Question 1

Eliminating a product or segment may have the long-term effect of reducing fixed costs.

Accepted Answer

If a product or segment is eliminated, the fixed costs associated with it would also be eliminated, resulting in a reduction of fixed costs in the long run.

Question 2

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.

Accepted Answer

The differential cost of producing Product P is $82 (selling price) - $13 (additional cost to produce) - $60 (selling price of Product O) = $9 per pound. Therefore, the statement that the differential cost of producing Product P is $55 per pound is false.

Question 3

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

The short-run price should cover all variable costs and expenses to ensure that the business is profitable, even if it is at a lower price than usual. However, the long-run effects of continuously offering special prices should also be considered.

Question 4

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.

Accepted Answer

Differential revenue is calculated as the difference between the selling price and the additional cost of production. In this case, the selling price of Product P is $82 per pound and requires an additional cost of $13 per pound to produce, resulting in a differential revenue of $69 per pound ($82 - $13). The differential revenue is $69 - $60 = $9 higher than the selling price of Product O, which means producing Product P would generate an additional revenue of $22 per pound. Therefore, the statement is true.

Question 5

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 total unit cost before and after the modification. Therefore, the differential cost in this situation would be $48 - $36 = $12, not $48.

Question 6

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

Accepted Answer

Opportunity costs can be affected by later decisions. The opportunity cost of a decision depends on the foregone alternative, which can change if later decisions or information alter the available options.

Question 7

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 two or more alternatives, which can help management make informed decisions about whether to continue or discontinue a segment or to replace plant assets.

Question 8

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 the modification, which is $48 - $36 = $12. Therefore, the statement is true.

Question 9

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.

Accepted Answer

The differential revenue of producing Product P is not $82 per pound, but rather $82 - $60 = $22 per pound ($82 selling price of P minus $60 selling price of O).

Question 10

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 11

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 12

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.

Question 13

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 14

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

Accepted Answer

This is the correct definition of opportunity cost. It refers to the potential benefits that could have been derived from using a certain amount of money in a different way.

Question 15

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.

Accepted Answer

The differential cost is the additional cost of producing Product P, which is $13 per pound as stated in the problem. Therefore, the statement is true.

Question 16

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, so it will not be affected by later decisions.

Question 17

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 remain the same whether it is sold or further processed, and therefore do not play a role in the decision to continue processing.

Question 18

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. When a manufacturer has excess productive capacity, they can either make additional products themselves or buy products from another manufacturer to fill the unused capacity.

Question 19

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 calculates the amount of additional revenue that can be generated from an alternative course of action.

Question 20

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.

Quiz 24: Differential Analysis and Product Pricing