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Exam 24: Differential Analysis and Product Pricing

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Question 81

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An oven with a book value of $67,000 has an estimated 5 year life. A proposal is offered to sell the oven for $8,500 and replace it with a new oven costing $110,000. The new machine has a five year life with no residual value. The new machine would reduce annual maintenance costs by $23,000. Provide a differential analysis on the proposal to replace the machine.

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Question 82

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Magpie Corporation uses the total cost concept of product pricing. Below is cost information for the production and sale of 60,000 units of its sole product. Magpie desires a profit equal to a 25% rate of return on invested assets of $700,000. The dollar amount of desired profit from the production and sale of the company's product is:

A) $175,000
B) $67,200
C) $73,500
D) $96,000

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Question 83

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A bottleneck happens when a key piece of manufacturing machinery can produce 1000 units per hour and demand for the product supports a production rate of 1200 units per hour.

Holiday Decorations Unique has been approached by the community college to make special decorations for the faculty and staff. The college is willing to buy 5,000 Christmas ornaments with their own design for $6.00 each. The company normally sells its decorations for $12.00 each. A break down of their costs is as follows: Should Holiday Decorations Unique accept the special order made by the college? The company has enough excess capacity to make this order.

Widgeon Co. manufactures three products: Bales; Tales; and Wales. The selling prices are: $55; $78; and $32, respectively. The variable costs for each product are: $20; $50; and $15, respectively. Each product must go through the same processing in a machine that is limited to 2,000 hours per month. Bales take 5 hours to process, Tales take 7 hours, and Wales take 1 hour. Assume that Widgeon produced enough product with the highest contribution margin per unit to use 1,000 hours of machine time. Product demand does not warrant any more production of that product. What is the maximum additional contribution margin that can be realized by utilizing the remaining 1,000 hours on the product with the second highest contribution margin per hour?

Hummingbird Company uses the product cost concept of applying the cost-plus approach to product pricing. The costs and expenses of producing 25,000 units of Product K are as follows: Hummingbird desires a profit equal to a 5% rate of return on invested assets of $642,500. Round your markup percentage to one decimal place, and other intermediate calculations and final answer to two decimal places.

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:

Yakking Co. manufactures mobile cellular equipment and develops a price for the product by using the variable cost concept. Yakking incurs variable costs of $1,900,000 in the production of 100,000 units while fixed costs total $50,000. The company employs $4,725,000 of assets and wishes to earn a profit equal to a 10% rate of return on assets. Round your markup percentage to one decimal place, and other intermediate calculations and final answer to two decimal places.

The Bitterns Company produces their product at a total cost of $89 per unit. Of this amount $14 per unit is selling and administrative costs. The total variable cost is $58 per unit. The desired profit is $25 per unit. Determine the mark up percentage on (a) total cost, (b) product cost and (c) variable cost concepts.

Miramar Industries manufactures two products, A and B. The manufacturing operation involves three overhead activities - production setup, material handling, and general factory activities. Miramar uses activity-based costing to allocate overhead to products. An activity analysis of the overhead revealed the following estimated costs and activity bases for these activities: Each product's total activity in each of the three areas are as follows: What is the overhead allocated to Product B using activity-based costing?

The condensed income statement for a business for the past year is as follows: Management is considering the discontinuance of the manufacture and sale of Product T 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 Product U. What is the amount of change in net income for the current year that will result from the discontinuance of Product T?

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.

Jay Company uses the total cost concept of applying the cost-plus approach to product pricing. The costs and expenses of producing and selling 38,400 units of Product E are as follows: Jay desires a profit equal to a 14% rate of return on invested assets of $640,000.

Hill Co. can further process Product O to produce Product P. Product O is currently selling for $60 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 $13 per pound.

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

Cost plus methods determine the normal selling price by estimating a cost amount per unit and adding a markup.

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

Flyer Company sells a product in a competitive marketplace. Market analysis indicates that their product would probably sell at $48 per unit. Flyer management desires a 12.5% profit margin on sales. Their current full cost per unit for the product is $44 per unit. What is the target cost of the company's product?

Hill Co. can further process Product O to produce Product P. Product O is currently selling for $60 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.

Product J is one of the many products manufactured and sold by Oceanside Company. An income statement by product line for the past year indicated a net loss for Product J of $12,250. This net loss resulted from sales of $275,000, 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. 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.