Question

Q1:

Carmen Co. can further process Product J to produce Product D. Product J is currently selling for $20.55 per pound and costs $14.35 per pound to produce. Product D would sell for $42.95 per pound and would require an additional cost of $8.35 per pound to produce.

What is the differential cost of producing Product D?

$8.35 per pound

$5.01 per pound

$6.68 per pound

$10.02 per pound

Q2:

Carmen Co. can further process Product J to produce Product D. Product J is currently selling for $20 per pound and costs $15.75 per pound to produce. Product D would sell for $38 per pound and would require an additional cost of $8.55 per pound to produce.

What is the differential revenue of producing Product D?

a.$22.25 per pound

b.$18.00 per pound

c.$6.75 per pound

d.$6.25 per pound

Q3:

Sage Company is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $17.00 per unit. The unit cost for the business to make the part is $21.00, including fixed costs, and $9.00, excluding fixed costs. If 33,588 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?

$570,996 cost decrease

$134,352 cost increase

$268,704 cost increase

$268,704 cost decrease

Q4:

Stryker Industries received an offer from an exporter for 15,000 units of product at $17.50 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data is available:

Domestic unit sales price	$20
Unit manufacturing costs:
Variable	11
Fixed	1

What is the differential revenue from the acceptance of the offer?

a.$250,000

b.$262,500

c.$52,500

d.$300,000

Q5:

Stryker Industries received an offer from an exporter for 28,000 units of product at $17 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data is available:

Domestic unit sales price	$23
Unit manufacturing costs:
Variable	12
Fixed	3

What is the differential cost from the acceptance of the offer?

$476,000

$84,000

$336,000

$644,000

Q6:

tryker Industries received an offer from an exporter for 30,000 units of product at $16 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data is available:

Domestic unit sales price	$22
Unit manufacturing costs:
Variable	11
Fixed	3

What is the amount of income or loss from acceptance of the offer?

$480,000 income

$660,000 loss

$150,000 income

$330,000 loss

Answer 1

1. Differential cost is the difference between the cost of two alternative decisions, or of a change in output levels. In the given question to produce product D further cost is $8.35, which is additional cost.

Hence differential cost is $8.35.

2. Differential revenue is the difference in sales that will be generated by two different courses of action. In the given question difference between two selling price are ($38-$20=$18)

Hence differential revenue is $18.

3. In differential costing system fixed cost is irrelevant for decision making purpose. In the given question fixed cost per unit is $12 ($21-$9). So $12 is irrelevant. Variable cost is 9, this will be compared with unit cost i.e. $ 17.    

Therefore differential cost increase from making the part rather than purchasing it is ($17-$9)*33,588 = $ 268,704 cost decrease

4. Since acceptance of the offer will not affect normal production or domestic sales prices, Differential revenue is same as received from export of additional unit’s i.e. 15000*$17.5= $ 262,500.

5.Since acceptance of the offer will not affect normal production or domestic sales prices, Differential cost is variable cost incurred on export of additional units. Fixed cost per unit is irrelevant as it remain same irrespective of increase in number of units. Therefore differential cost from the acceptance of the offer is 28,000*$12 = $336,000

6. Since acceptance of the offer will not affect normal production or domestic sales prices, so profit or loss on acceptance is equal to profit or loss on sale of export unit i.e. ($16-$11)*30,000 = $ 150,000.