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Exam 24: Differential Analysis, Product Pricing, and Activity-Based Costing

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Question 51

True/False

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When a segment of a company is showing a net loss, it is always best to discontinue the segment in order not to continue with losses.

A) True
B) False

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Question 52

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Match each definition that follows with the term (a-e) it defines. -Strategy that focuses on reducing bottlenecks

A) Opportunity cost
B) Sunk cost
C) Theory of constraints
D) Differential analysis
E) Product cost distortion

F) B) and C)
G) D) and E)

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Question 53

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The differential revenue of producing Product P over Product O is $22 per pound.

Match each definition that follows with the term (a-e) it defines. -A document that initiates a product or process change

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

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.

Finch, Inc. has bought a new server and must decide what to do with the old one. The cost of the old server was originally $60,000, and it has been depreciated $45,000. The company has received two offers. One offer was made to purchase the equipment outright for $18,500, less a 5% sales commission. The other offer was to lease the equipment for $7,000 for the next five years, but the company will be required to provide maintenance and insurance totaling $3,000 per year. What offer should Finch, Inc. accept?

Relevant revenues and costs refer to

Discontinuing a segment or product may not be the best choice when the segment is contributing to fixed expenses.

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

Rowan Quinn Company manufactures kitchen appliances. Currently, it is manufacturing one of its components at a variable cost of $40 and fixed costs of $15 per unit. An outside provider of this component has offered to sell Rowan Quinn the component for $45. Determine the best plan and calculate the savings assuming fixed costs are unaffected by the decision.

Discontinuing a product or segment is a huge decision that must be carefully analyzed. Which of the following would be a valid reason not to discontinue an operation?

Heston and Burton, CPAs, currently work a five-day week. They estimate that net income for the firm would increase by $75,000 annually if they worked an additional day each month. The cost associated with the decision to continue the practice of a five-day workweek is an example of a (n)

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 $48.

Should the special order be accepted?

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

Opportunity cost is the amount of increase or decrease in cost that would result from the best available alternative to the proposed use of cash or its equivalent.

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

Use this information for Swan Company to answer the questions that follow. Swan Company produces a product at a total cost of $43 per unit. Of this amount, $8 per unit is selling and administrative costs. The total variable cost is $30 per unit, and the desired profit is $20 per unit. -Determine the markup percentage on total cost.

Under the total cost concept, manufacturing cost plus desired profit is included in the total cost per unit.