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

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Question 71

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Nighthawk Inc. is considering disposing of an old machine with a book value of $22,500 and an estimated remaining life of three years. The old machine can be sold for $6,250. A new machine with a purchase price of $68,750 is being considered as a replacement. It will have a useful life of three years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $43,750 to $20,000 if the new machine is purchased. The differential effect on income for the entire three years for the new machine is a (n)

A) $8,750 increase
B) $31,250 decrease
C) $8,750 decrease
D) $2,925 decrease

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

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Question 72

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Jay Company uses the total cost concept of applying the cost-plus approach to product pricing. The costs and expenses of producing and selling 38,400 units of Product E are as follows:​ Jay desires a profit equal to a 14% rate of return on invested assets of $640,000. (a)Determine the amount of desired profit from the production and sale of Product E. (b)Determine the total costs and the cost amount per unit for the production and sale of 38,400 units of Product E. (c)Determine the markup percentage for Product E. (d)Determine the selling price of Product E.

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Question 73

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Match each definition that follows with the term (a-e) it defines. -Possible result of using an inappropriate overhead allocation method

Using the variable cost concept, determine the selling price for 30,000 units using the following data: variable cost per unit, $15.00; total fixed costs, $90,000; and desired profit, $150,000. Round the markup percentage to one decimal place and markup to nearest dollar.

MZE Manufacturing Company has a normal plant capacity of 37,500 units per month. Because of an extra-large quantity of inventory on hand, it expects to produce only 30,000 units in May. Monthly fixed costs and expenses are $112,500 ($3 per unit at normal plant capacity), and variable costs and expenses are $8.25 per unit. The present selling price is $13.50 per unit. The company has an opportunity to sell 7,500 additional units at $9.90 per unit to an exporter who plans to market the product under its own brand name in a foreign market. The additional business is therefore not expected to affect the regular selling price or quantity of sales of MZE Manufacturing Company.​Prepare a differential analysis report, dated April 21 of the current year, on the proposal to sell at the special price.

The differential cost of producing Product P over Product O is $13 per pound.

Match each definition that follows with the term (a-e) it defines. -Changing tooling when preparing for a new product

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.

Piper Corp. 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 $26 excluding 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?

What pricing concept is used if all costs are considered and a fair markup is added to determine the selling price?

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. -What is the total overhead allocated to Product A using activity-based costing?

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.

Use this information for Dotterel Corporation to answer the questions that follow. ? Dotterel Corporation uses the variable cost concept of product pricing. Below is the cost information for the production and sale of 35,000 units of its sole product. Dotterel desires a profit equal to an 11.2% rate of return on invested assets of $350,000. ?? -The unit selling price for the company's product is

Hadley Company is considering the disposal of equipment that is no longer needed for operations. The equipment originally cost $600,000 and accumulated depreciation to date totals $460,000. An offer has been received to lease the machine for its remaining useful life for a total of $290,000, after which the equipment will have no salvage value. The repair, insurance, and property tax expenses that would be incurred by Hadley on the machine during the period of the lease are estimated at $75,800. Alternatively, the equipment can be sold through a broker for $230,000 less a 10% commission.​Prepare a differential analysis report, dated June 15, on whether the equipment should be leased or sold.

Match each definition that follows with the term (a-e) it defines. -Constraint

Differential analysis can aid management in making decisions on a variety of alternatives, including whether to discontinue an unprofitable segment and whether to replace usable plant assets.

In addition to the differential costs in an equipment replacement decision, the remaining useful life of the old equipment and the estimated life of the new equipment are important considerations.

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?

Use this information for Mallard Corporation to answer the questions that follow. ​ Mallard Corporation uses the product cost concept of product pricing. Below is the 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. ​ $\begin{array} { l r } \text { Fixed factory overhead cost } & \$ 82,000 \\\text { Fixed selling and administrative costs } & 45,000 \\\text { Variable direct materials cost per unit } & 5.50 \\\text { Variable direct labor cost per unit } & 7.65 \\\text { Variable factory overhead cost per unit } & 2.25 \\\text { Variable selling and administrative cost per unit } & 0.90\end{array}$ -The markup percentage on product cost for the company's product is

Sage Company 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 $11 excluding 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?