Question 1

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.

Accepted Answer

Setting the price high enough to cover variable costs and expenses ensures that the business is not incurring losses in the short run. However, it is important to consider the long-term effects of offering a special price and whether it will ultimately benefit the business. Factors such as brand image, customer retention, and competition should also be taken into account when making pricing decisions.

Question 2

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.

Accepted Answer

The costs of initially producing an intermediate product are considered sunk costs and should not influence the decision on whether to further process a product, as these costs remain the same regardless of the decision.

Question 3

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.

Accepted Answer

The differential cost is the difference between the current cost and the modified cost, which is $12 ($48-$36).

Question 4

The differential revenue of producing Product P is $22 per pound.

Accepted Answer

Differential revenue is the additional revenue earned by producing one more unit of a product, and in this case, it is given as $22 per pound. Therefore, the statement is true.

Question 5

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.

Accepted Answer

Opportunity cost refers to the benefit that is missed or given up when an investor, individual, or business chooses one alternative over another. It's not about the increase or decrease in cost but the value of the best forgone alternative.

Question 6

The differential cost of producing Product P is $13 per pound.

Accepted Answer

The statement states a specific differential cost for producing Product P, so it is true.

Question 7

The differential revenue of producing Product P is $82 per pound.

Accepted Answer

The differential revenue of producing Product P is the difference between the selling price of Product P and Product O, which is $82 - $60 = $22 per pound, not $82 per pound.

Question 8

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

Accepted Answer

Differential analysis only looks at the short-term effects of a decision. It does not take into account the long-term or strategic effects that a decision may have. Therefore, in this case, it only considers the one-year effects of discontinuing a product.

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.

Accepted Answer

The remaining useful life of the old equipment and the estimated life of the new equipment are important factors to consider in an equipment-replacement decision, in addition to differential costs.

Question 10

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

Accepted Answer

Differential revenue compares the expected revenue from one option with another to determine the increase or decrease in revenue.

Question 11

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

Accepted Answer

An opportunity cost represents the benefits an individual, investor, or business misses out on when choosing one alternative over another, whereas a cost that will not be affected by later decisions is termed a sunk cost.

Question 12

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.

Accepted Answer

The differential cost is the difference between the total unit cost before and after a change, which in this case is $48 - $36 = $12. Therefore, the statement is true.

Question 13

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

Accepted Answer

This statement is true. A manufacturer with excess productive capacity may choose between using that capacity to produce goods or services in-house (make) or outsourcing production to another company or supplier (buy).

Question 14

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.

Accepted Answer

The statement is true. The costs of producing an intermediate product, such as direct materials and direct labor, are considered sunk costs and do not change regardless of whether the product is sold or further processed. Thus, they are not considered when deciding whether to further process a product. Only the incremental costs and benefits of further processing are taken into account.

Question 15

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.

Accepted Answer

Differential analysis involves comparing the costs and benefits of different alternatives, which can help management make decisions on various matters, including whether to discontinue an unprofitable segment or replace plant assets.

Question 16

The differential cost of producing Product P is $55 per pound.

Accepted Answer

The statement does not provide enough information to determine the accuracy of the statement. The differential cost of producing Product P may or may not be $55 per pound, we cannot determine it from the given statement alone.

Question 17

The amount of income that would result from an alternative use of cash is called opportunity cost.

Accepted Answer

This definition of opportunity cost is correct.

Question 18

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

Accepted Answer

Differential revenue refers to the difference in revenue between two alternative decisions, not specifically the income from the best alternative use of cash.

Question 19

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.

Accepted Answer

The Robinson-Patman Act does indeed prohibit price discrimination within the United States unless differences in prices can be justified by different costs of serving different customers.

Question 20

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

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered or changed by any subsequent decision.

Quiz 9: Differential Analysis, Product Pricing, and Activity-Based Costing