Managerial Accounting John Wild 7e - Test Bank Instant Download - Complete Test Bank With Answers Sample Questions Are Posted Below Managerial Accounting, 7e (Wild) Chapter 5 Cost Behavior and Cost-Volume-Profit Analysis 1) Total variable costs change in proportion to changes in volume of activity. Answer: TRUE Difficulty: 1 …
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Managerial Accounting John Wild 7e – Test Bank
Instant Download – Complete Test Bank With Answers
Sample Questions Are Posted Below
Managerial Accounting, 7e (Wild)
Chapter 5 Cost Behavior and Cost-Volume-Profit Analysis
1) Total variable costs change in proportion to changes in volume of activity.
Answer: TRUE
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
2) Total fixed costs change in proportion to changes in volume of activity.
Answer: FALSE
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
3) Variable costs per unit increase proportionately with increases in volume of activity.
Answer: FALSE
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
4) Fixed costs per unit decrease proportionately with increases in volume of activity.
Answer: TRUE
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
5) While the total amount of variable cost changes with the level of production, variable cost per unit remains constant as volume changes.
Answer: TRUE
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
6) While the total amount of fixed cost changes with the level of production, fixed cost per unit remains constant as volume changes.
Answer: FALSE
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
7) While the total amount of fixed cost remains constant with the level of production, fixed cost per unit changes as volume changes.
Answer: TRUE
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
8) Dividing a mixed cost into its separate fixed and variable cost components cannot be done in cost-volume-profit analysis.
Answer: FALSE
Difficulty: 2 Medium
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
9) As production volume increases, fixed cost per unit of output remains constant.
Answer: FALSE
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
10) As production volume activity increases, variable cost per unit remains constant.
Answer: TRUE
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
11) A step-wise variable cost can be separated into a fixed component and a variable component.
Answer: FALSE
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
12) Curvilinear costs increase as volume of activity increases, but at a nonconstant rate.
Answer: TRUE
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
13) The relevant range of operations includes extremely high and low levels of production that are unlikely to occur.
Answer: FALSE
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
14) The relevant range of operations is a range of volume neither close to zero nor at maximum capacity.
Answer: TRUE
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
15) Cost-volume-profit analysis requires management to classify all costs as either fixed or variable with respect to production or sales volume within the relevant range of operations.
Answer: TRUE
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
16) Cost-volume-profit analysis is a predictive tool for identifying the impact of future cost changes, price changes, and volume of activity changes.
Answer: TRUE
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
17) Cost-volume-profit analysis is used to predict future costs to be incurred, volumes of activity, sales to be made, and profit to be earned.
Answer: TRUE
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
18) Cost-volume-profit analysis can be used to compute expected income from predicted sales and cost levels.
Answer: TRUE
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
19) The margin of safety is the amount that sales can drop before the company incurs a loss.
Answer: TRUE
Difficulty: 1 Easy
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
20) The dollar amount of sales needed to achieve a target income is computed by dividing the sum of fixed costs plus the target pretax income by the contribution margin ratio.
Answer: TRUE
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
21) The margin of safety can be expressed in dollars or as a percent of sales.
Answer: TRUE
Difficulty: 1 Easy
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
22) The method most likely to produce the most precise line of cost behavior and require the least amount of judgment is the scatter diagram.
Answer: FALSE
Difficulty: 1 Easy
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
23) Contribution margin per unit is the amount by which a product’s unit selling price exceeds its variable cost per unit.
Answer: TRUE
Difficulty: 1 Easy
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
24) The contribution margin ratio is the percent of each sales dollar that remains after deducting the unit variable cost.
Answer: TRUE
Difficulty: 1 Easy
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
25) The extent, or relative size, of fixed costs in the total cost structure is known as operating leverage.
Answer: TRUE
Difficulty: 1 Easy
Topic: Degree of Operating Leverage
Learning Objective: 05-A2 Analyze changes in sales using the degree of operating leverage.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
26) Degree of operating leverage (DOL) is defined as total contribution margin in dollars divided by pretax income.
Answer: TRUE
Difficulty: 1 Easy
Topic: Degree of Operating Leverage
Learning Objective: 05-A2 Analyze changes in sales using the degree of operating leverage.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
27) Least-squares regression is a statistical method for identifying cost behavior.
Answer: TRUE
Difficulty: 1 Easy
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
28) The high-low method of deriving an estimated cost line uses all the data points available.
Answer: FALSE
Difficulty: 1 Easy
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
29) The high-low method can be used to estimate the cost equation using just two points.
Answer: TRUE
Difficulty: 1 Easy
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
30) A visual line fit to points in a scatter diagram may be used to identify the approximate relation between past cost and unit data.
Answer: TRUE
Difficulty: 1 Easy
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
31) There are only two methods to derive an estimated line of cost behavior; the high-low method and the scatter diagram.
Answer: FALSE
Difficulty: 1 Easy
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
32) Scatter diagrams plot volume (units) on the vertical axis and cost on the horizontal axis.
Answer: FALSE
Difficulty: 1 Easy
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
33) Scatter diagrams plot volume (units) on the horizontal axis and cost on the vertical axis.
Answer: TRUE
Difficulty: 1 Easy
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
34) To determine the slope of the variable cost from a scatter diagram, divide the change in units by the change in cost.
Answer: FALSE
Difficulty: 2 Medium
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
35) A scatter diagram is useful for identifying extreme data points or outliers.
Answer: TRUE
Difficulty: 2 Medium
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
36) The high-low method is used to derive the variable cost per unit and total fixed costs using just the highest and lowest volume levels.
Answer: TRUE
Difficulty: 2 Medium
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
37) A break-even point can be calculated either in units or in dollars of sales.
Answer: TRUE
Difficulty: 1 Easy
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
38) Cost-volume-profit analysis is used to determine the number of units that must be sold to break even..
Answer: TRUE
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
39) The break-even point is the sales level at which a company neither earns a profit nor incurs a loss.
Answer: TRUE
Difficulty: 1 Easy
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
40) The contribution margin per unit is the price at which a unit must be sold in order for the company to break even.
Answer: FALSE
Difficulty: 2 Medium
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
41) To calculate the break-even point in units, one must know unit fixed cost, unit variable cost, and sales price.
Answer: FALSE
Difficulty: 2 Medium
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
42) The contribution margin ratio is the percent by which the margin of safety exceeds the break-even point.
Answer: FALSE
Difficulty: 2 Medium
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
43) An important assumption in multiproduct CVP analysis is a constant sales mix.
Answer: TRUE
Difficulty: 1 Easy
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
44) A graphic depiction of the break-even point is known as a cost-volume-profit (CVP) chart.
Answer: TRUE
Difficulty: 1 Easy
Topic: Cost-Volume-Profit Chart
Learning Objective: 05-P3 Interpret a CVP chart and graph costs and sales for a single-product company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
45) A cost-volume-profit (CVP) chart is a graph that plots number of units produced on the horizontal axis and dollars of costs and sales on the vertical axis.
Answer: TRUE
Difficulty: 1 Easy
Topic: Cost-Volume-Profit Chart
Learning Objective: 05-P3 Interpret a CVP chart and graph costs and sales for a single-product company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
46) On a typical cost-volume-profit chart, unit sales are shown on the horizontal axis and both dollars of sales and dollars of costs are represented on the vertical axis.
Answer: TRUE
Difficulty: 1 Easy
Topic: Cost-Volume-Profit Chart
Learning Objective: 05-P3 Interpret a CVP chart and graph costs and sales for a single-product company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
47) Cost-volume-profit analysis cannot be used when a firm produces and sells more than one product.
Answer: FALSE
Difficulty: 2 Medium
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
48) The proportion of sales volumes for various products in a multiproduct company is known as the composite mix.
Answer: FALSE
Difficulty: 1 Easy
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
49) The proportion of sales volumes for various products in a multiproduct company is known as the sales mix.
Answer: TRUE
Difficulty: 1 Easy
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
50) An important assumption in multiproduct CVP analysis is a changing sales mix.
Answer: FALSE
Difficulty: 1 Easy
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
51) The variable costing method is required for external financial reporting.
Answer: FALSE
Difficulty: 1 Easy
Topic: Variable Costing and Performance Reporting
Learning Objective: 05-P5 Appendix 21B-Compute unit cost and income under both absorption and variable costing.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
52) The absorption costing method is required for external financial reporting.
Answer: TRUE
Difficulty: 1 Easy
Topic: Variable Costing and Performance Reporting
Learning Objective: 05-P5 Appendix 21B-Compute unit cost and income under both absorption and variable costing.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
53) Under variable costing, only costs that change in total with changes in production levels are included in product costs.
Answer: TRUE
Difficulty: 1 Easy
Topic: Variable Costing and Performance Reporting
Learning Objective: 05-P5 Appendix 21B-Compute unit cost and income under both absorption and variable costing.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
54) Under variable costing, fixed overhead costs are excluded from product costs.
Answer: TRUE
Difficulty: 1 Easy
Topic: Variable Costing and Performance Reporting
Learning Objective: 05-P5 Appendix 21B-Compute unit cost and income under both absorption and variable costing.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
55) Under absorption costing, fixed overhead costs are excluded from product costs.
Answer: FALSE
Difficulty: 1 Easy
Topic: Variable Costing and Performance Reporting
Learning Objective: 05-P5 Appendix 21B-Compute unit cost and income under both absorption and variable costing.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
56) Managers can use variable costing information for internal decision making, but they must use absorption costing for external reporting purposes.
Answer: TRUE
Difficulty: 1 Easy
Topic: Variable Costing and Performance Reporting
Learning Objective: 05-P5 Appendix 21B-Compute unit cost and income under both absorption and variable costing.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
57) A cost that remains unchanged in total despite variations in volume of activity within a relevant range is a:
Answer: A
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
58) A cost that changes in total in proportion to changes in volume of activity is a(n):
Answer: D
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
59) A cost that changes as volume changes, but at a nonconstant rate, is called a:
Answer: B
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
60) A cost with a flat cost line within a relevant range that shifts to another level when volume significantly changes is a(n):
Answer: A
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
61) A cost that includes both fixed and variable cost components is called a:
Answer: A
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
62) Curvilinear costs always increase:
Answer: D
Difficulty: 2 Medium
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
63) Which one of the following statements is not true?
Answer: C
Difficulty: 2 Medium
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
64) An important tool in predicting the volume of activity, the costs to be incurred, the sales to be made, and the profit to be earned is:
Answer: B
Difficulty: 2 Medium
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
65) Select cost information for Seacrest Enterprises is as follows:
| 1,000 units of output | 5,000 units of output | |||||||||
| Total | Cost/Unit | Total | Cost/Unit | |||||||
| Direct materials | $ | 5,000 | $ | 5.00 | $ | 25,000 | $ | 5.00 | ||
| Utilities expense | $ | 1,000 | $ | 1.00 | $ | 3,750 | $ | 0.75 | ||
| Rent expense | $ | 4,000 | $ | 4.00 | $ | 4,000 | $ | 0.80 | ||
Based on this information:
Answer: C
Difficulty: 3 Hard
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Analyze
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
66) Select cost information for Klondike Corporation is as follows:
| 1,000 units of output | 2,000 units of output | ||||||||||
| Total | Cost/Unit | Total | Cost/Unit | ||||||||
| Direct materials | $ | 4,000 | $ | 4.00 | $ | 8,000 | $ | 4.00 | |||
| Rent expense | $ | 2,000 | $ | 2.00 | $ | 2,000 | $ | 1.00 | |||
Based on this information:
Answer: D
Difficulty: 2 Medium
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
67) Which of the following costs are most likely to be classified as variable?
Answer: D
Difficulty: 2 Medium
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
68) Which of the following costs are most likely to be classified as fixed?
Answer: E
Difficulty: 2 Medium
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
69) A company’s normal operating range, which excludes extremely high or low operating levels that are not likely to occur, is called the:
Answer: D
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
70) A term describing a firm’s normal range of operating activities is:
Answer: A
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
71) Cost-volume-profit analysis is based on necessary assumptions. Which of the following is not one of these assumptions?
Answer: B
Difficulty: 1 Easy
Topic: Identifying Cost Behavior; Sales Mix and Break-Even
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.; 21-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
72) Target income refers to:
Answer: C
Difficulty: 1 Easy
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
73) The margin of safety is the excess of:
Answer: E
Difficulty: 1 Easy
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Risk Analysis
74) If a firm’s forecasted sales are $250,000 and its break-even sales are $190,000, the margin of safety in dollars is:
Answer: A
Explanation: $250,000 − $190,000 = $60,000
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Risk Analysis
75) The excess of expected sales over the sales level at the break-even point is known as the:
Answer: E
Difficulty: 1 Easy
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Risk Analysis
76) A firm expects to sell 25,000 units of its product at $11 per unit. Pretax income is predicted to be $60,000. If the variable costs per unit are $5, total fixed costs must be:
Answer: B
Explanation: Pretax income = Contribution margin − Fixed costs
$60,000 = (25,000 × $6) − Fixed costs
$60,000 = $150,000 − Fixed costs
Fixed costs = $150,000 − $60,000
Fixed costs = $90,000
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
77) During March, a firm expects its total sales to be $160,000, its total variable costs to be $95,000, and its total fixed costs to be $25,000. The contribution margin for March is:
Answer: A
Explanation: Contribution margin = Sales − Variable costs
$160,000 − $95,000 = $65,000
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
78) A firm expects to sell 25,000 units of its product at $11 per unit and to incur variable costs per unit of $6. Total fixed costs are $70,000. The total contribution margin is:
Answer: C
Explanation: Contribution margin = Sales − Variable costs
(25,000 × $11) − (25,000 × $6) = $125,000
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
79) A firm expects to sell 25,000 units of its product at $11 per unit and to incur variable costs per unit of $6. Total fixed costs are $70,000. The pretax net income is:
Answer: A
Explanation: Pretax net income = Sales − Variable costs − fixed costs
(25,000 × $11) − (25,000 × $6) − $70,000 = $55,000
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
80) Watson Company has monthly fixed costs of $83,000 and a 40% contribution margin ratio. If the company has set a target monthly income of $15,000, what dollar amount of sales must be made to produce the target income?
