Managerial Accounting Tools For Business And Decision Making 7th Edition by Jerry J. Weygandt -Kimmel – Test Bank

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Sample Questions Are Posted Below

CHAPTER 5

COST-VOLUME-PROFIT

Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy

Item	LO	BT	Item	LO	BT	Item	LO	BT	Item	LO	BT	Item	LO		BT
True-False Statements
1.	1	K	9.	1	C	17.	3	K	25.	4	K	33.	2		K
2.	1	K	10.	2	K	18.	3	K	26.	4	AP	34.	3		C
3.	1	K	11.	2	K	19.	3	K	27.	5	K	35.	4		K
4.	1	C	12.	2	C	20.	3	K	28.	5	K	36.	5		AP
5.	1	C	13.	2	K	21.	3	K	29.	5	K	37.	5		K
6.	1	C	14.	2	C	22.	3	K	30.	5	K
7.	1	K	15.	2	K	23.	4	K	31.	1	K
8.	1	K	16.	3	K	24.	4	K	32.	1	K
Multiple Choice Questions
38.	1	C	62.	1	C	86.	3	AP	110.	4	C	134.		5	AP
39.	1	K	63.	1	C	87.	3	K	111.	4	K	135.		5	AP
40.	1	K	64.	2	AP	88.	3	AP	112.	4	AP	136.		5	AP
41.	1	C	65.	2	K	89.	3	C	113.	4	AP	137.		5	AP
42.	1	C	66.	2	AP	90.	3	AP	114.	4	AP	138.		5	AP
43.	1	K	67.	2	AP	91.	3	AP	115.	4	AP	139.		5	AP
44.	1	C	68.	2	C	92.	3	AP	116.	4	AP	140.		5	AP
45.	1	C	69.	2	C	93.	3	AP	117.	4	AP	141.		5	AP
46.	1	K	70.	2	K	94.	3	AP	118.	4	AP	142.		5	AP
47.	1	C	71.	2	C	95.	3	AP	119.	4	AP	143.		5	K
48.	1	C	72.	2	AP	96.	3	AP	120.	4	AP	144.		5	C
49.	1	K	73.	2	AP	97.	3	AP	121.	4	AP	145.		1	K
50.	1	C	74.	2	AP	98.	3	AP	122.	4	AP	^st146.		2	K
51.	1	K	75.	2	K	99.	3	C	123.	4	C	147.		2	AP
52.	1	C	76.	2	K	100.	3	K	124.	5	AP	^st148.		3	K
53.	1	C	77.	2	C	101.	3	K	125.	5	AP	149.		3	C
54.	1	C	78.	2	AP	102.	3	AP	126.	5	AP	^st150.		3	K
55.	1	C	79.	2	AP	103.	4	AP	127.	5	AP	151.		3	AP
56.	1	C	80.	3	K	104.	4	AP	128.	5	AP	^st152.		4	AP
57.	1	K	81.	3	K	105.	4	K	129.	5	AP	153.		4	K
58.	1	C	82.	3	C	106.	4	C	130.	5	AP	^st154.		5	AP
59.	1	C	83.	3	K	107.	4	C	131.	5	AP	155.		5	K
60.	1	C	84.	3	C	108.	4	AP	132.	5	AP	156.		5	AP
61.	1	K	85.	3	C	109.	4	AP	133.	5	AP
Brief Exercises
157.	2	AP	159.	3	AP	161.	4	AP	163.	4	AP	165.	5		AP
158.	3	AP	160.	3	AP	162.	4	AP	164.	5	AP	166.	5		AP

^stThis question also appears in a self-test at the student companion website.

^a This question covers a topic in an appendix to the chapter.

Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy

Exercises
167.	1,2		AP		173.		3		AP		179.		3,4,5		AN		185.		3,5		AP		191.		4,5		AP
168.	1,2,4,5,		AP		174.		3		E		180.		3,4		AP		186.		4		AP		192.		5		AP
169.	1,3,4,5		AN		175.		3,4,5		AN		181.		3,4,5		AP		187.		4,5		AP		193.		5		AP
170.	2		AP		176.		3,4		AP		182.		3,4		AP		188.		4,5		AP
171.	2		AP		177.		4		AP		183.		3,4,5		AP		189.		4,5		C
172.	2		AP		178.		3,4,5		AN		184.		3,4,5		AP		190.		4,5		AP
Completion Statements
194.		1		K	197.	1		K		199.		1		K		201.		3		K		203.		4		K
195.		1		K	198.	1		K		200.		1		K		202.		4		K		204.		5		K
196.		1		K
Matching Statements
205.		1–3, 5		K
Short-Answer Essay
206.		4		S	208.	1		S		210.		2		S
207.		3		S	209.	2		S		211.		1		S

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Item	Type	Item	Type	Item	Type	Item	Type	Item	Type	Item	Type	Item	Type
Learning Objective 1
1.	TF	9.	TF	43.	MC	51.	MC	59.	MC	169.	Ex	205.	MA
2.	TF	31.	TF	44.	MC	52.	MC	60.	MC	194.	C	208.	SA
3.	TF	32.	TF	45.	MC	53.	MC	61.	MC	195.	C	210.	SA
4.	TF	38.	MC	46.	MC	54.	MC	62.	MC	196.	C	211.	SA
5.	TF	39.	MC	47.	MC	55.	MC	63.	MC	197.	C
6.	TF	40.	MC	48.	MC	56.	MC	145.	MC	198.	C
7.	TF	41.	MC	49.	MC	57.	MC	167.	Ex	199.	C
8.	TF	42.	MC	50.	MC	58.	MC	168.	Ex	200.	C
Learning Objective 2
10.	TF	15.	TF	67.	MC	72.	MC	77.	MC	157.	BE	172.	Ex
11.	TF	33.	TF	68.	MC	73.	MC	78.	MC	167.	Ex	205.	MA
12.	TF	64.	MC	69.	MC	74.	MC	79.	MC	168.	Ex	209.	SA
13.	TF	65.	MC	70.	MC	75.	MC	146.	MC	170.	Ex	210.	SA
14.	TF	66.	MC	71.	MC	76.	MC	147.	MC	171.	Ex
Learning Objective 3
16.	TF	80.	MC	88.	MC	96.	MC	149.	MC	173.	Ex	182.	Ex
17.	TF	81.	MC	89.	MC	97.	MC	150.	MC	174.	Ex	183.	Ex
18.	TF	82.	MC	90.	MC	98.	MC	151.	MC	175.	Ex	184.	Ex
19.	TF	83.	MC	91.	MC	99.	MC	158.	BE	176.	Ex	185.	Ex
20.	TF	84.	MC	92.	MC	100.	MC	159.	BE	178.	Ex	201.	C
21.	TF	85.	MC	93.	MC	101.	MC	160.	BE	179.	Ex	205.	MA
22.	TF	86.	MC	94.	MC	102.	MC	166.	BE	180.	Ex	207.	SA
34.	TF	87.	MC	95.	MC	148.	MC	169.	Ex	181.	Ex

Learning Objective 4
23.	TF		106.	MC	114.	MC	122.	MC	169.	Ex	182.	Ex	191.	Ex
24.	TF		107.	MC	115.	MC	123.	MC	175.	Ex	183.	Ex	202.	C
25.	TF		108.	MC	116.	MC	152.	MC	176.	Ex	184.	Ex	203.	C
26.	TF		109.	MC	117.	MC	153.	MC	177.	Ex	186.	Ex	206.	SA
35.	TF		110.	MC	118.	MC	161.	BE	178.	Ex	187.	Ex
103.	MC		111.	MC	119.	MC	162.	BE	179.	Ex	188.	Ex
104.	MC		112.	MC	120.	MC	163.	BE	180.	Ex	189.	Ex
105.	MC		113.	MC	121.	MC	168.	Ex	181.	Ex	190.	Ex
Learning Objective 5
27.	TF		126.	MC	134.	MC	142.	MC	166.	BE	184.	Ex	193.	Ex
28.	TF		127.	MC	135.	MC	143.	MC	168.	Ex	185.	Ex	204.	C
29.	TF		128.	MC	136.	MC	144.	MC	169.	Ex	187.	Ex	205.	MA
30.	TF		129.	MC	137.	MC	154.	MC	175.	Ex	188.	Ex
36.	TF		130.	MC	138.	MC	155.	MC	178.	Ex	189.	Ex
37.		TF	131.	MC	139.	MC	156.	MC	179.	Ex	190.	Ex
124.		MC	132.	MC	140.	MC	164.	BE	181.	Ex	191.	Ex
125.		MC	133.	MC	141.	MC	165.	BE	183.	Ex	192.	Ex

Note: TF = True-False BE = Brief Exercise C = Completion

MC = Multiple Choice Ex = Exercise MA = Matching

SA = Short-Answer Essay

CHAPTER LEARNING OBJECTIVES

Explain variable, fixed and mixed costs and the relevant range. Variable costs are costs that vary in total directly and proportionately with changes in the activity index. Fixed costs are costs that remain the same in total regardless of changes in the activity index. The relevant range is the range of activity in which a company expects to operate during a year. It is important in CVP analysis because the behavior of costs is assumed to be linear throughout the relevant range. Mixed costs increase in total but not proportionately with changes in the activity level. For purposes of CVP analysis, mixed costs must be classified into their fixed and variable elements.

Apply the high-low method to determine the components of mixed costs. Determine the variable cost per unit by dividing the change in total costs at the highest and lowest levels of activity by the difference in activity at those levels. Then, determine fixed costs by subtracting total variable costs from the amount of total costs at either the highest or lowest level of activity.

Prepare a CVP income statement to determine contribution margin. The five components of CVP analysis are (a) volume or level of activity, (b) unit selling prices, (c) variable cost per unit, (d) total fixed costs, and (e) sales mix. Contribution margin is the amount of revenue remaining after deducting variable costs. It is identified in a CVP income statement, which classifies costs as variable or fixed. It can be expressed as a total amount, as a per unit amount, or as a ratio.

Compute the break-even point using three approaches. The break-even point can be (a) computed from a mathematical equation, (b) computed by using a contribution margin technique, and (c) derived from a CVP graph.

Determine the sales required to earn target net income and determine margin of safety. The general formula for required sales is: Required sales = Variable costs + Fixed costs + Target net income. Two other formulas are: Required sales in units = (Fixed costs + Target net income) ÷ Unit contribution margin, and Required sales in dollars = (Fixed costs + Target net income) ÷ Contribution margin ratio. Margin of safety is the difference between actual or expected sales and sales at the break-even point. The formulas for margin of safety are: Actual (expected) sales – Break-even sales = Margin of safety in dollars; Margin of safety in dollars ÷ Actual (expected) sales = Margin of safety ratio.

