ACCT 2810 Final ch.12

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

Competition-based method

In attempting to improve profitability when faced with a bottleneck that is involved in the production of two or more products, which of the following is most important for management to consider?

Contribution margin per bottleneck hour for each product

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

Desired profit

Which of the following is NOT a cost concept commonly used in applying the cost-plus approach to product pricing?

Fixed cost concept

Max, Inc. can sell a large piece of machinery for $90,000. The machinery originally cost $240,000 and has accumulated depreciation of $130,000. Max will have to pay a 5% sales commission on the sale. Rather than sell, Max is considering leasing the machine. It can be leased for 4 years for $24,000 per year. Max has estimated future operating expenses to be $3,000 per year, and Max will be responsible for those expenses. Which of the following options most accurately describes the analysis and decision for Max?

Sell - because differential income is $1,500 if Max sells rather than leases

Which equation better describes target costing?

Selling Price - Desired Profit = Target Costs

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

Total cost

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

Total cost concept

What pricing method is used if all costs are considered and a fair markup is added to determine the selling price?

Total cost method

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

Total costs of manufacturing a product plus selling and administrative expenses

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

Total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit

Managers who often make special pricing decisions are more likely to use which of the following cost concepts in their work?

Variable cost

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

cost-plus approach.

Relevant revenues and costs focus on

differences between the alternatives being considered.

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

differential cost.

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

differential revenue.

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

opportunity cost.

In contrast to the total product and variable cost concepts used in setting seller's prices, the target cost approach assumes that

selling price is set by the marketplace.

A cost that will NOT be affected by later decisions is termed a

sunk cost.

Target costing is arrived at by

taking the selling price and subtracting desired profit.

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?

$ 90,000 cost decrease

Dinkins Inc. is considering disposing of a machine with a book value of $50,000 and an estimated remaining life of five years. The old machine can be sold for $15,000. A new machine with a purchase price of $150,000 is being considered as a replacement. It will have a useful life of five years and no residual value. It is estimated that variable manufacturing costs will be reduced from $70,000 to $45,000 if the new machine is purchased. The net differential increase or decrease in cost for the entire five years for the new equipment is

$10,000 increase.

A business is considering a cash outlay of $500,000 for the purchase of land, which it could lease for $40,000 per year. If alternative investments are available that yield a 21% return, the opportunity cost of the purchase of the land is

$105,000.

What is the differential revenue of producing Product D?

$14 per pound

Whiteville Co. can further process Product B to produce Product C. Product B is currently selling for $45 per pound and costs $30 per pound to produce. Product C would sell for $80 per pound and would require an additional cost of $18 per pound to produce. What is the differential cost of producing Product C?

$18 per pound

Sanchez Company is considering replacing equipment that originally cost $300,000 and that has $280,000 accumulated depreciation to date. A new machine will cost $450,000. What is the sunk cost in this situation?

$20,000

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?

$20,000 decrease

Matthews Company is considering replacing equipment that originally cost $250,000 and that has $225,000 accumulated depreciation to date. A new machine will cost $500,000, and the old equipment can be sold for $6,000. What is the sunk cost in this situation?

$25,000

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?

$27 per pound

A business is considering a cash outlay of $200,000 for the purchase of land, which it could lease for $35,000 per year. If alternative investments are available that yield an 18% return, the opportunity cost of the purchase of the land is

$36,000.

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?

$40,000 cost increase

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 16% return, the opportunity cost of the purchase of the land is

$40,000.

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?

$5 per pound

A business is considering a cash outlay of $500,000 for the purchase of land, which it intends to lease for $90,000 per year. If alternative investments are available that yield a 12% return, the opportunity cost of the purchase of the land is

$60,000.

Assume that Marlow Co. is considering disposing of equipment that cost $200,000 and has $160,000 of accumulated depreciation to date. Marlow Co. can sell the equipment through a broker for $100,000 less 5% commission. Alternatively, Minton Co. has offered to lease the equipment for five years for a total of $195,000. Marlow will incur repair, insurance, and property tax expenses estimated at $40,000. At lease-end, the equipment is expected to have no residual value. The net differential income from the lease alternative is

$60,000.

Management is considering the discontinuance of the manufacture and sale of Blam 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 Wham. What is the amount of change in net income for the current year that will result from the discontinuance of Blam?

$70,000 decrease

What is the differential cost of producing Product D?

$8.75 per pound

Paul's Delivery Service is considering selling one of its smaller trucks that is no longer needed in the business. The truck originally cost $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?

Paul's Delivery Service should sell the truck because the differential loss from leasing is $500.

What cost concept used in applying the cost-plus approach to product pricing covers selling expenses, administrative expenses, and desired profit in the "markup"?

Product cost concept

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?

Product cost concept

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?

Production of Product B rather than Product A will generate the maximum profitability for Wyandotte.

What is a bottleneck?

The point in the manufacturing process where demand for the product exceeds the ability to produce the product