Answer: A
Explanation: (Fixed costs + Target income)/Contribution margin ratio = Dollar sales at target income
($83,000 + $15,000)/.40 = $245,000 Sales
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
81) During its most recent fiscal year, Raphael Enterprises sold 200,000 electric screwdrivers at a price of $15 each. Fixed costs amounted to $400,000 and pretax income was $600,000. What amount should have been reported as variable costs in the company’s contribution margin income statement for the year in question?
Answer: D
Explanation: Revenues − Variable costs − Fixed costs = Pretax income
(200,000 × $15) − VC − $400,000 = $600,000.
$3,000,000 − VC = $1,000,000
$2,000,000 = VC
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
82) During its most recent fiscal year, Dover, Inc. had total sales of $3,200,000. Contribution margin amounted to $1,500,000 and pretax income was $400,000. What amount should have been reported as variable costs in the company’s contribution margin income statement for the year?
Answer: E
Explanation: Revenues − Variable costs = Contribution margin
$3,200,000 − VC = $1,500,000.
VC = $1,700,000
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
83) During its most recent fiscal year, Dover, Inc. had total sales of $3,200,000. Contribution margin amounted to $1,500,000 and pretax income was $400,000. What amount should have been reported as fixed costs in the company’s contribution margin income statement for the year?
Answer: D
Explanation: Contribution margin − Fixed costs = Pretax net income
$1,500,000 − FC = $400,000.
FC = $1,100,000
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
84) Henderson Co. has fixed costs of $36,000 and a contribution margin ratio of 24%. If expected sales are $200,000, what is the margin of safety as a percent of sales?
Answer: B
Explanation: Break-even sales = $36,000/0.24 = $150,000
Margin of safety (in percent) = ($200,000 − $150,000)/$200,000 = 25%
Difficulty: 3 Hard
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
85) Gladstone Co. has expected sales of $326,000 for the upcoming month and its monthly break even sales are $300,000. What is the margin of safety as a percent of sales, rounded to the nearest whole percent?
Answer: D
Explanation: Margin of safety (in percent) = (Expected sales − Break-even sales)/Expected sales
($326,000 − $300,000)/$326,000 = 8%
Difficulty: 2 Medium
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
86) A product sells for $200 per unit, and its variable costs per unit are $130. Total fixed costs are $420,000. If the firm wants to earn $35,000 pretax income, how many units must be sold?
Answer: A
Explanation: Units required to earn target pre-tax income of $35,000 = ($35,000 + $420,000)/$70 = 6,500 units
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
87) A company has fixed costs of $320,000 and a contribution margin per unit of $15. If the company wants to earn a target $40,000 pretax income, how many units must be sold (rounded to the nearest whole unit)?
Answer: A
Explanation: Units required to earn target pre-tax income of $40,000 = ($320,000 + $40,000)/$15 = 24,000 units
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
88) A company has fixed costs of $270,000, a unit contribution margin of $14, and a contribution margin ratio of 55%. If the company wants to earn a target $60,000 pretax income, what amount of sales must it make (rounded to the nearest whole dollar)?
Answer: E
Explanation: Sales dollars required to earn target pre-tax income of $60,000 = ($270,000 + $60,000)/55% = $600,000
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
89) Management anticipates fixed costs of $72,500 and variable costs equal to 40% of sales. What will pretax income equal if sales are $325,000?
Answer: B
Explanation: Pretax income = $325,000 − ((40% × $325,000) + $72,500) = $122,500
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
90) Locus Company has total fixed costs of $112,000. Its product sells for $35 per unit and variable costs amount to $25 per unit. Next year Locus Company wishes to earn a pretax income that equals 10% of fixed costs. How many units must be sold to achieve this target income level?
Answer: D
Explanation: Desired pretax income = 10% × $112,000 = $11,200
Units required = ($112,000 + $11,200)/($35 − $25) = 12,320 units
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
91) Raven Company has a target of $70,000 pre-tax income. The contribution margin ratio is 30%. What amount of dollar sales must be achieved to reach the goal if fixed costs are $36,000?
Answer: D
Explanation: Dollar sales at target income = ($36,000 + $70,000)/0.30 = $353,333
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
92) Use the following information to determine the margin of safety in dollars:
| Unit sales | 50,000 Units | |
| Dollar sales | $ | 500,000 |
| Fixed costs | $ | 204,000 |
| Variable costs | $ | 187,500 |
Answer: C
Explanation: Contribution margin ratio = ($500,000 − $187,500)/$500,000 = 62.5%
Break-even sales = $204,000/0.625 = $326,400
Margin of safety in dollars = $500,000 − $326,400 = $173,600
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
93) Use the following information to determine the break-even point in sales dollars:
| Unit sales | 50,000 Units | |
| Dollar sales | $ | 500,000 |
| Fixed costs | $ | 204,000 |
| Variable costs | $ | 187,500 |
Answer: D
Explanation: Contribution margin ratio = ($500,000 − $187,500)/$500,000 = 62.5%
Break-even sales = $204,000/0.625 = $326,400
Difficulty: 3 Hard
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
94) Use the following information to determine the break-even point in units (rounded to the nearest whole unit):
| Unit sales | 50,000 Units | ||
| Unit selling price | $ | 14.50 | |
| Unit variable cost | $ | 7.50 | |
| Fixed costs | $ | 186,000 | |
Answer: B
Explanation: Break-even point in units = Fixed costs/Contribution margin per unit
$186,000/($14.50 − $7.50) = 26,571 units
Difficulty: 2 Medium
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
95) Use the following information to determine the contribution margin ratio:
| Unit sales | 50,000 Units | ||
| Unit selling price | $ | 14.50 | |
| Unit variable cost | $ | 7.50 | |
| Fixed costs | $ | 204,000 | |
Answer: B
Explanation: Contribution margin ratio = ($14.50 − $7.50)/$14.50 = 48.3%
Difficulty: 2 Medium
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
96) The budgeted income statement presented below is for Burkett Corporation for the coming fiscal year. Compute the number of units that must be sold in order to achieve a target pretax income of $130,000.
| Sales (50,000 units) | $ | 1,000,000 | ||||||||
| Costs: | ||||||||||
| Direct materials | $ | 270,000 | ||||||||
| Direct labor | 240,000 | |||||||||
| Fixed factory overhead | 100,000 | |||||||||
| Variable factory overhead | 150,000 | |||||||||
| Fixed marketing costs | 110,000 | |||||||||
| Variable marketing costs | 50,000 | 920,000 | ||||||||
| Pretax income | $ | 80,000 | ||||||||
Answer: E
Explanation: Revenues − Variable Costs = Contribution Margin
$1,000,000 − ($270,000 + $240,000 + $150,000 + $50,000) = Contribution Margin
$1,000,000 − $710,000 = $290,000
$290,000/50,000 units to be sold = $5.80 budgeted contribution margin per unit
Budgeted unit sales = Total Fixed Costs + Target Pretax Income/CM Per Unit
Budgeted unit sales = [($100,000 + $110,000) + $130,000]/$5.80
Budgeted unit sales = $340,000/$5.80
Budgeted unit sales = 58,620.689 or 58,621
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
97) The budgeted income statement presented below is for Burkett Corporation for the coming fiscal year. If Burkett Corporation achieves the budgeted level of sales, what will be its margin of safety in dollars?
| Sales (50,000 units) | $ | 1,000,000 | ||||||||
| Costs: | ||||||||||
| Direct materials | $ | 270,000 | ||||||||
| Direct labor | 240,000 | |||||||||
| Fixed factory overhead | 100,000 | |||||||||
| Variable factory overhead | 150,000 | |||||||||
| Fixed marketing costs | 110,000 | |||||||||
| Variable marketing costs | 50,000 | 920,000 | ||||||||
| Pretax income | $ | 80,000 | ||||||||
Answer: D
Explanation: Sales Price Per Unit = Total Sales/Units Sold
Sales Price Per Unit = $1,000,000/50,000
Sales Price Per Unit = $20
Revenues − Variable Costs = Contribution Margin
$1,000,000 − ($270,000 + $240,000 + $150,000 + $50,000) = Contribution Margin
$1,000,000 − $710,000 = $290,000
$290,000/50,000 units to be sold = $5.80 budgeted contribution margin per unit
Contribution Margin Ratio = $5.80/$20
Contribution Margin Ratio = 29%
Break-even sales = Total Fixed Costs/Contribution Margin Ratio
Break-even sales = $210,000/29%
Break-even sales = $724,138
Margin of Safety in Dollars = Budgeted Sales − Break-even Sales
Margin of Safety in Dollars = $1,000,000 − $724,138
Margin of Safety in Dollars = $275,862
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis; Computing the Break-Even Point
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.; 21-P2 Compute the break-even point for a single-product company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
98) In cost-volume-profit analysis, the unit contribution margin is:
Answer: C
Difficulty: 1 Easy
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
99) The contribution margin ratio:
Answer: A
Difficulty: 1 Easy
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
100) Total contribution margin in dollars divided by pretax income is the:
Answer: A
Difficulty: 1 Easy
Topic: Degree of Operating Leverage
Learning Objective: 05-A2 Analyze changes in sales using the degree of operating leverage.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
101) Which of the following is the correct interpretation of a degree of operating leverage of 5?
Answer: C
Difficulty: 2 Medium
Topic: Degree of Operating Leverage
Learning Objective: 05-A2 Analyze changes in sales using the degree of operating leverage.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
102) A statistical method for identifying cost behavior is the:
Answer: E
Difficulty: 1 Easy
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
103) The least-squares regression method is:
Answer: C
Difficulty: 1 Easy
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
104) A graph used to analyze past cost behaviors by displaying costs and unit data for each period as points on a diagram is called a:
Answer: C
Difficulty: 1 Easy
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
105) A line on a scatter diagram that is intended to reflect the past relation between cost and unit volume is the:
Answer: D
Difficulty: 1 Easy
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
106) A method that estimates cost behavior by using just the highest and lowest volume levels is called the:
Answer: B
Difficulty: 1 Easy
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
107) The following information is available for a company’s utility cost for operating its machines over the last four months.
| Month | Machine hours | Utility cost | ||
| January | 900 | $ | 5,450 | |
| February | 1,800 | $ | 6,900 | |
| March | 2,400 | $ | 8,100 | |
| April | 600 | $ | 3,600 | |
Using the high-low method, the estimated variable cost per machine hour for utilities is:
Answer: C
Explanation: Variable cost per unit = Change in cost/change in units (using highest and lowest level of activity)
($8,100 − $3,600)/(2,400 − 600) = $2.50 per unit
Difficulty: 2 Medium
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
108) The following information is available for a company’s utility cost for operating its machines over the last four months.
| Month | Machine hours | Utility cost | ||
| January | 900 | $ | 5,450 | |
| February | 1,800 | $ | 6,900 | |
| March | 2,400 | $ | 8,100 | |
| April | 600 | $ | 3,600 | |
Using the high-low method, the estimated total fixed cost for utilities is:
Answer: E
Explanation: Variable cost per unit = Change in cost/change in units (using highest and lowest level of activity)
($8,100 − $3,600)/(2,400 − 600) = $2.50 per unit
Fixed cost = Total cost (high or low) − (variable cost per unit × hours (high or low))
$8,100 − ($2.50 × 2,400) = $2,100
OR $3,600 − ($2.50 × 600) = $2,100
Difficulty: 2 Medium
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
109) The following information is available for a company’s cost of sales over the last five months.
| Month | Units sold | Cost of sales | ||
| January | 400 | $ | 31,000 | |
| February | 800 | $ | 37,000 | |
| March | 1,600 | $ | 49,000 | |
| April | 2,400 | $ | 61,000 | |
Using the high-low method, the estimated variable cost of sales per unit sold is:
Answer: D
Explanation: Variable cost per unit = Change in cost/change in units (using highest and lowest level of activity)
($61,000 − $31,000)/(2,400 − 400) = $15.00 per unit
Difficulty: 2 Medium
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
110) The following information is available for a company’s cost of sales over the last five months.
| Month | Units sold | Cost of sales | |||
| January | 400 | $ | 31,000 | ||
| February | 800 | $ | 37,000 | ||
| March | 1,600 | $ | 49,000 | ||
| April | 2,400 | $ | 61,000 | ||
Using the high-low method, the estimated total fixed cost is:
Answer: A
Explanation: Variable cost per unit = Change in cost/change in units (using highest and lowest level of activity)
($61,000 − $31,000)/(2,400 − 400) = $15.00 per unit
Fixed cost = Total cost (high or low) − (variable cost per unit × hours (high or low)
$61,000 − ($15 × 2,400) = $25,000
OR $31,000 − ($15 × 400) = $25,000
Difficulty: 2 Medium
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
111) The sales level at which a company neither earns a profit nor incurs a loss is the:
Answer: D
Difficulty: 1 Easy
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
112) A company’s product sells at $12 per unit and has a $5 per unit variable cost. The company’s total fixed costs are $98,000. The contribution margin per unit is:
Answer: B
Explanation:
| Selling price per unit | $ | 12 | |||
| Variable cost per unit | 5 | ||||
| Contribution margin per unit | $ | 7 | |||
Difficulty: 1 Easy
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Remember
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
113) A company’s product sells at $12 per unit and has a $5 per unit variable cost. The company’s total fixed costs are $98,000. The break-even point in units is:
Answer: D
Explanation: $98,000/($12 − $5) = 14,000 units
Difficulty: 2 Medium
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
114) Maroon Company’s contribution margin ratio is 24%. Total fixed costs are $84,000. What is Maroon’s break-even point in sales dollars?
