Chapter 4-Differential Analysis

COST ACCOUNTING & COST CONCEPTS
Chapter 4: Differential Analysis

Accounting Demands Passion
Instructions: 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 is
only 1,250 units. The manufacturing costs are $60 per unit and marketing costs are $16 per unit.
Doug Hall offers to purchase 250 units at $76 each for the next five months. Should Black accept
the one-time-only special order if only absorption-costing data are available?
a.
Yes, good customer relations are essential.
b.
No, the company will only break even.
c.
No, since only the employees will benefit.
d.
Yes, since operating profits will most likely increase.
Answer: d
Difficulty: 3
Objective: 3
Since the $60 absorption cost per unit is most likely not all variable costs and since the entire $16
per unit of marketing costs may not be incurred, operating profits will most likely increase.
2. The sum of all costs incurred in all business functions in the value chain (product design,
manufacturing, marketing, and customer service, for example) is known as the
a.
business cost.
b.
full product cost.
c.
gross product cost.
d.
multiproduct cost.
Answer: b
Difficulty: 1
Objective: 3
3. The cost to produce Part A was $10 per unit in 20x3 and in 20x4 has increased to $11 per unit. In
20x4, Supplier XYZ has offered to supply Part A for $9 per unit. For the make-or-buy decision,
a.
incremental revenues are $2 per unit.
b.
incremental costs are $1 per unit.
c.
net relevant costs are $1 per unit.
d.
differential costs are $2 per unit.
Answer: d
Difficulty: 2
4. Constraints may include
a.
the availability of direct materials in manufacturing.
b.
linear square feet of display space for a retailer.
c.
direct labor in the service industry.
d.
all of the above.
Objective:
Answer: d
Difficulty: 1
Objective: 6
5. MedfordCorporationoperatesaplantwithaproductivecapacityto
manufacture20,000unitsofitsproductayear.Thefollow
informationpertainstotheproductioncostsatcapacity:
Variablecosts$160,000
Fixedcosts240,000
Totalcosts$400,000
=========
Asupplierhasofferedtosell4,000unitstoMedfordannually.
Assumenochangeinthefixedcosts.Whatisthepriceperunit
thatmakesMedfordindifferentbetweenthe"make"and"buy"
options?
a.$8
b.$12
c.$20
d.$0
Cost Accounting: Chapter 4-Differential Analysis
Cost Accounting & Cost Concepts Cost Accounting & Cost Concepts Cost Accounting
6. Barrie,Inc.,producesthreeproducts:A,B,andC.Twomachines
areusedtoproducetheproducts.Thecontributionmargins,sales
demands,andtimeoneachmachine(inminutes)isasfollows:
time
time
Demand
CM

onM1
onM2
A
100
$12
5
10
B
80
18
10
5
C
100
25
15
5
Thereare2,400minutesavailableoneachmachineduringtheweek.
Howmanyunitsshouldbeproducedandsoldtomaximizetheweekly
contribution?
ABC
a.10080100
b.2080100
c.10040100
d.1008073
a.
b.
c.
d.
7. Which of the following costs would be relevant in short-term decision making?

