Chapter 4-Differential Analysis

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COST ACCOUNTING & COST CONCEPTSChapter 4: Diferential Analysis

Accounting Demands PassionInstructions:Write the letter that best corresponds to your answer. Do not write on the test

questions and return it after use. Thank you and GODBLESS

1. Black Tool Company has a production capacity is 1,500 units per month, but current production isonly 1,250 units. The manufacturing costs are $0 per unit and marketing costs are $1 per unit.!oug "all offers to purchase 250 units at $# each for the net fi%e months. &hould Black acceptthe one'time'only special order if only absorption'costing data are a%ailable(

a. )es, good customer relations are essential.b. *o, the company +ill only break e%en.c. *o, since only the employees +ill benefit.d. )es, since operating profits +ill most likely increase.

Answer d Difficulty - Objective -&ince the $0 absorption cost per unit is most likely not all %ariable costs and since the entire $1per unit of marketing costs may not be incurred, operating profits +ill most likely increase.

2. The sum of all costs incurred in all business functions in the %alue chain product design,manufacturing, marketing, and customer ser%ice, for eample/ is kno+n as the

a. business cost.b. full product cost.c. gross product cost.d. multiproduct cost.

Answer b Difficulty 1 Objective --. The cost to produce art +as $10 per unit in 20- and in 20 has increased to $11 per unit. 3n

20, &upplier 4) has offered to supply art for $6 per unit. 7or the make'or'buy decision,a. incremental re%enues are $2 per unit.

b. incremental costs are $1 per unit.c. net rele%ant costs are $1 per unit.d. differential costs are $2 per unit.

Answer d Difficulty 2 Objective . Constraints may include

a. the a%ailability of direct materials in manufacturing.b. linear s8uare feet of display space for a retailer.c. direct labor in the ser%ice industry.d. all of the abo%e.

Answer d Difficulty 1 Objective 5. Medford Corporation operates a plant with a productive capacity to

manufacture 20,000 units of its product a year. The follow

information pertains to the production costs at capacity:

Variable costs $160,000

Fixed costs 240,000

--------

Total costs $400,000

=========

A supplier has offered to sell 4,000 units to Medford annually.

Assume no change in the fixed costs. What is the price per unit

that makes Medford indifferent between the "make" and "buy"

options?

a. $8

b. $12

c. $20

d. $0

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Cost Accounting & Cost Concepts Cost Accounting & Cost Concepts Cost Accounting

6. Barrie, Inc., produces three products: A, B, and C. Two machines

are used to produce the products. The contribution margins, sales

demands, and time on each machine (in minutes) is as follows:

time time

Demand CM on M1 on M2

A 100 $12 5 10

B 80 18 10 5

C 100 25 15 5

There are 2,400 minutes available on each machine during the week.

How many units should be produced and sold to maximize the weekly

contribution?

A B C

a. 100 80 100

b. 20 80 100

c. 100 40 100

d. 100 80 73

#. 9hich of the follo+ing costs +ould be rele%ant in short'term decision making(a. incremental fied costsb. all costs of in%entoryc. total %ariable costs that are the same in the considered alternati%esd. the cost of a fied asset that could be used in all the considered alternati%es

*& !37 :asy ;Bariablecosts

%oidable fiedcosts

?na%oidable fiedCosts

a. no yes yes

b. yes no yes

c. no no yes

d. yes yes no

*& ! !37 :asy ;B


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*& C !37 :asy ;B


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1=. . 9hich of the follo+ing statements regarding differential costs is are/ false(/ The full cost fallacy occurs +hen a decision'maker fails to include fied manufacturingo%erhead in the productAs cost.B/ 9hen deciding +hether or not to accept a special order, a decision'maker should focus ondifferential costs instead of full costs.A.;nly .

B.;nly B.C.*either nor B is false.!.Both and B are true.

The full cost fallacy is +hen fied costs areincluded.

AACSB: Analytic

AICPA: FN-Decision Main!

Bloo"#s: Co"$re%ension

Difficulty: Me*iu"

'earnin! Objective: +

)o$ic Area: Differential Analysis an* Pricin! Decisions

16. 9hich of the follo+ing costs are irrele%ant for a special order that +ill allo+ an organi@ation toutili@e some of its present idle capacity(.!irect materialsB.3ndirect materialsC.>ariable o%erheadD.?na%oidable fied o%erhead:.!ifferential sales commission

7ied o%erhead +ill be there any+ay.