Answer: C
Explanation: Break-even point in dollars = $84,000/0.24 = $350,000
Difficulty: 2 Medium
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
115) Fuschia Company’s contribution margin per unit is $12. Total fixed costs are $84,000. What is Fuschia’s break-even point in units?
Answer: A
Explanation: Break-even point in units = $84,000/$12 = 7,000 units
Difficulty: 2 Medium
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
116) A product sells for $200 per unit, and its variable costs are 65% of sales. The fixed costs are $420,000. What is the break-even point in sales dollars?
Answer: E
Explanation: Contribution margin ratio = ($200 − $130)/$200 = 35%
Break-even point in sales dollars = $420,000/0.35 = $1,200,000
Difficulty: 2 Medium
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
117) A product sells for $30 per unit and has variable costs of $18 per unit. The fixed costs are $720,000. If the variable costs per unit were to decrease to $15 per unit, fixed costs increase to $900,000, and the selling price does not change, break-even point in units would:
Answer: E
Explanation: Current break-even point in units = $720,000/($30 − $18) = 60,000 units
New break-even point in units = $900,000/($30 − $15) = 60,000 units
Difficulty: 3 Hard
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
118) Forrester Company is considering buying new equipment that would increase monthly fixed costs from $120,000 to $150,000 and would decrease the current variable costs of $70 by $10 per unit. The selling price of $100 is not expected to change. Forrester’s current break-even sales are $400,000 and current break-even units are 4,000. If Forrester purchases this new equipment, the revised contribution margin ratio would be:
Answer: C
Explanation: New contribution margin ratio = ($100 − $60)/$100 = 40%
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
119) Forrester Company is considering buying new equipment that would increase monthly fixed costs from $120,000 to $150,000 and would decrease the current variable costs of $70 by $10 per unit. The selling price of $100 is not expected to change. Forrester’s current break-even sales are $400,000 and current break-even units are 4,000. If Forrester purchases this new equipment, the revised break-even point in dollars would be:
Answer: E
Explanation: New contribution margin ratio = ($100 − $60)/$100 = 40%
New break-even point in dollars = $150,000/40% = $375,000
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis; Computing the Break-Even Point
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.; 21-P2 Compute the break-even point for a single-product company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
120) Forrester Company is considering buying new equipment that would increase monthly fixed costs from $120,000 to $150,000 and would decrease the current variable costs of $70 by $10 per unit. The selling price of $100 is not expected to change. Forrester’s current break-even sales are $400,000 and current break-even units are 4,000. If Forrester purchases this new equipment, the revised break-even point in units would:
Answer: B
Explanation: Current break-even point in units = $120,000/($100 − $70) = 4,000 units
New break-even point in units = $150,000/($100 − $60) = 3,750 units
Change in break-even units = 4,000 − 3,750 = 250 decrease
Difficulty: 3 Hard
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
121) The difference between sales price per unit and variable cost per unit is the:
Answer: E
Difficulty: 1 Easy
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
122) The contribution margin per unit expressed as a percentage of the product’s selling price is the:
Answer: C
Difficulty: 1 Easy
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
123) A company manufactures and sells a product for $120 per unit. The company’s fixed costs are $68,760, and its variable costs are $90 per unit. The company’s break-even point in units is:
Answer: A
Explanation: Break-even point = $68,760/($120 − $90) = 2,292 units
Difficulty: 2 Medium
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
124) A company manufactures and sells a product for $120 per unit. The company’s fixed costs are $68,760, and its variable costs are $90 per unit. The company’s break-even point in sales dollars is:
Answer: D
Explanation: Contribution margin ratio = ($120 − $90)/$120 = 25%
Break-even point in sales dollars = $68,760/0.25 = $275,040
Difficulty: 3 Hard
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
125) A company has fixed costs of $90,000. Its contribution margin ratio is 30% and the product sells for $75 per unit. What is the company’s break-even point in dollar sales?
Answer: E
Explanation: Break-even point in dollar sales = $90,000/0.30 = $300,000
Difficulty: 3 Hard
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
126) Mason Company manufactures and sells shoelaces for $2.00 per pair. Its variable cost per unit is $1.70. Mason’s total fixed costs are $10,500. How many pairs must Mason sell to break even?
Answer: C
Explanation: Break-even point in units = $10,500/($2.00 − $1.70) = 35,000 units
Difficulty: 2 Medium
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
127) Goldfarb Company manufactures and sells toasters. Each toaster sells for $23.75 and the variable cost per unit is $16.25. Goldfarb’s total fixed costs are $25,000, and budgeted sales are 8,000 units. What is the contribution margin per unit?
Answer: A
Explanation: Contribution margin per unit = $23.75 − $16.25 = $7.50
Difficulty: 2 Medium
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
128) Leeks Company’s product has a contribution margin per unit of $11.25 and a contribution margin ratio of 22.5%. What is the selling price of the product?
Answer: E
Explanation: $11.25 = 22.5% × selling price;
11.25/22.5% = $50 selling price
Difficulty: 3 Hard
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
129) Alvarez Company’s break-even point in units is 1,000. The sales price per unit is $10 and variable cost per unit is $7. If the company sells 2,500 units, what will net income be?
Answer: A
Explanation: Net Income = Contribution Margin × Units sold in excess of break-even units
Net Income = ($10 − $7) × (2,500 − 1,000) = $4,500
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis; Computing the Break-Even Point
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.; 21-P2 Compute the break-even point for a single-product company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
130) Mullis Corp. manufactures DVDs that sell for $5.00. Fixed costs are $28,000 and variable costs are $3.60 per unit. Mullis can buy a newer production machine that will increase fixed costs by $8,000 per year, but will decrease variable costs by $0.40 per unit. What effect would the purchase of the new machine have on Mullis’ break-even point in units?
Answer: E
Explanation: Break-even point with old machine = $28,000/($5.00 − $3.60) = 20,000 units
Break-even point with new machine = ($28,000 + $8,000)/[$5.00 − ($3.60 − $0.40)] = 20,000 units
Difficulty: 3 Hard
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
131) At Midland Company’s break-even point of 9,000 units, fixed costs are $180,000 and variable costs are $540,000 in total. The unit sales price is:
Answer: D
Explanation: Variable cost per unit = $540,000/9,000 units = $60 per unit
$180,000 Fixed cost/(Selling price per unit − $60 per unit) = 9,000 units; Selling price per unit = $80
Difficulty: 3 Hard
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
132) Assume that sales are predicted to be $3,750, the expected contribution margin is $1,500, and a net loss of $250 is anticipated. The break-even point in sales dollars is:
Answer: E
Explanation: $1,500 Contribution margin + $250 Net loss = Fixed costs of $1,750
Contribution margin ratio = $1,500/$3,750 = 40%
Break-even point in dollar sales = $1,750/0.40 = $4,375
Difficulty: 3 Hard
Topic: Computing the Break-Even Point; Contribution Margin and Its Measures
Learning Objective: 05-P2 Compute the break-even point for a single-product company.; 21-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
133) During a recent fiscal year, Creek Company reported pretax income of $125,000, a contribution margin ratio of 25% and total contribution margin of $400,000. Total variable costs must have been:
Answer: B
Explanation: $400,000 of Contribution Margin/.25 CM Ratio = Sales
$1,600,000 = Sales
Sales − Variable Costs = Contribution Margin
$1,600,000 − VC = $400,000
$1,200,000 = VC
Difficulty: 3 Hard
Topic: Computing the Break-Even Point; Contribution Margin and Its Measures
Learning Objective: 05-P2 Compute the break-even point for a single-product company.; 21-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
134) In Keegan Corporation’s most recent fiscal year, the company reported pretax earnings of $215,000. Fixed costs totaled $325,800, the unit selling price of the firm’s only product was $60, and the variable costs per unit were 40% of the selling price. Based on this information, the firm’s break-even point in units was:
Answer: D
Explanation: Break-even Units = Total Fixed Costs/CM per unit
Break-even Units = $325,800/(60% × $60 selling price)
Break-even Units = $325,800/$36; Break-even Units = 9,050
Difficulty: 3 Hard
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Analyze
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
135) A cost-volume-profit chart is also known as a(n)
Answer: C
Difficulty: 1 Easy
Topic: Cost-Volume-Profit Chart
Learning Objective: 05-P3 Interpret a CVP chart and graph costs and sales for a single-product company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
136) When graphing cost-volume-profit data on a CVP chart:
Answer: A
Difficulty: 1 Easy
Topic: Cost-Volume-Profit Chart
Learning Objective: 05-P3 Interpret a CVP chart and graph costs and sales for a single-product company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
137) A CVP graph presents data on:
Answer: B
Difficulty: 1 Easy
Topic: Cost-Volume-Profit Chart
Learning Objective: 05-P3 Interpret a CVP chart and graph costs and sales for a single-product company.
Bloom’s: Remember
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
138) A firm sells two products, Regular and Ultra. For every unit of Regular sold, two units of Ultra are sold. The firm’s total fixed costs are $1,612,000. Selling prices and cost information for both products follow. The contribution margin per composite unit is:
| Product | Unit Sales Price | Variable Cost Per Unit | ||
| Regular | $ | 20 | $ | 8 |
| Ultra | 24 | 4 | ||
Answer: E
Explanation:
| 1 unit of Regular at [$20 − $8] contribution margin per unit | $ | 12 | |||
| 2 units of Ultra at [$24 − $4] contribution margin per unit | 40 | ||||
| Contribution margin per composite unit | $ | 52 | |||
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
139) A firm sells two products, Regular and Ultra. For every unit of Regular sold, two units of Ultra are sold. The firm’s total fixed costs are $1,612,000. Selling prices and cost information for both products follow. What is the firm’s break-even point in units of Regular and Ultra?
| Product | Unit Sales Price | Variable Cost Per Unit | ||
| Regular | $ | 20 | $ | 8 |
| Ultra | 24 | 4 | ||
Answer: B
Explanation:
| 1 Regular unit at [$20 − $8] contribution margin per unit | $ | 12 | |||
| 2 Ultra units at [$24 − $4] contribution margin per unit | 40 | ||||
| Contribution margin per composite unit | $ | 52 | |||
Break-even point in composite units = $1,612,000/$52 = 31,000 composite units
31,000 composite units = 31,000 Regular units and 62,000 (2 × 31,000) Ultra units.
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
140) The ratio (proportion) of the sales volumes for the various products sold by a company is called the:
Answer: C
Difficulty: 1 Easy
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Remember
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
141) Mott Company’s sales mix is 3 units of A, 2 units of B, and 1 unit of C. Selling prices for each product are $20, $30, and $40, respectively. Variable costs per unit are $12, $18, and $24, respectively. Fixed costs are $320,000. What is the break-even point in composite units?
