CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–5A (Concluded)
6. a.
Differential
Reject Accept Effect
Order Order on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $0 $180,000 $180,000
Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
August 3
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–6A
1.
High Good Regular
Grade Grade Grade
Selling price………………………………………… $280 $270 $250
V
ariable conversion cost per unit………………
…
$180 $165 $150
90 84 80
2. The contribution margin per unit may give false signals when an organization
has production bottlenecks. Instead, Hercules should use the contribution margin
per bottleneck hour to determine relative product profitability, as follows:
High Good Regular
Grade Grade Grade
Contribution margin per unit……………………
…
$10 $21 $20
4 3 2.5
* ** ***
…
…
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–7A
1.
Total activity cost…………
…
$247,500 $48,000 $12,500 $69,300 $27,600
2.
Activity
Production 2,000 mh /mh 1,250 mh /mh
Setup 50 setups /setup 70 setups /setup
Inspection 100 insp. /insp. 160 insp. /insp.
Activity
Production 1,250 mh /mh
Setup 80 setups /setup
Inspection 240 insp. /insp.
Base Activity
Usage × Rate
Activity
$240 12,000 $240
$25 2,500 $25 4,000
=
16,800
$ 68,750
Activity
$55 $110,000 $55
Cost
Customer Service
Base
Production Setup ShippingInspection
Activity-
=Cost
Cost
Activity
Brown Sugar
Usage × Rate =
$55 $ 68,750
$240 19,200
Base Activity Activity
Usage × Rate
$25 6,000
Powdered Sugar
Activity-
White Sugar
Activity-
…
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–7A (Concluded)
3. The unit costs are different, even though each product requires 0.25 machine
hour because the products consume many activities in ratios different from
the volume. For example, the brown sugar consumes setup, inspection,
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–1B
1.
Differential
Operate Invest in Effect
Warehouse Bonds on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $3,640,000 $518,000 –$3,122,000
2. The proposal to operate the warehouse should be accepted.
3.
Total estimated revenue from operating warehouse……
$3,640,000
Total estimated expenses to operate warehouse:
Differential Analysis
Operate Warehouse (Alt. 1) or Invest in Bonds (Alt. 2)
July 1
12
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–2B
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 $12,900 $12,900
Costs:
Flint Tooling Co. should replace the old machine with the new machine.
2. Other factors to be considered include the following:
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 $44,100 of funds
($57,000 less $12,900 proceeds from the old machine) that are required to
purchase the new machine?
After considering such factors as those listed above, the net cost reduction
anticipated over the six-year period may not be sufficient to justify the
Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
November 8
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–3B
1.
Differential
Promote Promote Effect
Tennis Shoe Walking Shoe on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $595,000 $700,000 $105,000
Costs:*
Direct materials –133,000 –224,000 –91,000
Direct labor –56,000 –84,000 –28,000
Sole Mates Inc. should promote tennis shoes.
2. The sales manager’s tentative decision should be opposed. The sales
manager erroneously considered the full unit costs instead of the differential
Differential Analysis
Promote Tennis Shoe (Alt. 1) or Promote Walking Shoe (Alt. 2)
June 19
12
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–4B
1.
Process
Further into Differential
Sell Rolled Effect
Ingot Aluminium on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues, per ton $88,000 $140,800 $52,800
2. International Aluminum Co. should decide to process aluminum ingot further,
Differential Analysis
Sell Ingot (Alt. 1) or Process Further into Rolled Aluminum (Alt. 2)
February 5
12
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–5B
1. $60,000 ($600,000 × 10%)
2. a. Total manufacturing costs:
V
ariable ($52* × 10,000 units)………………………………………………
…
$520,000
Fixed factory overhead………………………………………………………
…
180,000
c. Cost amount per unit………………………………………………………… $70
…
b. Markup Percentage =
$60,000 + $80,000 + ($7 × 10,000 units)
=
Total Selling and Administrative Expenses
Desired Profit +
Total Manufacturing Costs
$520,000 + $180,000
…
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–5B (Continued)
3. (Appendix)
a. Total costs:
V
ariable ($59 × 10,000 units)………………………………………………
…
$590,000
Desired Profit
Total Costs
= 7.06%
c. Cost amount per unit………………………………………………………
…
$85
4. (Appendix)
a. Variable cost amount per unit: $59.00
Total variable costs: $59 × 10,000 units = $590,000
c. Cost amount per unit………………………………………………………
…
$59
5. The cost-plus approach price of $91 should be viewed as a general guideline for
Desired Profit + Total Fixed Costs
Total Variable Costs
b.
b. Markup Percentage =
Markup Percentage =
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–5B (Concluded)
6. a.
