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

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Question 71

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A cost that will not be affected by later decisions is termed a sunk cost.

A) True
B) False

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Question 72

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The amount of income that would result from an alternative use of cash is called:

A) differential income
B) sunk cost
C) differential revenue
D) opportunity cost

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

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Question 73

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Under the variable cost concept, only variable costs are included in the cost amount per unit to which the markup is added.

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. $\begin{array}{lc}\text { Fixed factory overhead cost } & \$ 82,000 \\\text { Fixed selling and administrative costs } & 45,000 \\\text { Variable direct materials cost per unit } & 5.50\\\text { Variable direct labor cost per unit } & 7.65 \\\text { Variable factory overhead cost per unit } & 2.25 \\\text { Variable selling and administrative cost per unit } & 0.90\end{array}$ -The markup percentage on product cost for the company's product is

Using the variable cost concept, determine the selling price for 30,000 units using the following data: variable cost p unit, $15.00; total fixed costs, $90,000; and desired profit, $150,000.

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. $\begin{array}{lc}\text { Fixed factory overhead cost } & \$ 82,000 \\\text { Fixed selling and administrative costs } & 45,000 \\\text { Variable direct materials cost per unit } & 5.50\\\text { Variable direct labor cost per unit } & 7.65 \\\text { Variable factory overhead cost per unit } & 2.25 \\\text { Variable selling and administrative cost per unit } & 0.90\end{array}$ -The dollar amount of desired profit from the production and sale of the company's product is

Under the total cost concept, manufacturing cost plus desired profit is included in the total cost per unit.

The theory of constraints is a manufacturing strategy that focuses on reducing the influence of bottlenecks on a process.

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.

Should the special order be accepted?

The total 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.

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

In using the variable cost concept 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.

The costs of initially producing an intermediate product should be considered in deciding whether to further process a product, even though the costs will not change, regardless of the decision.

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.

The Porter Beverage Factory owns a building for its operations. Porter uses only half of the building and is considering two options for the unused space. The Popcorn Store would like to purchase the half of the building that is not being used for $550,000. A 5% commission would have to be paid at the time of purchase. Salty Snacks 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 $15,000 of property taxes each year and $2,000 of yearly insurance on the property, according to the proposed lease agreement. Determine the differential income or loss from the lease alternative.

Grace Co. can further process Product B to produce Product C. Product B is currently selling for $60 per pound and costs $38 per pound to produce. Product C would sell for $95 per pound and would require an additional cost of $13 per pound to produce. What is the differential revenue of producing and selling Product C?

The Turtle Company has total estimated factory overhead for the year of $1,200,000, divided into four activities: fabrication, $600,000; assembly, $240,000; setup, $200,000; and materials handling, $160,000. Turtle manufactures two products, Boogie Boards and Surf Boards. The activity-base usage quantities for each product by each activity are as follows: $\begin{array}{|l|l|l|l|l|}\hline & \text { Fabrication } & \text { Assembly } & \text { Setup } & \begin{array}{l}\text { Materials } \\\text { Handling }\end{array} \\\hline \text { Boogie Boards } & 10,000 \mathrm{dlh} & 30,000 \mathrm{dlh} & 60 \text { setups } & 100 \text { moves } \\\hline \text { Surf Boards } & \underline{30,000} & \underline{10,000} & \underline{440} & \underline{700} \\\hline & \underline{40,000} \mathrm{dlh} & \underline{40,000} \mathrm{dlh} & \underline{500} \text { setups } & \underline{800} \text { moves } \\\hline\end{array}$ Each product is budgeted for 10,000 units of production for the year. Determine a) the activity rates for each activity and b) the factory overhead cost per unit for each product using activity-based costing.

The differential revenue of producing Product P is $82 per pound.

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?