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Exam 12: Differential Analysis and Product Pricing

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Question 21

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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) $35,000.
B) $36,000.
C) $1,000.
D) $37,000.

E) All of the above
F) B) and C)

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Question 22

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Based on the above data,what is the differential revenue from the acceptance of the offer?

A) $45,000
B) $40,000
C) $50,000
D) $60,000

E) A) and C)
F) A) and D)

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Question 23

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

The condensed income statement for a business for the past year is as follows:

In using the total cost concept of applying the cost-plus approach to product pricing,only profit is covered in the markup.

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.

Paul's Delivery Service is considering selling one of its smaller trucks that is no longer needed in the business.The truck originally costed $23,000 and has accumulated depreciation of $10,000.The truck can be sold for $14,000.Another company is interested in leasing the truck.It will pay $4,800 per year for three years.Paul's Delivery Service will continue to pay the taxes and license fees for the truck,but all other expenses will be paid by the lessee.Management assumes the expenses for the taxes and license will be $300 per year.Which of the following statements is correct?

What cost concept used in applying the cost-plus approach to product pricing includes total manufacturing costs and total selling and administrative expenses in the "cost" amount to which the markup is added?

A practical approach that is frequently used by managers when setting normal selling price is the:

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

Pearl Company is considering replacing equipment that originally costs $75,000.A new machine will cost $800,000 and the old equipment can be sold for $15,000.What is the sunk cost in this situation?

Hill Co.can further process Product O to produce Product P.Product O is currently selling for $65 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.

Based on the above data,what is the amount of gain or loss from acceptance of the offer?

A cost that will not be affected by later decisions is termed as sunk cost.

If the total unit cost of manufacturing Product Y is currently $40 and the total unit cost after modifying the style is estimated to be $48,the differential cost for this situation is $48.

Based on the above data,what is the differential cost from the acceptance of the offer?

The condensed income statement for a business for the past year is as follows:

Kirk Co.manufactures mobile cellular equipment and develops a price for the product by using a variable cost concept.Kirk incurs variable costs of $1,900,000 in the production of 100,000 units.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.

Managers who often make special pricing decisions are more likely to use which of the following cost concepts in their work?

Assume that Vivid Co.is considering disposing of equipment that cost $350,000 and has $280,000 of accumulated depreciation to date.Vivid Co.can sell the equipment through a broker for $135,000 less 5% commission.Alternatively,Comet Co.has offered to lease the equipment for five years for a total of $235,000.Vivid will incur repair,insurance,and property tax expenses estimated at $60,000.At lease-end,the equipment is expected to have no residual value.The net differential income from the lease alternative is: