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Exam 24: Differential Analysis and Product Pricing

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Question 41

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Relevant revenues and costs refer to:

A) activities that occurred in the past
B) monies already earned and/or spent
C) last year's net income
D) differences between the alternatives being considered

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

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Question 42

Multiple Choice

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Nighthawk Inc. is considering disposing of a 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 net differential increase or decrease in cost for the entire three years for the new equipment is:

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 43

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The Stewart Cake Factory owns a building for its operations. Stewart uses only half of the building and is considering two options for the unused space. The Candy Store would like to purchase the half of the building that is not being used for $550,000. A 7% commission would have to be paid at the time of purchase. Ice Cream Delight would like to lease the half of the building for the next 5 years at $100,000 each year. Stewart would have to continue paying $9,000 of property taxes each year and $1,000 of yearly insurance on the property, according to the proposed lease agreement. Determine the differential income or loss from the lease alternative.

Which of the following would be considered a sunk cost?

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.

Snipe Company has been purchasing a component, Part Q, for $19.20 a unit. Snipe is currently operating at 70% of capacity and no significant increase in production is anticipated in the near future. The cost of manufacturing a unit of Part Q, determined by the absorption costing method, is estimated as follows: Prepare a differential analysis report, dated March 12 of the current year, on the decision to make or buy Part Q.

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

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.

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.

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

Carillion 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 $310,000, after which the equipment will have no salvage value. The repair, insurance, and property tax expenses that would be incurred by Carillion Company 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 of the current year, 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 take 7 hours, and Wales take 1 hour. Assuming that Widgeon Co. can sell all of the products they can make, what is the maximum contribution margin they can earn per month?

When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be based upon ideal levels of performance.

Differential revenue is the amount of increase or decrease in revenue expected from a particular course of action as compared with an alternative.

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?

The Swan Company produces their 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 The desired profit is $20 per unit. Determine the mark up percentage on product cost.

Make or buy decisions should be made only with related parties.

If the company meets the new target cost number, how much will they have to cut costs per unit, if any?

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

Rachel Cake Factory normally sells their specialty cake for $22. An offer to buy 100 cakes for $19 per cake was made by an organization hosting a national event in the city. The variable cost per cake is $11. A special decoration per cake will add another $1 to the cost. Determine the differential income or loss per cake from selling the cakes.