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Exam 10: Differential Analysis and Product Pricing

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Question 1

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Lara Technologies is considering a total cash outlay of $250,000 for the purchase of land, which it could lease out for $35,000 per year. If alternative investments are available that yield a 12% return, the opportunity cost of the purchase of the land is

A) $35,000
B) $30,000
C) $250,000
D) $4,200

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

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Question 2

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

A) True
B) False

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Question 3

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Which equation better describes target costing?

Relevant revenues and costs refer to

Ptarmigan Company produces two products. Product A has a contribution margin of $20 and requires 4 machine hours. Product B has a contribution margin of $18 and requires 3 machine hours. Determine the most profitable product assuming the machine hours are the constraint.

The desired selling price for a product will be the same under both variable and total cost.

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

Under the variable cost concept, only variable costs are included in the cost amount per unit to which the markup is added.

Dotterel Corporation uses the variable cost concept of product pricing. Below is 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 markup percentage for the sale of the company's product is

Hummingbird Company uses the product cost concept of applying the cost-plus approach to product pricing. The costs and expenses of producing 25,000 units of Product K are as follows: Hummingbird desires a profit equal to a 5% rate of return on invested assets of $642,500. (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 of 25,000 units of Product K. (c) Determine the markup percentage for Product K. (d) Determine the selling price of Product K. Round your markup percentage to one decimal place, and other intermediate calculations and final answer to two decimal places.

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.

Miramar Industries manufactures two products: A and B.  The manufacturing operation involves three overhead activities-production setup, material handling, and general factory activities.  Miramar uses activity-based costing to allocate overhead to products.  An activity analysis of the overhead revealed the following estimated costs and activity bases for these activities: What is the total overhead allocated to Product A using activity-based costing?

Delaney Company is considering replacing equipment which originally cost $600,000 and which has $420,000 accumulated depreciation to date. A new machine will cost $790,000. What is the sunk cost in this situation?

Falcon Co. produces a single product. Its normal selling price is $30.00 per unit. The variable costs are $19.00 per unit. Fixed costs are $25,000 for a normal production run of 5,000 units per month. Falcon received a request for a special order that would not interfere with normal sales. The order was for 1,500 units with a special price of $20.00 per unit. Falcon has the capacity to handle the special order, and for this order, a variable selling cost of $1.00 per unit would be eliminated. If the order is accepted, what would be the impact on net income?

Mighty Safe Fire Alarm is currently buying 50,000 motherboards from MotherBoard, Inc. at a price of $65 per board. Mighty Safe is considering making its own boards. The costs to make the board are as follows: direct materials, $32 per unit; direct labor, $10 per unit; and variable factory overhead, $16.00 per unit. Fixed costs for the plant would increase by $75,000. Which option should be selected and why?

Starling Co. is considering disposing of a machine with a book value of $12,500 and estimated remaining life of five years. The old machine can be sold for $1,500. A new high-speed machine can be purchased at a cost of $25,000. It will have a useful life of five years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $26,000 to $23,500 if the new machine is purchased. The total net differential increase or decrease in cost for the new equipment for the entire five years is

Flyer Company sells a product in a competitive marketplace.  Market analysis indicates that its product would probably sell at $48 per unit.  Flyer management desires a 12.5% profit margin on sales.  Their current full cost for the product is $44 per unit. What is the desired profit per unit?

Grace Co. can further process Product B to produce Product C. Product B is currently selling for $60 per pound and costs $38 per pound to produce. Product C would sell for $95 per pound and would require an additional cost of $13 per pound to produce. What is the differential revenue of producing and selling Product C?

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

Dotterel Corporation uses the variable cost concept of product pricing. Below is 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 variable cost per unit for the production and sale of the company's product is