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Exam 25: Differential Analysis and Product Pricing

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Question 31

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Depending on the capacity of the plant, a company may best be served by further processing some of the product and leaving the rest as is, with no further processing.

A) True
B) False

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Question 32

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

A) True
B) False

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Question 33

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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?

Jamison Company produces and sells Product X at a total cost of $25 per unit, of which $15 is product cost and $10 is selling and administrative expenses. In addition, the total cost of $25 is made up of $14 variable cost and $11 fixed cost. The desired profit is $5 per unit. Determine the mark up percentage on total cost.

Widgeon Co. manufactures three products: Bales; Tales; and Wales. The selling prices are: $55; $78; and $32, respectively. The variable costs for each product are: $20; $50; and $15, respectively. Each product must go through the same processing in a machine that is limited to 2,000 hours per month. Bales take 5 hours to process, Tales take 7 hours, and Wales take 1 hour. Which product has the highest contribution margin per machine hour?

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?

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.

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

Magpie Corporation uses the total cost concept of product pricing. Below is cost information for the production and sale of 60,000 units of its sole product. Magpie desires a profit equal to a 25% rate of return on invested assets of $700,000. The cost per unit for the production and sale of the company's product is:

The Turtle Company has total estimated factory overhead for the year of $1,200,000, divided into four activities: Fabrication, $600,000; Assembly, $240,000; Setup, $200,000; and Materials Handling $160,000. Turtle manufactures two products: Boogie Boards and Surf Boards. The activity-base usage quantities for each product by each activity are as follows: Each product is budgeted for 10,000 units of production for the year. Determine (a) the activity rates for each activity and (b) the factory overhead cost per unit for each product using activity-based costing.

The target cost approach assumes that:

Sparrow Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $8.00 a unit. The unit cost for Sparrow Co. to make the part is $9.00, which includes $.60 of fixed costs. If 4,000 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?

Using the variable cost concept determine the mark-up per unit for 30,000 units using the following data: Variable cost per unit $15.00, total fixed costs $90,000 and desired profit $150,000.

Mallard 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. Mallard desires a profit equal to a 12% rate of return on invested assets of $800,000. The dollar amount of desired profit from the production and sale of the company's product is:

Make or buy options often arise when a manufacturer has excess productive capacity in the form of unused equipment, space, and labor.

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?

Relevant revenues and costs refer to:

Airflow Company sells a product in a competitive marketplace. Market analysis indicates that their product would probably sell at $28.00 per unit. Airflow management desires a profit equal to a 20% rate of return on invested assets of $1,400,000. They anticipate selling 50,000 units. Their current full cost per unit for the product is $25 per unit. (1) What is the amount of profit per unit? (2) What is the target cost per unit if they meet the market dictated price and management's desired profit?

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.

What cost concept used in applying the cost-plus approach to product pricing includes only desired profit in the "markup"?