Answer: E
Explanation:
| 3 units of A at [$20 − $12] contribution margin per unit | $ | 24 | |||
| 2 units of B at [$30 − $18] contribution margin per unit | 24 | ||||
| 1 unit of C at [$40 − $24] contribution margin per unit | 16 | ||||
| Contribution margin per composite unit | $ | 64 | |||
Break-even point in composite units = $320,000/$64 = 5,000
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
142) Madison Corporation sells three products (M, N, and O) in the following mix: 3:1:2. Unit price and cost data are:
| M | N | O | |||||||||||
| Unit sales price | $ | 7 | $ | 4 | $ | 6 | |||||||
| Unit variable costs | 3 | 2 | 3 | ||||||||||
Total fixed costs are $340,000. The selling price per composite unit for the current sales mix (rounded to the nearest cent) is:
Answer: D
Explanation:
| 3 units of M at $7 each | $ | 21 | |||
| 1 unit of N at $4 each | 4 | ||||
| 2 units of O at $6 | 12 | ||||
| Selling price of a composite unit | $ | 37 | |||
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
143) Madison Corporation sells three products (M, N, and O) in the following sales mix: 3:1:2. Unit price and cost data are:
| M | N | O | |||||||||||
| Unit sales price | $ | 7 | $ | 4 | $ | 6 | |||||||
| Unit variable costs | 3 | 2 | 3 | ||||||||||
Total fixed costs are $340,000. The contribution margin per composite unit for the current sales mix (round to the nearest cent) is:
Answer: C
Explanation:
| 3 units of M at [$7 − 3] contribution margin per unit | $ | 12 | |||
| 1 unit of N at [$4 − 2] contribution margin per unit | 2 | ||||
| 2 units of O at [$6 − 3] contribution margin per unit | 6 | ||||
| Contribution margin per composite unit | $ | 20 | |||
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
144) Madison Corporation sells three products (M, N, and O) in the following sales mix: 3:1:2. Unit price and cost data are:
| M | N | O | |||||||||||
| Unit sales price | $ | 7 | $ | 4 | $ | 6 | |||||||
| Unit variable costs | 3 | 2 | 3 | ||||||||||
Total fixed costs are $340,000. The break-even point in composite units for the current sales mix (round to the nearest unit) is:
Answer: A
Explanation:
| 3 units of M at [$7 − 3] contribution margin per unit | $ | 12 | |||
| 1 unit of N at [$4 − 2] contribution margin per unit | 2 | ||||
| 2 units of O at [$6 − 3] contribution margin per unit | 6 | ||||
| Contribution margin per composite unit | $ | 20 | |||
Break-even point in composite units = $340,000/$20 = 17,000 composite units
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
145) Madison Corporation sells three products (M, N, and O) in the following sales mix: 3:1:2. Unit price and cost data are:
| M | N | O | |||||||||||
| Unit sales price | $ | 7 | $ | 4 | $ | 6 | |||||||
| Unit variable costs | 3 | 2 | 3 | ||||||||||
Total fixed costs are $340,000. The break-even point in sales dollars for the current sales mix is (round to the nearest thousand):
Answer: D
Explanation:
| 3 units of M at $7 each | $ | 21 | |||
| 1 unit of N at $4 each | 4 | ||||
| 2 units of O at $6 | 12 | ||||
| Selling price per composite unit | $ | 37 | |||
| 3 units of M at [$7 − 3] contribution margin per unit | $ | 12 | |
| 1 unit of N at [$4 − 2] contribution margin per unit | 2 | ||
| 2 units of O at [$6 − 3] contribution margin per unit | 6 | ||
| Contribution margin per composite unit | $ | 20 |
Break-even point in dollar sales = $340,000/$20 = 17,000 composite units × $37 = $629,000
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
146) Barclay Bikes manufactures and sells three distinct styles of bicycles: the Youth model sells for $300 and has a unit contribution margin of $105; the Adult model sells for $850 and has a unit contribution margin of $450; and the Recreational model sells for $1,000 and has a unit contribution margin of $500. The company’s sales mix includes: 5 Youth models; 9 Adult models; and 6 Recreational models. If the firm’s annual fixed costs total $6,500,000, calculate the firm’s selling price per composite unit.
Answer: B
Explanation:
| Selling Price per Composite Unit: | |||||
| Youth model at $300 × sales mix of 5 | $ | 1,500 | |||
| Adult model at $850 × sales mix of 9 | $ | 7,650 | |||
| Recreational model at $1,000 × sales mix of 6 | $ | 6,000 | |||
| $ | 15,150 | ||||
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
147) Barclay Bikes manufactures and sells three distinct styles of bicycles: the Youth model sells for $300 and has a unit contribution margin of $105; the Adult model sells for $850 and has a unit contribution margin of $450; and the Recreational model sells for $1,000 and has a unit contribution margin of $500. The company’s sales mix includes: 5 Youth models; 9 Adult models; and 6 Recreational models. If the firm’s annual fixed costs total $6,500,000, calculate the firm’s contribution margin per composite unit.
Answer: D
Explanation:
| Contribution Margin per Composite Unit: | |||||
| Youth model at $105 × sales mix of 5 | $ | 525 | |||
| Adult model at $450 × sales mix of 9 | $ | 4,050 | |||
| Recreational model at $500 × sales mix of 6 | $ | 3,000 | |||
| $ | 7,575 | ||||
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
148) Barclay Bikes manufactures and sells three distinct styles of bicycles: the Youth model sells for $300 and has a unit contribution margin of $105; the Adult model sells for $850 and has a unit contribution margin of $450; and the Recreational model sells for $1,000 and has a unit contribution margin of $500. The company’s sales mix includes: 5 Youth models; 9 Adult models; and 6 Recreational models. If the firm’s annual fixed costs total $6,500,000, calculate the firm’s break-even point in composite units (rounded to the nearest whole unit).
Answer: C
Explanation:
| Contribution Margin per Composite Unit: | |||||
| Youth model at $105 × sales mix of 5 | $ | 525 | |||
| Adult model at $450 × sales mix of 9 | $ | 4,050 | |||
| Recreational model at $500 × sales mix of 6 | $ | 3,000 | |||
| $ | 7,575 | ||||
Break-even Sales in Composite Units = Total Fixed Costs/Contribution Margin per Composite Unit
Break-even Sales in Composite Units = $6,500,000/$7,575
Break-even Sales in Composite Units = 858 composite units (rounded)
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
149) Barclay Bikes manufactures and sells three distinct styles of bicycles: the Youth model sells for $300 and has a unit contribution margin of $105; the Adult model sells for $850 and has a unit contribution margin of $450; and the Recreational model sells for $1,000 and has a unit contribution margin of $500. The company’s sales mix includes: 5 Youth models; 9 Adult models; and 6 Recreational models. If the firm’s annual fixed costs total $6,500,000, calculate the firm’s contribution margin ratio per composite unit (rounded to the nearest whole percentage).
Answer: B
Explanation:
| Contribution Margin per Composite Unit: | |||||
| Youth model at $105 × sales mix of 5 | $ | 525 | |||
| Adult model at $450 × sales mix of 9 | $ | 4,050 | |||
| Recreational model at $500 × sales mix of 6 | $ | 3,000 | |||
| $ | 7,575 | ||||
Selling Price per Composite Unit:
| Youth model at $300 × sales mix of 5 | $ | 1,500 | |
| Adult model at $850 × sales mix of 9 | $ | 7,650 | |
| Recreational model at $1000 × sales mix of 6 | $ | 6,000 | |
| $ | 15,150 |
Contribution Margin Ratio per Composite Unit = $7,575/$15,150
Contribution Margin Ratio per Composite Unit = 50%
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
150) Barclay Bikes manufactures and sells three distinct styles of bicycles: the Youth model sells for $300 and has a unit contribution margin of $105; the Adult model sells for $850 and has a unit contribution margin of $450; and the Recreational model sells for $1,000 and has a unit contribution margin of $500. The company’s sales mix includes: 5 Youth models; 9 Adult models; and 6 Recreational models. If the firm’s annual fixed costs total $6,500,000, calculate the firm’s break-even point in total sales dollars.
Answer: B
Explanation:
| Contribution Margin per Composite Unit: | |||||
| Youth model at $105 × sales mix of 5 | $ | 525 | |||
| Adult model at $450 × sales mix of 9 | $ | 4,050 | |||
| Recreational model at $500 × sales mix of 6 | $ | 3,000 | |||
| $ | 7,575 | ||||
| Selling Price per Composite Unit: | |||||
| Youth model at $300 × sales mix of 5 | $ | 1,500 | |||
| Adult model at $850 × sales mix of 9 | $ | 7,650 | |||
| Recreational model at $1000 × sales mix of 6 | $ | 6,000 | |||
| $ | 15,150 | ||||
Contribution Margin Ratio per Composite Unit = $7,575/$15,150
Contribution Margin Ratio per Composite Unit = 50%
Break-even Sales Dollars = Total Fixed Costs/Contribution Margin Ratio of Composite Unit
Break-even Sales Dollars = $6,500,000/50%
Break-even Sales Dollars = $13,000,000
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
151) Kent Co. manufactures a product that sells for $50.00 and has variable costs of $24.00 per unit. Fixed costs are $260,000. Kent can buy a new production machine that will increase fixed costs by $11,400 per year, but will decrease variable costs by $3.50 per unit. Compute the contribution margin per unit if the machine is purchased.
Answer: C
Explanation: Contribution margin with new machine = $50.00 − ($24.00 − $3.50) = $29.50
Difficulty: 2 Medium
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
152) Kent Co. manufactures a product that sells for $50.00 and has variable costs of $24.00 per unit. Fixed costs are $260,000. Kent can buy a new production machine that will increase fixed costs by $11,400 per year, but will decrease variable costs by $3.50 per unit. Compute the revised break-even point in units if the new machine is purchased.
Answer: D
Explanation: Break-even point with new machine = ($260,000 + $11,400)/(($50.00 − ($24.00 − $3.50)) = 9,200 units
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
153) Kent Co. manufactures a product that sells for $50.00. Fixed costs are $260,000 and variable costs are $24.00 per unit. Kent can buy a new production machine that will increase fixed costs by $11,400 per year, but will decrease variable costs by $3.50 per unit. What effect would the purchase of the new machine have on Kent’s break-even point in units?
Answer: B
Explanation: Break-even point with old machine = $260,000/($50.00 − $24.00) = 10,000 units
Revised break-even point with new machine = ($260,000 + $11,400)/(($50.00 − ($24.00 − $3.50)) = 9,200 units; 10,000 − 9,200 = 800 unit decrease
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
154) Kent Co. manufactures a product that sells for $50.00. Fixed costs are $260,000 and variable costs are $24.00 per unit. Kent can buy a new production machine that will increase fixed costs by $11,400 per year, but will decrease variable costs by $3.50 per unit. Compute the revised break-even point in dollars with the purchase of the new machine.
Answer: E
Explanation: Break-even point with new machine = ($260,000 + $11,400)/((($50.00 − ($24.00 − $3.50))/$50.00) = $271,400/.59 = $460,000
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
155) McCoy Brothers manufactures and sells two products, A and Z in the ratio of 5:2. Product A sells for $75; Z sells for $95. Variable costs for product A are $35; for Z $40. Fixed costs are $418,500. Compute the contribution margin per composite unit.
Answer: A
Explanation:
| Contribution Margin: | |||||
| Product A ($75 − $35) = $40 × 5 | $ | 200 | |||
| Product Z ($95 − $40) = $55 × 2 | $ | 110 | |||
| Per Composite Unit $200 + $110 | $ | 310 | |||
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
156) McCoy Brothers manufactures and sells two products, A and Z in the ratio of 5:2. Product A sells for $75; Z sells for $95. Variable costs for product A are $35; for Z $40. Fixed costs are $418,500. Compute the break-even point in composite units.
Answer: C
Explanation:
| Contribution Margin: | |||||
| Product A ($75 − $35) = $40 × 5 | $ | 200 | |||
| Product Z ($95 − $40) = $55 × 2 | $ | 110 | |||
| Per Composite Unit $200 + $110 | $ | 310 | |||
Break-even point in Composite Units = $418,500/$310 = 1,350 units
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
157) McCoy Brothers manufactures and sells two products, A and Z in the ratio of 5:2. Product A sells for $75; Z sells for $95. Variable costs for product A are $35; for Z $40. Fixed costs are $418,500. Compute the number of units of Product A McCoy must sell to break even.
Answer: B
Explanation:
| Contribution Margin: | |||||
| Product A ($75 − $35) = $40 × 5 | $ | 200 | |||
| Product Z ($95 − $40) = $55 × 2 | $ | 110 | |||
| Per Composite Unit $200 + $110 | $ | 310 | |||
Break-even point in Composite Units = $418,500/$310 = 1,350 composite units
1,350 composite units × 5 units of Product A per composite unit = 6,750 units of Product A
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
158) McCoy Brothers manufactures and sells two products, A and Z in the ratio of 4:2. Product A sells for $75; Z sells for $95. Variable costs for product A are $35; for Z $40. Fixed costs are $418,500. Compute the number of units of Product Z McCoy must sell to break even.
Answer: D
Explanation:
| Contribution Margin: | |||||
| Product A ($75 − $35) = $40 × 4 | $ | 160 | |||
| Product Z ($95 − $40) = $55 × 2 | $ | 110 | |||
| Per Composite Unit | $ | 270 | |||
Fixed Costs of $418,500 / $270 = 1,550 composite units × 2 units of Z per composite unit = 3,100 units of Z
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
159) Wang Co. manufactures and sells a single product that sells for $450 per unit; variable costs are $270 per unit. Annual fixed costs are $800,000. Current sales volume is $4,200,000. Compute the contribution margin per unit.
Answer: E
Explanation: $450 − $270 = $180
Difficulty: 2 Medium
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
160) Wang Co. manufactures and sells a single product that sells for $450 per unit; variable costs are $270 per unit. Annual fixed costs are $800,000. Current sales volume is $4,200,000. Compute the contribution margin ratio.
Answer: A
Explanation: $450 − $270 = $180/$450 = 40%
Difficulty: 2 Medium
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
161) Wang Co. manufactures and sells a single product that sells for $450 per unit; variable costs are $270. Annual fixed costs are $800,000. Current sales volume is $4,200,000. Compute the break-even point in units.
Answer: C
Explanation: $450 − $270 = $180; $800,000/$180 = 4,444 units
Difficulty: 2 Medium
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
162) Wang Co. manufactures and sells a single product that sells for $450 per unit; variable costs are $270 per unit. Annual fixed costs are $800,000. Current sales volume is $4,200,000. Compute the break-even point in dollars.
Answer: B
Explanation: $450 − $270 = $180/$450 = 40%; $800,000/.40 = $2,000,000
Difficulty: 2 Medium
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
163) Wang Co. manufactures and sells a single product that sells for $450 per unit; variable costs are $270 per unit. Annual fixed costs are $800,000. Current sales volume is $4,200,000. Management targets an annual pre-tax income of $1,125,000. Compute the unit sales to earn the target pre-tax net income.
Answer: D
Explanation: $450 − $270 = $180; ($800,000+ $1,125,000)/$180 = 10,694 units
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
164) Wang Co. manufactures and sells a single product that sells for $450 per unit; variable costs are $270 per unit. Annual fixed costs are $800,000. Current sales volume is $4,200,000. Management targets an annual pre-tax income of $1,125,000. Compute the dollar sales to earn the target pre-tax net income.