incremental fixed costs
all costs of inventory
total variable costs that are the same in the considered alternatives
the cost of a fixed asset that could be used in all the considered alternatives
ANS: A
DIF: Easy
8. A cost is sunk if it
a. is not an incremental cost.
b. is unavoidable.
c. has already been incurred.
d. is irrelevant to the decision at hand.
OBJ: 10-2
ANS: C
DIF: Easy
OBJ: 10-2
9. Which of the following are relevant in a make or buy decision?
Variable
costs
a.
b.
c.
d.
no
yes
no
yes
Avoidable fixed
costs
Unavoidable fixed
Costs
yes
no
no
yes
yes
yes
yes
no
ANS: D
DIF: Easy
OBJ: 10-3
10. Which of the following are relevant in a make or buy decision?
Prime costs
a.
b.
c.
d.
yes
yes
yes
no
Sunk costs
yes
no
no
no
Incremental costs
yes
yes
no
yes
ANS: B
DIF: Easy
OBJ: 10-3
11. When a scarce resource, such as space, exists in an organization, the criterion that should be used to
determine production is
a. contribution margin per unit.
b. selling price per unit.
c. contribution margin per unit of scarce resource.
d. total variable costs of production.
ANS: C
DIF: Easy
OBJ: 10-4
12. The minimum selling price that should be acceptable in a special order situation is equal to total
a. production cost.
b. variable production cost.
c. variable costs.
d. production cost plus a normal profit margin.
ANS: C
DIF: Easy
OBJ: 10-6
13. Which of the following costs is irrelevant in making a decision about a special order price if some of the
company facilities are currently idle?
a. direct labor
b. equipment depreciation
c. variable cost of utilities
d. opportunity cost of production
ANS: B
DIF: Easy
OBJ: 10-6
14. A manager is attempting to determine whether a segment of the business should be eliminated. The focus of
attention for this decision should be on
a. the net income shown on the segment's income statement.
b. sales minus total expenses of the segment.
c. sales minus total direct expenses of the segment.
d. sales minus total variable expenses and avoidable fixed expenses of the segment.
ANS: D
DIF: Easy
OBJ: 10-7
15. Assume a company produces three products: A, B, and C. It can only sell up to 3,000 units of each product.
Production capacity is unlimited. The company should produce the product (or products) that has (have) the
highest
a. contribution margin per hour of machine time.
b. gross margin per unit.
c. contribution margin per unit.
d. sales price per unit.
ANS: C
DIF: Easy
OBJ: 10-7
16. The relevance of a particular cost to a decision is determined by the: (CMA adapted)
A. riskiness of the decision.
B. number of decision variables.
C. amount of the cost.
D. potential effect on the decision.
E. accuracy of the cost.
Relevance is predicated upon whether it affects a decision.
AACSB: Analytic
AICPA: FN-Decision Making
Bloom's: Comprehension
Difficulty: Easy
Learning Objective: 1
Topic Area: Differential Analysis
17. In a decision analysis situation, which one of the following costs is not likely to contain a variable
cost component? (CMA adapted)
A. Labor
B. Overhead
C. Straight-line Depreciation
D. Selling
E. Material
Straight-line depreciation is a fixed cost since it is the same amount each period.
AACSB: Analytic
Bloom's: Application
Difficulty: Easy
Topic Area: Differential Analysis
18. . Which of the following statements regarding differential costs is (are) false?
(A) The full cost fallacy occurs when a decision-maker fails to include fixed manufacturing
overhead in the product's cost.
(B) When deciding whether or not to accept a special order, a decision-maker should focus on
differential costs instead of full costs.
A. Only A.
B. Only B.
C. Neither A nor B is false.
D. Both A and B are true.
The full cost fallacy is when fixed costs are included.
AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Topic Area: Differential Analysis and Pricing Decisions
19. Which of the following costs are irrelevant for a special order that will allow an organization to
utilize some of its present idle capacity?
A. Direct materials
B. Indirect materials
C. Variable overhead
D. Unavoidable fixed overhead
E. Differential sales commission
Fixed overhead will be there anyway.
AACSB: Analytic
Difficulty: Easy
Topic Area: Short-Run Pricing Decisions: Special Orders
20. The AZ Company manufactures kitchen utensils. The company is currently producing well below
its full capacity. The BV Company has approached AZ with an offer to buy 20,000 utensils at
$0.75 each. AZ sells its utensils wholesale for $0.85 each; the average cost per unit is $0.83, of
