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Exam 24: Differential Analysis, Product Pricing, and Activity-Based Costing

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Question 21

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Match each of the definitions that follow with the term a-e) it defines. -Target selling price to be achieved in the long term

A) Engineering change order
B) Total cost concept
C) Variable cost concept
D) Normal selling price
E) Setup

F) C) and E)
G) A) and C)

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Question 22

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The differential revenue of producing Product P is $22 per pound.

A) True
B) False

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Question 23

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Airflow Company sells a product in a competitive marketplace. Market analysis indicates that the product would probably sell at $28.00 per unit. Airflow management desires a profit equal to a 20% rate of return on invested assets of $1,400,000. Airflow anticipates selling 50,000 units. The current full cost per unit for the product is $25 per unit. a) What is the amount of profit per unit? b) What is the target cost per unit if Airflow meets the market dictated price and management's desired profit?

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 activity­based costing to allocate overhead to products. An activity analysis of the overhead revealed the following estimated costs and activity bases for these activities: $\begin{array} { | l | l | c | } \hline \text { Activity } & \text { Cost } & \text { Activity Base } \\\hline \text { Production setup } & \$ 250,000 & \text { Number of setups } \\\hline \text { Material handling } & 150,000 & \text { Number of parts } \\\hline \text { General overhead } & 80,000 & \text { Number of direct labor hours } \\\hline\end{array}$ Each product's total activity in each of the three areas are as follows: $\begin{array} { | l | l | l | } \hline & \text { Product A } & \text { Product B } \\\hline \text { Number of setups } & 100 & 300 \\\hline \text { Number of parts } & 40,000 & 20,000 \\\hline \text { Number of direct labor hours } & 8,000 & 12,000 \\\hline\end{array}$ -What is the total overhead allocated to Product A using activity-based costing?

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 activity­based costing to allocate overhead to products. An activity analysis of the overhead revealed the following estimated costs and activity bases for these activities: $\begin{array} { | l | l | c | } \hline \text { Activity } & \text { Cost } & \text { Activity Base } \\\hline \text { Production setup } & \$ 250,000 & \text { Number of setups } \\\hline \text { Material handling } & 150,000 & \text { Number of parts } \\\hline \text { General overhead } & 80,000 & \text { Number of direct labor hours } \\\hline\end{array}$ Each product's total activity in each of the three areas are as follows: $\begin{array} { | l | l | l | } \hline & \text { Product A } & \text { Product B } \\\hline \text { Number of setups } & 100 & 300 \\\hline \text { Number of parts } & 40,000 & 20,000 \\\hline \text { Number of direct labor hours } & 8,000 & 12,000 \\\hline\end{array}$ -What is the overhead allocated to Product B using activity-based costing?

Lara Technologies is considering a cash outlay of $250,000 for the purchase of land, which it could lease out for $35,000 per year. If alternative investments are available that yield a 12% return, the opportunity cost of the purchase of the land is

What is the differential revenue of producing Product D?

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. $\begin{array} { l l } \text { Fixed factory overhead cost } & \$ 38,700 \\\text { Fixed selling and administrative costs } & 7,500 \\\text { Variable direct materials cost per unit } & 4.60 \\\text { Variable direct labor cost per unit } & 1.88 \\\text { Variable factory overhead cost per unit } & 1.13 \\\text { Variable selling and administrative cost per unit } & 4.50\end{array}$ -The markup percentage on total cost for the company's product is

What is the amount of income or loss from acceptance of the offer?

What is the differential cost of producing Product D?

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

Sensational Soft Drinks makes three products: iced tea, soda, and lemonade. The following data are available: Sensational is experiencing a bottleneck in one of its processes that affects each product as follows: a) Using a theory of constraints TOC) approach, rank the products in terms of profitability. b) What price for lemonade would equate its profitability contribution margin per bottleneck hour) to that of soda?

Match each of the definitions that follow with the term a-e) it defines. -Possible result of using an inappropriate overhead allocation method

Olsen Company produces two products. Product A has a contribution margin of $30 and requires 10 machine hours. Product B has a contribution margin of $24 and requires 4 machine hours. Determine the most profitable product assuming the machine hours are the constraint.

Nighthawk Inc. is considering disposing of a machine with a book value of $22,500 and an estimated remaining life of three years. The old machine can be sold for $6,250. A new machine with a purchase price of $68,750 is being considered as a replacement. It will have a useful life of three years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $43,750 to $20,000 if the new machine is purchased. The net differential increase or decrease in cost for the entire three years for the new equipment is

In using the variable cost concept of applying the cost-plus approach to product pricing, fixed manufacturing costs and fixed selling and administrative expenses must be covered by the markup.

The lowest contribution margin per scarce resource is the most profitable.

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

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. $\begin{array} { l l } \text { Fixed factory overhead cost } & \$ 38,700 \\\text { Fixed selling and administrative costs } & 7,500 \\\text { Variable direct materials cost per unit } & 4.60 \\\text { Variable direct labor cost per unit } & 1.88 \\\text { Variable factory overhead cost per unit } & 1.13 \\\text { Variable selling and administrative cost per unit } & 4.50\end{array}$ -The unit selling price for the company's product is

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.