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Exam 12: Differential Analysis and Product Pricing

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Question 51

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The condensed income statement for a business for the past year is as follows: Management is considering the discontinuance of the manufacture and sale of Blam at the beginning of the current year. The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Wham. What is the amount of change in net income for the current year that will result from the discontinuance of Blam?

A) $10,000 decrease
B) $40,000 decrease
C) $10,000 increase
D) $70,000 decrease

E) None of the above
F) All of the above

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Question 52

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Soap Company manufactures Soap X and Soap Y and can sell all it can make of either. Hours available to produce the products is the constrained resources.Based on the following data, which statement is true? $\begin{array}{|c|c|l|}\hline\mathrm{Y} & \mathrm{X}\\\hline \$ 25 & \$ 20 & \text { Sales Price } \\\hline 15 & 14 & \text { Variable Cost } \\\hline 5 & 3 & \text { Hours needed to process } \\\hline\end{array}$

A) X is more profitable than Y.
B) Y is more profitable than X.
C) Neither X nor Y have a positive contribution margin.
D) X and Y are equally profitable.

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

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Question 53

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Whiteville Co. can further process Product B to produce Product C Product B is currently selling for $45 per pound and costs $30 per pound to produce. Product C would sell for $80 per pound and would require an additional cost of $18 per pound to produce. What is the differential cost of producing Product C?

The condensed income statement for a business for the past year is presented as follows: Management is considering the discontinuance of the manufacture and sale of Product G at the beginning of the current year. The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Products F and H. What is the amount of change in net income for the current year that will result from the discontinuance of Product G?

When evaluating whether to lease or sell equipment, the book value of the equipment is considered to be a sunk cost and not a differential cost.

What is a bottleneck?

If the total unit cost of manufacturing Product Y is currently $40 and the total unit cost after modifying the style is estimated to be $48, the differential cost for this situation is $8.

The amount of increase or decrease in revenue that is expected from a particular course of action as compared with an alternative is termed:

Quick Company has been purchasing a component, Part Q, for $20 a unit. Quick 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 absorption costing method, is estimated as follows: $\begin{array}{ll} \$ 12.50 &\text { Direct materials } \\5.00 &\text { Directlabor } \\1.25 &\text { Variable factory overhead } \\\underline{3.15}&\text { Fixed factory overhead } \\\underline{\$21.90}&\text { Total }\end{array}$ Prepare a differential analysis report, dated March 12 of the current year, on the decision to make or buy Part Q.

In attempting to improve profitability when faced with a bottleneck related to hours that is involved in the production of two or more products, which of the following is most important for management to consider?

A practical approach that is frequently used by managers when setting normal selling price is the cost-plus approach.

A cost that will not be affected by later decisions is termed:

The condensed income statement for a business for the past year is presented as follows: Management is considering the discontinuance of the manufacture and sale of Product G at the beginning of the current year. The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Products F and H. What is the amount of change in net income for the current year that will result from the discontinuance of Product G?

Venus Co. can further process Product X to produce Product Y. Product X is currently selling for $18 per pound and costs $12.50 per pound to produce. Product Y would sell for $32 per pound and would require an additional cost of $8.75 per pound to produce. Based on the information provided for Venus Co., what is the differential cost of producing Product Y?

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.

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

Matthews Company is considering replacing equipment that originally cost $250,000 and that has $225,000 accumulated depreciation to date. A new machine will cost $500,000, and the old equipment can be sold for $6,000. What is the sunk cost in this situation?

Max, Inc. can sell a large piece of machinery for $90,000. The machinery originally cost $240,000 and has accumulated depreciation of $130,000. Max will have to pay a 5% sales commission on the sale. Rather than sell, Max is considering leasing the machine. It can be leased for 4 years for $24,000 per year. Max has estimated future operating expenses to be $3,000 per year, and Max will be responsible for those expenses. Which of the following options most accurately describes the analysis and decision for Max?

If the total unit cost of manufacturing Product Y is currently $40 and the total unit cost after modifying the style is estimated to be $48, the differential cost for this situation is $48.