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Exam 12: Differential Analysis and Product Pricing

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Question 31

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In contrast to the total product and variable cost concepts used in setting selling prices, the target cost approach assumes that:

A) a markup is added to total cost.
B) selling price is set by the market price.
C) a markup is added to variable cost.
D) a markup is added to product cost.

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

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Question 32

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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 $13 per pound.

A) True
B) False

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Question 33

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Pull Company is considering the disposal of equipment that is no longer needed for operations. The equipment originally cost $600,000, and accumulated depreciation to date totals $460,000. An offer has been received to lease the machine for its remaining useful life for a total of $300,000, after which the equipment will have no salvage value. The repair, insurance, and property tax expenses during the period of the lease are estimated at $75,800. Alternatively, the equipment can be sold through a broker for $230,000 less a 10% commission. Prepare a differential analysis report, dated June 15 of the current year, on whether the equipment should be leased or sold.

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

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.

When standard costs are used in applying the cost-plus approach to product pricing, the standards should be based upon normal levels of performance.

When eliminating a product or segment of a business, the fixed costs pertaining to the product or segment will always be eliminated.

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

When choosing whether or not to replace an equipment, the analysis normally focuses on the costs of continuing to use the old equipment versus replacing the equipment.

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

Venus Co. can further process Product X to produce Product Y. Product X is currently selling for $18 per pound and costs $12.50 per pound to produce. Product Y would sell for $32 per pound and would require an additional cost of $8.75 per pound to produce. Based on the information provided for Venus Co., what is the differential revenue of producing Product Y?

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

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

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:

A business received an offer from an exporter for 10,000 units of product at $13.50 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 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:

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:

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?

A business received an offer from an exporter for 5,000 units of product at $10 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: $\begin{array}{lrr} \text { Domestic urit sales price } &\$12\\ \text { Unit manufactuing costs } &\\ \text { Variable } &9\\ \text { Fixed} &1\\\end{array}$ Based on the above data, what is the differential cost from the acceptance of the offer?

The product cost concept includes all manufacturing costs in the cost amount to which the markup is added to determine product price.