AACSB: Analytic


Bloo"#s: A$$lication

Difficulty: &asy'earnin! Objective: +

)o$ic Area: S%ort-,un Pricin! Decisions: S$ecial Or*ers

20. The Company manufactures kitchen utensils. The company is currently producing +ell belo+its full capacity. The B> Company has approached +ith an offer to buy 20,000 utensils at$0.#5 each. sells its utensils +holesale for $0.=5 eachE the a%erage cost per unit is $0.=-, of+hich $0.12 is fied costs. 3f +ere to accept B>As offer, +hat +ould be the increase in Asoperating profits(.$00B.$=00C.$1,00!.$2,000:.As operating profits +ill not increase as a result of accepting the special order.

F$0.#5 ' $0.=- ' 0.12/G 20,000 H $=00

AACSB: Analytic


Bloo"#s: A$$licationDifficulty: &asy



Cost Accounting: Chapter 4-Diferentia Ana!sis 4


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21. The *I Company has gathered the follo+ing information for a unit of its most popular product

The abo%e cost information is based on ,000 units. foreign distributor has offered to buy 1,000units at a price of $1 per unit. This special order +ould not disturb regular sales. >ariableshipping and other selling epenses +ould be an additional $1 per unit for the special order. 3f thespecial order is accepted, *IAs operating profits +ill increase by.$1,000.B.$1,00.C.$2,000.

D.$,000.:.$5,000.

F$1 ' ' - ' 2 ' 1G 1,000 H $,000

AACSB: Analytic


Bloo"#s: A$$lication

Difficulty: Me*iu"'earnin! Objective: +


Cost Accounting: Chapter 4-Diferentia Ana!sis %


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22. The follo+ing information relates to the Tram Company for the upcoming year.

The cost of goods sold includes $1,200,000 of fied manufacturing o%erheadE the operatingepenses include $100,000 of fied marketing epenses. special order offering to buy 50,000units for $#.50 per unit has been made to Tram. 7ortunately, there +ill be no additional operatingepenses associated +ith the order and Tram has sufficient capacity to handle the order. "o+much +ill operate profits be increased if Tram accepts the special order(.$25,000B.$2,500

C.$100,000!.$125,000:.;perating profits +ill not increase as a result of accepting the special order.

Cost of sales -,200,000 ' 1,200,000/J00,000 H $5E ;perating :p -00,000 ' 100,000/J00,000 H 0.50E

&ales $#.50 ' 5 ' 0.50 H $2 50,000 units H $100,000

AACSB: AnalyticAICPA: FN-Decision Main!

Bloo"#s: A$$licationDifficulty: ar*



2-. The Blade !i%ision of e Company produces hardened steel blades. ;ne'third of BladeAs outputis sold to the 7orestry roducts !i%ision of eE the remainder is sold to outside customers.BladesA estimated operating profit for the year is

The 7orestry !i%ision has an opportunity to purchase 10,000 blades of the same 8uality from anoutside supplier on a continuing basis. The Blade !i%ision cannot sell any additional products tooutside customers. &hould the e Company allo+ its 7orestry !i%ision to purchase the bladesfrom the outside supplier at $1.25 per unit(

.*oE making the blades +ill sa%e e $1,500.B.)esE buying the blades +ill sa%e e $1,500.C.*oE making the blades +ill sa%e e $2,500.!.)esE buying the blades +ill sa%e e $2,500.

Cost to buy eternally ' $1.2510,000 units/ H $12,500Cost to make internally ' $1.0010,000 units/ H $10,000

Cost Accounting: Chapter 4-Diferentia Ana!sis


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AACSB: Analytic

AICPA: FN-Decision Main!Bloo"#s: A$$lication

Difficulty: ar*

'earnin! Objective: .

)o$ic Area: Mae-It or Buy-It Decisions

2. The C


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2. The price based on customersA percei%ed %alue for the product and the price that competitorscharge.predatory priceB.target priceC.target cost!.dumping price

This is the definition of target price.

AACSB: Analytic


Bloo"#s: /nowle*!e

Difficulty: &asy

'earnin! Objective: 0)o$ic Area: Cost Analysis for Pricin!

2#. The practice of setting price belo+ cost +ith the intent to dri%e competitors out of businessA.predatory pricingB.target pricingC.target costing!.peak'load pricing

This is the definition of predatory pricing.

