CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25–12 (Concluded)
c. The price of Decaf Columbian would need to decrease to $11.50 per pound
in order for the differential analysis to yield neither an advantage nor a
disadvantage (indifference). This is determined as follows:
The price of Decaf Columbian would need to be $0.38 lower, or $11.50, to
yield no net differential income or loss. This is verified by the following
differential analysis:
Sell Differential
Regular Effect
Columbian on Income
(Alternative 1) (Alternative 2)
Revenues $55,320 $10,230
(Alternative 2)
Decaf Columbian
$65,550
Further into
Process
October 6
Differential Analysis
Sell Regular Columbian (Alt. 1) or Process Further into Decaf Columbian (Alt. 2)
*
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25–13
a.
Differential
Reject Accept Effect
Order Order on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $0 $576,000 $576,000
Costs:
b. The additional units can be sold for $32 each, and because unused capacity is
available, the only costs that would be added if this additional production
were accepted are the variable costs of $29 per unit. The differential revenue
Ex. 25–14
Total costs…………………………………………………………………………
…
$375,000
…
Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
November 12
1
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25–15
a.
Differential
Reject Accept Effect
Order Order on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $0 $2,320,000 $2,320,000
Costs:
Direct materials 0 –1,120,000 –1,120,000
Direct labor 0 –440,000 –440,000
1
20,000 tires × $116 per tire
2
20,000 tires × $56 per tire
3
Brightstone should accept the special order from Euro Motors.
Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
January 21
1
2
3
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25-16
a. Contribution margin per room night:
Rate per room night $180
Variable costs per room night:
Housekeeping service 23
b. The discount price should be set greater than the variable costs per room
night so that the resulting contribution margin contributes to fixed costs and
profitability. Thus, the price should be greater than $33. The fixed costs are not
incremental to this decision and, thus, are sunk. However, the hotel must also
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25–17
a. Desired profit = $250,000 × 22% = $55,000
Ex. 25–18
a. Desired profit = $1,200,000 × 30% = $360,000
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25–19
b. The required profit margin of 20% of the estimated $27,000 price implies a
$21,600 target product cost as follows:
Target Product Cost = $27,000 – ($27,000 × 20%)
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25–20
$460 – $230
$230
$230
$460
b. Required cost reduction: $230 – $200 = $30
$30
60 min.
× 15 min. =
$ 7.50
1.c.
Direct labor reduction:
or,
a.
=
Historical markup percentage on product cost: = 100%
50% of selling price
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25–21
Determine the contribution margin per furnace hour as follows:
Revenue……………………………………
…
$43,000 $49,000 $56,500
V
ariable cost………………………………
…
34,000 28,000 26,500
*Calculated as follows:
$1.80
Type 5 Type 10 Type 20
Type 5: = $0.30 per furnace hour
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25–22
a. Large Medium Small Total
Units produced…………………
…
3,000 3,000 3,000
b. The Small glass product is the most profitable in a bottleneck operation,
demonstrated as follows:
Large Medium Small
Contribution margin……………………………
…
$54 $40 $24
…
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25–23
Activity Activity
Activity Cost Cost
Fabrication 1,680 mh /mh 1,070 mh /mh
Assembly 243 dlh /dlh 131 dlh /dlh
Activity-
$22
$12
$36,960
Stationary Bicycle
Activity-
Base
Usage
Activity
Treadmill
×= ×=Rate
ActivityBase
Usage Rate
2,916
$22 $23,540
$12 1,572
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25–24
Production Quality
a.
Setup Procurement Control
Activity cost…
…
$44,000 $13,500 $97,500
b.
Number of setups…………………
…
290 110
× Rate per setup…………………… $110 $110
$ 31,900 $12,100
Number of purchase orders……
…
760 140
…
…
…
…
c. The factory overhead allocated to each product on the basis of direct labor hours
would be 50% because each product has the same 2,000 direct labor hours. The
d. The factory overhead allocated to the custom power unit is much higher under the
activity-based approach, compared to the direct labor method. The reason is that
Materials
Management
$84,000
Custom Standard
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25–25
a.
