Question 1

A business 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 21% return, the opportunity cost of the purchase of the land is:
A) $105,000.
B) $40,000.
C) $65,000.
D) $8,400.

Accepted Answer

The opportunity cost is the return foregone by not investing in the alternative option. If the business can earn a 21% return on alternative investments, the opportunity cost of investing $500,000 in the land instead is 21% of $500,000, which is $105,000.

Question 2

In using the total cost concept of applying the cost-plus approach to product pricing, what is included in the cost amount to which the markup is added?
A) Total selling and administrative expenses plus desired profit
B) Total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit
C) Total costs of manufacturing a product plus selling and administrative expenses
D) Total variable manufacturing costs, total variable selling and administrative expenses, and desired profit

Accepted Answer

The total cost concept of applying the cost-plus approach to product pricing includes the total costs of manufacturing a product plus selling and administrative expenses. This includes all costs directly involved in producing the product, such as materials, labor, and manufacturing overhead costs, as well as indirect costs like selling and administrative expenses. The markup is then added to this total cost amount to determine the selling price of the product.

Question 3

The condensed income statement for a business 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?
A) $60,000 increase
B) $85,000 increase
C) $85,000 decrease
D) $60,000 decrease

Accepted Answer

The answer of The condensed income statement for a business...

Question 4

Granger Co. can further process Product B to produce C.  Product B is currently selling for $55 per pound and costs $42 per pound to produce. Product C would sell for $82 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?
A) $15 per pound
B) $42 per pound
C) $45 per pound
D) $27 per pound

Accepted Answer

The differential revenue is the difference in selling prices between Product C and Product B, which is $82 - $55 = $27 per pound.

Question 5

What pricing method is most likely to be used if there are several providers in the same market and there is sufficient demand for the product?
A) Demand-based method
B) Total cost method
C) Cost-plus method
D) Competition-based method

Accepted Answer

When there are several providers in the same market and sufficient demand for the product, the most suitable pricing method is the competition-based method. This method allows businesses to set their prices in line with their competitors, ensuring that they remain competitive and are not pricing themselves out of the market. The competition-based method helps to create a level playing field for all businesses in the same market, reducing the chances of one company taking over the market due to lower pricing.

Question 6

Sanchez Company is considering replacing equipment that originally cost $300,000 and has $280,000 accumulated depreciation to date. A new machine will cost $450,000. What is the sunk cost in this situation?
A) $150,000
B) $280,000
C) $20,000
D) $300,000

Accepted Answer

The answer of Sanchez Company is considering replacing equipment that...

Question 7

Bythel Corporation uses the product cost concept of product pricing. Below is cost information for the production and sale of 45,000 units of its sole product. Bythel desires a profit equal to a 10.8% rate of return on invested assets of $900,000. $\begin{array}{ll}
\$ 72,000 & \text { Fixed factory overhead cost } \
45,000 & \text { Fixed selling and administrative costs } \
4.50 & \text { Variable direct materials cost per unit } \
7.65 & \text { Variable direct labor cost per unit } \
2.25 & \text { Variable factory overhead cost per unit } \
0.90 & \text { Variable selling and administrative cost per unit }
\end{array}$
 Refer to the information provided for Bythel Corporation. The markup percentage for the company's product is:
A) 21.0%.
B) 25.4%.
C) 15.7%.
D) 24.0%.

Accepted Answer

The total cost per unit is calculated by adding all variable costs per unit and allocating fixed costs per unit. The desired profit is calculated as 10.8% of $900,000, which is $97,200. The markup percentage is calculated by dividing the desired profit by the total cost and multiplying by 100.

Question 8

In using the variable cost concept of applying the cost-plus approach to product pricing, what is included in the markup?
A) Total costs plus desired profit
B) Desired profit
C) Total selling and administrative expenses plus desired profit
D) Total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit

Accepted Answer

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

Question 9

A practical approach that is frequently used by managers when setting normal selling price is the:
A) cost-plus approach.
B) economic theory approach.
C) price graph approach.
D) market price approach.

Accepted Answer

The cost-plus approach is a practical approach used by managers to set normal selling prices. It involves adding a markup to the cost of the product to determine the selling price. This approach ensures that the selling price covers the cost of production and includes a profit margin. While other approaches, such as the market price approach, may also be used, the cost-plus approach is a reliable and straightforward method for setting prices.

Question 10

A business 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 $12, 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?
A) $150,000 increase
B) $ 90,000 decrease
C) $150,000 decrease
D) $ 90,000 increase

Accepted Answer

The answer of A business is operating at 90% of...

Question 11

What cost concept used in applying the cost-plus approach to product pricing covers selling expenses, administrative expenses, and desired profit in the "markup"?
A) Total cost concept
B) Product cost concept
C) Variable cost concept
D) Sunk cost concept

Accepted Answer

The product cost concept is used in applying the cost-plus approach to product pricing, which includes all costs incurred in manufacturing the product (direct materials, direct labor, and manufacturing overhead), as well as a markup amount to cover selling expenses, administrative expenses, and desired profit.

Question 12

Which of the following is not a cost concept commonly used in applying the cost-plus approach to product pricing?
A) Total cost concept
B) Product cost concept
C) Variable cost concept
D) Fixed cost concept

Accepted Answer

The fixed cost concept is not typically used on its own in cost-plus pricing; instead, total, product, and variable cost concepts are more commonly applied.