TRUE-FALSE STATEMENTS

An activity index identifies the activity that has a causal relationship with a particular cost.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A variable cost remains constant per unit at various levels of activity.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A fixed cost remains constant in total and on a per unit basis at various levels of activity.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

If volume increases, all costs will increase.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

If the activity index decreases, total variable costs will decrease proportionately.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Changes in the level of activity will cause unit variable and unit fixed costs to change in opposite directions.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

For CVP analysis, both variable and fixed costs are assumed to have a linear relationship within the relevant range of activity.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The relevant range of activity is the activity level where the firm will earn income.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Costs will not change in total within the relevant range of activity.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The high-low method is used in classifying a mixed cost into its variable and fixed elements.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A mixed cost has both selling and administrative cost elements.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The fixed cost element of a mixed cost is the cost of having a service available.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

For planning purposes, mixed costs are generally grouped with fixed costs.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The difference between the costs at the high and low levels of activity represents the fixed cost element of a mixed cost.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

When applying the high-low method, the variable cost element of a mixed cost is calculated before the fixed cost element.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

An assumption of CVP analysis is that all costs can be classified as either variable or fixed.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

In CVP analysis, the term “cost” includes manufacturing costs, and selling and administrative expenses.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Contribution margin is the amount of revenues remaining after deducting cost of goods sold.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Unit contribution margin is the amount that each unit sold contributes towards the recovery of fixed costs and to income.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The contribution margin ratio is calculated by multiplying the unit contribution margin by the unit sales price.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Both variable and fixed costs are included in calculating the contribution margin.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A CVP income statement shows contribution margin instead of gross profit.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The break-even point is where total sales equal total variable costs.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The break-even point is where total sales equal total fixed costs.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The break-even point is equal to the fixed costs plus net income.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

If the unit contribution margin is $1 and unit sales are 10,000 units above the break-even volume, then net income will be $10,000.

Ans: T, LO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A target net income is calculated by taking actual sales minus the margin of safety.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Target net income is the income objective for an individual product line.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The margin of safety is the difference between sales at breakeven and sales at a determined activity level.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The margin of safety is the difference between contribution margin and fixed costs.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The activity level is represented by an activity index such as direct labor hours, units of output, or sales dollars.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The trend in most companies is to have more variable costs and fewer fixed costs.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

For purposes of CVP analysis, mixed costs must be classified into their fixed and variable elements.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The contribution margin ratio of 40% means that 60 cents of each sales dollar is available to cover fixed costs and to produce a profit.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A cost-volume-profit graph shows the amount of net income or loss at each level of sales.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

If variable costs per unit are 70% of sales, fixed costs are $290,000 and target net income is $70,000, required sales are $1,200,000.

Ans: T, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The margin of safety ratio is equal to the margin of safety in dollars divided by the actual or (expected) sales.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Answers to True-False Statements

Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.
1.	T	7.	T	13.	F	19.	T	25.	F	31.	T	37.	T
2.	T	8.	F	14.	F	20.	F	26.	T	32.	F
3.	F	9.	F	15.	T	21.	F	27.	F	33.	T
4.	F	10.	T	16.	T	22.	T	28.	T	34.	F
5.	T	11.	F	17.	T	23.	F	29.	T	35.	T
6.	F	12.	T	18.	F	24.	F	30.	F	36.	T

MULTIPLE CHOICE QUESTIONS

For an activity base to be useful in cost behavior analysis,
the activity should always be stated in dollars.
there should be a correlation between changes in the level of activity and changes in costs.
the activity should always be stated in terms of units.
the activity level should be constant over a period of time.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A variable cost is a cost that
varies per unit at every level of activity.
occurs at various times during the year.
varies in total in proportion to changes in the level of activity.
may or may not be incurred, depending on management’s discretion.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A cost which remains constant per unit at various levels of activity is a
variable cost.
fixed cost.
mixed cost.
manufacturing cost.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Two costs at Bradshaw Company appear below for specific months of operation.

Month Amount Units Produced

Delivery costs September $ 40,000 40,000

October 55,000 60,000

Utilities September $ 84,000 40,000

October 126,000 60,000

Which type of costs are these?

Delivery costs and utilities are both variable.
Delivery costs and utilities are both mixed.
Utilities are mixed and delivery costs are variable.
Delivery costs are mixed and utilities are variable.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Quantitative Methods

An increase in the level of activity will have the following effects on unit costs for variable and fixed costs:

Unit Variable Cost Unit Fixed Cost

Increases Decreases
Remains constant Remains constant
Decreases Remains constant
Remains constant Decreases

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A fixed cost is a cost which
varies in total with changes in the level of activity.
remains constant per unit with changes in the level of activity.
varies inversely in total with changes in the level of activity.
remains constant in total with changes in the level of activity.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Fixed costs normally will not include
property taxes.
direct labor.
supervisory salaries.
depreciation on buildings and equipment.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The increased use of automation and less use of the work force in companies has caused a trend towards an increase in
both variable and fixed costs.
fixed costs and a decrease in variable costs.
variable costs and a decrease in fixed costs.
variable costs and no change in fixed costs.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Economics

Cost behavior analysis is a study of how a firm’s costs
relate to competitors’ costs.
relate to general price level changes.
respond to changes in the level of business activity.
respond to changes in the gross national product.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Cost behavior analysis applies to
retailers.
wholesalers.
manufacturers.
all entities.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

If a firm increases its activity level,
costs should remain the same.
most costs will rise.
no costs will remain the same.
some costs will change, others will remain the same.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The activity that causes changes in the behavior of costs is referred to as the activity
index.
multiplier.
element.
correlation.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Cost activity indexes might help classify costs as
temporary.
permanent.
variable.
transient.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Which of the following is not a cost classification?
Mixed
Multiple
Variable
Fixed

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

If the activity level increases 10%, total variable costs will
remain the same.
increase by more than 10%.
decrease by less than 10%.
increase 10%.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Which of the following costs are variable?

Cost 10,000 Units 30,000 Units

$100,000 $300,000
40,000 240,000
90,000 90,000
50,000 150,000
1 and 2
1 and 4
only 1
only 2

Ans: B, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Quantitative Methods

Changes in activity have a(n) _________ effect on fixed costs per unit.
positive
negative
inverse
neutral

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Which of the following is not a fixed cost?
Direct materials
Depreciation
Lease charge
Property taxes

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Why is identification of a relevant range important?
It is required under GAAP.
Cost behavior outside of the relevant range is not linear, which distorts CVP analysis.
It directly impacts the number of units of product a customer buys.
It is a cost that is incurred by a company that must be accounted for.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The relevant range of activity refers to the
geographical areas where the company plans to operate.
activity level where all costs are curvilinear.
levels of activity over which the company expects to operate.
level of activity where all costs are constant.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Which of the following is not a plausible explanation of why variable costs often behave in a curvilinear fashion?
Labor specialization
Overtime wages
Total variable costs are constant within the relevant range
Availability of quantity discounts

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

Firms operating at 100% capacity
are common.
are the exception rather than the rule.
have no fixed costs.
have no variable costs.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Performance Measurement

Which of the following would be the least controllable fixed costs?
Property taxes
Rent
Research and development
Management training programs

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Which one of the following is a name for the range over which a company expects to operate?
Mixed range
Fixed range
Variable range
Relevant range

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

If graphed, fixed costs that behave in a curvilinear fashion resemble a(n)
S-curve.
inverted S-curve.
straight line.
stair-step pattern.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The graph of variable costs that behave in a curvilinear fashion will
approximate a straight line within the relevant range.
be sharply kinked on both sides of the relevant range.
be downward sloping.
be a stair-step pattern.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Frazier Manufacturing Company collected the following production data for the past month:

Units Produced Total Cost

1,600 $66,000

1,300 57,000

1,500 67,500

1,100 49,500

If the high-low method is used, what is the monthly total cost equation?

Total cost = $13,200 + $33/unit
Total cost = $16,500 + $30/unit
Total cost = $0 + $45/unit
Total cost = $9,900 + $36/unit

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Performance Measurement

A mixed cost contains
a variable element and a fixed element.
both selling and administrative costs.
both retailing and manufacturing costs.
both operating and nonoperating costs.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

At the high level of activity in November, 7,000 machine hours were run and power costs were $18,000. In April, a month of low activity, 2,000 machine hours were run and power costs amounted to $9,000. Using the high-low method, the estimated fixed cost element of power costs is
$18,000.
$9,000.
$5,400.
$12,600.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Performance Measurement

Gribble Company’s high and low level of activity last year was 60,000 units of product produced in May and 20,000 units produced in November. Machine maintenance costs were $156,000 in May and $60,000 in November. Using the high-low method, determine an estimate of total maintenance cost for a month in which production is expected to be 45,000 units.
$135,000
$144,000
$117,000
$120,000

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Performance Measurement

Which of the following is not true about the graph of a mixed cost?
It is possible to determine the amount of the fixed cost from the graph.
There is a total cost line on the graph.
The fixed cost portion of the graph is the same amount at all levels of activity.
The variable cost portion of the graph is rectangular in shape.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Performance Measurement

Which of the following is not a mixed cost?
Car rental fee
Electricity
Depreciation
Telephone Expense

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

In using the high-low method, the fixed cost
is determined by subtracting the total cost at the high level of activity from the total cost at the low activity level.
is determined by adding the total variable cost to the total cost at the low activity level.
is determined before the total variable cost.
may be determined by subtracting the total variable cost from either the total cost at the low or high activity level.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

If Qualls Quality Airline cuts its domestic fares by 30%,
its fixed costs will decrease.
profit will increase by 30%.
a profit can only be earned by decreasing the number of flights.
a profit can be earned either by increasing the number of passengers or by decreasing variable costs.

Ans: D, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

In applying the high-low method, which months are relevant?

Month Miles Total Cost

January 80,000 $192,000

February 50,000 160,000

March 70,000 188,000

April 90,000 260,000

January and February
January and April
February and April
February and March

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

In applying the high-low method, what is the unit variable cost?

Month Miles Total Cost

January 80,000 $192,000

February 50,000 160,000

March 70,000 188,000

April 90,000 260,000

$2.88
$2.50
$3.20
Cannot be determined from the information given.

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

In applying the high-low method, what is the fixed cost?

Month Miles Total Cost

January 80,000 $192,000

February 50,000 160,000

March 70,000 188,000

April 90,000 260,000

$35,000
$72,000
$28,000
$100,000

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

For analysis purposes, the high-low method usually produces a(n)
reasonable estimate.
precise estimate.
overstated estimate.
understated estimate.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The high-low method is criticized because it
is not a graphical method.
is a mathematical method.
ignores much of the available data by concentrating on only the extreme points.
doesn’t provide reasonable estimates.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The high-low method is often employed in analyzing
fixed costs.
mixed costs.
variable costs.
conversion costs.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Portman Company’s activity for the first three months of 2016 are as follows:

Machine Hours Electrical Cost

January 2,100 $4,800

February 2,600 $5,800

March 2,900 $6,400

Using the high-low method, how much is the cost per machine hour?

