Question

20.      Which of the following is the major assumption as to cost and revenue behavior underlying conventional cost-volume-profit calculations?

a.	variability of fixed costs.
b.	variability of unit prices and efficiency.
c.	curvilinearity of relationships.
d.	linearity of relationships.

21.      A cost or revenue is _________ if the change results in a difference between alternatives.

a.	relevant
b.	differential
c.	effective
d.	strategic

22.      The short-run differential costs of a product are $25. Fixed costs are $5 per unit based on 10,000 units produced during this period. The company has adequate capacity to accept a special order of 1,000 units. What is the minimum price that could be charged using the differential approach to pricing?

a.	$ 5.00
b.	$20.00
c.	$25.00
d.	$30.00

        

23.      Sebastian Enterprises sells a product for $25 per unit and has the following costs for the product

Direct Materials	$10
Direct Labor	5
Variable Overhead	3
Fixed Overhead	2
Total	$20

The company received a special order for 100 units of the product. The order would require rental of a special tool which costs $200. What is the minimum price per unit that Sebastian Enterprises should charge for this special order if they wish to earn a $300 profit on this order? Assume there is sufficient idle capacity to accept this order.

a.	$18
b.	$20
c.	$23
d.	$25

Answer 1

Solution

Q20.

Answer – Correct option is d. – Linearity of relationships

Explanation: The behaviour of both cost and revenue remain linear throughout the relevant range.

The other options are incorrect for the following reasons:

Option a – variability of fixed costs.

Explanation: fixed costs remain constant through the relevant range in whole regardless of the product volume, and hence, variabilility of fixed costs is not an assumption.

Option b – variability of unit price and efficiency

Unit prices remain constant for any level of volume across the relevant range. Thus unit prices nor efficiency is not a correct assumption.

Option c-

Q21.

Answer – Cost or revenue is RELEVANT if the change results in a difference between alterantives.

Q22. Solution:

Short-run differential method approach to pricing:

Differential unit cost     $25

Less: fixed cost             $5

Minimum price             $20

Minimum price to be charged using the differential approach to pricing is $20 per unit.

The correct option is b. $20.

Q22. Variable price per unit = direct materials + direct labor + variable overhead

= $10 + 5+ 3 = $18

Add: cost per unit of rental tool = $200/100 units ==$2 per unit

Add: desired operating profit = $300/100 = $3

Desired price per unit that should be charged to earn a profit of $300 = $(18 + 2 + 3) = $23

The correct option is $23, Option C.