Activity
Casting mh /mh
Assembly dlh /dlh
b.
Activity
Activity Cost
Casting 800 mh /mh 600 mh /mh
Assembly 500 dlh /dlh 400 dlh /dlh
1,400
900
$30
$15
Base Usage
Estimated
Activity
Cost
Total
Activity-
÷
Entry Lighting Fixtures Dining Room Lighting Fixtures
Activity- Activity-
Usage × Rate =
Base Activity
$15 7,500 $15 6,000
$30 $24,000 $30 $18,000
Activity
Rate=
13,500
$42,000
Activity
Usage × Rate =
Base Activity
Cost
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25–26
a. Total costs:
V
ariable ($240 × 10,000 units)………………………………………………
…
$2,400,000
Desired Profit
Total Costs
c. Cost amount per unit……………………………………………………………
…
$289
…
Ex. 25–27
a. Total variable costs: ($240 × 10,000 units)…………………………………
…
$2,400,000
Cost amount per unit: $2,400,000 ÷ 10,000 units = $240
…
…
b.
b. Markup percentage =
Markup percentage =
Desired Profit + Total Fixed Costs
Total Costs
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–1A
1.
Operate Differential
Retail Invest in Effect
Store Bonds on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $1,264,000 $172,800 –$1,091,200
Costs:
2. The proposal to operate the retail store should be rejected.
3. Total estimated revenue from operating store………
…
$1,264,000
Total estimated expenses to operate store:
…
Differential Analysis
Operate Retail Store (Alt. 1) or Invest in Bonds (Alt. 2)
October 1
PROBLEMS
12
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–2A
1.
Continue Replace Differential
with Old Old Effect
Machine Machine on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues
Proceeds from sale of old machine $ 0 $ 29,700 $ 29,700
2. Other factors to be considered include:
a. Are there any improvements in the quality of work turned out by the new
machine?
b. What effect does the federal income tax have on the decision?
c. What opportunities are available for the use of the $90,000 of funds ($119,700 less
$29,700 proceeds from the old machine) that are required to purchase the new
machine?
Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
April 30
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–3A
1.
Differential
Promote Promote Effect
Moisturizer Perfume on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $1,210,000 $1,200,000 –$10,000
Costs:*
Direct materials –198,000 –280,000 –82,000
Parisian should promote moisturizer.
2. The sales manager’s tentative decision should be opposed. The sales manager
erroneously considered the full unit costs instead of the differential (additional)
Differential Analysis
Promote Moisturizer (Alt. 1) or Promote Perfume (Alt. 2)
August 21
12
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–4A
1.
Process
Further into Differential
Sell Raw Refined Effect
Sugar Sugar on Income
(Alternative 1) (Alternative 2) (Alternative 2)
2. Dominican Sugar Company should not process raw sugar further to produce
Differential Analysis
Sell Raw Sugar (Alt. 1) or Process Further into Refined Sugar (Alt. 2)
March 24
12
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–5A
1. $225,000 ($1,500,000 × 15%)
2. a. Total manufacturing costs:
V
ariable ($200* × 5,000 units)……………………………………………… $1,000,000
250,000
b. Markup Percentage =
$225,000 + $150,000 + ($35 × 5,000 units)
=
Total Selling and Administrative Expenses
Desired Profit +
Total Manufacturing Costs
$1,250,000
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–5A (Continued)
3. (Appendix)
a. Total costs:
V
ariable ($235 × 5,000 units)…………………………………………
…
$1,175,000
Desired Profit
Total Costs
c. Cost amount per unit……………………………………………………… $315
4. (Appendix)
a. Variable cost amount per unit: $235
Total variable costs: $235 × 5,000 units = $1,175,000
c. Cost amount per unit……………………………………………………… $235
5. The cost-plus approach price of $360 should be viewed as a general guideline
Desired Profit + Total Fixed Costs
Total Variable Costs
b.
b. Markup Percentage =
Markup Percentage =