$2.00
$3.00
$2.26
$1.78

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Ponszko Nursery used high-low data from June and July to determine its variable cost of $12 per unit. Additional information follows:

Month Units produced Total costs

June 2,000 $32,000

July 1,000 20,000

If Ponszko’s produces 2,300 units in August, how much is its total cost expected to be?

$8,000
$39,600
$27,600
$35,600

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

In CVP analysis, the term “cost”
includes only manufacturing costs.
means cost of goods sold.
includes manufacturing costs plus selling and administrative expenses.
excludes all fixed manufacturing costs.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Which one of the following is not an assumption of CVP analysis?
All units produced are sold.
All costs are variable costs.
Sales mix remains constant.
The behavior of costs and revenues are linear within the relevant range.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

CVP analysis does not consider
level of activity.
fixed cost per unit.
variable cost per unit.
sales mix.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Which of the following is not an underlying assumption of CVP analysis?
Changes in activity are the only factors that affect costs.
Cost classifications are reasonably accurate.
Beginning inventory is larger than ending inventory.
Sales mix is constant.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

CVP analysis is not important in
calculating depreciation expense.
setting selling prices.
determining the product mix.
utilizing production facilities.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

To which function of management is CVP analysis most applicable?
Planning
Motivating
Directing
Controlling

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Hollis Industries produces flash drives for computers, which it sells for $20 each. Each flash drive costs $13 of variable costs to make. During April, 1,000 drives were sold. Fixed costs for March were $2 per unit for a total of $1,000 for the month. How much is the contribution margin ratio?
25%
35%
65%
75%

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Contribution margin
is always the same as gross profit margin.
excludes variable selling costs from its calculation.
is calculated by subtracting total manufacturing costs per unit from sales revenue per unit.
equals sales revenue minus variable costs.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

If a company had a contribution margin of $1,000,000 and a contribution margin ratio of 40%, total variable costs must have been
$1,500,000.
$600,000.
$2,500,000.
$400,000.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Which of the following would not be an acceptable way to express contribution margin?
Sales minus variable costs
Sales minus unit costs
Unit selling price minus unit variable costs
Unit contribution margin divided by unit selling price

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A company has a unit contribution margin of $120 and a contribution margin ratio of 40%. What is the unit selling price?
$200
$300
$48
Cannot be determined.

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Sales are $500,000 and variable costs are $330,000. What is the contribution margin ratio?
52%
34%
66%
Cannot be determined because amounts are not expressed per unit.

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Dunbar Manufacturing’s variable costs are 30% of sales. The company is contemplating an advertising campaign that will cost $55,000. If sales are expected to increase $100,000, by how much will the company’s net income increase?
$45,000
$70,000
$30,000
$15,000

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Weatherspoon Company has a product with a selling price per unit of $200, the unit variable cost is $110, and the total monthly fixed costs are $300,000. How much is Weatherspoon’s contribution margin ratio?
45%
55%
150%
182%

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Armstrong Industries has a contribution margin of $240,000 and a contribution margin ratio of 30%. How much are total variable costs?
$72,000
$560,000
$168,000
$800,000

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Zehms, Inc. has a unit contribution margin of $30 and a contribution margin ratio of 60%. How much is the selling price of each unit?
$50
$75
$18
Cannot be determined without more information.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

A division sold 200,000 calculators during 2017:

Sales $2,000,000

Variable costs:

Materials $380,000

Order processing 150,000

Billing labor 110,000

Selling expenses 60,000

Total variable costs 700,000

Fixed costs 1,000,000

How much is the unit contribution margin?

$1.00
$3.50
$8.50
$6.50

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

At the break-even point of 2,000 units, variable costs are $165,000, and fixed costs are $96,000. How much is the selling price per unit?
$130.50
$34.50
$48.00
Not enough information

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

The following information is available for Wade Corp.:

Sales $580,000 Total fixed expenses $150,000

Cost of goods sold 390,000 Total variable expenses 360,000

A CVP income statement would report

gross profit of $190,000.
contribution margin of $430,000.
gross profit of $220,000.
contribution margin of $220,000.

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Which is the true statement?
In a CVP income statement, costs and expenses are classified only by function.
The CVP income statement is prepared for both internal and external use.
The CVP income statement shows contribution margin instead of gross profit.
In a traditional income statement, costs and expenses are classified as either variable or fixed.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The equation which reflects a CVP income statement is
Sales = Cost of goods sold + Operating expenses + Net income.
Sales + Fixed costs = Variable costs + Net income.
Sales – Variable costs + Fixed costs = Net income.
Sales – Variable costs – Fixed costs = Net income.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The CVP income statement
is distributed internally and externally.
classifies costs by functions.
discloses contribution margin in the body of the statement.
will reflect a different net income than the traditional income statement.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

O’Malley Company sells 100,000 units for $13 a unit. Fixed costs are $350,000 and net income is $250,000. What should be reported as variable expenses in the CVP income statement?
$600,000.
$700,000.
$950,000.
$1,050,000.

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

A company has total fixed costs of $240,000 and a contribution margin ratio of 20%. The total sales necessary to break even are
$960,000.
$1,200,000.
$300,000.
$288,000.

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

A company sells a product which has a unit sales price of $5, unit variable cost of $3 and total fixed costs of $240,000. The number of units the company must sell to break even is
120,000 units.
48,000 units.
480,000 units.
80,000 units.

Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

The break-even point is where
total sales equal total variable costs.
contribution margin equals total fixed costs.
total variable costs equal total fixed costs.
total sales equal total fixed costs.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The break-even point cannot be determined by
computing it from a mathematical equation.
computing it using contribution margin.
reading the prior year’s financial statements.
deriving it from a CVP graph.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Select the correct statement concerning the cost-volume-profit graph at right:
The point identified by “B” is the break-even point.
Line F is the variable cost line.
At point B, profits equal total costs.
Line E is the total cost line.

Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Fixed costs are $900,000 and the variable costs are 75% of the unit selling price. What is the break-even point in dollars?
$2,100,000
$2,700,000
$3,600,000
$1,200,000

Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Fixed costs are $3,000,000 and the unit contribution margin is $150. What is the break-even point?
$7,500,000
$20,000,000
7,500 units
20,000 units

Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Nelson Manufacturing has the following data:

Variable costs are 60% of the unit selling price.

The contribution margin ratio is 40%.

The unit contribution margin is $500.

The fixed costs are $500,000.

Which of the following does not express the break-even point?

$500,000 + .60X = X
$500,000 + .40X = X
$500,000 ÷ $500 = X
$500,000 ÷ .40 = X

Ans: B, LO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

A CVP graph does not include a
variable cost line.
fixed cost line.
sales line.
total cost line.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Boswell company reported the following information for the current year: Sales (50,000 units) $1,000,000, direct materials and direct labor $500,000, other variable costs $50,000, and fixed costs $360,000. What is Boswell’s contribution margin ratio?
68%.
45%.
32%.
55%.

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Boswell company reported the following information for the current year: Sales (50,000 units) $1,000,000, direct materials and direct labor $500,000, other variable costs $50,000, and fixed costs $360,000. What is Boswell’s break-even point in units?
32,728.
40,000.
51,112.
56,250.

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Walters Corporation sells radios for $50 per unit. The fixed costs are $525,000 and the variable costs are 60% of the selling price. As a result of new automated equipment, it is anticipated that fixed costs will increase by $125,000 and variable costs will be 50% of the selling price. The new break-even point in units is:
26,250
26,000
25,750
21,000

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Cunningham, Inc. sells MP3 players for $60 each. Variable costs are $40 per unit, and fixed costs total $120,000. What sales are needed by Cunningham to break even?
$160,000.
$300,000.
$360,000.
$480,000.

Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Cunningham, Inc. sells MP3 players for $60 each. Variable costs are $40 per unit, and fixed costs total $120,000. How many MP3 players must Cunningham sell to earn net income of $280,000?
20,000.
7,000.
5,000.
6,000.

Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Gall Manufacturing sells a product for $50 per unit. The fixed costs are $840,000 and the variable costs are 60% of the selling price. As a result of new automated equipment, it is anticipated that fixed costs will increase by $200,000 and variable costs will be 50% of the selling price. The new break-even point in units is:
42,000.
41,600.
41,200.
33,600.

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Pascal, Inc. is planning to sell 900,000 units for $1.50 per unit. The contribution margin ratio is 20%. If Pascal will break even at this level of sales, what are the fixed costs?
$270,000.
$630,000.
$900,000.
$1,020,000.

Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

April Industries sells a product with a contribution margin of $12 per unit, fixed costs of $223,200, and sales for the current year of $300,000. How much is April’s break-even point?
13,800 units
$76,800
18,600 units
6,400 units

Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Kaplan, Inc. produces flash drives for computers, which it sells for $27 each. The variable cost to make each flash drive is $13. During April, 700 drives were sold. Fixed costs for April were $2 per unit for a total of $1,400 for the month. How much is the monthly break-even level of sales in dollars for Kaplan?
$100
$2,700
$14,000
$8,400

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Vintage Wines has fixed costs of $20,000 per year. Its warehouse sells wine with variable costs of 80% of its unit selling price. How much in sales does Vintage need to break even per year?
$16,000
$4,000
$25,000
$100,000

Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Bruno & Court is a nonprofit organization that captures stray deer bewildered within residential communities. Fixed costs are $20,000. The variable cost of capturing each deer is $10 each. Bruno & Court is funded by a local philanthropy in the amount of $64,000 for 2016. How many deer can Bruno & Court capture during 2016?
4,400
6,400
8,400
4,000

Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

At the break-even point of 2,000 units, variable costs are $55,000, and fixed costs are $35,000. How much is the selling price per unit?
$45.00
$10.00
$17.50
$27.50

Ans: A, LO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Variable costs for Abbey, Inc. are 25% of sales. Its selling price is $100 per unit. If Abbey sells one unit more than break-even units, how much will profit increase?
$75
$25
$50
$400

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

A company requires $1,700,000 in sales to meet its net income target. Its contribution margin is 30%, and fixed costs are $300,000. What is the target net income?
$510,000
$390,000
$700,000
$210,000

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Montoya Manufacturing has fixed costs of $3,000,000 and variable costs are 40% of sales. What are the required sales if Montoya desires net income of $300,000?
$5,500,000
$5,000,000
$8,250,000
$7,500,000

