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Exam 10: Differential Analysis and Product Pricing

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Question 31

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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 markup percentage on total cost for the company's product is

A) 21.0%
B) 22.6%
C) 15.8%
D) 24.0%

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

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Question 32

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The Sierra Company produces its product at a total cost of $89 per unit. Of this amount, $14 per unit is selling and administrative costs. The total variable cost is $58 per unit and t he desired profit is $28 per unit. Determine the markup percentage using the: (a) total cost (b) product cost (c) variable cost concept.

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(a) Total cost = $28/$89 = 31....

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Question 33

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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, 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?

Rylan Corporation received an offer from an exporter for 25,000 units of product at $16 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: What is the amount of the income or loss from acceptance of the offer?

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.

The Canine Company has total estimated factory overhead for the year of $2,400,000, divided into four activities: fabrication, $1,200,000; assembly, $480,000; setup, $400,000; and materials handling, $320,000. Canine manufactures two products, Standard Crates and Deluxe Crates. The activity-base usage quantities for each product by each activity are as follows: Each product is budgeted for 20,000 units of production for the year. Determine (a) the activity rates for each activity (b) the factory overhead cost per unit for each product using activity-based costing.

When a bottleneck occurs between two products, the company must determine the contribution margin for each product and manufacture the product that has the highest contribution margin per bottleneck hour.

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 activity rate for production setup?

The product cost concept includes all manufacturing costs in the cost amount to which the markup is added to determine product price.

Hill Co. can further process Product O to produce Product P. Product O is currently selling for $60 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 cost of producing Product P is $55 per pound.

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

The product cost concept includes all manufacturing costs plus selling and administrative expenses in the cost amount to which the markup is added to determine product price.

Piper Rose Boutique has been approached by the community college to make special polo shirts for the faculty and staff. The college is willing to buy 4,000 polos with its own design for $6.00 each. The company normally sells its shirts for $12.00 each.  The company has enough excess capacity to make this order.  A breakdown of their costs is as follows: Should Piper Rose Boutique accept the special order made by the college?

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.

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, 7 hours; and Wales 1 hour. Assume that Widgeon produced enough product with the highest contribution margin per unit to use 1,000 hours of machine time. Product demand does not warrant any more production of that product. What is the maximum additional contribution margin that can be realized by utilizing the remaining 1,000 hours on the product with the second highest contribution margin per hour?

In using the total cost concept of applying the cost-plus approach to product pricing, selling expenses, administrative expenses, and profit are covered in the markup.

Airflow Company sells a product in a competitive marketplace.  Market analysis indicates that the 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.  Airflow anticipates selling 50,000 units.  The current full cost per unit for the product is $25 per unit. (a) What is the amount of profit per unit? (b) What is the target cost per unit if Airflow meets the market dictated price and management's desired profit?

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

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.

Which of the following would be considered a sunk cost?