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Exam 24: Differential Analysis and Product Pricing

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Question 21

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In using the product cost concept of applying the cost-plus approach to product pricing, selling expenses, administrative expenses, and profit are covered in the markup.

A) True
B) False

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Question 22

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The product 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.

A) True
B) False

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Question 23

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A business is considering a cash outlay of $400,000 for the purchase of land, which it could lease for $40,000 per year. If alternative investments are available which yield a 21% return, the opportunity cost of the purchase of the land is:

Discontinuing a segment or product may not be the best choice when the segment is contributing to fixed expenses.

Pheasant Co. can further process Product B to produce Product C. Product B is currently selling for $30 per pound and costs $28 per pound to produce. Product C would sell for $60 per pound and would require an additional cost of $24 per pound to produce. What is the differential cost of producing Product C?

Opportunity cost is the amount of increase or decrease in cost that would result from the best available alternative to the proposed use of cash or its equivalent.

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

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: 0 What is the activity rate for Material Handling?

Since the costs of producing an intermediate product do not change regardless of whether the intermediate product is sold or processed further, these costs are not considered in deciding whether to further process a product.

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.

Moon Company uses the variable cost concept of applying the cost-plus approach to product pricing. The costs and expenses of producing and selling 75,000 units of Product T are as follows: Moon desires a profit equal to a 18% rate of return on invested assets of $1,440,000. Round your markup percentage to one decimal place and other intermediate calculations and final answer to two decimal places.

Under the variable cost concept, only variable costs are included in the cost amount per unit to which the markup is added.

Depending on the capacity of the plant, a company may best be served by further processing some of the product and leaving the rest as is, with no further processing.

When a company is showing a net loss, it is always best to discontinue the segment in order not to continue with losses.

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

Activity-based costing is determined by charging products for only the services (activities) they used during production.

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

Lark Art Company sells unfinished wooden decorations at a price of $15.00. The current profit margin is $5.00 per decoration. The company is considering taking individual orders and customizing them for sale. To finish the decoration the company would have to pay additional labor of $3.00, additional materials costing an average of $4.00 per unit and fixed costs would increase by $1,500. If the company estimates that it can sell 600 units for $25.00 each month, should they start taking the orders?

A business is considering a cash outlay of $250,000 for the purchase of land, which it could lease for $35,000 per year. If alternative investments are available which yield an 18% return, the opportunity cost of the purchase of the land is:

Due to Medicare reimbursement cuts, Loving Home Care is considering shutting down its Certified Nursing Assistant (CNA) Division. Fixed costs will have to be transferred to the Nursing Division if the CNA division is discontinued. Based on the following income statement make a recommendation to the president regarding this decision.