Deck 25: Differential Analysis and Product Pricing

Question 1

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.

Answer 1

True

Question 2

A cost that will not be affected by later decisions is termed a sunk cost.

Answer 2

True

Question 3

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.

Answer 3

True

Question 4

Differential revenue is the amount of increase or decrease in revenue expected from a particular course of action as compared with an alternative.

Question 5

Hill Co. can further process Product O to produce Product P. Product O is currently selling for $60 per pound and costs $42 per pound to produce. Product P would sell for $82 per pound and would require an additional cost of $13 per pound to produce.​
The differential cost of producing Product P is $55 per pound.

Question 6

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.

Question 7

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.

Question 8

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.

Question 9

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.

Question 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.

Question 11

The revenue that is forgone from an alternative use of an asset, such as cash, is called opportunity cost.

Question 12

Make-or-buy options often arise when a manufacturer has excess productive capacity in the form of unused equipment, space, and labor.

Question 13

Hill Co. can further process Product O to produce Product P. Product O is currently selling for $60 per pound and costs $42 per pound to produce. Product P would sell for $82 per pound and would require an additional cost of $13 per pound to produce.​
The differential revenue of producing Product P is $22 per pound.

Question 14

Hill Co. can further process Product O to produce Product P. Product O is currently selling for $60 per pound and costs $42 per pound to produce. Product P would sell for $82 per pound and would require an additional cost of $13 per pound to produce.​
The differential revenue of producing Product P is $82 per pound.

Question 15

A cost that will not be affected by later decisions is termed an opportunity cost.

Question 16

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.

Question 17

Differential revenue is the amount of profit that would result from the best available alternative proposed use of cash.

Question 18

Differential analysis only considers the short-term (one-year) effects of discontinuing a product.

Question 19

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.

Question 20

Hill Co. can further process Product O to produce Product P. Product O is currently selling for $60 per pound and costs $42 per pound to produce. Product P would sell for $82 per pound and would require an additional cost of $13 per pound to produce.​
The differential cost of producing Product P is $13 per pound.

Question 21

The product cost method includes all manufacturing costs plus selling and administrative expenses in the cost amount to which the markup is added to determine product price.

Question 22

In using the variable cost method of applying the cost-plus approach to product pricing, fixed manufacturing costs and fixed selling and administrative expenses must be covered by the markup.

Question 23

When a bottleneck occurs in a process used in the production of multiple products, the company must determine the contribution margin for each product and give priority to the product that has the lowest contribution margin per bottleneck hour.

Question 24

A bottleneck begins when demand for the company's product exceeds the ability to produce the product.

Question 25

Businesses with fixed capacity will charge higher prices when demand is low in an effort to cover fixed costs.

Question 26

The product cost method includes all manufacturing costs in the cost amount to which the markup is added to determine product price.

Question 27

Yield pricing practices are common in low-fixed-cost service businesses.

Question 28

The theory of constraints is a manufacturing strategy that focuses on reducing the influence of bottlenecks on a process.

Question 29

In using the product cost method of applying the cost-plus approach to product pricing, selling expenses, administrative expenses, and profit are covered in the markup.

Question 30

In a production bottleneck situation, the product with the highest contribution margin per unit should be given priority over a product that has the highest contribution margin per bottleneck hour.

Question 31

In using the variable cost method 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.

Question 32

Discontinuing a segment or product may not be the best choice when the segment is contributing to fixed expenses.

Question 33

Cost-plus methods determine the normal selling price by estimating a cost amount per unit and adding a markup.

Question 34

Under the total cost method, manufacturing cost plus desired profit is included in the total cost per unit.

Question 35

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.

Question 36

When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be based on ideal levels of performance.

Question 37

In using the total cost method of applying the cost-plus approach to product pricing, selling expenses, administrative expenses, and profit are covered in the markup.

Question 38

When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be based on normal levels of performance.

Question 39

Yield pricing is a type of "accepting business at a special price" differential analysis.

Question 40

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.

