Question 1

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

Accepted Answer

Opportunity cost is the amount of income that would result from the next-best alternative use of cash. It represents the trade-off between two choices and is an important concept in decision making. The other options, differential income, sunk cost, and differential revenue, do not accurately describe the concept of opportunity cost.

Question 2

Quail Co. can further process Product B to produce Product C Product B is currently selling for $60 per pound and costs $42 per pound to produce. Product C would sell for $92 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 is the difference between the selling price of Product C and the selling price of Product B, which is $92 - $60 = $32 per pound.

Question 3

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

Accepted Answer

Differential cost is the cost difference between two alternative courses of action. It helps in making decisions by analyzing the expected increase or decrease in cost. Therefore, option C is the correct answer. Option A refers to costs that are expensed in a particular time period. Option B refers to costs associated with manufacturing a particular product. Option D refers to costs that are incurred at the discretion of management.

Question 4

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?

Accepted Answer

The differential cost is based on variable costs. Making the part costs $12 per unit (excluding fixed costs), while purchasing costs $15 per unit. The cost decrease is ($15 - $12) * 30,000 = $90,000.

Question 5

Partridge Co. can further process Product J to produce Product D Product J is currently selling for $21 per pound and costs $15.75 per pound to produce. Product D would sell for $38 per pound and would require an additional cost of $9.25 per pound to produce.
What is the differential revenue of producing Product D?

Accepted Answer

The differential revenue is the difference in selling prices between Product D and Product J, which is $38 - $21 = $17 per pound.

Question 6

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?

Accepted Answer

From the condensed income statement, we can see that Product T generated a revenue of $500,000 and had variable expenses of $250,000. Therefore, the contribution margin for Product T is $250,000.

If Product T is discontinued, the total revenue will decrease by $500,000, but there will be no change in the fixed expenses or the sales of Product U. Therefore, the total contribution margin will decrease by $250,000.

Since the contribution margin is a direct offset to fixed expenses and net income is calculated as (contribution margin - fixed expenses), the net income for the current year will decrease by $120,000 (i.e. the contribution margin lost from discontinuing Product T).

Therefore, the answer is D - $120,000 decrease.

Question 7

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

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered, regardless of future decisions. It is irrelevant for future decision-making and should not be considered in determining the costs and benefits of future options. Period costs are recurring costs that are expensed in the period incurred, differential costs represent the difference in costs between two alternatives, and replacement costs reflect the cost of replacing an asset that has reached the end of its useful life.

Question 8

A business is considering a cash outlay of $250,000 for the purchase of land, which it could lease for $35,000 per year. If alternative investments are available which yield an 18% return, the opportunity cost of the purchase of the land is:

Accepted Answer

The opportunity cost is the return that the business would forgo by investing in the land instead of the alternative investment that yields 18%.

First, we need to calculate the annual opportunity cost of the alternative investment:

18% of the cash outlay = 0.18 x $250,000 = $45,000

Therefore, if the business invests $250,000 in the land, it would forgo earning $45,000 per year from the alternative investment.

Since the land would generate $35,000 per year in lease income, the net opportunity cost would be:

$45,000 - $35,000 = $10,000

Therefore, the opportunity cost of purchasing the land is $10,000 per year.

The best choice is B because it represents the annual opportunity cost that the business would forgo by investing in the land.

Question 9

The condensed income statement for a business for the past year is presented 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

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

Question 10

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...

Question 11

Raptor Company is considering replacing equipment which originally cost $500,000 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 Raptor Company is considering replacing equipment which...

Question 12

A business 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 $28, 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 the differential cost increase or decrease from making the part instead of purchasing it, we need to calculate the total cost of making the part and compare it to the total cost of purchasing it.

Total cost of making the part:
Variable cost per unit = $28
Fixed cost per unit = ($36 - $28) = $8
Total cost per unit = $28 + $8 = $36
Total cost for 15,000 units = 15,000 x $36 = $540,000

Total cost of purchasing the part:
15,000 units x $24 per unit = $360,000

Therefore, the differential cost increase or decrease from making the part instead of purchasing it would be:

$540,000 - $360,000 = $180,000 cost increase

So the answer is C.

Question 13

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

Accepted Answer

The desired selling price for a product will be the same under both variable and total cost because the desired selling price is determined by the market and is not affected by the cost of production.

Question 14

Raven Company is considering replacing equipment which originally cost $500,000 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 cost refers to the original cost of the equipment minus its accumulated depreciation, which is $500,000 - $420,000 = $80,000.

Question 15

Partridge Co. can further process Product J to produce Product D Product J is currently selling for $21 per pound and costs $15.75 per pound to produce. Product D would sell for $38 per pound and would require an additional cost of $9.25 per pound to produce.
What is the differential cost of producing Product D?

Accepted Answer

The differential cost of producing Product D is the additional cost of producing Product D compared to the current cost of producing Product J. Therefore, the differential cost is: 
($9.25 per pound for producing Product D) - ($15.75 per pound for producing Product J) = -$6.50 per pound. 
Since this is a negative number, it means that producing Product D would actually result in a lower cost than producing Product J. Therefore, the best choice would be to further process Product J into Product D.

Question 16

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

Accepted Answer

Differential revenue is the amount of increase or decrease in revenue that is expected from a particular course of action as compared with an alternative. The other options are not related to the concept of comparing revenue between different courses of action.

Question 17

Activity-based costing is determined by charging products for only the services (activities) they used during production.

Accepted Answer

Activity-based costing allocates costs based on the activities that actually contribute to the production of a product, rather than allocating costs based on broad averages or direct labor and materials. This ensures that products are only charged for the services they used during production.

Question 18

Cost plus methods determine the normal selling price by estimating a cost amount per unit and adding a markup.

Accepted Answer

Cost plus methods involve calculating the cost of producing a unit of a product and adding a markup to determine the selling price.

Question 19

Pheasant 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 $60 per pound and would require an additional cost of $24 per pound to produce. What is the differential cost of producing Product C?

Accepted Answer

The differential cost of producing Product C is the additional cost required to produce Product C compared to the cost of producing Product B. Therefore, the differential cost of producing Product C is $24 per pound ($24 additional cost to produce Product C - $0 additional cost to produce Product B). Option B is the correct choice.

Question 20

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

Accepted Answer

Under the variable cost concept, only the variable costs such as direct materials, direct labor, and variable overheads are included in the cost per unit. Fixed costs such as rent, salaries, and depreciation are not included in the cost per unit calculation. This is because fixed costs do not vary with the level of production or sales. The markup is then calculated based on the variable cost per unit.

Quiz 25: Differential Analysis and Product Pricing