1. a. Differential revenue is the amount of increase or decrease in revenue expected from a
c. Differential income is the difference between differential revenue and differential cost.
2. The differential income and costs of the lease option should be compared against selling the building.
The differential revenue would be the lease revenue compared to the proceeds from sale. The
4. A business should only accept business at a special price if the lower price will not contaminate the
regular pricing for other customers or induce other customers to demand the special price. In addition,
5. It would be reasonable to purchase from the supplier if the fixed cost per unit was less than 50 cents.
6. Some of the financial considerations include the profitability of the store, including all the revenues
and the variable and fixed costs associated with the store, since they would all be differential to the
7. In the long run, the normal selling price must be set high enough to cover all costs (both fixed an
d
variable) and provide a reasonable amount for profit.
CHAPTER 25
DIFFERENTIAL ANALYSIS, PRODUCT PRICING,
DISCUSSION QUESTIONS
AND ACTIVITY-BASED COSTING
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
DISCUSSION QUESTIONS (Continued)
9. The target cost concept begins with a price that can be sustained in the marketplace, then
11. Activity-based costing should be used when a business has a combination of wide product
variety and complex production and support processes. In these circumstances, activity-based
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
PE 25–1A
Differential
Lease Sell Effect
Machine Machine on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $243,000 $231,000 –$12,000
PE 25–1B
Differential
Lease Sell Effect
Equipment Equipment on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $84,600 $82,000 –$2,600
Differential Analysis
Lease Equipment (Alt. 1) or Sell Equipment (Alt. 2)
March 23, 2014
PRACTICE EXERCISES
Differential Analysis
Lease Machine (Alt. 1) or Sell Machine (Alt. 2)
January 12, 2014
PE 25–2A
Differential
Continue Discontinue Effect
Product S Product S on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenue $149,000 $ 0 –$149,000
Costs:
PE 25–2B
Differential
Continue Discontinue Effect
Product B Product B on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenue $39,500 $ 0 –$39,500
Differential Analysis
Continue Product B (Alt. 1) or Discontinue Product B (Alt. 2)
May 9, 2014
Differential Analysis
Continue Product S (Alt. 1) or Discontinue Product S (Alt. 2)
September 12, 2014
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
PE 25–3A
Differential
Make Buy Effect
Bread Bread on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Unit costs:
PE 25–3B
Differential
Make Buy Effect
Bottles Bottles on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Unit costs:
Purchase price $ 0 –$35 –$35
Differential Analysis
Make Bottles (Alt. 1) or Buy Bottles (Alt. 2)
March 30, 2014
Differential Analysis
Make Bread (Alt. 1) or Buy Bread (Alt. 2)
August 16, 2014
PE 25–4A
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 $ 98,000 $ 98,000
PE 25–4B
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 $50,500 $50,500
Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
April 11, 2014
Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
February 18, 2014
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
PE 25–5A
Process Differential
Sell Further into Effect
Product T Product U on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues, per unit $4.65 $5.30 $0.65
PE 25–5B
Process Differential
Sell Further into Effect
Product D Product E on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues, per unit $36 $43 $7
Differential Analysis
Sell Product D (Alt. 1) or Process Further into Product E (Alt. 2)
February 26, 2014
Differential Analysis
Sell Product T (Alt. 1) or Process Further into Product U (Alt. 2)
August 2, 2014
PE 25–6A
Differential
Reject Accept Effect
Order Order on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues, per unit $0.00 $39.00 $39.00
PE 25–6B
Differential
Reject Accept Effect
Order Order on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues, per unit $0.00 $7.20 $7.20
Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
March 16, 2014
Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
October 23, 2014
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
PE 25–7A
PE 25–7B
PE 25–8A
Product A Product B
Unit contribution margin……………………………………………
…
$24 $30
PE 25–8B
Product K Product L
Unit contribution margin……………………………………………
…
$120 $100
Markup percentage on product cost: Desired Profit + Selling and Admin. Exp.
Total Product Cost
Desired Profit + Selling and Admin. Exp.
Total Product Cost
Markup percentage on product cost:
PE 25–9A
a. Fabrication: $450,000 ÷ 2,000 direct labor hours = $225 per dlh
b.
Activity Activity
Activity Cost Cost
Fabrication 800 dlh /dlh 1,200 dlh /dlh
$225 $270,000
Activity-
$225
$180,000
Bass Boat
×= ×=Rate
Activity
Rate
Speedboat
Activity-
Base
Usage
Activity Base
Usage
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
PE 25–9B
a. Cutting: $90,000 ÷ 1,500 direct labor hours = $60 per dlh
b.
