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Exam 12: Differential Analysis and Product Pricing

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Question 21

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

A) differential income.
B) sunk cost.
C) differential revenue.
D) opportunity cost.

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

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Question 22

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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) None of the above
F) B) and C)

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Question 23

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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?

The highest contribution margin per scarce resource is the most profitable.

Hill Co.can further process Product O to produce Product P.Product O is currently selling for $65 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 $17 per pound.

A practical approach that is frequently used by managers when setting normal long-run prices is the cost-plus approach.

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. -The dollar amount of desired profit from the production and sale of the company's product is

What is the differential revenue of producing Product D?

What is the differential cost of producing Product D?

Target costing is arrived at by

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

In contrast to the total product and variable cost concepts used in setting seller's prices,the target cost approach assumes that

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

A business received an offer from an exporter for 5,000 units of product at $10 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: -What is the differential revenue from the acceptance of the offer?

If the total unit cost of manufacturing Product Y is currently $40 and the total unit cost after modifying the style is estimated to be $48,the differential cost for this situation is $48.

What cost concept used in applying the cost-plus approach to product pricing includes total manufacturing costs and total selling and administrative expenses in the "cost" amount to which the markup is added?

Frank Co.is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $25 unit.The unit cost for Frank Co.to make the part is $30,which includes $3 of fixed costs.If 20,000 units of the part are normally purchased each year but could be manufactured using unused capacity,what would be the amount of differential cost increase or decrease for making the part rather than purchasing it?

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

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.

What cost concept used in applying the cost-plus approach to product pricing includes only total manufacturing costs in the "cost" amount to which the markup is added?