Answer: B
Explanation: Contribution margin ratio = 40% ($450 − $270)/$420
| Sales to Achieve Target Pretax Income | = | Fixed Costs + Targeted Pretax Income |
| Contribution Margin Ratio | ||
| = | $800,000 + $1,125,000 | |
| 0.40 | ||
| = | $4,812,500 |
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
165) Wang Co. manufactures and sells a single product that sells for $450 per unit; variable costs are $270 per unit. Annual fixed costs are $800,000. Current sales volume is $4,200,000. Compute the current margin of safety in dollars.
Answer: C
Explanation: Break-even = $450 − $270 = $180; $180/$450 = 40%; $800,000/.40 = $2,000,000
Margin of safety = $4,200,000 − $2,000,000 = $2,200,000
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis; Computing the Break-Even Point
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.; 21-P2 Compute the break-even point for a single-product company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
166) Carver Packing Company reports total contribution margin of $72,000 and pretax net income of $24,000 for the current month. In the next month, the company expects sales volume to increase by 8%. The degree of operating leverage and the expected percent change in income, respectively, are:
Answer: E
Explanation: Degree of operating leverage = Total contribution margin/Pretax net income $72,000/$24,000 = 3
Percent change in income = Degree of operating leverage × % change in sales 3 × 8% = 24%
Difficulty: 2 Medium
Topic: Degree of Operating Leverage
Learning Objective: 05-A2 Analyze changes in sales using the degree of operating leverage.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
167) Morse Company reports total contribution margin of $48,000 and pretax net income of $12,000 for the current month. The degree of operating leverage is:
Answer: A
Explanation: Degree of operating leverage = Total contribution margin/Pretax net income $48,000/$12,000 = 4
Difficulty: 2 Medium
Topic: Degree of Operating Leverage
Learning Objective: 05-A2 Analyze changes in sales using the degree of operating leverage.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
168) A manufacturer reports the following costs to produce 10,000 units in its first year of operations: Direct materials, $10 per unit, Direct labor, $6 per unit, Variable overhead, $70,000, and Fixed overhead, $120,000. The total product cost per unit under absorption costing is:
Answer: C
Explanation:
| Product cost – Absorption Costing | |||||
| Direct Materials | $ | 10 | |||
| Direct Labor | 6 | ||||
| Variable overhead ($70,000/10,000 units) | 7 | ||||
| Fixed overhead ($120,000/10,000 units) | 12 | ||||
| Total product cost per unit | $ | 35 | |||
Difficulty: 2 Medium
Topic: Variable Costing and Performance Reporting
Learning Objective: 05-P5 Appendix 21B-Compute unit cost and income under both absorption and variable costing.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
169) A manufacturer reports the following costs to produce 10,000 units in its first year of operations: Direct materials, $10 per unit, Direct labor, $6 per unit, Variable overhead, $70,000, and Fixed overhead, $120,000. The total product cost per unit under variable costing is:
Answer: B
Explanation:
| Product cost – Variable Costing | |||||
| Direct Materials | $ | 10 | |||
| Direct Labor | 6 | ||||
| Variable overhead ($70,000/10,000 units) | 7 | ||||
| Fixed overhead (excluded) | 0 | ||||
| Total product cost per unit | $ | 23 | |||
Difficulty: 2 Medium
Topic: Variable Costing and Performance Reporting
Learning Objective: 05-P5 Appendix 21B-Compute unit cost and income under both absorption and variable costing.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
170) A manufacturer reports the following costs to produce 10,000 units in its first year of operations: Direct materials, $10 per unit, Direct labor, $6 per unit, Variable overhead, $70,000, and Fixed overhead, $120,000. Of the 10,000 units produced, 9,200 were sold, and 800 remain in inventory at year-end. Under absorption costing, the value of the inventory is:
Answer: C
Explanation:
| Product cost – Absorption Costing | |||||
| Direct Materials | $ | 10 | |||
| Direct Labor | 6 | ||||
| Variable overhead ($70,000/10,000 units) | 7 | ||||
| Fixed overhead ($120,000/10,000 units) | 12 | ||||
| Total product cost per unit | $ | 35 | |||
800 units × $35 per unit = $28,000
Difficulty: 2 Medium
Topic: Variable Costing and Performance Reporting
Learning Objective: 05-P5 Appendix 21B-Compute unit cost and income under both absorption and variable costing.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
171) A manufacturer reports the following costs to produce 10,000 units in its first year of operations: Direct materials, $10 per unit, Direct labor, $6 per unit, Variable overhead, $70,000, and Fixed overhead, $120,000. Of the 10,000 units produced, 9,200 were sold, and 800 remain in inventory at year-end. Under variable costing, the value of the inventory is:
Answer: B
Explanation:
| Product cost – Variable Costing | |||||
| Direct Materials | $ | 10 | |||
| Direct Labor | 6 | ||||
| Variable overhead ($70,000/10,000 units) | 7 | ||||
| Fixed overhead (excluded) | 0 | ||||
| Total product cost per unit | $ | 23 | |||
800 units × $23 per unit = $18,400
Difficulty: 2 Medium
Topic: Variable Costing and Performance Reporting
Learning Objective: 05-P5 Appendix 21B-Compute unit cost and income under both absorption and variable costing.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
172) A manufacturer reports the following information below for its first three years in operation.
| Year 1 | Year 2 | Year 3 | |||||||||||
| Income under variable costing | $ | 76,000 | $ | 109,000 | $ | 115,000 | |||||||
| Beginning inventory (units) | 0 | 800 | 500 | ||||||||||
| Ending inventory (units) | 800 | 500 | 0 | ||||||||||
| Fixed manufacturing overhead per unit | $ | 8.00 | $ | 8.00 | $ | 8.00 | |||||||
Income for year 1 using absorption costing is:
Answer: B
Explanation: Income under absorption costing = Income under variable costing − FOH beginning inventory + FOH ending inventory
Year 1:
$76,000 − (0 units × $8.00) + (800 units × $8.00) = $82,400
Difficulty: 3 Hard
Topic: Variable Costing and Performance Reporting
Learning Objective: 05-P5 Appendix 21B-Compute unit cost and income under both absorption and variable costing.
Bloom’s: Apply
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
173) A manufacturer reports the following information below for its first three years in operation.
| Year 1 | Year 2 | Year 3 | |||||||||||
| Income under variable costing | $ | 76,000 | $ | 109,000 | $ | 115,000 | |||||||
| Beginning inventory (units) | 0 | 800 | 500 | ||||||||||
| Ending inventory (units) | 800 | 500 | 0 | ||||||||||
| Fixed manufacturing overhead per unit | $ | 8.00 | $ | 8.00 | $ | 8.00 | |||||||
Income for year 2 using absorption costing is:
Answer: C
Explanation: Income under absorption costing = Income under variable costing − FOH beginning inventory + FOH ending inventory
Year 1:
$76,000 − (0 units × $8.00) + (800 units × $8.00) = $82,400
Year 2:
$109,000 − (800 units × $8.00) + (500 units × $8.00) = $106,600
Year 3:
$115,000 − (500 units × $8.00) + (0 units × $8.00) = $111,000
Total:
$82,400 + $106,600 + $111,000 = $300,000
Difficulty: 3 Hard
Topic: Variable Costing and Performance Reporting
Learning Objective: 05-P5 Appendix 21B-Compute unit cost and income under both absorption and variable costing.
Bloom’s: Apply
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
174) A manufacturer reports the following information below for its first three years in operation.
| Year 1 | Year 2 | Year 3 | |||||||||||
| Income under variable costing | $ | 76,000 | $ | 109,000 | $ | 115,000 | |||||||
| Beginning inventory (units) | 0 | 800 | 500 | ||||||||||
| Ending inventory (units) | 800 | 500 | 0 | ||||||||||
| Fixed manufacturing overhead per unit | $ | 8.00 | $ | 8.00 | $ | 8.00 | |||||||
Income for year 3 using absorption costing is:
Answer: E
Explanation: Income under absorption costing = Income under variable costing − FOH beginning inventory + FOH ending inventory
Year 3:
$115,000 − (500 units × $8.00) + (0 units × $8.00) = $111,000
Difficulty: 2 Medium
Topic: Variable Costing and Performance Reporting
Learning Objective: 05-P5 Appendix 21B-Compute unit cost and income under both absorption and variable costing.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
175) A manufacturer reports the following information below for its first three years in operation.
| Year 1 | Year 2 | Year 3 | |||||||||||
| Income under variable costing | $ | 76,000 | $ | 109,000 | $ | 115,000 | |||||||
| Beginning inventory (units) | 0 | 800 | 500 | ||||||||||
| Ending inventory (units) | 800 | 500 | 0 | ||||||||||
| Fixed manufacturing overhead per unit | $ | 8.00 | $ | 8.00 | $ | 8.00 | |||||||
Income for year 3-year period using absorption costing is:
Answer: C
Explanation: Income under absorption costing = Income under variable costing − FOH beginning inventory + FOH ending inventory
Year 1:
$76,000 − (0 units × $8.00) + (800 units × $8.00) = $82,400
Year 2:
$109,000 − (800 units × $8.00) + (500 units × $8.00) = $106,600
Year 3:
$115,000 − (500 units × $8.00) + (0 units × $8.00) = $111,000
Total: $82,400 + $106,600 + $111,000 = $300,000
Note: Since total inventory levels at the beginning and end of the 3-year period are identical (0 units beginning inventory, Year 1; 0 units ending inventory, Year 3), income under absorption costing is identical to inventory under variable costing. $76,000 + $109,000 + $115,000 = $300,000)
Difficulty: 3 Hard
Topic: Variable Costing and Performance Reporting
Learning Objective: 05-P5 Appendix 21B-Compute unit cost and income under both absorption and variable costing.
Bloom’s: Apply
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
176) Shown below are terms or phrases preceded by letters a through j followed by a list of definitions. Match the terms or phrases 1 through 10 with the correct definitions by placing the letter of the term or phrase in the answer space provided at the beginning of each definition.
(a) Mixed cost
(b) Fixed cost
(c) Contribution margin per unit
(d) Curvilinear cost
(e) Variable cost
(f) Step-wise cost
(g) Relevant range of operations
(h) Estimated line of cost behavior
(i) Least-squares regression
(j) Cost-volume-profit analysis
________(1) The amount that the sale of one unit contributes toward covering fixed costs and generating profit.
________(2) A cost that changes in total in proportion to changes in volume of activity.
________(3) A cost that includes both fixed and variable cost components.
________(4) A cost that changes as volume changes, but at a nonconstant rate.
________(5) A line drawn on a graph to reflect the relation between cost and unit volume.
________(6) A statistical method for identifying cost behavior that is more precise than the high-low method and a scatter diagram.
________(7) A company’s normal operating range of production volume; excludes extremely high and low operating levels that are unlikely to recur.
________(8) A cost that remains constant over limited ranges of volumes of activity but shifts to another level when volume changes significantly.
________(9) A business planning tool that helps managers predict how changes in costs and sales levels affect profit.
________(10) A cost that remains unchanged in total amount despite variations in the volume of activity within a relevant range.
Answer: 1. C; 2. E; 3. A; 4. D; 5. H; 6. I; 7. G; 8. F; 9. J; 10. B
Difficulty: 1 Easy
Topic: Contribution Margin and Its Measures; Measuring Cost Behavior; Identifying Cost Behavior
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.; 21-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.; 21-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
177) Define variable cost, fixed cost, and mixed cost.
Answer: Variable cost: a cost that changes in total in proportion to changes in volume of activity. Fixed cost: a cost that remains unchanged in total even when volume of activity changes within the relevant range. Mixed cost: a cost that includes both fixed and variable cost components.
Difficulty: 2 Medium
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
178) What are the cost behaviors per unit and in total for variable cost and fixed costs within the relevant range?
Answer: Variable costs per unit are constant. Variable costs in total vary with volume. Fixed costs are constant in total and decrease per unit as volume increases.
Difficulty: 2 Medium
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
179) Describe what happens to the net income of a company under each of the following assumptions: (a) Units sold are less than break-even units. (b) Units sold are greater than break-even units. (c) Units sold are equal to the break-even units.
Answer: (a) If the units sold are less than the break-even units, the company will have a net loss. (b) If the units sold are greater than the break-even units, the company will generate a net income. (c) At the break-even point, where units sold are equal to break-even units, the company will neither make a profit nor a loss.
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
180) Discuss how CVP analysis can be useful in planning.
Answer: One of the first steps in planning is to predict the volume of activity, the costs to be incurred, sales to be made, and profit to be earned. CVP analysis is useful in helping managers predict how changes in costs and sales levels affect profit. This can help management plan operations and formulate strategies as well as project target incomes.
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
181) Describe and compare the three cost estimation methods used to develop a cost equation.
Answer: The three methods are scatter diagram, the high-low method, and least-squares regression. Scatter diagrams plot data in graphical form and a line is drawn to reflect the relation between cost and unit volume. With the high-low method, only the data point for the highest and lowest volumes of activity are used to determine a line. Least-squares regression is a statistical method best done with a spreadsheet or calculator. The three methods will differ slightly in their estimates, with least-squares regression being the most precise, scatter diagrams being the most subject to interpretation, and the high-low method being the least accurate if the extreme values don’t reflect normal activity, but it is easiest to apply to obtain a quick cost equation estimate.
Difficulty: 2 Medium
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
182) What are the unit contribution margin and the contribution margin ratio? What do these measures reveal about a company’s cost structure?
