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Exam 24: Differential Analysis, Product Pricing, and Activity-Based Costing

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Question 1

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A commercial oven with a book value of $67,000 has an estimated remaining 5 year life. A proposal is offered to sell the oven for $8,500 and replace it with a new oven costing $110,000. The new machine has a 5-year life with no residual value. The new machine would reduce annual maintenance costs by $23,000. Provide a differential analysis on the proposal to replace the commercial oven.

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Question 2

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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 activity­based costing to allocate overhead to products. An activity analysis of the overhead revealed the following estimated costs and activity bases for these activities: $\begin{array} { | l | l | c | } \hline \text { Activity } & \text { Cost } & \text { Activity Base } \\\hline \text { Production setup } & \$ 250,000 & \text { Number of setups } \\\hline \text { Material handling } & 150,000 & \text { Number of parts } \\\hline \text { General overhead } & 80,000 & \text { Number of direct labor hours } \\\hline\end{array}$ Each product's total activity in each of the three areas are as follows: $\begin{array} { | l | l | l | } \hline & \text { Product A } & \text { Product B } \\\hline \text { Number of setups } & 100 & 300 \\\hline \text { Number of parts } & 40,000 & 20,000 \\\hline \text { Number of direct labor hours } & 8,000 & 12,000 \\\hline\end{array}$ -What is the activity rate for general overhead?

A) $4.00 per direct labor hour
B) $60.00 per direct labor hour
C) $6.67 per direct labor hour
D) $10.00 per direct labor hour

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

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Question 3

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Piper Corp. is operating at 70% of capacity and is currently purchasing a part used in its manufacturing operations for $24 per unit. The unit cost for the business to make the part is $36, including fixed costs, and $26, not including fixed costs. If 15,000 units of the part are normally purchased during the year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease from making the part rather than purchasing it?

Gull Corp. is considering selling its old popcorn machine and replacing it with a newer one. The old machine has a book value of $5,000 and its remaining useful life is 5 years. Annual costs are $4,000. A high school is willing to buy it for $2,000. New equipment would cost $18,000 with annual operating costs of $1,500. The new machine has an estimated useful life of 5 years. Should the machine be replaced?

Which equation better describes target costing?

Determine the markup percentage on total cost.

Manufacturers must conform to the Robinson-Patman Act, which prohibits price discrimination within the United States unless differences in prices can be justified by different costs of serving different customers.

MZE Manufacturing Company has a normal plant capacity of 37,500 units per month. Because of an extra-large quantity of inventory on hand, it expects to produce only 30,000 units in May. Monthly fixed costs and expenses are $112,500 $3 per unit at normal plant capacity) and variable costs and expenses are $8.25 per unit. The present selling price is $13.50 per unit. The company has an opportunity to sell 7,500 additional units at $9.90 per unit to an exporter who plans to market the product under its own brand name in a foreign market. The additional business is therefore not expected to affect the regular selling price or quantity of sales of MZE Manufacturing Company. Prepare a differential analysis report, dated April 21 of the current year, on the proposal to sell at the special price.

Determine the markup percentage on product cost.

What is the contribution per machine hour for Wales?

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 is the differential cost from the acceptance of the offer?

Match the definitions that follow with the term a-e) it defines. -Combines market-based pricing with a cost-reduction emphasis

Diamond Boot Factory normally sells their specialty boots for $375 a pair. An offer to buy 100 boots for $275 per pair was made by an organization hosting a national event in Norfolk. The variable cost per boot is $250 and special stitching will add another $20 per pair to the cost. Determine the differential income or loss per pair of boots from selling to the organization.

If the order is accepted, what would be the impact on net income?

Match each of the definitions that follow with the term a-e) it defines. -A document that initiates a product or process change

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

Jay Company uses the total cost concept of applying the cost-plus approach to product pricing. The costs and expenses of producing and selling 38,400 units of Product E are as follows: $\begin{array}{ll}\text { Variable costs: } & \\\text { Direct materials } & \$ 4.70 \\\text { Direct labor } & 2.50 \\\text { Factory overhead } & 1.90 \\\text { Selling and administrative expenses } & 2.60\\\text { Total }&\$11.70\\\text { Fixed costs: }\\\text { Factory overhead } & \$ 80,000 \\\text { Selling and administrative expenses } & 14,000\end{array}$ Jay desires a profit equal to a 14% rate of return on invested assets of $640,000. a) Determine the amount of desired profit from the production and sale of Product E. b) Determine the total costs and the cost amount per unit for the production and sale of 38,400 units of Product E. c) Determine the markup percentage for Product E. d) Determine the selling price of Product E.

The desired selling price for a product will be the same under both variable and total cost.

Falcon Inc. manufactures Product B, incurring variable costs of $15.00 per unit and fixed costs of $70,000. Falcon desires a profit equal to a 12% rate of return on assets, $785,000 of assets are devoted to producing Product B, and 100,000 units are expected to be produced and sold. a) Compute the markup percentage, using the total cost concept. b) Compute the selling price of Product B. Round your intermediate calculations and final answer to two decimal places.