Sm_24 21e - CHAPTER 24 DIFFERENTIAL ANALYSIS AND PRODUCT PRICING CLASS DISCUSSION QUESTIONS 1 a Differential revenue is the amount of in crease or

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CHAPTER 24 DIFFERENTIAL ANALYSIS AND PRODUCT PRICING CLASS DISCUSSION QUESTIONS 1. a. Differential revenue is the amount of in- crease or decrease in revenue expec- ted from a particular course of action compared with an alternative. b. Differential cost is the amount of in- crease or decrease in cost expected from a particular course of action com- pared with an alternative. c. Differential income is the difference between differential revenue and differ- ential cost. 2. This decision is an example of a make vs. buy decision. Exabyte is focusing on its comparative advantages, which include marketing and distribution, while building partnerships with others to actually manu- facture key elements of the product. 3. In the long run, the normal selling price must be set high enough to cover all costs (both fixed and variable) and provide a reasonable amount for profit. 4. The differential income and costs of the lease option should be compared against selling the building. The differential revenue would be the lease revenue compared to the proceeds from sale. The differential ex- penses would be the costs associated with leasing the building, including mainten- ance, property tax, and insurance com- pared to the expense of selling, such as sales commissions. The opportunity cost of money should also be considered in the analysis. 5. Assuming there is demand for the premium grade product, this would assume the dif- ferential price (premium less commodity) exceeded the differential cost to process the product to premium grade. 6. A business should only accept business at a special price if the lower price will not contaminate the regular pricing for other customers or induce other customers to buy at the special price. In addition, the business must be careful not to violate the Robinson-Patman Act, which prohibits un- competitive price differences across differ- ent markets for the same product. Lastly, the company may only offer the special price once for an incremental order. Thus, the business must consider the longer-term ramifications of offering discount business to a customer that may wish to order in the future. 7. It would be reasonable to purchase from the supplier if the fixed cost per unit was less than 40 cents. That is, if the fixed cost were less than 40 cents per unit, then the variable cost per unit would exceed the supplier’s price, making the supplier price more attractive. 8. Some of the financial considerations in- clude the profitability of the store, including all the revenues, variable and fixed costs associated with the store, since they would all be differential to the decision. In addi- tion, any costs of closing the store and pre- paring the store for disposal would need to be considered (legal costs, demolition costs, employee severance costs). Lastly, the opportunity cost of the value of the equipment and land (either in cash or rent- al income) should be considered. For ex- ample, if the opportunity value of the assets
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This note was uploaded on 01/15/2012 for the course ACC 305 taught by Professor Williams during the Spring '11 term at University of Phoenix.

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Sm_24 21e - CHAPTER 24 DIFFERENTIAL ANALYSIS AND PRODUCT PRICING CLASS DISCUSSION QUESTIONS 1 a Differential revenue is the amount of in crease or

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