Answer: The unit contribution margin is the sales price per unit minus the total variable cost per unit. The contribution margin contributes to covering fixed costs and generating profits on a per unit basis. The contribution margin ratio is the unit contribution margin divided by sales price per unit.
Difficulty: 2 Medium
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
183) What is operating leverage? How can the degree of operating leverage be used in analyzing changes in sales?
Answer: Operating leverage is the extent or relative size of fixed costs in the total cost structure. Degree of operating leverage–total contribution margin in dollars divided by pretax income–can be used to predict how changes in sales will affect pretax income. Degree of operating leverage times the percent change in sales will equal the change in pretax income.
Difficulty: 2 Medium
Topic: Degree of Operating Leverage
Learning Objective: 05-A2 Analyze changes in sales using the degree of operating leverage.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
184) What is a scatter diagram? How is a scatter diagram used to estimate cost behavior?
Answer: A scatter diagram displays past cost data in a graphical form, with the volume on the horizontal axis and the cost on the vertical axis. Using one’s best judgment, the estimated line of cost behavior is drawn on the scatter diagram to estimate the relation between costs and volume.
Difficulty: 2 Medium
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
185) What is the high-low method? Briefly describe how it is applied.
Answer: The high-low method is a way to estimate cost behavior using the costs related to the highest and lowest volume levels of activity. The change in cost is divided by the change in units to calculate variable cost per unit. The total fixed cost is calculated by multiplying either the high level (low level) of volume by the variable cost per unit, and subtracting that from the total cost for the high level (low level) of volume.
Difficulty: 2 Medium
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
186) Define the break-even point of a company.
Answer: The break-even point of a company is the sales level at which the company neither earns a profit nor incurs a loss for the planning period. Alternatively stated, the company’s total sales equals the total of variable and fixed costs.
Difficulty: 2 Medium
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
187) Briefly describe a CVP chart, including its major components.
Answer: The vertical axis of a CVP chart plots total dollars of costs and sales. The horizontal axis plots the volume of activity. Specifically, fixed cost is represented as a point on the vertical axis and the total cost line is plotted from the fixed cost point rising upward at a slope equal to the unit variable cost. Sales are plotted from zero at a slope equal to the unit sales price. Break-even is where the total cost line intersects the sales line.
Difficulty: 2 Medium
Topic: Cost-Volume-Profit Chart
Learning Objective: 05-P3 Interpret a CVP chart and graph costs and sales for a single-product company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
188) Describe how a cost-volume-profit analysis would be performed for a company that sells more than one product when the sales mix is known.
Answer: Multi product CVP analysis uses composite units to estimate break even. It takes into consideration the proportion of each product sold. When the sales mix is known, the contribution margin per composite unit is determined as the selling price per composite unit minus the variable cost per composite unit. The break-even analysis is then calculated in terms of composite units. Using the sales mix, the composite units are translated into units and dollars of the individual products.
Difficulty: 2 Medium
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
189) A company has a goal of earning $128,000 in pre-tax income. The contribution margin ratio is 30%. What dollar amount of sales must be achieved to reach the goal if fixed costs are $64,000?
Answer: Targeted dollar sales = ($64,000 + $128,000)/0.30 = $640,000
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
190) A company has total fixed costs of $200,000. Its product sells for $25 per unit and variable costs amount to $15 per unit. The company has a target pre-tax income of $50,000. How many units must be sold to achieve this pre-tax target income?
Answer: Targeted sales in units = ($200,000 + $50,000)/($25 – $15) = 25,000 units
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
191) Proctor Company has fixed costs of $315,000 and a contribution margin ratio of 24%. If sales are expected to be $1,500,000, what is the margin of safety, in percent?
Answer: Break-even point in dollars sales = $315,000/0.24 = $1,312,500
Margin of safety in percent = ($1,500,000 – $1,312,500)/$1,500,000 = 12.5%
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
192) Johnston Co. anticipates total fixed costs of $120,000 and variable costs equal to 40% of sales. What is the pretax income if sales are $650,000?
Answer: Pretax Income = $650,000 – (.40 ∗ $650,000) – $120,000 = $270,000
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
193) Journey Company is considering the production and sale of a new product with the following sales and cost data: unit sales price $18; unit variable costs $8.50; and total fixed costs of $81,250. Determine the dollar sales needed to generate a pre-tax income of $44,000, rounded to the nearest whole dollar.
Answer: Contribution margin ratio = ($18 – $8.50)/$18 = 52.8%
Targeted dollar sales = ($81,250 + $44,000)/0.528 = $237,216
Or, alternatively:
Contribution margin per unit = $18 – $8.50=$9.50
Targeted sales in units= ($81,250 + $44,000)/$9.50=13,184 units rounded to nearest whole unit.
Targeted dollar sales = 13,184 units ∗ $18 =$237,312
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
194) Philadelphia Co. is considering the production and sale of a new product with the following sales and cost data: unit sales price, $300; unit variable costs, $180; total fixed costs, $270,000; and projected sales, $900,000. What is the margin of safety:
(a) In dollar sales? And (b) As a percent of sales?
Answer: Contribution margin ratio = ($300 – $180)/$300 = 40%
Break-even point in dollar sales = $270,000/0.40 = $675,000
Margin of safety:
(a) In sales dollars = Sales – Break-even sales
= $900,000 – $675,000
= $225,000
(b) As a percent of sales = (Sales – Break-even sales)/Sales
= ($900,000 – $675,000)/$900,000
= 25%
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
195) Zola Co. has a contribution margin ratio of 40% and would like to determine whether an additional advertising expenditure of $4,000 would increase sales by $8,000. Calculate the increase or decrease in net income that would result from this change, and comment on whether Zola should purchase the additional advertising.
Answer:
Increase in sales…………………………… $8,000
Contribution margin ratio…………………. ∗ . 40
Increase in contribution margin…………… $3,200
Increase in costs…………………………… (4,000)
Net decrease in income…………………… $ (800)
No, the increased advertising should not be purchased because it reduces net income.
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking; Critical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
196) Portal Manufacturing has total fixed costs of $520,000. A unit of product sells for $15 and variable costs per unit are $11.
Answer:
a)
| Portal Manufacturing
Contribution Margin Income Statement For Year Ended December 31 |
|
| Sales (100,000 ∗ $15) | $1,500,000 |
| Variable costs (100,000 ∗ $11) | 1,100,000 |
| Contribution margin | 400,000 |
| Fixed costs | 520,000 |
| Net loss | $(120,000) |
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis; Computing the Break-Even Point
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.; 21-P2 Compute the break-even point for a single-product company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
197) Crookshank Manufacturing has total fixed costs of $460,000. A unit of product sells for $20 and variable costs per unit are $11.
Prepare a contribution margin income statement showing predicted net income (loss) if Crookshank sells 100,000 units for the year ended December 31.
Answer:
| Crookshank Manufacturing
Contribution Margin Income Statement For Year Ended December 31 |
|
| Sales (100,000 ∗ $20) | $2,000,000 |
| Variable costs (100,000 ∗ $11) | 1,100,000 |
| Contribution margin | 900,000 |
| Fixed costs | 460,000 |
| Net income | $440,000 |
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
198) Margin Company has total fixed costs of $360,000 and variable costs of $14 per unit. If the unit sales price is reduced from $24 to $20 and advertising is increased by $10,000, sales will increase from 40,000 to 65,000 units. Should Margin reduce its per unit sales price and pay for the additional advertising? (Support your answer with calculations.)
Answer:
Current: Proposed:
Sales (40,000 ∗ $24) …. $960,000 Sales (65,000 ∗ $20) …. $1,300,000
Variable costs Variable costs
(40,000 ∗ $14)….. (560,000) (65,000 ∗ $14)……. (910,000)
Contribution margin….. $400,000 Contribution margin….. $ 390,000
Fixed costs
Fixed costs …………… (360,000) (360,000 + $10,000)… (370,000)
Net income …………… $ 40,000 Net income …….………. $ 20,000
Since there is a $20,000 decrease in income from the proposed strategy, the additional advertising and reduced selling price should not be implemented.
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Analyze
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
199) The following data relate to a product sold by Hallstone Company:
| Total Variable costs | $90,000 |
| Total fixed costs | $27,000 |
| Predicted pre-tax income | $18,000 |
| Contribution margin per unit | $5.00 |
(a) Calculate the number of units expected to be sold.
(b) Calculate the expected total dollar sales.
Answer:
(a) ($27,000 + 18,000)/$5 = 9,000 units
| (b) | Total Variable costs………………………… | $ 90,000 |
| + Contribution margin ($5 ∗ 9,000)……….… | 45,000 | |
| Total sales…………………………………… | $135,000 |
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
200) A product is sold for $45 and has variable costs of $33 per unit. The total fixed costs for the firm are $180,600. If the firm desires to earn a pretax income of $77,400, how many units must be sold?
Answer: Unit sales targeted income = Fixed Costs + Targeted pretax income/CM per unit
($180,600 + $77,400)/($45 – $33) = 21,500 units
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
201) A firm produces and sells a product with a contribution margin of $32 per unit. The firm is presently selling 90,000 units and earning $320,000 in pre-tax income. If the firm desires to increase its pre-tax income to $ 400,000, how many more units must it sell?
Answer:
Target increase in pretax income = $80,000
Additional units = $80,000/$32 = 2,500 units
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
202) Isaacson Co. has total fixed costs of $240,000 and a contribution margin ratio of 40%. If rent expense increases by $5,000, how much will total sales revenue have to increase to cover this increase in costs?
Answer: To cover the cost increase, the increased fixed costs must be countered with an increase in contribution margin. Specifically:
Sales increase ∗ Contribution margin ratio = Increased contribution margin
Sales increase ∗ .40 = $5,000
Sales increase = $5,000/.40
= $12,500
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
203) A company is looking into two alternative methods of producing its product. The following information about the two alternatives is available. If the company’s expected sales volume is 35,000 units, which alternative should be selected?Prepare forecasted contribution margin income statements and compute the degree of operating leverage to assess the alternatives.
| Alternative #1 | Alternative #2 | |
| Variable costs per unit……… | $8 | $12 |
| Fixed costs…………………… | $240,000 | $140,000 |
| Selling price per unit………… | $20 | $20 |
Answer:
Alternative 1 Alternative 2
Sales (35,000 ∗ $20)……… $700,000 Sales (35,000 ∗ $20)……… $700,000
Variable costs Variable costs
(35,000 ∗ $8)……………… (280,000) (35,000 ∗ $12)…………… (420,000)
Contribution margin……… $420,000 Contribution margin……… $280,000
Fixed costs……………… (240,000) Fixed costs………………… (140,000)
Income…………………… $180,000 Income…………………… $140,000
Degree of operating leverage: Degree of operating leverage:
$420,000/$180,000 = 2.3 $280,000/$140,000 = 2
Alternative 1 provides the higher income. In addition, it has a higher degree of operating leverage. This means that for every 1% of increase in sales, income before tax should increase by 2.3% for alternative 1, rather than 2% for alternative 2. Therefore, alternative 1 should be selected.
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis; Degree of Operating Leverage
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.; 21-A2 Analyze changes in sales using the degree of operating leverage.
Bloom’s: Analyze
AACSB/Accessibility: Analytical Thinking; Critical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
204) Dodge Industries incurs the following costs during the current year:
| Depreciation of machinery………… | $15,000 |
| Direct labor……………………… | 6,000 |
| Direct materials…………………… | 4,000 |
| Executive salaries………………… | 20,000 |
| Insurance………………………… | 2,000 |
| Rent on building………………… | 8,000 |
| Factory supplies…………………… | 10,000 |
| Vehicle lease cost………………… | 5,000 |
Sales for the year were $80,000 and Dodge determined that only the direct production costs and factory supplies are to be classified as variable costs; all other costs are classified as fixed costs. Dodge sold 400 units.
(a) Calculate the unit contribution margin and the contribution margin ratio for Dodge
Industries.
(b) Dodge Industries is considering plans that would increase the contribution margin ratio for next year. Should it pursue these plans? Explain.
Answer:
(a)
| Total variable costs are: | |
| Direct materials | $ 4,000 |
| Direct labor | 6,000 |
| Factory supplies | 10,000 |
| Total variable costs | $20,000 |
Variable costs per unit = $20,000/400 = $50 per unit
Sales price per unit = $80,000/400 = $200 per unit
Unit contribution margin:
| Sales price per unit | $200 |
| Variable costs per unit | 50 |
| Contribution margin per unit | $150 |
Contribution margin ratio = $150/$200 = 75%
(b) Perhaps. Based on the current cost structure, for every dollar of sales, contribution margin increases by $0.75. The contribution margin is used to cover fixed cost and contribute toward net income. As long as fixed costs do not change, net income will increase if the contribution margin is increased. The risk is that if sales decrease, then contribution margin will fall by $0.75. If the contribution margin ratio increases, the decline in income will be larger.
Difficulty: 3 Hard
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Analyze
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
205) Glover Headgear produces specialty logo baseball caps for a variety of customers. Selected cost data for Glover follows: direct materials cost $17,000; depreciation on factory equipment, $21,000; direct labor, $16,000; factory lease, $24,000. If Glover sells 6,100 caps at an average price of $12 for each cap, what is the company’s contribution margin in total dollars?