Activity Activity
Activity Cost Cost
Cutting 500 dlh /dlh 1,000 dlh /dlh
Jeans
Activity-
Base
Usage
Activity Base
Usage
Khakis
×= ×=Rate
Activity
Rate
Activity-
$60
$30,000 $60 $ 60,000
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25–1
a.
Differential
Lease Sell Effect
Machinery Machinery on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Ex. 25–2
Note to Instructors: This differential analysis is a “lease or buy ” decision, which is from
the user perspective. The “lease or sell ” decision is from the perspective of the
equipment owner. Thus, the analysis is similar to the text examples, but must be
set up from the user’s, rather than the owner’s, perspective.
Differential
Lease Buy Effect
Equipment Equipment on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Costs:
Purchase price $ 0 –$4,600 –$4,600
EXERCISES
Differential Analysis
Lease Equipment (Alt. 1) or Buy Equipment (Alt. 2)
August 4, 2014
Differential Analysis
Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2)
April 16, 2014
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25–3
a.
Differential
Continue Discontinue Effect
Star Cola Star Cola on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $290,000 $ 0 –$290,000
Costs:
Differential Analysis
Continue Star Cola (Alt. 1) or Discontinue Star Cola (Alt. 2)
January 21, 2014
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25–4
a.
Differential
Continue Discontinue Effect
Cups Cups on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $31,300 $ 0 –$31,300
Differential Analysis
Continue Cups (Alt. 1) or Discontinue Cups (Alt. 2)
March 31, 2014
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25–5
Note to Instructors: Many students may be unfamiliar with the financial services
industry. This exercise provides an opportunity to introduce students to some
basic terms and concepts used within the industry.
a. The “Investor Services” segment serves the retail customer, you and me.
These are the brokerage, Internet, and mutual fund services used by individual
investors. The “Institutional Services” segment includes the same services
provided for financial institutions, such as banks, mutual fund managers,
insurance companies, and pension plan administrators.
b. Variable costs in the “Investor Services” segment include:
2. Fees paid to exchanges for executing trades
4. Advertising
Fixed costs in the “Investor Services” segment include:
2. Depreciation on brokerage office equipment, such as computers and
computer networks
c. Investor Institutional
Services Services
(in millions) (in millions)
Income from operations………………………………………… $780 $443
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25–6
The flaw in the decision is the failure to focus on the differential revenues and
costs, which indicate that operating income would be reduced by $59,000 if
Children’s Shoes were discontinued. This differential income from sales of
Children’s Shoes can be determined from the following differential analysis:
Continue Discontinue Differential
Children’s Children’s Effect
Shoes Shoes on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues $235,000 $ 0 –$235,000
Costs:
Variable cost of goods sold –130,000 0 130,000
Ex. 25–7
a.
Make Buy Differential
Carrying Carrying Effect
Case Case on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Costs:
Purchase price $ 0.00 –$65.00 –$65.00
b. Assuming there were no better alternative uses for the spare capacity, it would
Differential Analysis
Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2)
July 19, 2014
Differential Analysis
Continue Children’s Shoes (Alt. 1) or Discontinue Children’s Shoes (Alt. 2)
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25–8
a.
Lay Out Purchase Differential
Pages Layout Effect
Internally Services on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues:
Salvage of computer equipment $ 0 $ 9,000 $ 9,000
Costs:
Office expenses –39,000 0 39,000
Office depreciation –28,000 –28,000 0
b. The benefit from using an outside service is shown to be $4,000 greater
than performing the layout work internally. The fixed costs (depreciation
c. Before electing to terminate the five employees, the guild should consider
the long-run impact of the decision. Specifically, future page layout rates
Differential Analysis
Lay Out Pages Internally (Alt. 1) or Purchase Layout Services (Alt. 2)
February 22, 2014
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25–9
a.
Continue Replace Differential
with Old Old Effect
Machine Machine on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues:
Proceeds from sale of old
Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
Spetember 11, 2014
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25–10
a.
Continue Replace Differential
with Old Old Effect
Machine Machine on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues:
Sales (5 years)* $1,025,000 $1,025,000 $ 0
Costs:
b. The proposal should not be accepted.
c. In addition to the factors given, consideration should be given to such factors
Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
May 4, 2014
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Ex. 25–11
Process Differential
Sell Further into Effect
Rough Cut Finished Cut on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues, per 100 board ft. $586 $755 $169
Ex. 25–12
a.
Process
Sell Further into Differential
Regular Decaf Effect
Columbian Columbian on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Sell Regular Columbian (Alt. 1) or Process Further into Decaf Columbian (Alt. 2)
October 6, 2014
Differential Analysis
Sell Rough Cut (Alt. 1) or Process Further into Finished Cut (Alt. 2)
June 14, 2014
Differential Analysis
12