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Exam 24: Differential Analysis and Product Pricing

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Question 21

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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 customers.To finish the decoration,the company would have to pay additional labor of $3.00 per unit,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 per unit each month,should it start taking the orders?

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​ Yes,the...

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Question 22

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Starling Co.is considering disposing of a machine with a book value of $12,500 and estimated remaining life of five years.The old machine can be sold for $1,500.A new high-speed machine can be purchased at a cost of $25,000.It will have a useful life of five years and no residual value.It is estimated that the annual variable manufacturing costs will be reduced from $26,000 to $23,500 if the new machine is purchased.The total net differential increase or decrease in cost for the new equipment for the entire five years is

A) decrease of $11,000
B) decrease of $15,000
C) increase of $11,000
D) increase of $15,000

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

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Question 23

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

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?

What is the overhead allocated to Product B using activity-based costing?

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.

Differential analysis only considers the short-term (one-year)effects of discontinuing a product.

The Eastwood Cake Factory sells chocolate cakes,birthday decorated cakes,and specialty cakes.The factory is experiencing a bottleneck and is trying to determine which cake is more profitable.Even though the company may have to limit the orders that it takes,Eastwood is concerned about customer service and satisfaction. ​ (a)Calculate the contribution margin per hour per cake. (b)Determine which cakes the company should try to sell more of first,second,and then last.

In deciding whether to accept business at a special price,the short-run price should be set high enough to cover all variable costs and expenses.

Hummingbird Company uses the product cost concept of applying the cost-plus approach to product pricing.The costs and expenses of producing 25,000 units of Product K are as follows: ​ ​ Hummingbird desires a profit equal to a 5% rate of return on invested assets of $642,500. ​ ​ Round your markup percentage to one decimal place,and other intermediate calculations and final answer to two decimal places.

The Sierra Company produces its product at a total cost of $89 per unit.Of this amount,$14 per unit is selling and administrative costs.The total variable cost is $58 per unit and the desired profit is $28 per unit. ​ Determine the markup percentage using the (a)total cost,(b)product cost,and (c)variable cost concept.

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

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

Product J is one of the many products manufactured and sold by Oceanside Company.An income statement by product line for the past year indicated a net loss for Product J of $12,250.This net loss resulted from sales of $275,000,cost of goods sold of $186,500,and operating expenses of $85,750.It is estimated that 30% of the cost of goods sold represents fixed factory overhead costs and that 40% of the operating expense is fixed.If Product J is retained,the revenue,costs,and expenses are not expected to change significantly from those of the current year.Because of the large number of products manufactured,the total fixed costs and expenses are not expected to decline significantly if Product J is discontinued. ​ Prepare a differential analysis report,dated February 8 of the current year,on the proposal to discontinue Product J.

Cost-plus methods determine the normal selling price by estimating a cost amount per unit and adding a markup.

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.

Which product has the highest contribution margin per machine hour?

In order to meet the new target cost,how much will the company have to cut costs per unit,if any?

When using the variable cost concept of applying the cost-plus approach to product pricing,what is included in the markup?

Jacoby Company received an offer from an exporter for 30,000 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?