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Aero, Inc. requires sales of $2,000,000 to cover its fixed costs of $600,000 and to earn net income of $500,000. What percent are variable costs of sales?
25%
45%
30%
55%

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Lansbury Manufacturing produces hair brushes. The selling price is $20 per unit and the variable costs are $8 per brush. Fixed costs per month are $4,800. If Lansbury sells 30 more units beyond breakeven, how much does profit increase as a result?
$360
$600
$240
$1,200

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Hayduke Corporation reported the following results from the sale of 5,000 units in May: sales $300,000, variable costs $180,000, fixed costs $90,000, and net income $30,000. Assume that Hayduke increases the selling price by 5% on June 1. How many units will have to be sold in June to maintain the same level of net income?
4,444.
4,600.
4,750.
5,000.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Keene, Inc. produces flash drives for computers, which it sells for $20 each. Each flash drive costs $6 of variable costs to make. During March, 1,000 drives were sold. Fixed costs for March were $5.60 per unit for a total of $5,600 for the month. If variable costs decrease by 10%, what happens to the break-even level of units per month for Keene?
It is 10% higher than the original break-even point.
It decreases about 16 units.
It decreases about 40 units.
It depends on the number of units the company expects to produce and sell.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Reliable Manufacturing wants to sell a sufficient quantity of products to earn a profit of $100,000. If the unit sales price is $10, unit variable cost is $8, and total fixed costs are $200,000, how many units must be sold to earn income of $100,000?
150,000 units
100,000 units
37,500 units
1,500,000 units

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

How much sales are required to earn a target income of $240,000 if total fixed costs are $300,000 and the contribution margin ratio is 40%?
$900,000
$600,000
$1,350,000
$990,000

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Farmers’ Industries has fixed costs of $600,000 and variable costs are 60% of sales. How much will Farmers report as sales when its net income equals $60,000?
$1,650,000
$1,100,000
$1,560,000
$396,000

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Murphy Company produces flash drives for computers, which it sells for $20 each. Each flash drive costs $6 of variable costs to make. During April, 700 drives were sold. Fixed costs for April were $4 per unit for a total of $2,800 for the month. How much does Murphy’s operating income increase for each $1,000 increase in revenue per month?
$700
$500
$14,000
Not enough information to determine the answer.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Greg’s Golf Carts produces two models: Model 24 has sales of 500 units with a contribution margin of $40 each; Model 26 has sales of 350 units with a contribution margin of $50 each. If sales of Model 26 increase by 100 units, how much will profit change?
$5,000 increase
$17,500 increase
$22,500 increase
$35,000 increase

Ans: A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Wendy Industries produces only one product. Monthly fixed expenses are $12,000, monthly unit sales are 4,000, and the unit contribution margin is $10. How much is monthly net income?
$40,000
$52,000
$0
$28,000

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

A company desires to sell a sufficient quantity of products to earn a profit of $400,000. If the unit sales price is $20, unit variable cost is $12, and total fixed costs are $800,000, how many units must be sold to earn net income of $400,000?
225,000 units
150,000 units
120,000 units
90,000 units

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Stephanie, Inc. sells its product for $40. The variable costs are $18 per unit. Fixed costs are $16,000. The company is considering the purchase of an automated machine that will result in a $2 reduction in unit variable costs and an increase of $5,000 in fixed costs. Which of the following is true about the break-even point in units?
It will remain unchanged.
It will decrease.
It will increase.
It cannot be determined from the information provided.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

How much sales are required to earn a target net income of $200,000 if total fixed costs are $250,000 and the contribution margin ratio is 40%?
$625,000
$1,012,500
$1,125,000
$500,000

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

The following monthly data are available for Lumberyard Company. which produces only one product: Selling price per unit, $42; Unit variable expenses, $14; Total fixed expenses, $42,000; Actual sales for the month of June, 3,000 units. How much is the margin of safety for the company for June?
$42,000
$63,000
$84,000
$1,500

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Danny’s Lawn Equipment has actual sales of $800,000 and a break-even point of $520,000. How much is its margin of safety ratio?
35%
46%
54%
65%

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

The following monthly data are available for Seasons Company which produces only one product: Selling price per unit, $42; Unit variable expenses, $14; Total fixed expenses, $42,000; Actual sales for the month of June, 4,000 units. How much is the margin of safety for the company for June?
$70,000
$105,000
$63,000
$2,500

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

The amount by which actual or expected sales exceeds break-even sales is referred to as
contribution margin.
unanticipated profit.
margin of safety.
target net income.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

In evaluating the margin of safety, the
break-even point is not relevant.
higher the margin of safety ratio, the greater the margin of safety.
higher the dollar amount, the lower the margin of safety.
higher the margin of safety ratio, the lower the fixed costs.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Within the relevant range, the variable cost per unit
differs at each activity level.
remains constant at each activity level.
increases as production increases.
decreases as production increases.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

An example of a mixed cost is
direct materials.
supervisory salaries.
utility costs.
property taxes.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

In the Restin Company, maintenance costs are a mixed cost. At the low level of activity (80 direct labor hours), maintenance costs are $600. At the high level of activity (200 direct labor hours), maintenance costs are $1,100. Using the high-low method, what is the variable maintenance cost per unit and the total fixed maintenance cost?

Variable Cost Per Unit Total Fixed Cost

$4.17 $267
$4.17 $500
$5.50 $220
$5.50 $400

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Cost-volume-profit analysis includes all of the following assumptions except
the behavior of costs is curvilinear throughout the relevant range.
costs can be classified accurately as either variable or fixed.
changes in activity are the only factors that affect costs.
all units produced are sold.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The contribution margin ratio increases when
fixed costs increase.
fixed costs decrease.
variable costs as a percentage of sales decrease.
variable costs as a percentage of sales increase.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Contribution margin is
the amount of revenue remaining after deducting fixed costs.
available to cover fixed costs and contribute to income for the company.
sales less fixed costs.
unit selling price less unit fixed costs.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Chung, Inc. sells 100,000 wrenches for $24 per unit. Fixed costs are $700,000 and net income is $500,000. What should be reported as variable expenses in the CVP income statement?
$1,080,000
$1,200,000
$1,900,000
$1,700,000

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Sweet Manufacturing is planning to sell 400,000 hammers for $6 per unit. The contribution margin ratio is 20%. If Sweet will break even at this level of sales, what are the fixed costs?
$480,000
$1,120,000
$1,600,000
$1,920,000

Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

At the break-even point,
sales equal total variable costs.
contribution margin equals total variable costs.
contribution margin equals total fixed costs.
sales equal total fixed costs.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Wilton Co. reported the following results from the sale of 5,000 hammers in May: sales $200,000, variable costs $120,000, fixed costs $60,000, and net income $20,000. Assume that Wilton increases the selling price of hammers by 10% on June 1. How many hammers will have to be sold in June to maintain the same level of net income?
4,000
4,300
4,500
5,000

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Required sales in dollars to meet a target net income is computed by dividing
fixed costs plus target net income by unit contribution margin.
variable costs plus target net income by unit contribution margin.
fixed costs plus target net income by contribution margin ratio.
total costs plus target net income by contribution margin ratio.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Bolton Industries had actual sales of $1,000,000 when break-even sales were $600,000. What is the margin of safety ratio?
40%
33%
60%
67%

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Answers to Multiple Choice Questions

Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.
38.	b	55.	a	72.	c	89.	b	106.	c	123.	a	140.	b
39.	c	56.	b	73.	b	90.	b	107.	d	124.	a	141.	a
40.	a	57.	c	74.	a	91.	b	108.	c	125.	d	142.	b
41.	d	58.	c	75.	a	92.	d	109.	d	126.	a	143.	c
42.	d	59.	b	76.	c	93.	a	110.	b	127.	b	144.	b
43.	d	60.	a	77.	b	94.	b	111.	a	128.	a	145.	b
44.	b	61.	d	78.	a	95.	a	112.	b	129.	a	146.	c
45.	b	62.	d	79.	d	96.	d	113.	b	130.	b	147.	a
46.	c	63.	a	80.	c	97.	a	114.	b	131.	a	148.	a
47.	d	64.	a	81.	b	98.	d	115.	c	132.	c	149.	c
48.	d	65.	a	82.	b	99.	c	116.	a	133.	a	150.	b
49.	a	66.	c	83.	c	100.	d	117.	b	134.	a	151.	b
50.	c	67.	d	84.	a	101.	c	118.	a	135.	a	152.	a
51.	b	68.	d	85.	a	102.	b	119.	c	136.	d	153.	c
52.	d	69.	c	86.	b	103.	b	120.	b	137.	b	154.	a
53.	b	70.	d	87.	d	104.	a	121.	d	138.	c	155.	c
54.	c	71.	d	88.	a	105.	b	122.	a	139.	c	156.	a

BRIEF Exercises

BE 157

Dollywood Corporation accumulates the following data concerning a mixed cost, using miles as the activity level.

	Miles Driven	Total Cost		Miles Driven	Total Cost
January	10,000	$16,500	March	9,000	$12,500
February	8,000	$14,500	April	7,000	$12,000

Instructions

Compute the variable and fixed cost elements using the high-low method.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 157 (4 min.)

$16,500 − $12,000

————————— = $1.50 = variable cost per mile

10,000 − 7,000

$1.50 (10,000) + FC = $16,500

Fixed cost = $1,500

$1.50 (7,000) + FC = $12,000

Fixed cost = $1,500

BE 158

Sandel Company makes 2 products, footballs and baseballs. Additional information follows:

Footballs Baseballs

Units 4,000 2,500

Sales $60,000 $25,000

Variable costs 36,000 7,000

Fixed costs 9,000 9,000

Net income $15,000 $ 9,000

Profit per unit $3.75 $3.60

Instructions

Sandel has unlimited demand for both products. Therefore, which product should Sandel tell his sales people to emphasize?

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 158 (5 min.)

Unit contribution margin:

Footballs: [$60,000 – $36,000] ÷ 4,000 = $6

Baseballs: [$25,000 – $7,000] ÷ 2,500 = $7.20

Sandel should tell his sales people to sell more baseballs due to the higher contribution margin per unit.

BE 159

Determine the missing amounts.

	Unit Selling Price	Unit Variable Costs	Unit Contribution Margin	Contribution Margin Ratio
1.	$300	$165	A.	B.
2.	$600	C.	$150	D.
3.	E.	F.	$440	40%

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 159 (6 min.)

$300 – $165 = $135
$135 ÷ $300 = 45%
$600 – $150 = $450
$150 ÷ $600 = 25%
$440 ÷ 40% = $1,100
If 40% = CM ratio, then 60% = variable cost percentage; $1,100 × 60% = $660

Or $1,100 – $440 = $660

BE 160

Kipling Company has sales of $1,500,000 for the first quarter of 2016. In making the sales, the company incurred the following costs and expenses.

