.
False
26.
The product cost concept includes all manufacturing costs plus selling and administrative expenses in the
cost
amount to which the markup is added to determine product price.
a.
True
b.
False
27.
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
28.
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
29.
When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be
based
upon normal levels of performance.
a.
True
b.
False
30.
When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be
based
upon ideal levels of performance.
a.
True
b.
False
31.
Cost-plus methods determine the normal selling price by estimating a cost amount per unit and adding a markup.
a.
True
b.
False
32.
A bottleneck begins when demand for the company’s product exceeds the ability to produce the product.
a.
True
b.
False
33.
A bottleneck happens when a key piece of manufacturing machinery can produce 1,000 units per hour and
demand
for the product supports a production rate of 1,200 units per hour.
a.
True
b.
False
34.
When a bottleneck occurs between two products, the company must determine the contribution margin for
each
product and manufacture the product that has the highest contribution margin per bottleneck hour.
a.
True
b.
False
35.
The theory of constraints is a manufacturing strategy that focuses on reducing the influence of bottlenecks on
a
process.
a.
True
b.
False
36.
The lowest contribution margin per scarce resource is the most profitable.
a.
True
b.
False
37.
Activity-based costing provides more accurate and useful cost data than traditional systems.
a.
True
b.
False
38.
Activity-based costing is determined by charging products for only the services (activities) they used
during
production.
a.
True
b.
False
39.
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
40.
In using the variable cost concept of applying the cost-plus approach to product pricing, fixed manufacturing
costs
and both fixed and variable selling and administrative expenses must be covered by the markup.
a.
True
b.
False
41.
In using the total 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
42.
Under the total cost concept, manufacturing cost plus desired profit is included in the total cost per unit.
a.
True
b.
False
43.
The total cost concept includes all manufacturing costs plus selling and administrative expenses in the cost
amount
to which the markup is added to determine product price.
a.
True
b.
False
44.
Under the variable cost concept, only variable costs are included in the cost amount per unit to which the markup
is
added.
a.
True
b.
False
45.
The desired selling price for a product will be the same under both variable and total cost.
a.
True
b.
False
46.
The amount of increase or decrease in revenue that is expected from a particular course of action as compared
with an alternative is
a.
manufacturing margin
b.
contribution margin
c.
differential cost
d.
differential revenue
47.
The amount of increase or decrease in cost that is expected from a particular course of action as compared with an
alternative is
a.
period cost
b.
product cost
c.
differential cost
d.
discretionary cost
48.
A cost that will not be affected by later decisions is termed a(n)
a.
period cost
b.
differential cost
c.
sunk cost
d.
replacement cost
49.
The condensed income statement for a Fletcher Inc. for the past year is as follows:
Product
F
G
H
Total
Sales
$300,000
$210,000
$340,000
$850,000
Costs:
Variable costs
$180,000
$180,000
$220,000
$590,000
Fixed costs
50,000
50,000
40,000
140,000
Total costs
$230,000
$230,000
$260,000
$730,000
Income (loss)
$ 70,000
$ (20,000)
$ 80,000
$120,000
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.
$20,000 increase
b.
$30,000 increase
c.
$20,000 decrease
d.
$30,000 decrease
50.
The condensed income statement for a Hayden Corp. for the past year is as follows:
Product
T
U
Sales
$680,000
$320,000
Costs:
Variable costs
$540,000
$220,000
Fixed costs
145,000
40,000
Total costs
$685,000
$260,000
Income (loss)
$ (5,000)
$ 60,000
Management is considering the discontinuance of the manufacture and sale of Product T 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 U. What is the amount of change in net income for the current year that will result from the
discontinuance
of Product T?
a.
$140,000 increase
b.
$5,000 increase
c.
$5,000 decrease
d.
$140,000 decrease
51.
Sage Company 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 $11,
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 cost increase
b.
$120,000 cost decrease
c.
$150,000 cost increase
d.
$120,000 cost increase
52.
Piper Corp. is operating at 70% of capacity and is currently purchasing a part used in its manufacturing
operations
for $24 per unit. The unit cost for the business to make the part is $36, including fixed costs, and $26,
not including
fixed costs. If 15,000 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.
$30,000 cost decrease
b.
$180,000 cost increase
c.
$30,000 cost increase
d.
$180,000 cost decrease
53.
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
54.
Yasmin Co. can further process Product B to produce Product C. Product B is currently selling for $30 per pound
and costs $28 per pound to produce. Product C would sell for $55 per pound and would require an additional cost
of $31 per pound to produce. What is the differential cost of producing Product C?
a.
$30 per pound
b.
$31 per pound
c.
$28 per pound
d.
$55 per pound
Chapter 24(9): Differential Analysis, Product Pricing, and Activity-Based Costing
Carmen Co. can further process Product J to produce Product D. Product J is currently selling for $20 per pound
and costs $15.75 per pound to produce. Product D would sell for $38 per pound and would require an additional
cost of $8.55 per pound to produce.
55.
What is the differential cost of producing Product D?
a.
$6.50 per pound
b.
$8.55 per pound
c.
$17.00 per pound
d.
$5.25 per pound
56.
What is the differential revenue of producing Product D?
a.
$6.75 per pound
b.
$22.25 per pound
c.
$18.00 per pound
d.
$6.25 per pound
57.
Grace Co. can further process Product B to produce Product C. Product B is currently selling for $60 per pound
and costs $38 per pound to produce. Product C would sell for $95 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.
$35 per pound
b.
$38 per pound
c.
$95 per pound
d.
$60 per pound