Differential
Reject Accept Effect
Order Order on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $0 $91,200 $91,200
Costs
Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
September 5
1
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–6B
1.
Ethylene Butane Ester
Selling price…………………………………………
…
$170 $155 $130
V
ariable conversion cost per unit………………
…
$40 $40 $30
2. The contribution margin per unit may give false signals when an organization
has production bottlenecks. Instead, Wilmington Chemical Company should use
the contribution margin per bottleneck hour to determine relative product
profitability as follows:
Ethylene Butane Ester
Contribution margin per unit……………………
…
$15 $27 $15
…
****
…
…
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–7B
1.
Total activity cost…………
…
$220,000 $117,000 $21,000 $105,000 $102,000
2.
Activity
Production 400 mh /mh 500 mh /mh
Setup 80 setups /setup 30 setups /setup
Moving 230 moves /move 70 moves /move
Activity
Production 200 mh /mh
Setup 150 setups /setup
Moving 300 moves /move
Base Activity
Usage × Rate
Activity
$450 36,000 $450
$35 8,050 $35 2,450
=
13,500
$100,000
Activity
$200 $ 80,000 $200
Cost
Product Engineering
Base
Production Setup ShippingMoving
Activity-
=Cost
Cost
Activity
Newsprint
Usage × Rate =
$200
$450 67,500
$ 40,000
Base Activity Activity
Usage × Rate
Specialty Paper
Activity-
Computer Paper
Activity-
…
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–7B (Concluded)
3. The unit costs are different, even though each product requires 0.4 machine
hour because the products consume many activities in ratios different from
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
CP 25–1
No, it would be unethical for Aaron to attend the meeting. Such a meeting
CP 25–2
The contribution margin is $4 ($22 – $18) per dozen on the special order. Thus,
Varden’s manager can contribute to fixed costs by accepting the order. However,
there are some additional considerations the manager must consider before
accepting this order.
1. Have we ever done business overseas? Exports require additional
2. Will the customer sell the golf balls overseas, or will they re-label the golf
balls and have them imported back into the United States? Such a situation
3. Is it likely that other customers will learn of the “special deal” the overseas
company received and demand equal treatment? That is, is there a risk that
we’ll spoil the pricing structure in the domestic market?
4. Will the overseas customer want to do business in the future, or is this just a
single sale? If the overseas customer is expected to purchase more golf balls
5. Is there a possibility of another customer being willing to purchase the golf
balls at the $35 price? If so, Varden may not want to commit capacity to the
6. Will we help the overseas customer establish a presence in the overseas golf
ball market where we may wish to compete in the future?
CASES & PROJECTS
CP 25–3
First, Marriott has excess capacity for this day, so it should be willing to accept
additional customers. The Priceline.com customer generates incremental revenue
that will not reduce other business. Given this, however, the price must at least
cover variable cost, or else Marriott will incur a loss. The variable cost per room
night is shown below.
Housekeeping labor cost………………………………………………………………… $38
Cost of room supplies (soap, paper, etc.)……………………………………………
…
8
Laundry labor and material cost………………………………………………………
…
10
…
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
CP 25–4
a. Juanita believes that the fixed costs should be treated as a sunk cost and
ignored in the pricing decision. In essence, Juanita is suggesting that the new
computer model be treated as an incremental decision. However, the new
b. Target costing provides a different perspective to the pricing issue. Under
target costing, Diamond Computer Company should begin with the price the
market is willing to pay, which is $1,250. This price should then be reduced by
CP 25–5
a. This activity is designed to have students access a number of products and
services on the Internet to see their commercial potential. Each of the listed
sites will provide product descriptions and pricing.
The list of costs in the products will not be determined at the Internet site but
must be assumed. Some examples include:
Delta Air Lines—Airline tickets Fixed or Variable?
Fuel………………………………………………………………
…
V
Crew salaries…………………………………………………… F
…
Assume that the activity base is the number of passenger miles for
determining fixed and variable costs. Employee salaries for an airline
are relatively fixed and only become variable when there are significant
changes to the flight schedule.
Amazon.com—Books Fixed or Variable?
Cost of books (purchased for resale)……………………… V
Web page design and programming………………………
…
F
…
Assume that the activity base is the number of books sold for determining
fixed and variable costs.
Dell Inc.—Personal computers Fixed or Variable?
Cost of computers (dl, dm, and foh)………………………
…
V (mostly)
Web page design and programming………………………
…
F
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
CP 25–5 (Concluded)
b. The product with the largest markup on variable cost is the airline ticket. The
CP 25–6
The product profitability report indicates that the two products are equal in
terms of profitability (on a per-case basis). However, the additional information
indicates that there will be more activities required for Jamaican Punch than for