	Variable	Fixed
Product costs	$500,000	$550,000
Selling expenses	100,000	75,000
Administrative expenses	80,000	67,000

Instructions

Calculate net income under CVP for 2016.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 160 (4 min.)

$1,500,000 − [$500,000 + $100,000 + $80,000] − [$550,000 + $75,000 + $67,000] = $128,000

BE 161

Hurly Co. has fixed costs totaling $165,000. Its unit contribution margin is $1.50, and the selling price is $5.50 per unit.

Instructions

Compute the break-even point in units.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 161 (3 min.)

$1.50X – $165,000 = 0

X = 110,000 units

BE 162

Salem Bakery sells boxes of donuts each with a variable cost percentage of 35%. Its fixed costs are $54,600 per year.

Instructions

Determine the sales dollars Salem needs to break even per year.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 162 (3 min.)

Contribution margin ratio = 100% – 35% = 65%

.65x – $54,600 = 0

X = $84,000 of sales dollars

BE 163

Cannon Co. has a unit selling price of $500, variable cost per unit $300, and fixed costs of $240,000.

Instructions

Compute the break-even point in units and in sales dollars.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 163 (4 min.)

$500X − $300X − $240,000 = 0

BEP in units = X = 1,200 units

BEP in dollars = 1,200 units × $500 = $600,000

BE 164

Oakbrook, Inc. reported actual sales of $2,000,000, and fixed costs of $350,000. The contribution margin ratio is 25%.

Instructions

Compute the margin of safety in dollars and the margin of safety ratio.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 164 (4 min.)

BEP in dollars: $350,000 ÷ 25% = $1,400,000

Margin of safety in dollars: $2,000,000 − $1,400,000 = $600,000

Margin of safety ratio: $600,000 ÷ $2,000,000 = 30%

BE 165

The following monthly data are available for Fortner Industries which produces only one product which it sells for $18 each. Its unit variable costs are $8, and its total fixed expenses are $17,000. Actual sales for the month of May totaled 2,000 units.

Instructions

Compute the margin of safety in dollars for the company for May.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 165 (4 min.)

BEP in units: $18X – $8X – $17,000 = 0

BEP in units = X = 1,700 units

Units at current sales level = 2,000

Margin of safety = (2,000 – 1,700) × $18 = $5,400

Sales can drop by $5,400 before the company incurs a loss

BE 166

At break-even point, a company sells 1,200 widgets. Its selling price is $6 per widget, variable cost is $2 per widget, and its fixed cost is $4 per widget.

Instructions

If it sells 200 additional widgets, determine the company’s incremental profit.

Solution 166 (4 min.)

$6(1,200) – $2(1,200) – X = 0

Total fixed costs = X = $4,800

Incremental profit = 200 × ($6 – $2) = $800

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Exercises

Ex. 167

Sandburg Manufacturing manufactures a single product. Annual production costs incurred in the manufacturing process are shown below for the production of 2,000 units. The Utilities and Maintenance are mixed costs. The fixed portions of these costs are $300 and $200, respectively.

Costs Incurred

Production in Units 2,000 4,000

Production Costs

Direct Materials $ 6,000 ?
Direct Labor 16,000 ?
Utilities 1,000 ?
Rent 3,000 ?
Indirect Labor 4,200 ?
Supervisory Salaries 1,500 ?
Maintenance 1,000 ?
Depreciation 2,500 ?

Instructions

Calculate the expected costs to be incurred when production is 4,000 units. Use your knowledge of cost behavior to determine which of the other costs are fixed or variable.

Ans: N/A, LO: 1, 2, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 167 (12–18 min.)

Costs Incurred

Production in Units 2,000 4,000

Production Costs

Direct Materials $ 6,000 $12,000
Direct Labor 16,000 32,000
Utilities 1,000 1,700
Rent 3,000 3,000
Indirect Labor 4,200 8,400
Supervisory Salaries 1,500 1,500
Maintenance 1,000 1,800
Depreciation 2,500 2,500

Variable $6,000 ÷ 2,000 = $3.00 per unit; 4,000 × $3.00 = $12,000
Variable $16,000 ÷ 2,000 = $8.00 per unit; 4,000 × $8.00 = $32,000
Mixed $1,000 – $300 = $700; $700 ÷ 2,000 = $.35 per unit of variable costs;

4,000 × $.35 = $1,400 + $300 (fixed) = $1,700

Fixed $3,000
Variable $4,200 ÷ 2,000 = $2.10 per unit; 4,000 × $2.10 = $8,400
Fixed $1,500
Mixed $1,000 – $200 = $800 variable portion; $800 ÷ 2,000 = $.40

4,000 × $.40 = $1,600 + $200 (fixed portion) = $1,800

Fixed $2,500

Ex. 168

Bill Braddock is considering opening a Fast ‘n Clean Car Service Center. He estimates that the following costs will be incurred during his first year of operations: Rent $9,200, Depreciation on equipment $7,000, Wages $16,400, Motor oil $2.00 per quart. He estimates that each oil change will require 5 quarts of oil. Oil filters will cost $3.00 each. He must also pay The Fast ‘n Clean Corporation a franchise fee of $1.10 per oil change, since he will operate the business as a franchise. In addition, utility costs are expected to behave in relation to the number of oil changes as follows:

Number of Oil Changes Utility Costs

4,000 $ 6,000

6,000 $ 7,300

9,000 $ 9,600

12,000 $12,600

14,000 $15,000

Bill Braddock anticipates that he can provide the oil change service with a filter at $25 each.

Instructions

(a) Using the high-low method, determine variable costs per unit and total fixed costs.

(b) Determine the break-even point in number of oil changes and sales dollars.

(c) Without regard to your answers in parts (a) and (b), determine the oil changes required to earn net income of $20,000, assuming fixed costs are $32,000 and the contribution margin per unit is $8.

Ans: N/A, LO: 1, 2, 4 ,5, Bloom: AP, Difficulty: Hard, Min: 19, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 168 (19–24 min.)

(a) Separation of mixed costs:

($15,000 – $6,000) $9,000

Change in cost/Change in quantity: ————————— = ——— = $.90 per oil change

(14,000 – 4,000) 10,000

Variable costs: Fixed costs:

Oil (5 quarts × $2.00) $10.00 Rent $ 9,200

Filter 3.00 Depreciation 7,000

Franchise fee 1.10 Wages 16,400

Utility costs (variable) .90 Utility costs 2,400*

Total variable $15.00 Total $35,000

*$6,000 – (4,000 × .90) = $2,400

(b) (1) Break-even oil changes in units:

Fixed costs	=	$35,000	= 3,500 oil changes
Unit contribution margin		$10.00*

(2) Break-even sales in dollars:

Fixed costs	=	$35,000	= $87,500
Contribution margin ratio		.40

*Selling price per unit (a) $25

Variable cost per unit 15

Unit contribution margin (b) $10

Contribution margin ratio (b) ÷ (a) 40%

(c)	Fixed costs + Net income	=	$32,000 + $20,000	= 6,500 oil changes
	Unit contribution margin	=	$8	= 6,500 oil changes

Ex. 169

Jane Botosan operates a bed and breakfast hotel in a resort area near Lake Michigan. Depreciation on the hotel is $60,000 per year. Jane employs a maintenance person at an annual salary of $41,000 and a cleaning person at an annual salary of $24,000. Real estate taxes are $10,000 per year. The rooms rent at an average price of $60 per person per night including breakfast. Other costs are laundry and cleaning service at a cost of $10 per person per night and the cost of food which is $5 per person per night.

Ex. 169 (Cont.)

Instructions

(a) Determine the number of rentals and the sales revenue Jane needs to break even using the contribution margin technique.

(b) If the current level of rentals is 4,000, by what percentage can rentals decrease before Jane has to worry about having a net loss?

(c) Jane is considering upgrading the breakfast service to attract more business and increase prices. This will cost an additional $3 for food costs per person per night. Jane feels she can increase the room rate to $68 per person per night. Determine the number of rentals and the sales revenue Jane needs to break even if the changes are made.

Ans: N/A, LO: 1, 3, 4, 5, Bloom: AN, Difficulty: Hard, Min: 22, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 169 (22–27 min.)

(a) Variable costs per person per night: Fixed costs:

Laundry and cleaning $10 Depreciation $ 60,000

Breakfast 5 Maintenance 41,000

Total variable $15 Cleaning 24,000

Real estate tax 10,000

Total fixed $135,000

Break-even number of persons per night rentals:

Fixed costs	=	$135,000	= 3,000 rentals
Contribution margin per person per night		$45*

*Sales price per unit $60

Variable cost per unit 15

Unit contribution margin $45

Break-even sales in dollars:

Fixed costs	=	$135,000	= $180,000
Contribution margin ratio		75%**

**Unit contribution margin (a) $45

Sales price per unit (b) $60

Contribution margin ratio (a) ÷ (b) = 75%

(b) Margin of safety:

Actual rentals – Break-even rentals	=	(4,000 – 3,000)	= 25%
Actual rentals		4,000

Solution 169 (Cont.)

Laundry and cleaning $10.00 Depreciation $ 60,000

Breakfast 8.00 Maintenance 41,000

Total variable $18.00 Cleaning 24,000

Real estate tax 10,000

Total fixed $135,000

Break-even number of persons per night rentals:

Fixed costs	=	$135,000	= 2,700 rentals
Contribution margin per person per night		$50*

*Sales price per unit $68

Variable cost per unit 18

Unit contribution margin $50

Break-even point in sales dollars: 2,700 × $68 = $183,600

Ex. 170

Corris Co. accumulates the following data concerning a mixed cost, using miles as the activity level.

Miles Driven Total Cost

January 10,000 $17,000

February 8,000 13,500

March 9,000 14,400

April 7,000 12,500

Instructions

Compute the variable and fixed cost elements using the high-low method.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 170 (5 min.)

$17,000 – $12,500	= $1.50 = variable cost per mile
10,000 – 7,000

($1.50 x 10,000) + fixed cost = $17,000

Fixed cost = $2,000

Ex. 171

Moresan Co. gathered the following information on power costs and factory machine usage for the last six months:

Month Power Cost Factory Machine Hours

January $24,400 13,900

February 30,400 17,600

March 29,000 16,800

April 22,340 13,200

May 19,900 11,600

June 16,900 8,600

Instructions

Using the high-low method of analyzing costs, answer the following questions and show computations to support your answers.

(a) What is the estimated variable portion of power costs per factory machine hour?

(b) What is the estimated fixed power cost each month?

(c) If it is estimated that 10,000 factory machine hours will be run in July, what is the expected total power cost for July?

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 171 (10–15 min.)

