Question 1

Red Co.uses the product cost concept of applying the cost-plus approach to product pricing.Below is cost information for the production and sale of 40,000 units of its sole product.Red Co.desires a profit equal to a 15% rate of return on invested assets of $1,200,000. $$\begin{array} { l r } 
\text { Fixed factory overhead cost } & \$ 80,000.00 \
\text { Fixed selling and administrative costs } & 140,000.00 \
\text { Variable direct materials cost per unit } & 7.00 \
\text { Variable direct labor cost per unit } & 11.00 \
\text { Variable factory overhead cost per unit } & 3.00 \
\text { Variable selling and administrative cost per unit } & 2.00
\end{array}$$ ? What is the markup percentage for the company's product? (Round the answer to two decimal places.)

Accepted Answer

The total cost per unit is $7 + $11 + $3 + $2 + ($80,000/40,000) + ($140,000/40,000) = $27.50. Desired profit is 15% of $1,200,000, which is $180,000. The markup percentage is ($180,000 / (40,000 units * $27.50)) * 100 = 43.50%.

Question 2

Managers who often make special pricing decisions are more likely to use which of the following cost concepts in their work?

Accepted Answer

Managers who make special pricing decisions are likely to consider the variable cost, which is the cost that varies proportionally with the level of production or sales. This allows them to determine the minimum price at which they can sell their product/service without incurring losses. The total cost (A) and fixed cost (D) may not be as relevant in this decision-making process, and the product cost (B) may include both fixed and variable costs, which may not provide managers with a precise estimate for pricing decisions.

Question 3

What cost concept used in applying the cost-plus approach to product pricing includes total manufacturing costs and total selling and administrative expenses in the "cost" amount to which the markup is added?

Accepted Answer

The total cost concept includes both manufacturing costs and selling and administrative expenses in the cost amount used for markup. This approach ensures that all costs related to producing and selling the product are accounted for in setting the price.

Question 4

In contrast to the total product and variable cost concepts used in setting selling prices, the target cost approach assumes that:

Accepted Answer

The target cost approach is based on the market price. It starts with the selling price that the market can bear and then subtracts the desired profit to determine the target cost. This approach contrasts with methods that add a markup to various cost components.

Question 5

What cost concept used in applying the cost-plus approach to product pricing includes only total manufacturing costs in the "cost" amount to which the markup is added?

Accepted Answer

The product cost concept includes only the total manufacturing costs in the "cost" amount used in the cost-plus approach to product pricing. This excludes any variable costs or opportunity costs associated with the production of the product. Therefore, the markup added to the product cost under this concept represents the profit margin for the company.

Question 6

Soap Company manufactures Soap X and Soap Y and can sell all it can make of either.Hours available to produce the products is the constrained resources.Based on the following data, which statement is true? $$\begin{array} { l c c } 
& \mathrm { X } & \mathrm { Y } \
\hline \text { Sales Price } & \$ 20 & \$ 25 \
\text { Variable Cost } & 14 & 15 \
\hline \text { Hours needed to process } & 3 & 5
\end{array}$$

Accepted Answer

The answer of Soap Company manufactures Soap X and Soap...

Question 7

Red Co.uses the product cost concept of applying the cost-plus approach to product pricing.Below is cost information for the production and sale of 40,000 units of its sole product.Red Co.desires a profit equal to a 15% rate of return on invested assets of $1,200,000. ? $$\begin{array} { l r } 
\text { Fixed factory overhead cost } & \$ 80,000.00 \
\text { Fixed selling and administrative costs } & 140,000.00 \
\text { Variable direct materials cost per unit } & 7.00 \
\text { Variable direct labor cost per unit } & 11.00 \
\text { Variable factory overhead cost per unit } & 3.00 \
\text { Variable selling and administrative cost per unit } & 2.00
\end{array}$$ ?
The dollar amount of desired profit from the production and sale of the company's product is:

Accepted Answer

The desired profit is calculated as a 15% rate of return on invested assets of $1,200,000, which equals $1,200,000 * 0.15 = $180,000.

Question 8

Defense contractors would be more likely to use which of the following cost concepts in pricing their product?

Accepted Answer

Defense contractors typically use total cost in pricing their products to ensure all costs, including fixed, variable, and overhead, are covered in their pricing strategy.

Question 9

Product J is one of the many products manufactured and sold by Gooble Company.An income statement by product line for the past year indicated a net loss for Product J of $7,250.This net loss resulted from sales of $265,000, cost of goods sold of $186,500, and operating expenses of $85,750.It is estimated that 30% of the cost of goods sold represents fixed factory overhead costs and that 40% of the operating expense is fixed.If Product J is retained, the revenue, costs, and expenses are not expected to change significantly from those of the current year.However, because of the net loss, management is considering the elimination of the unprofitable endeavor.Because of the large number of products manufactured, the total fixed costs and expenses are not expected to decline significantly if Product J is discontinued.
?
Prepare a differential analysis report, dated February 8 of the current year, on the proposal to discontinue Product J.

