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Exam 24: Differential Analysis, Product Pricing, and Activity-Based Costing

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Question 61

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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.

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Question 62

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The Eastwood Cake Factory sells chocolate cakes, birthday decorated cakes, and specialty cakes. The factory is experiencing a bottleneck and is trying to determine which cake is more profitable. Even though the company may have to limit the orders that it takes, Eastwood is concerned about customer service and satisfaction. $\begin{array} { | l | l | l | l | } \hline & \begin{array} { l } \text { Chocolate } \\\text { Cake }\end{array} & \begin{array} { l } \text { Birthday } \\\text { Cake }\end{array} & \begin{array} { l } \text { Specialty } \\\text { Cake }\end{array} \\\hline \text { Sales price } & \$ 20.00 & \$ 45.00 & \$ 60.00 \\\hline \text { Variable cost per cake } & \$ 5.00 & \$ 12.00 & \$ 20.00 \\\hline \begin{array} { l } \text { Hours needed to bake, frost, } \\\text { and decorate }\end{array} &1 \text { hour } & 2.5 \text { hour }&2 \text { hour } \\\hline\end{array}$ a) Calculate the contribution margin per hour per cake. b) Determine which cakes the company should try to sell more of first, second, and then last.

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a) Chocolate $15.00,...

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Question 63

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An unfinished desk is produced for $36.00 and sold for $65.00. A finished desk can be sold for $75.00. The additional processing cost to complete the finished desk is $5.95. Provide a differential analysis for further processing.

Relevant revenues and costs refer to

Assuming that Widgeon Co. can sell all of the products it can make, what is the maximum contribution margin it can earn per month?

The condensed income statement for a Fletcher Inc. for the past year is 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?

Match the definitions that follow with the term a-e) it defines. -Only includes the costs of manufacturing in product cost per unit

Differential analysis only considers the short-term one-year) effects of discontinuing a product.

Target costing is arrived at by taking

In deciding whether to accept business at a special price, the short-run price should be set high enough to cover all variable costs and expenses.

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

Farris Company is considering a cash outlay of $500,000 for the purchase of land, which it could lease out for $40,000 per year. If alternative investments are available that yield a 15% return, the opportunity cost of the purchase of the land is

Keating Co. is considering disposing of equipment that cost $50,000 and has $40,000 of accumulated depreciation to date. Keating Co. can sell the equipment through a broker for $25,000 less 5% commission. Alternatively, Gunner Co. has offered to lease the equipment for five years for a total of $48,750. Keating will incur repair, insurance, and property tax expenses estimated at $8,000 over the five-year period. At lease-end, the equipment is expected to have no residual value. The net differential income from the lease alternative is

The target cost approach assumes that:

Mallard Corporation uses the product cost concept of product pricing. Below is cost information for the production and sale of 45,000 units of its sole product. Mallard desires a profit equal to a 12% rate of return on invested assets of $800,000. $\begin{array}{lc}\text { Fixed factory overhead cost } & \$ 82,000 \\\text { Fixed selling and administrative costs } & 45,000 \\\text { Variable direct materials cost per unit } & 5.50\\\text { Variable direct labor cost per unit } & 7.65 \\\text { Variable factory overhead cost per unit } & 2.25 \\\text { Variable selling and administrative cost per unit } & 0.90\end{array}$ -What pricing concept considers the price that other providers charge for the same product?

Which of the following would be considered a sunk cost?

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

Match each of the definitions that follow with the term a-e) it defines. -Variable manufacturing costs plus variable selling and administrative costs are included in cost per unit

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

Match the definitions that follow with the term a-e) it defines. -Sets the price according to demand