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Exam 25: Differential Analysis and Product Pricing

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Question 51

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Delaney Company is considering replacing equipment that originally cost $600,000 and has accumulated depreciation of $420,000 to date. A new machine will cost $790,000 and the old equipment can be sold for $8,000. The sunk cost in this situation is

A) $172,000
B) $180,000
C) $188,000
D) $290,000

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

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Question 52

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In using the variable cost method of applying the cost-plus approach to product pricing, fixed manufacturing costs and both fixed and variable selling and administrative expenses must be covered by the markup.

A) True
B) False

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Question 53

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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 $13 per pound.

Match each phrase that follows with the term (a-e) it describes. -Revenue forgone from an alternative use of an asset A)Opportunity cost B)Sunk cost C)Theory of constraints D)Differential analysis E)Product cost distortion

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. Flyer's current full cost for the product is $44 per unit.​ -If the company cannot cut costs any lower than they already are, the profit margin on sales to meet the market selling price would be

Match each phrase that follows with the term (a-e) it describes. Some terms may not be used and other terms may be used more than once. -A common practice in many high-fixed-cost service businesses A)Total cost method B)Variable cost method C)Normal selling price D)Product cost method E)Yield pricing

Match each word or phrase that follows with the term (a-e) it describes. -Combines market-based pricing with a cost-reduction emphasis A)Demand-based method B)Competition-based method C)Product cost method D)Target costing method E)Production bottleneck

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.

In a production bottleneck situation, the product with the highest contribution margin per unit should be given priority over a product that has the highest contribution margin per bottleneck hour.

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 revenue of producing Product P is $82 per pound.

Opportunity cost is the amount of increase or decrease in cost that would result from the best available alternative to the proposed use of cash or its equivalent.

Dotterel Corporation uses the variable cost method 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% return on invested assets of $350,000. ​ -The variable cost per unit for the production and sale of Dotterel's product is

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.

Eastwood Cake Factory sells chocolate cakes, birthday cakes, and specialty cakes. The factory is experiencing a bottleneck and is trying to determine which cake is most profitable. Even though Eastwood may have to limit its orders, it is concerned about customer service and satisfaction. a. Compute the contribution margin per hour per cake. b. Determine which cakes the company should try to sell more of first, second, and then last.

Lofty Airlines has a flight for which the regular ticket price is $200 and the variable costs per passenger are $50. Fixed costs assigned to each flight are $12,000. Each flight has a capacity of 125 seats, with an average of 95 seats sold at the regular price. To attract customers to the last 30 unsold seats, Lofty discounts the tickets by 50% for standby passengers. The contribution margin per standby passenger is

Stryker Industries received an offer from an exporter for 15,000 units of product at $17.50 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: ​ -The differential cost from the acceptance of the offer is

Match each phrase that follows with the term (a-e) it describes. -Evaluation of how profit will change based on an alternative course of action A)Opportunity cost B)Sunk cost C)Theory of constraints D)Differential analysis E)Product cost distortion

Jamison Company uses the total cost method of applying the cost-plus approach to product pricing. Jamison 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 markup percentage on total cost.

A bottleneck begins when demand for the company's product exceeds the ability to produce the product.

Yakking Co. manufactures mobile cellular equipment and uses the variable cost method of applying the cost-plus approach to product pricing. Yakking incurs variable costs of $1,900,000 in the production of 100,000 units, while fixed costs total $50,000. The company employs $4,725,000 of assets and wishes to earn a profit equal to a 10% return on invested assets. a.Compute a markup percentage based on variable cost. b.Determine a selling price.Round the markup percentage to one decimal place and other intermediate computations and final answer to two decimal places.