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
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
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
Base Activity
Usage × Rate
Base Activity
$55 $110,000 $55
Cost
Activity
$ 68,750
Customer ServiceProduction Setup ShippingInspection
Activity-
= Cost
Activity
Brown Sugar
Usage × Rate =
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
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
Costs:
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, 2014
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:
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?
Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
November 8, 2014
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:*
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, 2014
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, rather
Differential Analysis
Sell Ingot (Alt. 1) or Process Further into Rolled Aluminum (Alt. 2)
February 5, 2014
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
b. Markup Percentage =
Total Selling and Administrative Expenses
Desired Profit +
Total Manufacturing Costs
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–5B (Continued)
3. (Appendix)
a. Total costs:
$590,000
4. (Appendix)
a. Variable cost amount per unit: $59.00
5. The cost-plus approach price of $91 should be viewed as a general guideline for
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, 2014
1
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
Prob. 25–6B
1. Ethylene Butane Ester
Selling price……………………………………………
…
$170 $155 $130
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
Activity
Production 200 mh /mh
Base Activity
Usage × Rate
Base Activity
Cost
Activity
Product EngineeringProduction Setup ShippingMoving
Activity-
= Cost
Activity
Newsprint
Usage × Rate =
Base Activity Activity
Usage × Rate = Cost
$200
$ 40,000
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
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
b. Target costing provides a different perspective to the pricing issue. Under
target costing, Diamond Computer Company should begin with the price the
CHAPTER 25 Differential Analysis, Product Pricing, and Activity-Based Costing
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
Amazon.com—Books Fixed or Variable?
Cost of books (purchased for resale)……………………… V
…
Freight…………………………………………………………… V
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)
*Depends on contract terms with software vendor
Assume that the activity base is the number of PCs sold for determining fixed
and variable costs. One could argue that advertising might be variable.
…
…
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