(a) Variable power cost per factory machine hour:

$30,400 – $16,900	=	$13,500	= $1.50 per factory machine hour
17,600 – 8,600		9,000

(b) Monthly fixed power cost:

High Low

(February) (June)

Total costs $30,400 $16,900

Less: Variable costs

17,600 × $1.50 26,400

8,600 × $1.50 12,900

Total fixed costs $ 4,000 $ 4,000

Variable cost (10,000 × $1.50) $15,000

Fixed cost 4,000

Total estimated power cost $19,000

Ex. 172

The Bradshaw Law Office has the following monthly telephone records and costs:

Calls Costs

2,000 $2,400

1,500 2,000

2,200 2,600

2,500 2,800

2,300 2,700

1,700 2,200

Instructions

Identify the fixed and variable cost elements using the high-low method.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 172 (10–15 min.)

High calls minus low calls: 2,500 – 1,500 = 1,000

Change in cost: $2,800 – $2,000 = $800

$800 ÷ 1,000 = $.80 variable cost per call

High Low

Total Cost $2,800 $2,000

Less: Variable costs

2,500 × $.80 2,000

1,500 × $.80 1,200

Total fixed costs $ 800 $ 800

Ex. 173

Determine the missing amounts.

Unit contribution Contribution

Unit Selling Price Unit Variable Costs Margin Margin Ratio

$300 $210 A B
$600 C $210 D
E F $360 30%

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 173 (10 min.)

$300 – $210 = $90
$90 ÷ $300 = 30%
$600 – $210 = $390
$210 ÷ $600 = 35%
$360 ÷ 30% = $1,200
If 30% = CM ratio, then 70% = variable cost percentage

$1,200 × 70% = $840

Ex. 174

Henderson Farms reports the following results for the month of November:

Sales (10,000 units) $600,000

Variable costs 420,000

Contribution margin 180,000

Fixed costs 110,000

Net income $ 70,000

Management is considering the following independent courses of action to increase net income.

Increase selling price by 5% with no change in total variable costs.
Reduce variable costs to 66% of sales.
Reduce fixed costs by $10,000.

Instructions

If maximizing net income is the objective, which is the best course of action?

Ans: N/A, LO: 3, Bloom: E, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 174 (15–20 min.)

Current selling price is: $600,000 ÷ 10,000 units = $60

Increase $60 by 5%: $60 × 1.05 = $63

Revised sales $630,000

Variable costs 420,000

Contribution margin 210,000

Fixed costs 110,000

Net income $100,000

Sales $600,000

Variable costs (reduce variable costs to 66% of sales) 400,000

Contribution margin 200,000

Fixed costs 110,000

Net income $ 90,000

Sales $600,000

Variable costs 420,000

Contribution margin 180,000

Fixed costs (reduce fixed costs by $10,000) 100,000

Net income $ 80,000

Increasing the price will increase net income from $70,000 to $100,000. Option (2) will increase net income to only $90,000, and Option (3) will increase net income to only $80,000.

Ex. 175

Marvin Co. had a net loss of $150,000 in 2015 when the selling price per unit was $20, the variable costs per unit were $15, and the fixed costs were $600,000. Management expects per unit data and total fixed costs to be the same in 2016. Management has set a goal of earning net income of $75,000 in 2016.

Instructions

(a) Compute the units sold in 2015.

(b) Compute the number of units that would have to be sold in 2016 to reach management’s desired net income level.

(c) Assume that Marvin Co. sells the same number of units in 2016 as it did in 2015. What would the selling price have to be in order to reach the target net income? Use the mathematical equation.

Ans: N/A, LO: 3, 4, 5, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 175 (15–20 min.)

(a) Units sold in 2015 =	Fixed costs – Net loss	=	$600,000 – $150,000
	Unit contribution margin		$20 – $15

= $450,000 ÷ $5 = 90,000 units

(b) Units sold in 2016 =	Fixed costs + Net income	=	$600,000 + $75,000
	Unit contribution margin		$20 – $15

= $675,000 ÷ $5 = 135,000 units

(c) Selling price needed in 2016 =	Variable costs + Fixed costs + Net income
	90,000 units

Selling price needed in 2016 =	90,000($15) + $600,000 + $75,000
	90,000 units

= $2,025,000 ÷ 90,000 = $22.50

Ex. 176

In the month of September, Matlock Industries sold 800 units of product. The average sales price was $30. During the month, fixed costs were $6,300 and variable costs were 70% of sales.

Instructions

(a) Determine the contribution margin in dollars, per unit, and as a ratio.

(b) Using the contribution margin technique, compute the break-even point in dollars and in units.

Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 176 (12–17 min.)

(a) Contribution margin (in dollars)

Sales (800 × $30) $24,000

Less: Variable costs ($24,000 × 70%) 16,800

Contribution margin $ 7,200

Unit contribution margin

Unit sales price $30

Less: Variable cost per unit ($30 × 70%) 21

Unit contribution margin $ 9

Contribution margin ratio

$9 ÷ $30 = 30%

(b) Break-even sales (in dollars)

Fixed costs ÷ Contribution margin ratio

$6,300 ÷ 30% = $21,000

Break-even sales (in units)

Fixed costs ÷ Contribution margin per unit

$6,300 ÷ $9 = 700 units

Ex. 177

In 2015, Stallman Co. had a break-even point of $800,000 based on a selling price of $10 per unit and fixed costs of $200,000. In 2016, the selling price and variable costs per unit did not change, but the break-even point increased to $840,000.

Instructions

(a) Compute the variable cost per unit and the contribution margin ratio for 2015.

(b) Using the contribution margin ratio, compute the increase in fixed costs for 2016.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 177 (15–20 min.)

(a) Unit contribution margin =	Fixed Costs	=	$200,000
	Break-even Sales in units		($800,000 ÷ $10)

=	$200,000	= $2.50
	80,000

Variable cost per unit = $10 – $2.50 = $7.50

Contribution margin ratio = $2.50 ÷ $10 = 25%

(b) Fixed costs = Break-even Sales × CM Ratio

= $840,000 × 25% = $210,000

Therefore, fixed costs increased $10,000 ($210,000 – $200,000).

Ex. 178

The income statement for Bradford Machine Company for 2015 appears below.

BRADFORD MACHINE COMPANY

Income Statement

For the Year Ended December 31, 2015

——————————————————————————————————————————

Sales (40,000 units)…………………………………………………………………………… $1,000,000

Variable expenses…………………………………………………………………………….. 700,000

Contribution margin…………………………………………………………………………… 300,000

Fixed expenses…………………………………………………………………………………. 360,000

Net income (loss)………………………………………………………………………………. $ (60,000)

Instructions

Answer the following independent questions and show computations using the contribution margin technique to support your answers:

What was the company’s break-even point in sales dollars in 2015?
How many additional units would the company have had to sell in 2016 in order to earn net income of $45,000?
If the company is able to reduce variable costs by $2.50 per unit in 2016 and other costs and unit revenues remain unchanged, how many units will the company have to sell in order to earn a net income of $45,000?

Ans: N/A, LO: 3, 4, 5, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 178 (15–20 min.)

1.	$360,000	= $1,200,000
	30%

2.	$360,000 + $45,000	= $1,350,000 Total sales needed.
	30%

	$1,350,000	= 54,000 total units to be sold
	$25

40,000 actual units sold

14,000 additional units to be sold

Note: Required sales in units can be obtained directly by dividing fixed costs plus profit by contribution margin per unit:

($360,000 + $45,000) ÷ ($25 – $17.50) = 54,000 units

2015 Variable cost per unit = $17.50 ($700,000 ÷ 40,000 units)

Variable cost reduction = 2.50

2016 Variable cost per unit $15.00

Expected contribution margin $10 ($25 – $15)

	$360,000 + $45,000	= 40,500 units
	$10

Ex. 179

Webber, Inc. developed the following information for its product:

Per Unit

Sales price $90

Variable cost 63

Contribution margin $27

Total fixed costs $1,215,000

Instructions

Answer the following independent questions and show computations using the contribution margin technique to support your answers.

How many units must be sold to break even?
What is the total sales that must be generated for the company to earn a profit of $60,000?
If the company is presently selling 50,000 units, but plans to spend an additional $108,000 on an advertising program, how many additional units must the company sell to earn the same net income it is now making?
Using the original data in the problem, compute a new break-even point in units if the unit sales price is increased 20%, unit variable cost is increased by 10%, and total fixed costs are increased by $236,250.

Ans: N/A, LO: 3, 4, 5, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 179 (15–20 min.)

1.	$1,215,000	= 45,000 units must be sold to break even.
	$27

Contribution margin ratio = 30% ($27 ÷ $90).

	$1,215,000 + $60,000	= $4,250,000 total sales
	.30

3.	$108,000	= 4,000 additional units
	$27

New sales price $108.00 ($90 × 1.20)

New variable cost 69.30 ($63 × 1.10)

New contribution margin $38.70

New total fixed costs $1,451,250 ($1,215,000 + $236,250)

	$1,451,250	= 37,500 units (rounded) is the new break-even point.
	38.70

Ex. 180

Werth & Garza Manufacturing’s sales slumped badly in 2016 due to so many people purchasing gifts online. The company’s income statement showed the following results from selling 500,000 units of product: net sales $2,125,000; total costs and expenses $2,500,000; and net loss $375,000. Costs and expenses consisted of the following:

Total Variable Fixed

Cost of goods sold $2,000,000 $1,300,000 $700,000

Selling expenses 200,000 50,000 150,000

Administrative expenses 300,000 150,000 150,000

$2,500,000 $1,500,000 $1,000,000

Management is considering the following alternative for 2016:

Purchase new automated equipment that will change the proportion between variable and fixed expenses to 45% variable and 55% fixed.

Instructions

(a) Compute the break-even point in dollars for 2016.

(b) Compute the break-even point in dollars under the alternative course of action.

Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 180 (8–10 min.)

(a) Selling price = $2,125,000 ÷ 500,000 = $4.25 per unit

Variable cost per unit = $1,500,000 ¸ 500,000 = $3 per unit

Sales – Variable cost – Fixed cost = 0

$4.25X – $3X – $1,000,000 = 0

Break-even point in units = 800,000 units ($1,000,000 ÷ $1.25)

Break-even point in dollars = 800,000 × $4.25 = $3,400,000

(b) New variable cost per unit = (45% × $2,500,000) ÷ 500,000 = $2.25 per unit

$4.25X – $2.25X – ($2,500,000 × 55%) = 0

$2X – $1,375,000 = 0

New break-even point in units = 687,500 units ($1,375,000 ÷ $2)

New break-even point in dollars = 687,500 × $4.25 = $2,921,875

Ex. 181

Henning Co. estimates that variable costs will be 70% of sales and fixed costs will total $2,160,000. The selling price of the product is $10, and 750,000 units will be sold.