Question 13

Bythel Corporation uses the product cost concept of product pricing. Below is cost information for the production and sale of 45,000 units of its sole product. Bythel desires a profit equal to a 10.8% rate of return on invested assets of $900,000. $\begin{array}{ll}
\$ 72,000 & \text { Fixed factory overhead cost } \
45,000 & \text { Fixed selling and administrative costs } \
4.50 & \text { Variable direct materials cost per unit } \
7.65 & \text { Variable direct labor cost per unit } \
2.25 & \text { Variable factory overhead cost per unit } \
0.90 & \text { Variable selling and administrative cost per unit }
\end{array}$
 Refer to the information provided for Bythel Corporation. The dollar amount of desired profit from the production and sale of the company's product is:
A) $97,200.
B) $67,200.
C) $73,500.
D) $96,000.

Accepted Answer

The desired profit is calculated as 10.8% of the invested assets, which is $900,000. Therefore, the desired profit is $900,000 * 10.8% = $97,200.

Question 14

Target costing is arrived at by:
A) taking the selling price and subtracting desired profit.
B) taking the selling price and adding desired profit.
C) taking the selling price and subtracting the budget standard cost.
D) taking the budget standard cost and reducing it by 10%.

Accepted Answer

The answer of Target costing is arrived at by:
A) taking...

Question 15

A business received an offer from an exporter for 10,000 units of product at $13.50 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available:  What is the amount of the gain or loss from acceptance of the offer?
A) $75,000 loss
B) $40,000 gain
C) $15,000 gain
D) $85,000 gain

Accepted Answer

The cost per unit is not given, so we cannot determine the exact profit. However, we know that accepting the offer will not affect normal production or domestic sales prices, so we can assume that the business will still make a profit on each unit sold. Therefore, accepting the offer at $13.50 per unit will result in a gain compared to the cost of the product. The gain will be the difference between the selling price and the cost per unit, multiplied by the number of units sold. Without knowing the cost per unit, we cannot determine the exact amount of the gain, but by accepting the offer, the business will make a profit. Option C is the only answer choice that reflects a gain.

Question 16

Nachos Co. can further process Product J to produce Product D Product J is currently selling for $12 per pound and costs $9 per pound to produce. Product D would sell for $20 per pound and would require an additional cost of $5 per pound to produce. What is the differential cost of producing Product D?
A) $9 per pound
B) $14 per pound
C) $5 per pound
D) $3 per pound

Accepted Answer

The differential cost of producing Product D is the additional cost required to process Product J into Product D, which is $5 per pound.

Question 17

Bythel Corporation uses the product cost concept of product pricing. Below is cost information for the production and sale of 45,000 units of its sole product. Bythel desires a profit equal to a 10.8% rate of return on invested assets of $900,000. $\begin{array}{ll}
\$ 72,000 & \text { Fixed factory overhead cost } \
45,000 & \text { Fixed selling and administrative costs } \
4.50 & \text { Variable direct materials cost per unit } \
7.65 & \text { Variable direct labor cost per unit } \
2.25 & \text { Variable factory overhead cost per unit } \
0.90 & \text { Variable selling and administrative cost per unit }
\end{array}$
 Refer to the information provided for Bythel Corporation. The unit selling price for the company's product is:
A) $17.00.
B) $13.94.
C) $20.06.
D) $20.96.

Accepted Answer

The answer of Bythel Corporation uses the product cost concept...

Question 18

In using the total cost concept of applying the cost-plus approach to product pricing, what is included in the markup?
A) Total selling and administrative expenses plus desired profit
B) Total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit
C) Total costs plus desired profit
D) Desired profit

Accepted Answer

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

Question 19

Which equation better describes target costing?
A) Selling Price - Desired Profit = Target Costs
B) Selling Price - Target Variable Costs = Profit
C) Target Variable Costs + Net operating income = Selling Price
D) Target Variable Costs + Target Fixed Costs + Contribution margin = Selling Price

Accepted Answer

Target costing is a strategic approach that determines the maximum cost that a company can incur for producing and selling a product, based on the selling price and desired profit margin. Therefore, the equation A (Selling Price - Desired Profit = Target Costs) best describes target costing as it reflects the calculation of the cost needed to achieve a specific profit margin. Option B refers to cost-plus pricing, option C is the formula for calculating the contribution margin, and option D is the equation for calculating the break-even point.

Question 20

What pricing method is used if all costs are considered and a fair markup is added to determine the selling price?
A) Total cost method
B) Demand-based method
C) Variable cost method
D) Markup method

Accepted Answer

The answer of What pricing method is used if all...

Quiz 12: Differential Analysis and Product Pricing

A business 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 21% return, the opportunity cost of the purchase of the land is:

In using the total cost concept of applying the cost-plus approach to product pricing, what is included in the cost amount to which the markup is added?

What pricing method is most likely to be used if there are several providers in the same market and there is sufficient demand for the product?

Sanchez Company is considering replacing equipment that originally cost $300,000 and has $280,000 accumulated depreciation to date. A new machine will cost $450,000. What is the sunk cost in this situation?

In using the variable cost concept of applying the cost-plus approach to product pricing, what is included in the markup?

A practical approach that is frequently used by managers when setting normal selling price is the:

What cost concept used in applying the cost-plus approach to product pricing covers selling expenses, administrative expenses, and desired profit in the "markup"?

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

Target costing is arrived at by:

A business received an offer from an exporter for 10,000 units of product at $13.50 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: What is the amount of the gain or loss from acceptance of the offer?

In using the total cost concept of applying the cost-plus approach to product pricing, what is included in the markup?

Which equation better describes target costing?

What pricing method is used if all costs are considered and a fair markup is added to determine the selling price?