Question 1

The amount of income that would result from an alternative use of cash is called:

Accepted Answer

The amount of income that would result from an alternative use of cash is called opportunity cost. Opportunity cost is an essential concept in decision-making, as it helps in determining the foregone benefit of selecting one choice over another.

Question 2

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

Accepted Answer

The statement is true. The total cost concept takes into account all the costs incurred in the manufacturing process as well as the selling and administrative expenses to arrive at the final cost of the product. The markup is then added to this cost to determine the selling price.

Question 3

The amount of increase or decrease in revenue that is expected from a particular course of action as compared with an alternative is

Accepted Answer

Differential revenue measures the expected increase or decrease in revenue that will result from a particular course of action as compared to an alternative. The other options (manufacturing margin, contribution margin, and differential cost) do not specifically measure changes in revenue.

Question 4

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

Accepted Answer

The answer of The desired selling price for a product...

Question 5

What is the differential revenue of producing Product D?

Accepted Answer

The answer of What is the differential revenue of producing...

Question 6

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

Accepted Answer

The answer of In using the total cost concept of...

Question 7

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.What is the differential cost of producing Product C?

Accepted Answer

The differential cost of producing Product C is the difference between the cost of producing Product B and the cost of producing Product C.

The cost of producing Product B is $28 per pound, and it would sell for $30 per pound. Therefore, the differential cost of producing Product B is $2 per pound ($30-$28).

To produce Product C, Yasmin Co. would need to spend an additional $31 per pound on top of the cost of producing Product B ($28 per pound). Therefore, the differential cost of producing Product C is $31 plus the differential cost of producing Product B, which is $33 per pound ($31 + $2).

Since the question asks for the differential cost of producing Product C, the best choice is B, $31 per pound.

Question 8

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

Accepted Answer

In the variable cost concept, only the variable costs are considered in determining the cost per unit, and the markup is added to this amount to determine the selling price. Fixed costs are not included in the cost per unit calculation.

Question 9

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

Accepted Answer

To find out whether it would be more cost-effective to make or buy the part, we need to calculate the differential cost. The differential cost is the difference between the cost of making the part and the cost of purchasing the part.

Cost of making the part:
Variable costs = $26 per unit
Fixed costs = $10 per unit (i.e. $36 - $26)
Therefore, the total cost of making the part per unit = $26 + $10 = $36

Cost of purchasing the part = $24 per unit

Differential cost = Cost of making - Cost of purchasing
= $36 - $24 = $12 per unit

If Piper Corp. were to make 15,000 units of the part instead of purchasing them, the differential cost increase would be:
Differential cost increase = Differential cost x Number of units
= $12 x 15,000
= $180,000

Therefore, the correct answer is C) $30,000 cost increase.

Question 10

A cost that will not be affected by later decisions is termed a(n)

Accepted Answer

A sunk cost refers to a cost that has already been incurred and cannot be recovered or changed no matter what decision is made in the future. Therefore, it is not affected by later decisions. Period costs are regular expenses such as rent or salaries, differential costs are the costs associated with choosing one option over another, and replacement costs refer to the cost of replacing an asset that has reached the end of its useful life.

Question 11

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

Accepted Answer

The answer of Delaney Company is considering replacing equipment which...

Question 12

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.What is the differential revenue of producing and selling Product C?

Accepted Answer

The differential revenue of producing and selling Product C is the difference between the selling price of Product C and the selling price of Product B, which is $95 - $60 = $35 per pound.

Question 13

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

Accepted Answer

Sunk costs are the costs that have already been incurred and cannot be recovered. In this situation, the original cost of the equipment and the accumulated depreciation are both sunk costs as they have already been incurred and cannot be recovered. Therefore, the sunk cost in this situation is $420,000 (accumulated depreciation). The cost of the new machine, $790,000, is not a sunk cost as it has not yet been incurred.

Question 14

Lara Technologies is considering a cash outlay of $250,000 for the purchase of land,which it could lease out 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

Accepted Answer

The opportunity cost is the return that could be earned from the best alternative investment. In this case, the alternative investments yield 12% return, so the opportunity cost of investing in the land is the return of this alternative investment.
Thus, the opportunity cost is 12%*250,000 = $30,000.
Since the annual lease income from the land is $35,000, which is higher than the opportunity cost of $30,000, it is a viable investment. Therefore, the best choice is to purchase the land.

Question 15

The condensed income statement for a 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.What is the amount of change in net income for the current year that will result from the discontinuance of Product T?

Accepted Answer

Discontinuing Product T will result in a decrease in sales revenue and contribution margin equal to the current amount generated by Product T. According to the income statement, Product T generates $140,000 in sales revenue and $80,000 in contribution margin. Therefore, the discontinuance of Product T will result in a $140,000 decrease in net income for the current year.

Question 16

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

Accepted Answer

The differential cost is the difference in variable costs between making and buying. The variable cost to make is $11, and the purchase cost is $15. Therefore, making the part saves $4 per unit. For 30,000 units, the cost decrease is 30,000 units * $4 = $120,000.

Question 17

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

Accepted Answer

The answer of Under the total cost concept,manufacturing cost plus...

Question 18

What is the differential cost of producing Product D?

Accepted Answer

To calculate the differential cost of producing Product D, we need to compare the total cost of producing Product D with the total cost of producing Product A.

The total cost of producing Product D is:
Direct materials = $4.50 per pound x 400 pounds = $1,800
Direct labor = $1.00 per pound x 400 pounds = $400
Variable overhead = $1.20 per pound x 400 pounds = $480
Fixed overhead = $6,000 / 6 products = $1,000 per product
Total cost of producing Product D = $1,800 + $400 + $480 + $1,000 = $3,680

The total cost of producing Product A is:
Direct materials = $3.50 per pound x 350 pounds = $1,225
Direct labor = $0.75 per pound x 350 pounds = $262.50
Variable overhead = $0.90 per pound x 350 pounds = $315
Fixed overhead = $6,000 / 5 products = $1,200 per product
Total cost of producing Product A = $1,225 + $262.50 + $315 + $1,200 = $3,002.50

The differential cost of producing Product D is:
Total cost of producing Product D - Total cost of producing Product A
$3,680 - $3,002.50 = $677.50

Therefore, the differential cost of producing Product D is $8.55 per pound ($677.50 / 79 pounds).

The best choice is to continue producing Product A and not produce Product D, as the differential cost is higher than the total cost of producing Product A.

Question 19

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.What is the amount of change in net income for the current year that will result from the discontinuance of Product G?

Accepted Answer

We need to find the change in net income after discontinuing Product G. 
From the income statement, we see that the contribution margin for Product G is $60,000 ($100,000 - $40,000). If we discontinue Product G, we will lose this contribution margin. 
Therefore, the net income will decrease by $30,000 ($60,000 x 0.5) since the company has a contribution margin ratio of 50% ($430,000 ÷ $860,000). 
Hence, the correct answer is (D) $30,000 Decrease.

Question 20

The amount of increase or decrease in cost that is expected from a particular course of action as compared with an alternative is

Accepted Answer

Differential cost is the amount of increase or decrease in cost that is expected from a particular course of action as compared with an alternative. Period cost refers to expenses that are not related to the production of goods, while product cost refers to costs directly associated with the production of goods. Discretionary cost refers to expenses that are incurred at management's discretion, such as advertising or research and development costs. Therefore, choice C is the most appropriate answer.

Quiz 24: Differential Analysis and Product Pricing