Instructions

Using the mathematical equation,

(a) Compute the break-even point in units and dollars.

(b) Compute the margin of safety in dollars and as a ratio.

Ans: N/A, LO: 3, 4, 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 181 (15–20 min.)

(a) Break-even sales in units

$10X = $7X + $2,160,000

$3X = $2,160,000

X = 720,000 units

Break-even point in dollars

X = .3X + $2,160,000

.3X = $2,160,000

X = $7,200,000

(b) Margin of safety in dollars

$7,500,000 – $7,200,000 = $300,000

Margin of safety ratio

$300,000 ÷ $7,500,000 = 4%

Sales $7,500,000

Variable Costs (5,250,000)

Fixed Costs (2,160,000)

Net Income $ 90,000

Ex. 182

Norton, Inc. has the following information available for September 2016.

Unit selling price of video game consoles $ 400

Unit variable costs $ 280

Total fixed costs $48,000

Units sold 500

Instructions

(a) Prepare a CVP income statement that shows both total and per unit amounts.

(b) Compute Norton’s breakeven in units.

Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 182 (10 min.)

(a) NORTON, INC. COMPANY

CVP Income Statement

For the Month Ended September 30, 2016

_____________________________________________________________________________

Total Per Unit

Sales (500 video game consoles)………………………………….. $200,000 $400

Variable costs……………………………………………………………… 140,000 280

Contribution margin……………………………………………………… 60,000 $120

Fixed costs………………………………………………………………….. 48,000

Net income…………………………………………………………………. $ 12,000

Solution 182 (Cont.)

(b) Sales = Variable costs + Fixed costs

$400X = $280X + $48,000

$120X = 48,000

X = 400 units

Ex. 183

In the month of April, Avante Salon gave 2,500 haircuts, shampoos, and permanents at an average price of $40. During the month, fixed costs were $20,000 and variable costs were 75% of sales.

Instructions

(a) Determine the contribution margin in dollars, per unit, and as a ratio.

(b) Using the contribution margin technique, compute the break-even point in dollars and in units.

Ans: N/A, LO: 3, 4, 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 183 (10 min.)

(a) Contribution margin (in dollars): Sales = (2,500 ´ $40) = $100,000

Variable costs = $100,000 ´ .75 = 75,000

Contribution margin $ 25,000

Variable cost (per unit): $40 ´ .75 = $30.

Contribution margin (per unit) $40 – ($40 ´ 75%) = $10.

Contribution margin (ratio): $10 ¸ $40 = 25%

(b) Breakeven sales (in dollars):

Breakeven sales (in units):

Margin of safety (ratio) $20,000 ¸ $100,000 = 20%

Ex. 184

Taveras Industries developed the following information for the product it sells:

Sales price $50 per unit

Variable cost of goods sold $28 per unit

Fixed cost of goods sold $650,000

Variable selling expense 10% of sales price

Variable administrative expense $2.00 per unit

Fixed selling expense $400,000

Fixed administrative expense $300,000

For the year ended December 31, 2016, Taveras produced and sold 100,000 units of product.

Ex. 184 (Cont.)

Instructions

(a) Prepare a CVP income statement using the contribution margin format for Taveras Industries for 2016.

(b) What was the company’s break-even point in units in 2016? Use the contribution margin technique.

Ans: N/A, LO: 3, 4, 5, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 184 (20–25 min.)

(a) TAVERAS INDUSTRIES

Income Statement

For the Year Ended December 31, 2016

———————————————————————————————————————————

Sales……………………………………………………………………………….. $5,000,000

Variable expenses

Cost of goods sold……………………………………………………….. $2,800,000

Administrative……………………………………………………………… 200,000

Selling expenses………………………………………………………….. 500,000

Total variable expenses………………………………………………… 3,500,000

Contribution margin…………………………………………………………… 1,500,000

Fixed expenses

Cost of goods sold……………………………………………………….. 650,000

Selling………………………………………………………………………… 400,000

Administrative……………………………………………………………… 300,000

Total fixed expenses…………………………………………………….. 1,350,000

Net income………………………………………………………………………. $ 150,000

(b) Break-even point was 90,000 units in 2016.

Variable costs per unit Unit contribution margin

Cost of goods sold $28 Sales price $50

Administrative 2 Variable cost 35

Selling 5 Contribution margin $15

$35

$1,350,000 ÷ $15 = 90,000 units to break even.

Actual sales $5,000,000

Break-even sales (90,000 × $50) 4,500,000

Margin of safety $ 500,000

Ex. 185

Gordon Manufacturing earned net income of $100,000 during 2015. The company wants to earn net income of $40,000 more during 2016. The company’s fixed costs are expected to be $147,000, and variable costs are expected to be 30% of sales.

Instructions

(a) Determine the required sales to meet the target net income during 2016.

(b) Fill in the dollar amounts for the summary income statement for 2016 below, based on your answer to part (a).

Sales revenue	$
Variable costs
Contribution margin
Fixed costs
Net income	$

Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 185 (6–8 min.)

(a) 70%X – $147,000 = $140,000

Required sales = $410,000 ($287,000 ÷ .70)

(b) Sales revenue $410,000

Variable costs ($410,000 ×.30) 123,000

Contribution margin 287,000

Fixed costs 147,000

Net income $140,000

Ex. 186

Ferris, Inc. has a unit selling price of $500, variable cost per unit of $300, and fixed costs of $260,000.

Instructions

Compute the break-even point in units and in sales dollars.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 186 (5 min.)

$500X – $300X – $260,000 = 0

Break-even point in units = X = 1,300 units ($260,000 ÷ $200)

Break-even point in dollars = 1,300 units × $500 = $650,000

Ex. 187

Erickson, Inc. makes student book bags that sell for $20 each. For the coming year, management expects fixed costs to be $225,000. Variable costs are $14 per unit.

Instructions

(a) Compute break-even sales in dollars using the mathematical equation.

(b) Compute break-even sales using the contribution margin ratio.

(d) Compute the sales required to earn net income of $150,000, using the mathematical equation.

Ans: N/A, LO: 4 ,5, Bloom: AP, Difficulty: Medium, Min: 19, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 187 (19–24 min.)

(a) Break-even Sales = Variable Costs + Fixed Costs

X = .70X + $225,000

.30X = $225,000

X = $750,000

(b) Unit Contribution Margin = Unit Selling Price – Unit Variable Cost

CM = $20 – $14 = $6

Contribution Margin Ratio =	Contribution Margin per Unit
	Unit Selling Price

CM Ratio = $6 ÷ $20 = 30%

Break-even Sales =	Fixed Costs
	Contribution Margin Ratio

= $225,000 ÷ 30% = $750,000

Less: Break-even Sales 750,000

Margin of Safety $187,500

Margin of Safety Ratio =	Margin of Safety
	Actual Sales

= $187,500 ÷ $937,500 = 20%

(d) Required Sales = Variable Costs + Fixed Costs + Targeted Net Income

X = .70X + $225,000 + $150,000

.30X = $375,000

X = $1,250,000

Ex. 188

Melody Manufacturing produces a hip-hop CD that is sold for $20. The contribution margin ratio is 40%. Fixed expenses total $9,200.

Instructions

(a) Compute the variable cost per unit.

(b) Compute how many CDs Melody Manufacturing will have to sell in order to break even.

Ans: N/A, LO: 4, 5, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 188 (7–10 min.)

(a) Variable cost per unit: $20 × (1 – .40) = $12/unit

(b) $20X – $12X – $9,200 = 0

X = 1,150 units ($9,200 ÷ $8)

Solution 188 (Cont.)

X = 3,175 units ($25,400 ÷ $8)

Ex. 189

Usher, Inc. has prepared the following cost-volume-profit graph:

Instructions

For the items listed below, enter to the left of the item, the letter in the graph which best corresponds to the item.

____ 1. Activity base

____ 2. Break-even point

____ 3. Dollars

____ 4. Fixed costs

____ 5. Loss

____ 6. Profit

____ 7. Revenues

____ 8. Total costs

____ 9. Variable costs

Ans: N/A, LO: 4, 5, Bloom: C, Difficulty: Medium, Min: 9, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Solution 189 (9–14 min.)

D Activity base
A Break-even point
E Dollars
C Fixed costs
G Loss
B Profit
I Revenues
H Total costs
F Variable costs

Ex. 190

Holder Manufacturing had $125,000 of net income in 2015 when the selling price per unit was $100, the variable costs per unit were $70, and the fixed costs were $475,000. Management expects per unit data and total fixed costs to remain the same in 2016. The president of Holder Manufacturing is under pressure from stockholders to increase net income by $60,000 in 2016.

Instructions

(a) Compute the number of units sold in 2015.

(b) Compute the number of units that would have to be sold in 2016 to reach the stockholders’ desired profit level.

(c) Assume that Holder Manufacturing sells the same number of units in 2016 as it did in 2015. What would the selling price have to be in order to reach the stockholders’ desired profit level.

Ans: N/A, LO: 4, 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 190 (10–14 min.)

(a) Sales = Variable cost + Fixed cost + Target net income

$100X = $70X + $475,000 + $125,000

$30X = $600,000

Or X = 20,000 units

Units sold in 2015 =	$475,000 + $125,000	= 20,000 units
	$100 – $70

(b) Units sold in 2016 =	$475,000 + $185,000*	= 22,000 units
	$100 – $70

*$125,000 + $60,000 = $185,000

(c)	$475,000 + $185,000	= 20,000 units where X = new selling price
	X – $70

$660,000 = 20,000X – $1,400,000

$2,060,000X = 20,000X

X = $103

Ex. 191

Englehart, Inc. reports the following operating results for the month of August: Sales $450,000 (units 5,000); variable costs $280,000; and fixed costs $115,000. Management is considering the following independent courses of action to increase net income.

Increase selling price by 10% with no change in total variable costs.
Reduce variable costs to 65% of sales.
Reduce fixed costs by $15,000.

Instructions

Compute the net income to be earned under each alternative. Which course of action will produce the highest net income?

Ans: N/A, LO: 4, 5, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 191 (6 min.)

(1) Unit sales price = $450,000 ¸ 5,000 units = $90

Increase selling price to $99, or ($90 ´ 110%).

Net income = $495,000 – $280,000 – $115,000 = $100,000.

(2) Reduce variable costs to 65% of sales.

Net income = $450,000 – $292,500 – $115,000 = $42,500.

(3) Reduce fixed costs to $100,000, or ($115,000 – $15,000).

Net income = $450,000 – $280,000 – $100,000 = $70,000.

Alternative 1, increasing selling price, will produce the highest net income.

