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Exam 24: Differential Analysis and Product Pricing

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Question 71

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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. The dollar amount of desired profit from the production and sale of the company's product is:

A) $105,840
B) $225,000
C) $ 96,000
D) $220,500

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

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Question 72

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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 $55 per pound.

A) True
B) False

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Question 73

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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.

Using the variable cost concept determine the mark-up per unit for 30,000 units using the following data: Variable cost per unit $15.00, total fixed costs $90,000 and desired profit $150,000.

If the total unit cost of manufacturing Product Y is currently $36 and the total unit cost after modifying the style is estimated to be $48, the differential cost for this situation is $48.

A practical approach which is frequently used by managers when setting normal long-run prices is the cost-plus approach.

Super Security Company manufacturers home alarms. Currently it is manufacturing one of its components at a variable cost of $45 and fixed costs of $15 per unit. An outside provider of this component has offered to sell Safe Security the component for $50. Determine the best plan and calculate the savings.

A business received an offer from an exporter for 30,000 units of product at $16 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: What is the amount of the gain or loss from acceptance of the offer?

A bottleneck begins when demand for the company's product exceeds the ability to produce the product.

Differential analysis can aid management in making decisions on a variety of alternatives, including whether to discontinue an unprofitable segment and whether to replace usable plant assets.

Make or buy options often arise when a manufacturer has excess productive capacity in the form of unused equipment, space, and labor.

The Canine Company has total estimated factory overhead for the year of $2,400,000, divided into four activities: Fabrication, $1,200,000; Assembly, $480,000; Setup, $400,000; and Materials Handling $320,000. Canine manufactures two products: Standard Crates and Deluxe Crates. The activity-base usage quantities for each product by each activity are as follows: Each product is budgeted for 20,000 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.

Activity-based costing provides more accurate and useful cost data than traditional systems.

Discontinuing a product or segment is a huge decision that must be carefully analyzed. Which of the following would be a valid reason not to discontinue an operation?

A business received an offer from an exporter for 20,000 units of product at $15 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: What is the differential revenue from the acceptance of the offer?

The Swan Company produces their product at a total cost of $43 per unit. Of this amount $8 per unit is selling and administrative costs. The total variable cost is $30 per unit The desired profit is $20 per unit. Determine the mark up percentage on total cost.

Raven Company is considering replacing equipment which originally cost $500,000 and which has $420,000 accumulated depreciation to date. A new machine will cost $790,000. What is the sunk cost in this situation?

Dotterel Corporation uses the variable cost concept of product pricing. Below is cost information for the production and sale of 35,000 units of its sole product. Dotterel desires a profit equal to a 11.2% rate of return on invested assets of $350,000. The variable cost per unit for the production and sale of the company's product is:

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. The cost per unit for the production of the company's product is:

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