Question 41

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

Question 42

The differential revenue of producing Product D is

A)$6.75 per pound
B)$22.25 per pound
C)$18.00 per pound
D)$6.25 per pound

Question 43

The condensed income statement for Hayden Corp. for the past year is as follows: 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. The amount of change in profit for the current year that will result from the discontinuance of Product T is a

A)$140,000 increase
B)$5,000 increase
C)$5,000 decrease
D)$140,000 decrease

Question 44

Farris Company is considering a cash outlay of $500,000 for the purchase of land, which it could lease for $40,000 per year. If alternative investments are available that yield a 15% return, the opportunity cost of the purchase of the land is

A)$75,000
B)$40,000
C)$44,000
D)$7,500

Question 45

Jarrett Company is considering a cash outlay of $300,000 for the purchase of land, which it could lease for $36,000 per year. If alternative investments are available that yield a 9% return, the opportunity cost of the purchase of the land is

A)$27,000
B)$36,000
C)$9,000
D)$72,000

Question 46

Delaney Company is considering replacing equipment that originally cost $600,000 and has accumulated depreciation of $420,000 to date. A new machine will cost $790,000 and the old equipment can be sold for $8,000. The sunk cost in this situation is

A)$172,000
B)$180,000
C)$188,000
D)$290,000

Question 47

A cost that has been incurred in the past, cannot be recouped, and is not relevant to future decisions is termed a

A)period cost
B)differential cost
C)sunk cost
D)replacement cost

Question 48

The desired selling price for a product will be the same under both the variable and total cost methods.

Question 49

The total cost method includes all manufacturing costs plus selling and administrative expenses in the cost amount to which the markup is added to determine product price.

Question 50

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

Question 51

The condensed income statement for a Fletcher Inc. for the past year is as follows: 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. The amount of change in profit for the current year that will result from the discontinuance of Product G is a

A)$20,000 increase
B)$30,000 increase
C)$20,000 decrease
D)$30,000 decrease

Question 52

The differential cost of producing Product D is

A)$6.50 per pound
B)$8.55 per pound
C)$17.00 per pound
D)$5.25 per pound

Question 53

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. The differential cost of producing Product C is

A)$30 per pound
B)$31 per pound
C)$28 per pound
D)$55 per pound

Question 54

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. The differential revenue of producing and selling Product C is

A)$35 per pound
B)$38 per pound
C)$95 per pound
D)$60 per pound

Question 55

Lara Technologies is considering a total cash outlay of $250,000 for the purchase of land, which it could lease for $35,000 per year. If alternative investments are available that yield a 12% return, the opportunity cost of the purchase of the land is

A)$35,000
B)$30,000
C)$250,000
D)$4,200

Question 56

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, the amount of differential cost increase or decrease from making the part rather than purchasing it would be a

A)$150,000 cost increase
B)$120,000 cost decrease
C)$150,000 cost decrease
D)$120,000 cost increase

Question 57

The revenue that is forgone from an alternative use of an asset, such as cash, is called

A)differential profit
B)sunk cost
C)differential revenue
D)opportunity cost

Question 58

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, the amount of differential cost increase or decrease from making the part rather than purchasing it would be a

A)$30,000 cost decrease
B)$180,000 cost increase
C)$30,000 cost increase
D)$180,000 cost decrease

Question 59

Delaney Company is considering replacing equipment that originally cost $600,000 and has accumulated depreciation of $420,000 to date. A new machine will cost $790,000. The sunk cost in this situation is

A)$370,000
B)$790,000
C)$180,000
D)$190,000

Question 60

Under the variable cost method, only variable costs are included in the cost amount per unit to which the markup is added.

Question 61

Which of the following methods of applying the cost-plus approach to product pricing includes selling expenses, administrative expenses, and desired profit in the markup?

A)total cost method
B)product cost method
C)variable cost method
D)demand-based method

Question 62

Which of the following methods of applying the cost-plus approach to product pricing includes only total manufacturing costs in the cost amount to which the markup is added?

A)variable cost method
B)total cost method
C)product cost method
D)all of these choices

Question 63

Keating Co. is considering disposing of equipment that cost $50,000 and has $40,000 of accumulated depreciation to date. Keating Co. can sell the equipment through a broker for $25,000 less a 5% commission. Alternatively, Gunner Co. has offered to lease the equipment for five years for a total of $48,750. Keating will incur repair, insurance, and property tax expenses estimated at $8,000 over the five-year period. At lease-end, the equipment is expected to have no residual value. The net differential profit or loss from the sell alternative is a

A)$17,000 loss
B)$7,000 profit
C)$27,000 loss
D)$14,500 profit

Question 64

Which of the following is not a method commonly used in applying the cost-plus approach to product pricing?

A)total cost method
B)product cost method
C)variable cost method
D)fixed cost method

Question 65

Which of the following reasons would cause a company to reject an offer to accept business at a special price?

A)The additional sale will not conflict with regular sales.
B)The additional sales will increase differential profit.
C)The additional sales will not increase fixed expenses.
D)The additional sales will increase fixed expenses.