which $0.12 is fixed costs. If AZ were to accept BV's offer, what would be the increase in AZ's
operating profits?
A. $400
B. $800
C. $1,600
D. $2,000
E. AZ's operating profits will not increase as a result of accepting the special order.
[$0.75 - ($0.83 - 0.12)] 20,000 = $800
AACSB: Analytic
Difficulty: Easy
21. The MNK Company has gathered the following information for a unit of its most popular product:
The above cost information is based on 4,000 units. A foreign distributor has offered to buy 1,000
units at a price of $16 per unit. This special order would not disturb regular sales. Variable
shipping and other selling expenses would be an additional $1 per unit for the special order. If the
special order is accepted, MNK's operating profits will increase by:
A. $1,000.
B. $1,600.
C. $2,000.
D. $4,000.
E. $5,000.
[$16 - 6 - 3 - 2 - 1] 1,000 = $4,000
AACSB: Analytic
Difficulty: Medium
22. The following information relates to the Tram Company for the upcoming year.
The cost of goods sold includes $1,200,000 of fixed manufacturing overhead; the operating
expenses include $100,000 of fixed marketing expenses. A special order offering to buy 50,000
units for $7.50 per unit has been made to Tram. Fortunately, there will be no additional operating
expenses associated with the order and Tram has sufficient capacity to handle the order. How
much will operate profits be increased if Tram accepts the special order?
A. $25,000
B. $62,500
C. $100,000
D. $125,000
E. Operating profits will not increase as a result of accepting the special order.
Cost of sales: (3,200,000 - 1,200,000)/400,000 = $5; Operating Exp: (300,000 - 100,000)/400,000 = 0.50;
Sales $7.50 - 5 - 0.50 = $2 50,000 units = $100,000
AACSB: Analytic
Difficulty: Hard
23. The Blade Division of Axe Company produces hardened steel blades. One-third of Blade's output
is sold to the Forestry Products Division of Axe; the remainder is sold to outside customers.
Blades' estimated operating profit for the year is:
The Forestry Division has an opportunity to purchase 10,000 blades of the same quality from an
outside supplier on a continuing basis. The Blade Division cannot sell any additional products to
outside customers. Should the Axe Company allow its Forestry Division to purchase the blades
from the outside supplier at $1.25 per unit?
A. No; making the blades will save Axe $1,500.
B. Yes; buying the blades will save Axe $1,500.
C. No; making the blades will save Axe $2,500.
D. Yes; buying the blades will save Axe $2,500.
Cost to buy externally - $1.25(10,000 units) = $12,500
Cost to make internally - $1.00(10,000 units) = $10,000
AACSB: Analytic
Difficulty: Hard
Topic Area: Make-It or Buy-It Decisions
24. The CJP Company produces 10,000 units of item S10 annually at a total cost of $190,000.
The XYZ Company has offered to supply 10,000 units of S10 per year for $18 per unit. If CJP
accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of CJP's
facilities could be rented to a third party for $15,000 per year. What are the relevant costs for the
"make" alternative?
A. $160,000
B. $165,000
C. $175,000
D. $185,000
$20,000 + 55,000 + 45,000 + (4 10,000) + 15,000 = $175,000
AACSB: Analytic
Difficulty: Medium
25. The time from initial research and development to the time that support to the customer ends is
the
A. product life cycle
B. short run
C. target time
D. predatory price
This is the definition of product life cycle.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Topic Area: Cost Analysis for Pricing
26. The price based on customers' perceived value for the product and the price that competitors
charge:
A. predatory price
B. target price
C. target cost
D. dumping price
This is the definition of target price.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
27. The practice of setting price below cost with the intent to drive competitors out of business:
A. predatory pricing
B. target pricing
C. target costing
D. peak-load pricing
This is the definition of predatory pricing.
AACSB: Analytic
AICPA: BB-Legal
Bloom's: Knowledge
Difficulty: Easy
Topic Area: Legal Issues Relating to Costs and Sales Prices
28. The practice of setting prices highest when the quantity demanded for the product approaches
capacity:
B. target pricing
C. peak-load pricing
D. price fixing
This is the definition of peak-load pricing.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
29. Agreement among business competitors to set prices at a particular level:

