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Exam 12: Differential Analysis and Product Pricing

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Question 31

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Dinkins Inc.is considering disposing of a machine with a book value of $50,000 and an estimated remaining life of five years.The old machine can be sold for $15,000.A new machine with a purchase price of $150,000 is being considered as a replacement.It will have a useful life of five years and no residual value.It is estimated that variable manufacturing costs will be reduced from $70,000 to $45,000 if the new machine is purchased.The net differential increase or decrease in cost for the entire five years for the new equipment is:

A) $10,000 increase.
B) $25,000 decrease.
C) $10,000 decrease.
D) $25,000 increase.

E) C) and D)
F) A) and B)

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Question 32

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Green Co.incurs a cost of $15 per pound to produce Product X, which it sells for $26 per pound.The company can further process Product X to produce Product Y.Product Y would sell for $30 per pound and would require an additional cost of $10 per pound to be produced.The differential revenue of producing Product Y is _____.

A) $4 per pound
B) $30 per pound
C) $26 per pound
D) $5 per pound

E) B) and C)
F) All of the above

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Question 33

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Tidewater Company uses the product cost concept of applying the cost-plus approach to product pricing.The cost and expenses of producing and selling 50,000 units of Product K are as follows: ​ $\begin{array}{lr}\text { Variable costs: } & \\\text { Direct materials } & \$ 5.00 \\\text { Direct labor } & 8.50 \\\text { Factory overhead } & 2.50 \\\text { Selling and administrative expenses } & 1.00 \\\text { Total } & \$ 17.00\\\\\text { Fixed costs: }\\\text { Factory overhead }&\$ 50,000 \\\text { Selling and administrative expenses }&34,000\end{array}$ ​ Tidewater desires a profit equal to a 10% rate of return on invested assets of $1,285,000. (a)Determine the amount of desired profit from the production and sale of Product K. (b)Determine the total manufacturing costs and the cost amount per unit for the production and sale of 50,000 units of Product K. (c)Determine the markup percentage for Product K. (d)Determine the selling price of Product K.

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?

In using the variable cost concept of applying the cost-plus approach to product pricing, variable manufacturing costs and variable selling and administrative expenses must be covered by the markup.

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

The product cost concept includes all manufacturing costs in the cost amount to which the markup is added to determine product price.

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

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?

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.

When standard costs are used in applying the cost-plus approach to product pricing, the standards should be based upon normal levels of performance.

When evaluating whether to lease or sell an equipment, book value is considered to be the cost of selling the equipment.

A business is considering a cash outlay of $200,000 for the purchase of land, which it could lease for $35,000 per year.If alternative investments are available that yield an 18% return, the opportunity cost of the purchase of the land is:

When choosing whether or not to replace an equipment, the analysis normally focuses on the costs of continuing to use the old equipment versus replacing the equipment.

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

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

In using the total cost concept of applying the cost-plus approach to product pricing, only profit is covered in the markup.

When choosing whether or not to replace a fixed asset, management will consider the price at which the asset can be sold.

What is a production constraint?

In using the variable cost concept of applying the cost-plus approach to product pricing, fixed manufacturing costs and fixed selling and administrative expenses must be covered by the markup.