Question 66

Mighty Safe Fire Alarm is currently buying 50,000 motherboards from MotherBoard, Inc., at a price of $65 per board. Mighty Safe is considering making its own boards. The costs to make the board are as follows: direct materials, $32 per unit; direct labor, $10 per unit; and variable factory overhead, $16 per unit. Fixed costs for the plant would increase by $75,000. Which option should be selected and why?

A)buy, $75,000 increase in profits
B)make, $275,000 increase in profits
C)buy, $275,000 increase in profits
D)make, $350,000 increase in profits

Question 67

Rylan Corporation received an offer from an exporter for 25,000 units of product at $16 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: ​
The amount of the profit or loss from acceptance of the offer is a

A)$125,000 loss
B)$25,000 profit
C)$125,000 profit
D)$25,000 loss

Question 68

Discontinuing a product or segment is a huge decision that must be carefully analyzed. Which of the following would be a valid reason not to discontinue an operation?

A)Losses are minimal.
B)Variable costs are less than revenues.
C)Variable costs are more than revenues.
D)Allocated fixed costs are more than revenues.

Question 69

Nighthawk Inc. is considering disposing of an old machine with a book value of $22,500 and an estimated remaining life of three years. The old machine can be sold for $6,250. A new machine with a purchase price of $68,750 is being considered a replacement. It will have a useful life of three years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $43,750 to $20,000 if the new machine is purchased. The three-year differential effect on profit from replacing the machine is a(n)

A)$8,750 increase
B)$31,250 decrease
C)$8,750 decrease
D)$2,925 decrease

Question 70

Rowan Quinn Company manufactures kitchen appliances. Currently, it is manufacturing one of its components at a variable cost of $40 and fixed costs of $15 per unit. An outside provider of this component has offered to sell Rowan Quinn the component for $45. Determine the best plan and compute the savings assuming fixed costs are unaffected by the decision.

A)$5 savings per unit if manufactured
B)$5 savings per unit if purchased
C)$10 savings per unit if manufactured
D)$15 savings per unit if purchased

Question 71

Which of the following would be considered a sunk cost?

A)purchase price of new equipment
B)equipment rental for the production area
C)net book value of equipment that has no market value
D)warehouse lease expense

Question 72

Falcon Co. produces a single product. Its normal selling price is $30.00 per unit. The variable costs are $19.00 per unit. Fixed costs are $25,000 for a normal production run of 5,000 units per month. Falcon received a request for a special order that would not interfere with normal sales. The order was for 1,500 units with a special price of $20.00 per unit. Falcon has the capacity to handle the special order, and for this order, a variable selling cost of $1.00 per unit would be eliminated. If the order is accepted, the differential effect on profit would be a(n)

A)decrease of $750
B)decrease of $4,500
C)increase of $3,000
D)increase of $1,500

Question 73

All of the following should be considered in a make-or-buy decision except

A)cost savings
B)quality issues with the supplier
C)future growth in the plant and other production opportunities
D)whether the supplier will make a profit that would no longer belong to the business

Question 74

Jacoby Company received an offer from an exporter for 30,000 units of product at $15 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: The differential revenue from the acceptance of the offer is

A)$450,000
B)$630,000
C)$510,000
D)$120,000

Question 75

Rylan Corporation received an offer from an exporter for 25,000 units of product at $16 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: ​
The differential cost from the acceptance of the offer is

A)$150,000
B)$275,000
C)$550,000
D)$125,000

Question 76

Stryker Industries received an offer from an exporter for 15,000 units of product at $17.50 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: ​
The differential revenue from the acceptance of the offer is

A)$300,000
B)$262,500
C)$52,500
D)$250,000

Question 77

Starling Co. is considering disposing of a machine with a book value of $12,500 and estimated remaining life of five years. The old machine can be sold for $1,500. A new high-speed machine can be purchased at a cost of $25,000. It will have a useful life of five years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $26,000 to $23,500 if the new machine is purchased. The five-year differential effect on profit from replacing the machine is a(n)

A)decrease of $11,000
B)decrease of $15,000
C)increase of $11,000
D)increase of $15,000

Question 78

When using the product cost method of applying the cost-plus approach to product pricing, which of the following is included in the markup?

A)desired profit
B)total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit
C)total costs plus desired profit
D)total selling and administrative expenses plus desired profit

Question 79

Stryker Industries received an offer from an exporter for 15,000 units of product at $17.50 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: ​
The differential cost from the acceptance of the offer is

A)$200,000
B)$262,500
C)$85,500
D)$165,000

Question 80

Stryker Industries received an offer from an exporter for 15,000 units of product at $17.50 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: ​
The amount of profit or loss from acceptance of the offer is a

A)$97,500 profit
B)$94,500 loss
C)$37,500 profit
D)$37,500 loss