AACSB: AnalyticAICPA: BB-'e!al

Bloo"#s: /nowle*!eDifficulty: &asy

'earnin! Objective: 0

)o$ic Area: 'e!al Issues ,elatin! to Costs an* Sales Prices

Cost Accounting: Chapter 4-Diferentia Ana!sis (


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-0. :porting a product to another country at a price belo+ domestic costA.dumpingB.target pricingC.peak'load pricing!.price fiing

This is the definition of dumping.

AACSB: AnalyticAICPA: BB-'e!al

Bloo"#s: /nowle*!e

Difficulty: &asy


)o$ic Area: 'e!al Issues ,elatin! to Costs an* Sales Prices

-1. target cost is computed as

.cost to manufacture plus a desired markupB.cost to manufacture plus designated selling epensesC.market +illingness to pay ' cost to manufactureD.market +illingness to pay ' desired profit

Target cost is based on eternal market prices and desired profit. 3n essence, ho+ much can a productcost(


Bloo"#s: /nowle*!eDifficulty: &asy


)o$ic Area: Cost Analysis for Pricin!

Cost Accounting: Chapter 4-Diferentia Ana!sis "*


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-2. The operations of Blink Corporation are di%ided into the 9ill !i%ision and the loy !i%ision.roMections for the net year are as follo+s

;perating income for Blink Corporation as a +hole if the Carter !i%ision +ere dropped +ould be.$1--,000B.$112,000C.$61,000D.$6,000

$112,000 ' -,000 H $6,000

AACSB: Analytic


Bloo"#s: Analysis

Difficulty: Me*iu"'earnin! Objective: .

)o$ic Area: Decision to A** or Dro$ a Pro*uct 'ine or Close a Business 1nit

Cost Accounting: Chapter 4-Diferentia Ana!sis ""


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--. Bryon 3ndustries manufactures 20,000 components per year. The manufacturing cost of thecomponents +as determined as follo+s

n outside supplier has offered to sell the component for $1#. 3f Bryon purchases the componentfrom the outside supplier, the manufacturing facilities +ould be unused and could be rented out for$10,000. 3f Bryon purchases the component from the supplier instead of manufacturing it, theeffect on income +ould be.a $#0,000 increaseB.a $50,000 decreaseC.a $10,000 decrease!.a $-0,000 increase

ake $100,000 L 10,000 L 0,000 H $-20,000

Buy 20,000 1# H $-0,000 ' 10,000 H $--0,000

ake -20,000 ' Buy --0,000 H '10,000 decrease in income to Buy

AACSB: Analytic


Bloo"#s: Analysis

Difficulty: Me*iu"

'earnin! Objective: .)o$ic Area: Mae-It or Buy-It Decisions

Cost Accounting: Chapter 4-Diferentia Ana!sis "#


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-. lbany 3ndustries produces t+o products. 3nformation about the products is as follo+s

The companyAs fied costs totaled $#0,000, of +hich $15,000 can be directly traced to roduct 1and $0,000 can be directly traced to roduct 2. The effect on the firmAs profits if roduct 2 isdropped +ould be a.$10,000 increaseB.$-5,000 increaseC.$-5,000 decreaseD.$10,000 decrease

Current profit ,000 L 10,000 5/ ' #0,000 H ,000

rofit of only roduct 1 ,000 / ' #0,000 ' 0,000/ H 2,000 ' -0,000 H ',000

Current ,000 ' *e+ ',000/ H '10,000 decreaserofit of only roduct 1


Bloo"#s: Analysis

Difficulty: Me*iu"



-5. Chetek 3ndustries manufactures 15,000 components per year. The manufacturing cost of thecomponents +as determined to be as follo+s

ssume Chetek 3ndustries could a%oid $0,000 of fied manufacturing o%erhead if it purchasesthe component from an outside supplier. n outside supplier has offered to sell the component for$-. 3f Chetek purchases the component from the supplier instead of manufacturing it, the effecton income +ould be a.$0,000 increaseB.$10,000 increaseC.$100,000 decrease!.$10,000 increase

ake 150,000 L 20,000 L 60,000 H $=0,000

Buy 15,000 - H $510,000 ' 0,000 H #0,000

ake =0,000 ' Buy #0,000 H 10,000 increase

AACSB: Analytic


Bloo"#s: AnalysisDifficulty: Me*iu"