Answer:
| Sales (6,100 caps @ $12)…………… | $73,200 | |
| Less Variable Costs: | ||
| Direct materials………………… | $17,000 | |
| Direct labor…………………… | 16,000 | 33,000 |
| Contribution margin………………… | $40,200 |
Difficulty: 2 Medium
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
206) Ludington Corporation provides the following data from a recent period for its manufacture of shoes: direct material costs, $24,000; direct labor costs, $12,000; and total fixed costs, $40,000. Sales were $60,000 based on 12,000 units sold during the period. Calculate the contribution margin and the contribution margin ratio.
Answer:
| Contribution Margin | ||
| Sales………………………………… | $60,000 | Contribution Margin/Sales =CM% |
| Less Variable Costs: | $24,000/$60,000 = 40% | |
| Direct materials………………… | $24,000 | |
| Direct labor…………………… | 12,000 | |
| Total variable costs…………… | $36,000 | |
| Contribution Margin………………… | $24,000 |
Difficulty: 2 Medium
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
207) A company has total fixed costs of $360,000. Its product sells for $40 per unit and variable costs amount to $25 per unit. What is the break-even point in dollar sales?
Answer: Contribution margin ratio = ($40 – $25)/$40 = 37.5%
Break-even point in dollar sales = $360,000/0.375 = $960,000
Difficulty: 2 Medium
Topic: Contribution Margin and Its Measures; Computing the Break-Even Point
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.; 21-P2 Compute the break-even point for a single-product company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
208) The following information describes a product expected to be produced and sold by Quark Corporation:
Selling price…………………………… $33 per unit
Variable costs………………………… $27 per unit
Total fixed costs……………………… $855,000 per year
Required:
(a) Calculate the contribution margin per unit.
(b) Calculate the break-even point in units.
Answer:
(a) Contribution margin = $33 – $27 = $6 per unit
(b) Break-even point in units = $855,000/$6 per unit =142,500 units
Difficulty: 2 Medium
Topic: Contribution Margin and Its Measures; Computing the Break-even Point
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.; 21-P2 Compute the break-even point for a single-product company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
209) A company manufactures and sells searchlights. Each searchlight sells for $345. The variable cost per unit is $198, and the company’s total fixed costs are $635,000. Predicted sales are 15,000 units. What is the contribution margin per unit?
Answer: Contribution margin = $345 – $198 = $147
Difficulty: 2 Medium
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
210) Clockworks Co. reports the following data for the current year:
Units sold………………………………………… 1,200
Unit sales price…………………………………… $30
Unit variable cost………………………………… $10
Total fixed cost…………………………………… $18,000
Required:
(a) Calculate Clockworks’ pretax income.
(b) Calculate Clockworks’ degree of operating leverage.
Answer:
(a)
Sales (1,200 units ∗ $30 each)…………………… $36,000
Variable costs (1,200 ∗ $10)……………………… (12,000)
Contribution margin……………………………… $24,000
Fixed costs………………………………………… (18,000)
Income before taxes……………………………… $ 6,000
(b) Degree of operating leverage = $24,000/$6,000 = 4
Difficulty: 3 Hard
Topic: Degree of Operating Leverage; Applying Cost-Volume-Profit Analysis
Learning Objective: 05-A2 Analyze changes in sales using the degree of operating leverage.; 21-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
211) Fielder Productions reports the following information:
Total contribution margin………………… $32,000
Total fixed costs…………………………… $28,000
Required:
(a) Calculate Fielder’s degree of operating leverage (DOL).
(b) If sales increase by 6%, what is the expected percentage increase in pretax income?
Answer:
| (a) | Contribution margin……………………… | $32,000 |
| Fixed costs……………………………… | (28,000) | |
| Income before income taxes……………… | $ 4,000 |
Degree of operating leverage = $32,000/$4,000 = 8
(b) A 6% increase in sales will result in a 48% (6% * 8) increase in income before taxes.
Difficulty: 2 Medium
Topic: Degree of Operating Leverage
Learning Objective: 05-A2 Analyze changes in sales using the degree of operating leverage.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
212) Craft Company and Jarmer Company each have sales of $200,000 and costs of $140,000. Craft Company’s costs consist of $40,000 fixed and $100,000 variable, while Jarmer Company’s costs consist of $100,000 fixed and $40,000 variable. Which company will suffer the greatest decline in profits if sales volume declines by 15%?Prepare contribution margin income statements and compute the degree of operating leverage
Answer:
| Craft Company | Jarmer Company | ||
| Sales | $200,000 | Sales | $200,000 |
| Variable costs | 100,000 | Variable costs | 40,000 |
| Contribution margin | 100,000 | Contribution margin | 160,000 |
| Fixed costs | 40,000 | Fixed costs | 100,000 |
| Income before tax | $ 60,000 | Income before tax | $ 60,000 |
| Operating leverage | 1.67 | Operating leverage | 2.67 |
Since Jarmer’s degree of operating leverage is higher, the decrease in sales will have a larger impact on pretax income for Jarmer Company than it will for Craft.
Difficulty: 3 Hard
Topic: Degree of Operating Leverage
Learning Objective: 05-A2 Analyze changes in sales using the degree of operating leverage.
Bloom’s: Analyze
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Critical Thinking; FN Measurement
213) Wolowitz Company’s product has a contribution margin per unit of $62.50 and a contribution margin ratio of 25%. What is the per unit selling price of the product?
Answer:
| Contribution margin ratio | = | Contribution margin/Selling price | |
| 25% = | $62.50/Selling price | ||
| Selling price = $62.50/0.25 = $250 |
Difficulty: 2 Medium
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
214) A company sells a single product that has a contribution margin ratio of 28%. If the company’s total fixed costs are $84,000, what is the break-even point in dollar sales?
Answer: Break-even point in dollar sales = $84,000/0.28 = $300,000
Difficulty: 2 Medium
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
215) Elk Co. manufactures a product that sells for $12 per unit. Total fixed costs are $96,000 and variable costs are $7 per unit. Elk can buy a newer production machine that will increase total fixed costs by $22,800 and decrease variable costs by $0.40 per unit. What effect would the purchase of the new machine have on Elk’s break-even point in units?
Answer: Current break-even point in units = $96,000/($12 – $7) = 19,200 units
New break-even point in units = ($96,000 + $22,800)/($12 – $6.60) = 22,000 units
Increase in break-even point in units = 22,000 – 19,200 = 2,800 unit increase
Difficulty: 3 Hard
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
216) Expanse Co. is considering the production and sale of a new product line with the following sales and cost data: unit sales price $125; unit variable costs $50; and total fixed costs of $150,000. Calculate the break-even point in units and in dollar sales.
Answer: Break-even point in units = $150,000/($125 – $50) = 2,000 units
Break-even point in sales dollars = 2,000 units ∗ $125 = $250,000
Difficulty: 2 Medium
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
217) Seaquest Company’s contribution margin income statement is presented below. Sales for the current period consisted of 5,000 units. Determine the company’s break-even point in dollars.
| Seaquest Company
Contribution Margin Income Statement |
|
| Sales | $125,000 |
| Variable costs | 90,000 |
| Contribution margin | 35,000 |
| Fixed costs | 28,000 |
| Net income | $7,000 |
Answer: Per unit costs:
Sales price = $125,000/5,000 = $25
Variable cost = $90,000/5,000 = $18
Contribution margin ratio = ($25 – $18)/$25 = .28
Break-even in dollars = $28,000/.28 = $100,000
Difficulty: 3 Hard
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
218) The following information is available for Alba Company’s maintenance cost over the last four months.
| Month | Maintenance hours | Maintenance cost |
| January | 150 | $6,000 |
| February | 120 | $5,100 |
| March | 240 | $8,100 |
| April | 210 | $6,900 |
Use the high-low method to estimate both the fixed and variable component of its maintenance cost.
Answer: Variable cost per unit = Change in cost/change in units (using highest and lowest level of activity)
($8,100 – $5,100)/(240 – 120) = $25 per unit
Fixed cost = Total high (low) cost – (variable cost per unit ∗ high (low) hours)
$8,100 – ($25 ∗ 240) = $2,100
OR $5,100 – ($25 ∗ 120) = $2,100
Difficulty: 2 Medium
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
219) The following information is available for a company’s cost of sales over the last four months.
| Month | Units sold | Cost of sales |
| January | 1,200 | $43,000 |
| February | 800 | $37,000 |
| March | 1,600 | $49,000 |
| April | 2,400 | $61,000 |
Use the high-low method to estimate the fixed and variable components of the cost of sales.
Answer: Variable cost per unit = Change in cost/change in units (using highest and lowest level of activity)
($61,000 – $37,000)/(2,400 – 800) = $15.00 per unit
Fixed cost = Total high (low) cost – (variable cost per unit ∗ high (low) hours)
$61,000 – ($15 ∗ 2,400) = $25,000
OR $37,000 – ($15 ∗ 800) = $25,000
Difficulty: 2 Medium
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
220) A company manufactures a product and sells it for $120 per unit. The total fixed costs of manufacturing and selling the product are expected to be $155,250, and the variable costs are expected to be $75 per unit. What is the company’s break-even point in (a) units and (b) dollar sales?
Answer: Contribution margin = $120 – $75 = $45;
(a) Break-even points in units $155,250/$45 = 3,450 units
(b) Break-even point in dollar sales = 3,450 units ∗ $120= $414,000
Difficulty: 3 Hard
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
221) A product has a contribution margin per unit of $17 and sells at $25 per unit. If the break-even point is 82,000 units, calculate (a) the variable costs per unit and (b) the total fixed costs.
Answer:
(a) Variable costs per unit = $25.00 – $17.00 = $8.00
(b) At the break-even point, the total contribution margin = total fixed costs.
Contribution margin at the break-even point = 82,000 units ∗ $17.00 = $1,394,000.
Fixed costs = $1,394,000
Difficulty: 3 Hard
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
222) A firm provides the following sales data:
Expected unit sales………… 5,000 Unit variable cost………… $10
Unit selling price…………… $16 Total fixed cost…………… $12,000
Required:
(a) Calculate the break-even point in dollar sales.
(b) Calculate the margin of safety in dollar sales.
Answer:
(a) Contribution margin ratio = ($16 – 10)/$16 = 37.5%
Break-even point in dollar sales = $12,000/0.375 = $32,000
(b) Margin of safety in dollars = ($5,000 ∗ $16) – $32,000 = $48,000
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis; Computing the Break-Even Point
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.; 21-P2 Compute the break-even point for a single-product company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
223) Parker Co. is preparing next period’s forecasts. Total fixed costs are expected to be $300,000 and the contribution margin ratio is expected to be 30%.
(a) Calculate the company’s break-even point in dollar sales.
(b) If sales are $1,800,000 above the break-even point, what will Parker’s pretax income be?
Answer:
(a) Break-even point in dollars = Fixed costs/Contribution margin ratio
= $300,000/.30
= $1,000,000
(b) Income before taxes = (*Sales ∗ Contribution margin ratio) – Fixed costs
= (*$2,800,000 ∗ .30) – $300,000
= $540,000
*$1,000,000 + $1,800,000
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis; Computing the Break-Even Point
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.; 21-P2 Compute the break-even point for a single-product company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
224) The following information describes a product expected to be produced and sold by Garr Company:
Selling price……………………………………… $80 per unit
Variable costs…………………………………… $32 per unit
Total fixed costs………………………………… $630,000
Required:
(a) Calculate the contribution margin ratio.
(b) Calculate the break-even point in dollar sales.
(c) What dollar amount of sales would be necessary to achieve a pretax income of $120,000?
Answer:
(a) Contribution margin ratio = ($80 – $32)/80 = 60%
(b) Break-even point in dollars = $630,000/.6 = $1,050,000
(c) Pretax income of $120,000 = ($630,000 + $120,000)/.6 = $1,250,000
Difficulty: 3 Hard
Topic: Contribution Margin and Its Measures; Applying Cost-Volume-Profit Analysis; Computing the Break-Even Point
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.; 21-C2 Describe several applications of cost-volume-profit analysis.; 21-P2 Compute the break-even point for a single-product company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
225) Identify items a, b, and c in the cost-volume-profit graph shown below.
Answer: (a) Profit area; (b) Loss area; (c) Break-even point
Difficulty: 2 Medium
Topic: Cost-Volume-Profit Chart
Learning Objective: 05-P3 Interpret a CVP chart and graph costs and sales for a single-product company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
226) The sales mix of Desert Springs Company is 5 units of A, 3 units of B, and 1 unit of C. Per unit sales prices for each product are $30, $40, and $50, respectively. Variable costs per unit are $14, $24, and $34, respectively. Fixed costs are $597,600. What is the break-even point in composite units and in units of A, B, and C?
Answer:
| 5 units of Product A @ $30 per unit = | $150 |
| 3 units of Product B @ $40 per unit = | 120 |
| 1 unit of Product C @ $50 per unit = | 50 |
| Selling price of a composite unit……………… | $320 |
| 5 units of Product A @ $14 per unit = | $ 70 |
| 3 units of Product B @ 24 per unit = | 72 |
| 1 unit of Product C @ $34 per unit = | 34 |
| Variable costs of a composite unit…………… | $176 |
Contribution margin of a composite unit = $320 – $176 = $144
Break-even point in composite units = $597,600/$144 = 4,150 composite units
4,150 ∗ 5 = 20,750 units of A
4,150 ∗ 3 = 12,450 units of B
4,150 ∗ 1 = 4,150 units of C
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
227) A firm sells two different products, A and B. For each unit of B sold, the firm sells two units of A. Total fixed costs $1,260,000. Additional selling prices and cost information for both products follow:
| Product | Selling
Price per unit |
Variable
Costs per unit |
| A……. | $72 | $40 |
| B……. | 48 | 28 |
Required:
(a) Calculate the contribution margin per composite unit.