B. target pricing
D. price fixing
This is the definition of price fixing.
AACSB: Analytic
AICPA: BB-Legal
Bloom's: Knowledge
Difficulty: Easy
30. Exporting a product to another country at a price below domestic cost:

A. dumping
B. target pricing
D. price fixing
This is the definition of dumping.
AACSB: Analytic
AICPA: BB-Legal
Bloom's: Knowledge
Difficulty: Easy
31. A target cost is computed as

A. cost to manufacture plus a desired markup
B. cost to manufacture plus designated selling expenses
C. market willingness to pay - cost to manufacture
D. market willingness to pay - desired profit
Target cost is based on external market prices and desired profit. In essence, how much can a product
cost?
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
10
32. The operations of Blink Corporation are divided into the Will Division and the Aloy Division.
Projections for the next year are as follows:
Operating income for Blink Corporation as a whole if the Carter Division were dropped would be
A. $133,000
B. $112,000
C. $91,000
D. $49,000
$112,000 - 63,000 = $49,000
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Topic Area: Decision to Add or Drop a Product Line or Close a Business Unit
11
33. Bryon Industries manufactures 20,000 components per year. The manufacturing cost of the
components was determined as follows:
An outside supplier has offered to sell the component for $17. If Bryon purchases the component
from the outside supplier, the manufacturing facilities would be unused and could be rented out for
$10,000. If Bryon purchases the component from the supplier instead of manufacturing it, the
effect on income would be:
A. a $70,000 increase
B. a $50,000 decrease
C. a $10,000 decrease
D. a $30,000 increase
Make: $100,000 + 160,000 + 60,000 = $320,000
Buy: 20,000 17 = $340,000 - 10,000 = $330,000
Make 320,000 - Buy 330,000 = -10,000 decrease in income to Buy
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
12
34. Albany Industries produces two products. Information about the products is as follows:
The company's fixed costs totaled $70,000, of which $15,000 can be directly traced to Product 1
and $40,000 can be directly traced to Product 2. The effect on the firm's profits if Product 2 is
dropped would be a
A. $10,000 increase
B. $35,000 increase
C. $35,000 decrease
D. $10,000 decrease
Current profit: (4,000 6 + 10,000 5) - 70,000 = 4,000
Profit of only Product 1: (4,000 6) - (70,000 - 40,000) = 24,000 - 30,000 = -6,000
Current 4,000 - New (-6,000) = -10,000 decrease
Profit of only Product 1:
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
35. Chetek Industries manufactures 15,000 components per year. The manufacturing cost of the
components was determined to be as follows:
Assume Chetek Industries could avoid $40,000 of fixed manufacturing overhead if it purchases
the component from an outside supplier. An outside supplier has offered to sell the component for
$34. If Chetek purchases the component from the supplier instead of manufacturing it, the effect
on income would be a
A. $60,000 increase
B. $10,000 increase
C. $100,000 decrease
D. $140,000 increase
Make: 150,000 + 240,000 + 90,000 = $480,000
Buy: 15,000 34 = $510,000 - 40,000 = 470,000
Make 480,000 - Buy 470,000 = 10,000 increase
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
13
36. The operations of Superior Corporation are divided into the Northrup Division and the Hawley
Division. Projections for the next year are as follows:
Operating income for Superior Corporation, as a whole, if the Hawley Division were dropped
would be
A. $45,000
B. $80,000
C. $100,000
D. $120,000
170,000 - 125,000 = $45,000
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
37. The Winwood Company manufactures two products: Q and T. The costs and revenues are as
follows:
Total demand for Product Q is 14,000 units and for Product T is 9,000 units. Machine time is a
scarce resource. During the year, 54,000 machine hours are available. Product Q requires 5
machine hours per unit, while Product T requires 3 machine hours per unit.
How many units of Products Q and T should Winwood produce?
A. a
B. b
C. c
D. d
Product Q CM/hr: ($150 - 80)/5 = $14; Product T CM/hr: ($88 - 42)/3 = $15.33: Produce T first: 9,000
units of T 3 hrs = 27,000 hours used: 54,000 - 27,000 = 27,000 hours remaining: Product Q: 27,000
hours available/5 = 5,400 units
14
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Topic Area: Product Choice Decisions
38. Roswell Inc has 5,400 machine hours available each month. The following information on the
company's three products is available:
If market demand exceeds the available capacity, in what sequence should orders be filled to
maximize the company's profits?
A. Product 1 first, product 2 second, and product 3 third
B. Product 2 first, product 3 second, and product 1 third
C. Product 3 first, product 2 second, and product 1 third
D. Product 3 first, product 1 second, and product 2 third
P1 CM/hr = 15/3 = $5; P2: 18/2 = $9; P3: 7.50/1 = $7.50
Priority would be P2 ($9/hr) followed by P3 ($7.50) and P1 ($5)
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
15
39. The Clapton Company manufactures two products: Alpha and Beta. The costs and revenues are as
follows:
Total demand for Alpha is 10,000 units and for Beta is 6,000 units. Machine time is a scarce
resource. During the year, 50,000 machine hours are available. Alpha requires 4 machine hours per
unit, while Beta requires 2.5 machine hours per unit.
What is the maximum contribution margin Clapton can achieve during a year?
A. $444,250
B. $1,014,000
C. $488,000
D. $855,500
Alpha CM/hr: (75 - 40)/4 = $8.75; Beta CM/hr: (44 - 21)/2.5 = 9.20: Produce Beta first: 6,000 units of
Beta 2.5 hrs = 15,000 hours used: 50,000 - 15,000 = 35,000 hours remaining: Alpha: 35,000 hours
available/4 = 8,750 units: CM = 8,750 $35 + 6,000 $23 = $444,250
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
40. The Bremmer Company produces 5,000 units of item ZQ98 annually at a total cost of $200,000.
The Daisy Company has offered to supply all 5,000 units of ZQ98 per year for $35 per unit. If
Bremmer accepts the offer, $8 per unit of the fixed overhead would be saved. In addition, some of
Bremmer's leased facilities could be vacated, reducing lease payments by $30,000 per year. What
are the relevant costs for the "make" alternative?
A. $120,000
B. $175,000
C. $190,000
D. $200,000
$20,000 + 55,000 + 45,000 + (8 5,000) + 30,000 = $190,000
AACSB: Analytic
Difficulty: Medium
END OF THE EXAMINATION!
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COST ACCOUNTING & COST CONCEPTS

Chapter 4: Differential Analysis

7. Which of the following costs would be relevant in short-term decision making?

Cost Accounting: Chapter 4-Differential Analysis

Cost Accounting: Chapter 4-Differential Analysis

Cost Accounting: Chapter 4-Differential Analysis

Cost Accounting: Chapter 4-Differential Analysis

Cost Accounting: Chapter 4-Differential Analysis

Cost Accounting: Chapter 4-Differential Analysis

Cost Accounting: Chapter 4-Differential Analysis

29. Agreement among business competitors to set prices at a particular level:

Cost Accounting: Chapter 4-Differential Analysis

30. Exporting a product to another country at a price below domestic cost:

31. A target cost is computed as

Cost Accounting: Chapter 4-Differential Analysis

Cost Accounting: Chapter 4-Differential Analysis

Cost Accounting: Chapter 4-Differential Analysis

Cost Accounting: Chapter 4-Differential Analysis

Cost Accounting: Chapter 4-Differential Analysis

END OF THE EXAMINATION!

Cost Accounting: Chapter 4-Differential Analysis

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