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Exam 12: Differential Analysis and Product Pricing

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Question 51

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?Blue Lights Co.uses the total cost concept of product pricing.Given below is cost information for the production and sale of 50,000 units of its sole product.Blue Lights desires a profit equal to a 12.6% rate of return on invested assets of $1,000,000. $\begin{array}{lr}\text {Fixed factory overhead cost }&\$90,000\\\text {Fixed selling and administrative costs }&55,000\\\text { Variable direct materials cost per unit}&6.00\\\text {Variable direct labor cost per unit }&9.65\\\text {Variable factory overhead cost per unit }&3.50\\\text {Variable selling and administrative cost per unit }&1.20\\\end{array}$ ? Based on the information provided, the dollar amount of desired profit from the production and sale of the company's product is:

A) ?$126,000.
B) $67,200.
C) $237,700.
D) $96,000.

E) A) and D)
F) None of the above

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Question 52

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In which of the following pricing methods is the markup added to manufacturing costs and selling and expenses to determine the selling price?

A) Total cost method
B) Product cost method
C) Variable cost method
D) Fixed cost method

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

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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 $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.

A business is considering a cash outlay of $250,000 for the purchase of land, which it intends to lease for $40,000 per year.If alternative investments are available that yield an 15% return, the opportunity cost of the purchase of the land is

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

Granger Co.can further process Product B to produce Product C.Product B is currently selling for $55 per pound and costs $42 per pound to produce.Product C would sell for $82 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 product with the highest contribution margin per scarce resource is the most profitable.

The revenue that is forgone from an alternative use of an asset, such as cash, is called an opportunity cost.

Manufacturers must conform to the Robinson-Patman Act, which prohibits price discrimination within the United States unless differences in prices can be justified by different costs.

Product J is one of the many products manufactured and sold by Gooble Company.An income statement by product line for the past year indicated a net loss for Product J of $7,250.This net loss resulted from sales of $265,000, cost of goods sold of $186,500, and operating expenses of $85,750.It is estimated that 30% of the cost of goods sold represents fixed factory overhead costs and that 40% of the operating expense is fixed.If Product J is retained, the revenue, costs, and expenses are not expected to change significantly from those of the current year.However, because of the net loss, management is considering the elimination of the unprofitable endeavor.Because of the large number of products manufactured, the total fixed costs and expenses are not expected to decline significantly if Product J is discontinued. ? Prepare a differential analysis report, dated February 8 of the current year, on the proposal to discontinue Product J.

A cost that will not be affected by later decisions is termed an opportunity cost.

What cost concept used in applying the cost-plus approach to product pricing includes only total manufacturing costs in the "cost" amount to which the markup is added?

Frank Co.is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $25 unit.The unit cost for Frank Co.to make the part is $30, which includes $3 of fixed costs.If 20,000 units of the part are normally purchased each year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease for making the part rather than purchasing it?

Wyandott Co.produces two products.Both products pass through a firing process that is operating at full capacity and is a production bottleneck.Product A requires 2 hours of processing and has a contribution margin per unit of $60.Product B requires 1 hour of processing and has a contribution margin of $40.Which of the following provides the most accurate assessment of the situation assuming unlimited demand for each product?

A cost that has been incurred in the past and is irrelevant is termed a(n) :

The condensed income statement for a business for the past year is presented as follows: ? $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Product }$$\begin{array}{lrrrr}&\mathrm{F}& \mathrm{G} & \mathrm{H}&\text { Total}\\ \text { Sales } & \$ 200,000 & \$ 180,000 & \$ 320,000 & \$ 700,000 \\\text { Less variable costs } & 120,000 & \underline{160,000} & \underline{200,000} & 480,000 \\\text { Contribution margin } & \$ 80,000 & \$ 20,000 & \$ 120,000 & \$ 220,00 \\\text { Less fixed costs } & 25,000 & \underline{30,000} & \underline{40,000} & \underline{95,000} \\\begin{array}{l}\text { Income (loss) from } \\\text { operations }\end{array} & \$ \mathbf{5 5 , 0 0 0} & \$ 10,000 & \$ \mathbf{8 0 , 0 0 0} & \$ \mathbf{1 2 5 , 0 0 0}\end{array}$ ?? 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?

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

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

When deciding to make or buy a part needed for the manufacturing process, management needs to consider whether the plant has excess production capacity available to make the part or if current production will need to be interrupted to manufacture the part.

Flourish Co.is considering replacing a machine that originally cost $850,000 and has $500,000 accumulated depreciation to date.A new machine will cost $450,000.What is the sunk cost in this situation?