(b) Calculate the break-even point in units of each individual product.
(c) If pretax income before taxes of $294,000 is desired, how many units of A and B must be sold?
Answer:
(a)
| 2 units of A at ($72 – 40) contribution margin per unit………… | $64 |
| 1 unit of B at ($48 – 28) contribution margin per unit………… | 20 |
| Contribution margin of a composite unit……………………… | $84 |
| (b) Break-even point in composite units | = $1,260,000/$84 |
| = 15,000 composite units |
(c) Composite units to earn $294,000 in pretax income:
($1,260,000 + $294,000)/$84 = 18,500 composite units
18,500 composite units ∗ 2 = 37,000 units of A
18,500 composite units ∗ 1 = 18,500 units of B
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
228) Benjamin Co. has three products A, B, and C, and its fixed costs are $69,000. The sales mix for its products are 3 units of A, 4 units of B, and 1 unit of C. Information about the three products follows:
| A | B | C | |
| Projected sales in dollars………… | $192,000 | $192,000 | $64,000 |
| Selling price per unit……………… | $40 | $30 | $40 |
| Contribution margin ratio………… | 30% | 35% | 35% |
(a) Calculate the company’s break-even point in composite units and sales dollars.
(b) Calculate the number of units of each individual product to be sold at the break-even point.
Answer:
3 units of A at $40 each…………………… $120
4 units of B at $30 each…………………… 120
1 unit of C at $40 each…………………… 40
Selling price of a composite unit………… $280
| Contribution margin of A ($120 ∗ 30%)……………… | $36 |
| Contribution margin of B ($120 ∗ 35%)……………… | 42 |
| Contribution margin of C ($40 ∗ 35%)……………… | 14 |
| Contribution margin of composite unit……………… | $92 |
(a)
Break-even point in composite units = $69,000/$92 = 750 composite units
Break-even point in sales dollars = 750 ∗ $280 = $210,000
(b) At break-even point: 750 ∗ 3 = 2,250 units of A
750 ∗ 4 = 3,000 units of B
750 ∗ 1 = 750 units of C
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
229) Varigon Co. produces and sells three products–Household, Commercial, and Industrial, and has total fixed costs of $52,000. Sales and cost data follow:
Household Commercial Industrial
Sales price per unit……………… $6 $8 $10
Variable costs per unit…………… 4 6 7
Sales mix……………..………… 3 2 1
Calculate the break-even point in composite units.
Answer:
Composite Sales Price
Household 3 ∗ $6 = $18
Commercial 2 ∗ $8 = $16
Industrial 1 ∗ $10 = $10
$44
Composite Variable Cost
Household 3 ∗ $4 = $12
Commercial 2 ∗ $6 = $12
Industrial 1 ∗ $7 = $ 7
31
Composite Contribution Margin $13
Break-even point in composite units = $52,000/$13 = 4,000 composite units
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
230) Whiting Company sells a mix of three related products. Total fixed costs are $144,000. The following additional information is available for Whiting Company.
|
Sales Mix |
Variable Cost/Unit | Sales Price/Unit | |
| X | 4 | $4 | $9 |
| Y | 4 | $8 | $14 |
| Z | 2 | $7 | $15 |
Determine the company’s break-even point in composite units.
Answer:
Selling price of a composite unit
4 units of X @ $9 per unit $36
4 units of Y @ $14 per unit 56
2 units of Z @ $15 per unit 30
Selling price of a composite unit $122
Variable costs of a composite unit
4 units of X @ $4 per unit $16
4 units of Y @ $8 per unit 32
2 units of Z @ $7 per unit 14
Variable costs of a composite unit $62
Contribution margin per composite unit $60
Break-even point in composite units = $144,000 / $60 = 2,400 composite units
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
231) Preston Company is analyzing two alternative methods of producing its product. The production manager indicates that variable costs can be reduced 40% by installing a machine that automates production, but fixed costs would increase. Alternative 1 shows costs before installing the machine; Alternative 2 shows costs after the machine is installed. (a) Compute the break-even point in units and dollars for both alternatives. (b) Prepare a forecasted income statement for both alternatives assuming that 30,000 units will be sold. The statements should report sales, total variable costs, contribution margin, fixed costs, income before taxes, income taxes, and net income. Below the income statement, compute the degree of operating leverage. Which alternative would you recommend and why?
| Alternative 1 | Alternative 2 | |
| Variable costs per unit………………… | $20 | ? |
| Fixed costs…………………………… | $200,000 | $274,400 |
| Selling price per unit………………… | $40 | $40 |
| Income tax rate………………………… | 25% | 25% |
Answer:
(a)
Alternative 1 break-even in units = $200,000/$20 = 10,000 units
Alternative 1 break-even in dollars = $200,000/($20/$40) = $400,000
Alternative 2 break-even in units = $274,400/($40 – ($20 ∗ .6)) = 9,800 units
Alternative 1 break-even in dollars =$274,400/($28/$40) = $392,000
(b)
| Alternative 1: | Alternative 2: | ||||
| Sales (30,000 ∗ $40)…… | $1,200,000 | Sales (30,000 ∗ $40)…… | $1,200,000 | ||
| Variable costs | Variable costs | ||||
| (30,000 ∗ $20)………… | (600,000 | ) | (30,000 ∗ ($20 ∗ .6))…… | (360,000 | ) |
| Contribution margin…… | $600,000 | Contribution margin…… | $840,000 | ||
| Fixed costs……………… | (200,000 | ) | Fixed costs……………… | (274,400 | ) |
| Income before tax……… | $400,000 | Income before tax……… | $565,600 | ||
| Income taxes…………… | (100,000 | ) | Income taxes…………… | (141,400 | ) |
| Net Income…………… | $300,000 | Net Income…………… | $424,200 |
Degree of operating leverage: Degree of operating leverage:
$600,000/$400,000 = 1.5 $840,000/$565,600 = 1.49
Preston Company should definitely go with Alternative 2. Break-even is lowered which would give the company a greater margin of safety if sales volume did start to decline. Net income is greatly improved using Alternative 2 at the current sales level. Degree of operating leverage is basically the same.
Difficulty: 3 Hard
Topic: Applying Cost-Volume-Profit Analysis; Computing the Break-Even Point; Degree of Operating Leverage
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.; 21-P2 Compute the break-even point for a single-product company.; 21-A2 Analyze changes in sales using the degree of operating leverage.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
232) Magnolia Company is considering the production and sale of a new product with the following sales and cost data: unit sales price, $350; unit variable costs, $180; total fixed costs, $399,500; and projected sales, $910,000. Round your answers to the nearest whole unit or dollar.
(a) Calculate break-even in units.
(b) Calculate break-even in dollars (use four decimal places when calculating the contribution margin ratio).
(c) Calculate number of units that would need to be sold to generate an after-tax profit of $420,000 assuming a 30% tax rate.
(d) Calculate dollar sales that would be needed to generate the same profit as above.
(e) Calculate the margin of safety stated as a percentage using the $910,000 projected sales level.
Be sure to label each calculation and show all calculations.
Answer:
(a) $399,500/($350 – 180) = 2,350 units
(b) $399,500/(($350 – 180)/$350) = $822,524 or $822,500.
(c) $399,500 + ($420,000/(1 – .3)) = ($399,500 + $600,000)/$170 = 5,880 units
(d) ($399,500 + $600,000)/.4857 = $2,057,855 or $2,058,000 or (5,880 BE units ∗ $350 = $2,058,000)
(e) $910,000 – $822,500 = $87,500/$822,500 = 10.6%
Difficulty: 3 Hard
Topic: Computing the Break-Even Point; Applying Cost-Volume-Profit Analysis
Learning Objective: 05-P2 Compute the break-even point for a single-product company.; 21-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
233) Dubashi Windows manufactures two standard size windows, J and R, in the ratio of 5:3. J has a selling price of $150 per unit and R has a selling price of $200 per unit. The variable cost of J is $75.00 and the variable cost of R is $90.00. Fixed costs are $352,500. Compute the (a) contribution margin per composite unit, (b) break-even point in composite units, (c) number of units of each product that will be sold at the break-even point.
Answer:
(a)
Selling price of a composite unit
5 units of J @ $150 per unit $750
3 units of R @ $200 per unit 600
Selling price of a composite unit $1,350
Variable costs of a composite unit
5 units of J @ $75 per unit $375
3 units of R @ $90 per unit 270
Variable costs of a composite unit $645
Contribution margin per composite unit $705
Break-even point in composite units = $144,000 / $60 = 2,400 composite units
(b) $352,500 / $705 = 500 composite units to break-even
(c) 500 composite units = 2,500 units of product J (500 x 5) and 1,500 units of product R (500 x 3)
Difficulty: 3 Hard
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
234) Bing Company’s contribution margin income statement is presented below. Sales for the current period consisted of 7,500 units. Compute the company’s break-even point in (a) units, and (b) dollars. Compute the margin of safety in (c) dollars and (d) percent.
| Bing Company
Contribution Margin Income Statement |
|
| Sales | $225,000 |
| Variable costs | 135,000 |
| Contribution margin | 90,000 |
| Fixed costs | 48,000 |
| Net income | $42,000 |
Answer: Per unit costs:
Sales price = $225,000/7,500 = $30
Variable cost = $135,000/7,500 = $18
Contribution margin per unit = $30 – $18 = $12 per unit
Contribution margin ratio = ($30 – $18)/$30 = .40
(a) Break-even in units = $48,000/$12 = 4,000 units
(b) Break-even in dollars = $48,000/.40 = $120,000 (or 4,000 units x $30)
(c) Margin of safety in dollars = $225,000 – $120,000 = $105,000
(d) Margin of safety in percent = $105,000/$225,000 = 46.7%
Difficulty: 3 Hard
Topic: Computing the Break-Even Point; Applying Cost-Volume-Profit Analysis
Learning Objective: 05-P2 Compute the break-even point for a single-product company.; 21-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
235) A ________ cost is one that remains unchanged despite variations in the volume of activity within a relevant range. A ________ cost is one that changes in proportion to changes in volume of activity.
Answer: fixed; variable
Answers must appear in this order
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
236) A ________ cost is one that includes both fixed and variable cost components; a ________ cost is one that reflects a step pattern.
Answer: mixed; step-wise
Answers must appear in this order
Difficulty: 1 Easy
Topic: Identifying Cost Behavior
Learning Objective: 05-C1 Describe different types of cost behavior in relation to production and sales volume.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
237) Three important assumptions in cost-volume-profit analysis are that (1) ________ per unit is constant, (2) ________ per unit is constant, and (3) ________ are constant in total.
Answer: selling price; variable cost; fixed costs
The first and second answers are interchangeable. The third answer must appear as shown.
Difficulty: 1 Easy
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
238) Solving problems to determine the relationship of cost, volume, and profit often starts with measuring the ________ point. Further analysis emphasizing profitability may be accomplished by measuring the ________ and ________.
Answer: break-even; margin of safety; target net income
Answers must appear in this order
Difficulty: 2 Medium
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
239) Three methods to separate costs into fixed and variable are the ________, ________, and ________ methods.
Answer: scatter diagram; high-low; least squares regression
Answers can appear in any order
Difficulty: 1 Easy
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
240) The unit contribution margin divided by the selling price per unit is the ________.
Answer: contribution margin ratio
Difficulty: 1 Easy
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
241) The difference between the unit sales price and the unit variable cost of an item is defined as the ________.
Answer: unit contribution margin or contribution margin
Difficulty: 1 Easy
Topic: Contribution Margin and Its Measures
Learning Objective: 05-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
242) Examining strategies that impact several estimates in the CVP analysis is known as ________.
Answer: sensitivity analysis
Difficulty: 1 Easy
Topic: Applying Cost-Volume-Profit Analysis
Learning Objective: 05-C2 Describe several applications of cost-volume-profit analysis.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
243) One aid in measuring cost behavior involves creating a display of the data about past costs in graphical form. Such a visual display is called a ________.
Answer: scatter diagram
Difficulty: 1 Easy
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
244) When using the high-low method for estimating cost behavior, the slope, or variable cost per unit, is calculated by ________.
Answer: change in cost divided by change in units (or volume)
Difficulty: 2 Medium
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
245) ________ is a statistical method of identifying an estimated line of cost behavior.
Answer: Least-squares regression
Difficulty: 1 Easy
Topic: Measuring Cost Behavior
Learning Objective: 05-P1 Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
246) The ________ is the sales level at which a company neither earns a profit nor incurs a loss.
Answer: break-even point
Difficulty: 1 Easy
Topic: Computing the Break-Even Point
Learning Objective: 05-P2 Compute the break-even point for a single-product company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
247) A graphic presentation of cost-volume-profit data is known as a ________ graph (or chart); this presentation is also sometimes called a ________ chart.
Answer: CVP (cost-volume-profit); break-even
Answers must appear in this order
Difficulty: 1 Easy
Topic: Cost-Volume-Profit Chart
Learning Objective: 05-P3 Interpret a CVP chart and graph costs and sales for a single-product company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
248) The ratio (proportion) of the sales volumes of the various products sold by a company is called the ________.
Answer: sales mix
Difficulty: 1 Easy
Topic: Sales Mix and Break-Even
Learning Objective: 05-P4 Compute the break-even point for a multiproduct company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Measurement
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