)o$ic Area: Mae-It or Buy-It Decisions

Cost Accounting: Chapter 4-Diferentia Ana!sis "$


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-. The operations of &uperior Corporation are di%ided into the *orthrup !i%ision and the "a+ley!i%ision. roMections for the net year are as follo+s

;perating income for &uperior Corporation, as a +hole, if the "a+ley !i%ision +ere dropped+ould beA.$5,000B.$=0,000

C.$100,000!.$120,000

1#0,000 ' 125,000 H $5,000


Bloo"#s: Analysis

Difficulty: Me*iu"



-#. The 9in+ood Company manufactures t+o products N and T. The costs and re%enues are asfollo+s

Total demand for roduct N is 1,000 units and for roduct T is 6,000 units. achine time is ascarce resource. !uring the year, 5,000 machine hours are a%ailable. roduct N re8uires 5machine hours per unit, +hile roduct T re8uires - machine hours per unit."o+ many units of roducts N and T should 9in+ood produce(

.a

B.bC.cD.d

roduct N CJhr $150 ' =0/J5 H $1E roduct T CJhr $== ' 2/J- H $15.-- roduce T first 6,000

units of T - hrs H 2#,000 hours used 5,000 ' 2#,000 H 2#,000 hours remaining roduct N 2#,000

hours a%ailableJ5 H 5,00 units

Cost Accounting: Chapter 4-Diferentia Ana!sis "4


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Bloo"#s: Analysis

Difficulty: Me*iu"


)o$ic Area: Pro*uct C%oice Decisions

-=. os+ell 3nc has 5,00 machine hours a%ailable each month. The follo+ing information on thecompanyAs three products is a%ailable

3f market demand eceeds the a%ailable capacity, in +hat se8uence should orders be filled tomaimi@e the companyAs profits(.roduct 1 first, product 2 second, and product - third

B.roduct 2 first, product - second, and product 1 thirdC.roduct - first, product 2 second, and product 1 third!.roduct - first, product 1 second, and product 2 third

1 CJhr H 15J- H $5E 2 1=J2 H $6E - #.50J1 H $#.50riority +ould be 2 $6Jhr/ follo+ed by - $#.50/ and 1 $5/

AACSB: Analytic

AICPA: FN-Decision Main!Bloo"#s: Analysis

Difficulty: Me*iu"'earnin! Objective: .


Cost Accounting: Chapter 4-Diferentia Ana!sis "%


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-6. The Clapton Company manufactures t+o products lpha and Beta. The costs and re%enues are asfollo+s

Total demand for lpha is 10,000 units and for Beta is ,000 units. achine time is a scarceresource. !uring the year, 50,000 machine hours are a%ailable. lpha re8uires machine hours perunit, +hile Beta re8uires 2.5 machine hours per unit.9hat is the maimum contribution margin Clapton can achie%e during a year(A.$,250B.$1,01,000C.$==,000!.$=55,500

lpha CJhr #5 ' 0/J H $=.#5E Beta CJhr ' 21/J2.5 H 6.20 roduce Beta first ,000 units of

Beta 2.5 hrs H 15,000 hours used 50,000 ' 15,000 H -5,000 hours remaining lpha -5,000 hoursa%ailableJ H =,#50 units C H =,#50 $-5 L ,000 $2- H $,250

AACSB: Analytic


Bloo"#s: Analysis

Difficulty: ar*'earnin! Objective: .


0. The Bremmer Company produces 5,000 units of item N6= annually at a total cost of $200,000.

The !aisy Company has offered to supply all 5,000 units of N6= per year for $-5 per unit. 3f

Bremmer accepts the offer, $= per unit of the fied o%erhead +ould be sa%ed. 3n addition, some ofBremmerAs leased facilities could be %acated, reducing lease payments by $-0,000 per year. 9hatare the rele%ant costs for the KmakeK alternati%e(.$120,000B.$1#5,000C.$160,000!.$200,000

$20,000 L 55,000 L 5,000 L = 5,000/ L -0,000 H $160,000

AACSB: Analytic

AICPA: FN-Decision Making

Bloom's: Application

Difficulty: Medium

ea!ning "#$ecti%e: &

opic A!ea: Make-It o! Buy-It Decisions

END OF THE EXAMINATION!

Cost Accounting: Chapter 4-Diferentia Ana!sis "

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Chapter 4-Differential Analysis