Accepted Answer

The answer of Product J is one of the many...

Question 10

Tidewater Company uses the product cost concept of applying the cost-plus approach to product pricing.The cost and expenses of producing and selling 50,000 units of Product K are as follows:
​ $\begin{array}{lr}
\text { Variable costs: } & \
\text { Direct materials } & \$ 5.00 \
\text { Direct labor } & 8.50 \
\text { Factory overhead } & 2.50 \
\text { Selling and administrative expenses } & 1.00 \
\text { Total } & \$ 17.00\\\text { Fixed costs: }\
\text { Factory overhead }&\$ 50,000 \
\text { Selling and administrative expenses }&34,000
\end{array}$ ​
Tidewater desires a profit equal to a 10% rate of return on invested assets of $1,285,000.
(a)Determine the amount of desired profit from the production and sale of Product K.
(b)Determine the total manufacturing costs and the cost amount per unit for the production and sale of 50,000 units of Product K.
(c)Determine the markup percentage for Product K.
(d)Determine the selling price of Product K.

Accepted Answer

The answer of Tidewater Company uses the product cost concept...

Question 11

Grey Inc.has been purchasing a component, Z for $85 a unit.The company is currently operating at 75% of full capacity, and no significant increase in production is anticipated in the near future.The cost of manufacturing a unit of Z, determined by absorption costing method, is estimated as follows:
​ $\begin{array}{lr}
\text { Direct materials } & \$ 30 \
\text { Direct labor } & 15 \
\text { Variable factory overhead } & 26 \
\text { Fixed factory overhead } & 10 \
\text { Total }&\$81
\end{array}$ ​
Prepare a differential analysis report, dated March 12 of the current year, on the decision to make or buy Part Z.

Accepted Answer

The answer of Grey Inc.has been purchasing a component, Z...

Question 12

FDE Manufacturing Company has a normal plant capacity of 75,000 units per month.Because of an extra large quantity of inventory on hand, it expects to produce only 60,000 units in May.Monthly fixed costs and expenses are $150,000 ($2 per unit at normal plant capacity), and variable costs and expenses are $13 per unit.The present selling price is $25 per unit.The company has an opportunity to sell 5,000 additional units at $14.30 per unit to an exporter who plans to market the product under its own brand name in a foreign market.The additional business is therefore not expected to affect the regular selling price or quantity of sales of FDE Manufacturing Company.
​
Prepare a differential analysis report, dated April 21 of the current year, on the proposal to sell at the special price.

Accepted Answer

The answer of FDE Manufacturing Company has a normal plant...

Question 13

Soap Company manufactures Soap X and Soap Y and can sell all it can make of either.Hours available to produce the products is the constrained resources.Based on the following data, if Soap could reduce the processing time for X by 10%, which of the following statements is true? $$\begin{array} { l c c } 
& \text { X } & \text { Y } \
\hline \text { Sales Price } & \$ 20 & \$ 25 \
\text { Variable Cost } & 14 & 15 \
\hline \text { Hours needed to process } & 3 & 5
\end{array}$$

Accepted Answer

Reducing the processing time for X by 10% means it would take 2.7 hours (or 162 minutes) to process one unit of X.

Question 14

Pull Company is considering the disposal of equipment that is no longer needed for operations.The equipment originally cost $600,000, and accumulated depreciation to date totals $460,000.An offer has been received to lease the machine for its remaining useful life for a total of $300,000, after which the equipment will have no salvage value.The repair, insurance, and property tax expenses during the period of the lease are estimated at $75,800.Alternatively, the equipment can be sold through a broker for $230,000 less a 10% commission.
?
Prepare a differential analysis report, dated June 15 of the current year, on whether the equipment should be leased or sold.

Accepted Answer

The answer of Pull Company is considering the disposal of...

Question 15

What is a production constraint?

Accepted Answer

A production constraint refers to the point in the manufacturing process where the demand for the company's products exceeds its ability to produce the products, resulting in a bottleneck in the production process. This constraint can limit the output of the entire system, and it can impact the company's overall profitability if not addressed promptly.

Question 16

Wyandott Co.produces two products.Both products pass through a firing process that is operating at full capacity and is a production bottleneck.Product A requires 2 hours of processing and has a contribution margin per unit of $60.Product B requires 1 hour of processing and has a contribution margin of $40.Which of the following provides the most accurate assessment of the situation assuming unlimited demand for each product?

