Exam 12: Differential Analysis and Product Pricing

Nachos Co. can further process Product J to produce Product D Product J is currently selling for $12 per pound and costs $9 per pound to produce. Product D would sell for $20 per pound and would require an additional cost of $5 per pound to produce. What is the differential cost of producing Product D?

Defense contractors would be more likely to use which of the following cost concepts in pricing their product?

In using the total cost concept of applying the cost-plus approach to product pricing, only profit is covered in the markup.

Glover Inc. manufactures Product B, incurring variable costs of $15.00 per unit and fixed costs of $70,000. Glover desires a profit equal to a 12% rate of return on assets. Assets of $785,000 are devoted to producing Product B, and 100,000 units are expected to be produced and sold.

In using the variable cost concept of applying the cost-plus approach to product pricing, what is included in the markup?

When a product or segment of a business is determined to be generating a loss, the total income from operations for the company will always increase if management eliminates the product or segment.

A business 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 $12, 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?

What pricing method is most likely to be used if there are several providers in the same market and there is sufficient demand for the product?

Hill Co. can further process Product O to produce Product P. Product O is currently selling for $65 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.

Eliminating a product or segment will usually eliminates all of the product's or segment's variable costs.

Which equation better describes target costing?

Differential revenue is the amount of income that would result from the best available alternative for the proposed use of cash.

In addition to the differential costs in an equipment replacement decision, the difference between the remaining useful life of the old equipment and the estimated life of the new equipment is an important consideration.

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

Relevant revenues and costs focus on:

FDE Manufacturing Company has a normal plant capacity of 75,000 units per month. Because of an extra large quantity of inventory on hand, it expects to produce only 60,000 units in May. Monthly fixed costs and expenses are $150,000 ($2 per unit at normal plant capacity), and variable costs and expenses are $13 per unit. The present selling price is $25 per unit. The company has an opportunity to sell 5,000 additional units at $14.30 per unit to an exporter who plans to market the product under its own brand name in a foreign market. The additional business is therefore not expected to affect the regular selling price or quantity of sales of FDE Manufacturing Company. Prepare a differential analysis report, dated April 21 of the current year, on the proposal to sell at the special price.

Hill Co. can further process Product O to produce Product P. Product O is currently selling for $65 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.

Target costing is arrived at by:

The total cost concept includes all manufacturing costs minus selling and administrative expenses in the total cost amount to which the markup is added to determine the product price.

Paul's Delivery Service is considering selling one of its smaller trucks that is no longer needed in the business. The truck originally costed $23,000 and has accumulated depreciation of $10,000. The truck can be sold for $14,000. Another company is interested in leasing the truck. It will pay $4,800 per year for three years. Paul's Delivery Service will continue to pay the taxes and license fees for the truck, but all other expenses will be paid by the lessee. Management assumes the expenses for the taxes and license will be $300 per year. Which of the following statements is correct?