Ex. 192

Kreter, Inc. earned net income of $300,000 last year. This year it wants to earn net income of $450,000. The company’s fixed costs are expected to be $300,000, and variable costs are expected to be 70% of sales.

Instructions

(a) Determine the required sales to meet the target net income of $450,000 using the mathematical equation.

(b) Using a CVP income statement format, prove your answer.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 192 (8–12 min.)

(a) Sales = Variable Cost + Fixed Cost + Target Net Income

X = .70X + $300,000 + $450,000

.30X = $750,000

X = $2,500,000

Required Sales are $2,500,000.

(b) Sales $2,500,000

Variable costs 1,750,000

Contribution margin 750,000

Fixed costs 300,000

Target net income $ 450,000

Ex. 193

Cunningham Industries reported actual sales of $2,000,000, and fixed costs of $540,000. The contribution margin ratio is 30%.

Instructions

Compute the margin of safety in dollars and the margin of safety ratio.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 193 (7 min.)

Break-even point in dollars: $540,000 ÷ 30% = $1,800,000

Margin of safety in dollars: $2,000,000 – $1,800,000 = $200,000

Margin of safety ratio: $200,000 ÷ $2,000,000 = 10%

COMPLETION STATEMENTS

Knowledge of cost behavior is important in ______________________ analysis.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

A _________________ cost remains constant per unit at every level of activity.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Unit fixed costs __________________ with the changes in the level of activity.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Total fixed costs are ___________ over various levels of activities, whereas total variable costs __________________ directly and ________________ with changes in the activity level.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

An assumption of CVP analysis is that variable and fixed costs have a _______________ relationship with an activity base.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The range over which a company expects to operate is referred to as the _____________ range.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A cost that has both variable and fixed elements is referred to as a _________________ cost.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The amount of revenue remaining after deducting total variable costs is called the _________________________.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The _______________ point is when total revenues equal total costs.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

_________________ divided by the contribution margin ratio will give the amount of _________________ to break even.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The difference between actual or expected sales and break-even sales is called the __________________________.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Answers to Completion Statements

cost-volume-profit (CVP) 200. mixed
variable 201. contribution margin
vary inversely 202. break-even
constant, vary, proportionately 203. Fixed costs, sales (in dollars)
linear 204. margin of safety
relevant

MATCHING

Match the items in the two columns below by entering the appropriate code letter in the space provided.

Activity index F. Mixed costs
Variable costs G. Break-even point
Fixed costs H. Contribution margin
High-low method I. Margin of safety
Relevant range J. Contribution margin ratio

____ 1. The amount of revenue remaining after deducting variable costs.

____ 2. Costs that contain both a variable and a fixed element.

____ 3. The percentage of sales dollars available to cover fixed costs and produce income.

____ 4. Identifies the activity which causes changes in the behavior of costs.

____ 5. The difference between actual or expected sales and sales at the break-even point.

____ 6. Costs that vary in total directly and proportionately with changes in the activity level.

____ 7. The level of activity at which total revenues equal total costs.

____ 8. The range over which the company expects to operate during the year.

____ 9. Costs that remain the same in total regardless of changes in the activity level.

____ 10. A method that uses the total costs incurred at the high and low levels of activity.

Ans: N/A, LO: 1–3, 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Answers to Matching

H 6. B
F 7. G
J 8. E
A 9. C
I 10. D

SHORT-ANSWER ESSAY QUESTIONS

S-A E 206

A cost-volume-profit graph is frequently used in business meetings because it presents a picture of cost relationships within a company. Briefly describe the type of information and data that you would need in order to prepare a CVP graph. After a CVP graph is prepared, what are the major points that could be made from the graph that would be of interest to management?

Ans: N/A, LO: 4, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Solution 206

To begin constructing a CVP graph, information is needed concerning the maximum estimated level of sales units and the unit sales price. This is necessary to create the axes and also to plot the total revenue line from the origin. In addition, the costs must be broken down into fixed and variable components in order to plot both the fixed cost line and the total cost line.

Using a CVP graph, management can readily identify the break-even point and can see how much profit or loss would result from varying levels of sales. The graph also makes it easy to portray the effects of any changes such as costs or selling prices.

S-A E 207

A CVP income statement is frequently prepared for internal use by management. Describe the features of the CVP income statement that make it more useful for management decision-making than the traditional income statement that is prepared for external users.

Ans: N/A, LO: 3, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Solution 207

Several features of the CVP income statement make it more useful for internal decision-making. The CVP income statement classifies costs as either fixed or variable, rather than by function. Being able to identify the behavior of costs in this manner can aid management in controlling those costs.

Also, the CVP income statement shows the contribution margin, rather than a gross profit. This helps management establish the extent to which their sales are able to cover their fixed costs, and to analyze the impact on net income of changes in sales or costs.

S-A E 208

(a) Matt Sampson asks your help in understanding the term “activity index.” Explain the meaning and importance of this term for Matt.

(b) State the two ways that variable costs may be defined.

Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Solution 208

(a) The activity index identifies the activity that causes changes in the behavior of costs. Once the index is determined, it is possible to classify the behavior of costs in response to changes in activity levels into three categories: variable, fixed, or mixed.

(b) Variable costs may be defined in total or on a per-unit basis. Variable costs in total vary directly and proportionately with changes in the activity level. Variable costs per unit remain the same at every level of activity.

S-A E 209

How should mixed costs be classified in CVP analysis? What approach is used to effect the appropriate classification?

Ans: N/A, LO: 2, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Solution 209

For CVP analysis, mixed costs must be classified into their fixed and variable elements. One approach to the classification of mixed costs is the high-low method.

S-A E 210 (Ethics)

Hanson, Inc. requires its marketing managers to submit estimated cost-volume-profit data on all requests for new products, or expansions of a product line.

Nancy Stephens is a new manager. Her calculations show a fixed cost for a new project at $100,000 and a variable cost of $5. Since the selling price is only $15 for the proposed product, 10,000 units would need to be sold to break even. That is approximately twice the volume estimate for the first year. She shares her dismay with Patti Patterson, another manager.

Patti strongly advises her to revise her estimates. She points out that several of the costs that had been classified as fixed costs could be considered variable, since they are step costs and mixed costs. When the data has been revised classifying those costs as variable costs, the project appears viable.

Required:

Who are the stakeholders in this decision?
Is it ethical for Nancy to revise the costs as indicated? Briefly explain.
What should Nancy do?

Ans: N/A, LO: 1, 2, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Professional Demeanor, IMA: Decision Analysis

Solution 210

The stakeholders include:

Nancy Stephens

Hanson, Inc.

Hanson’s customers

It is ethical to revise the costs, certainly. The only problem that exists is the failure to account for the fixed cost component of the step and mixed costs. At low volume levels, such as those anticipated for this project, the project is likely to be less profitable than forecast. To the extent that Nancy is submitting misleading figures in order to get her project approved, she is behaving unethically.

Nancy should try to make the forecasts as accurate as possible by making a better determination of cost behavior. If that is not possible within the time she has, she should submit both sets of figures, and let the selection committee make its determination.

S-A E 211 (Communication)

For two years, Annette Larson has been the manager of the production department of a company manufacturing toys made of plastic-coated cardboard. One of the toys is a paper doll, whose “clothes” are made of acetate, and stay on the doll with static electricity. The company’s sales were mainly to large educational institutions until last year, when the dolls were sold for the first time to a large discount retailer. The dolls were sold out immediately, and enough orders were received to keep the department at full capacity for the immediate future.

The fixed costs for the department are $50,000, with $1 per unit variable costs. A paper doll and one set of clothes sell for $3. The maximum volume is 80,000 units. With the increased volume, Ms. Larson is considering two options to improve profitability. One would reduce variable costs to $0.75, and the other would reduce fixed costs to $35,000.

Required:

Given the fact that sales are increasing, make a short (one paragraph) recommendation to Ms. Larson about which option she should choose. Support your recommendation with a calculation showing her how profitability will change with each option.

Ans: N/A, SO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Quantitative Methods

Solution 211

The variable costs should be reduced to $0.75 per unit in order to ensure maximum profitability of the paper doll product line. The calculations are as follows:

Current Profit = ($3 × 80,000) – ($1 × 80,000) – $50,000

= $240,000 – $80,000 – $50,000

= $110,000

Plan #1: Reduce Variable Costs to $0.75

Profit = ($3 × 80,000) – ($0.75 × 80,000) – $50,000

= $240,000 – $60,000 – $50,000

= $130,000

Plan #2: Reduce Fixed Costs to $35,000

Profit = ($3 × 80,000) – ($1 × 80,000) – $35,000

= $240,000 – $80,000 – $35,000

= $125,000

Managerial Accounting Tools For Business And Decision Making 7th Edition by Jerry J. Weygandt -Kimmel - Test Bank

Description

Additional Information

Reviews

COST-VOLUME-PROFIT

Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy

True-False Statements

Multiple Choice Questions

Brief Exercises

Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy

Exercises

Completion Statements

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

CHAPTER LEARNING OBJECTIVES

TRUE-FALSE STATEMENTS

MULTIPLE CHOICE QUESTIONS

BE 157

Solution 157 (4 min.)

Solution 158 (5 min.)

Solution 159 (6 min.)

BE 160

Solution 160 (4 min.)

BE 161

Solution 161 (3 min.)

BE 162

Solution 162 (3 min.)

BE 163

Solution 163 (4 min.)

BE 164

Solution 164 (4 min.)

BE 165

Solution 165 (4 min.)

BE 166

Solution 166 (4 min.)

Ex. 167

Solution 167 (12–18 min.)

Ex. 168

Solution 168 (19–24 min.)

Ex. 169

Ex. 169 (Cont.)

Solution 169 (22–27 min.)

Solution 169 (Cont.)

Ex. 170

Solution 170 (5 min.)

Ex. 171

Solution 171 (10–15 min.)

Ex. 172

Solution 172 (10–15 min.)

Ex. 173

Solution 173 (10 min.)

Ex. 174

Solution 174 (15–20 min.)

Ex. 175

Solution 175 (15–20 min.)

Ex. 176

Solution 176 (12–17 min.)

Ex. 177

Solution 177 (15–20 min.)

Ex. 178

Solution 178 (15–20 min.)

Ex. 179

Solution 179 (15–20 min.)

Ex. 180

Solution 180 (8–10 min.)

Ex. 181

Solution 181 (15–20 min.)

Ex. 182

Solution 182 (10 min.)

Solution 182 (Cont.)

Ex. 183

Solution 183 (10 min.)

Ex. 184

Ex. 184 (Cont.)

Solution 184 (20–25 min.)

Ex. 185

Solution 185 (6–8 min.)

Ex. 186

Solution 186 (5 min.)

Ex. 187

Solution 187 (19–24 min.)