Accepted Answer

Product B generates a higher contribution margin per hour ($40 per hour) compared to Product A ($30 per hour, calculated as $60/2 hours), making it more profitable to produce given the bottleneck constraint.

Question 17

Brickman's Pharmacy sells a variety of products.The business is divided into four segments or departments for reporting purposes.The departments and their operating results are shown below: $\begin{array}{lrrrrr}&\text { Pharmaceuticals}&\text { Cosmetics }&\text { Grocery } &\text { Household }\
\text { Sales Revenue } & \$ 600,000 & \$ 300,000 & \$ 200,000 & \$ 400,000 \
\text { Variable Costs } & 425,000 & 200,000 & 170,000 & 250,000\\text { Contribution Margin } & \$ 175,000 & \$ 100,000 & \$ 30,000 & \$ 150,000 \
\text { Fixed Costs } & 80,000 & 60,000 & 40,000 & 80,000 \
\text { Net Income (Loss) } & \$ \mathbf{9 5 , 0 0 0} & \mathbf{\$ 4 0 , 0 0 0} & \mathbf{\$ ( 1 0 , 0 0 0 )} & \mathbf{\$} 70,000
\end{array}$ ​
The fixed costs consist of insurance, property taxes, interest, and other costs that will not be eliminated if a department is discontinued.
Brickman's management is considering eliminating the grocery department.Assuming sales in the other departments will not be affected by dropping the grocery department, what will be the effect on the company's total operating income?

Accepted Answer

The answer of Brickman's Pharmacy sells a variety of products.The...

Question 18

Jarvis Company uses the total cost concept of applying the cost-plus approach to product pricing.The costs and expenses of producing and selling 35,000 units of Product E are as follows: $\begin{array}{lrr}
  \text {Variable costs:  } &\
 \text { Direct materials } &\$3.00\
 \text { Direct labor } &1.25\
 \text {  Factory overhead} &0.75\
 \text { Selling and administrative expenses } &3.00\
 \text {Total  } &\underline{\underline{\$8.00}}\
\
 \text { Fixed costs: } &\
 \text {Factory over head  } &\$50.000\
 \text {Selling and administrative expenses  } &20,000\
\end{array}$
 ?
Jarvis desires a profit equal to a 14% rate of return on invested assets of $450,000.
(a)Determine the amount of desired profit from the production and sale of Product E.
(b)Determine the total costs and the cost amount per unit for the production and sale of 35,000 units of Product E.
(c)Determine the markup percentage for Product E.
(d)Determine the selling price of Product E.

Accepted Answer

The answer of Jarvis Company uses the total cost concept...

Question 19

In attempting to improve profitability when faced with a bottleneck related to hours that is involved in the production of two or more products, which of the following is most important for management to consider?

Accepted Answer

The most important factor to consider when facing a bottleneck related to hours is the contribution margin per bottleneck hour for each product. This will help management determine which products are more profitable to produce given the limited bottleneck resources. Option A, contribution margin per unit, is important but does not take into consideration the time required for production, which is the bottleneck issue. Option B, time required for each product passing through the bottleneck, is relevant but needs to be combined with contribution margin information to make decisions about production. Option C, selling price or sales revenue generated by each product, is important but does not take into account the bottleneck issue and the limited hours available for production.

Question 20

Red Co.uses the product cost concept of applying the cost-plus approach to product pricing.Given below is cost information for the production and sale of 40,000 units of its sole product.Red Co.desires a profit equal to a 15% rate of return on invested assets of $1,200,000. ? $$\begin{array} { l r } 
\text { Fixed factory overhead cost } & \$ 80,000.00 \
\text { Fixed selling and administrative costs } & 140,000.00 \
\text { Variable direct materials cost per unit } & 7.00 \
\text { Variable direct labor cost per unit } & 11.00 \
\text { Variable factory overhead cost per unit } & 3.00 \
\text { Variable selling and administrative cost per unit } & 2.00
\end{array}$$ ?
The unit selling price for the company's product is:

Accepted Answer

First, calculate the total desired profit: 15% of $1,200,000 = $180,000. Next, calculate the total cost: Fixed costs ($80,000 + $140,000) + Variable costs per unit ($7 + $11 + $3 + $2) * 40,000 units = $220,000 + ($23 * 40,000) = $1,140,000. Total desired revenue = Total cost + Desired profit = $1,140,000 + $180,000 = $1,320,000. Unit selling price = Total desired revenue / Number of units = $1,320,000 / 40,000 = $33.

Quiz 12: Differential Analysis and Product Pricing