cost accounting test bank chapter 3

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Cost Accounting, 15e (Horngren/Datar/Rajan) Chapter 3 Cost-Volume-Profit Analysis

Objective 3.1

1) Managers use cost-volume-profit (CVP) analysis to ________. A) forecast the cost of capital for a given period of time

B) to study the behavior of and relationship among the elements such as total revenues, total costs, and income

C) estimate the risks associated with a given job

D) analyse a firm's profitability and help to decide wealth distribution among its stakeholders Answer: B

Diff: 1

Objective: 1

AACSB: Analytical thinking

2) One of the first steps to take when using CVP analysis to help make decisions is ________. A) calculating the break-even point

B) identifying the variable and fixed costs

C) calculation of the degree of operating leverage for the company D) estimating the volume of sales to make a good profit Answer: B

Diff: 2

Objective: 1

AACSB: Analytical thinking

3) Which of the following is true of cost-volume-profit analysis? A) The theory assumes that all costs are variable.

B) The theory assumes that units manufactured equal units sold.

C) The theory states that total variable costs remain the same over a relevant range. D) The theory states that total costs remain the same over the relevant range. Answer: B

Diff: 1

Objective: 1

AACSB: Analytical thinking

4) The selling price per unit less the variable cost per unit is the ________. A) fixed cost per unit B) gross margin C) margin of safety

D) contribution margin per unit Answer: D

Diff: 1

Objective: 1

AACSB: Analytical thinking

5) In the graph method of CVP analysis, the total revenues line always begins from the x-axis and the total costs line begins from the fixed cost line. Answer: TRUE

Diff: 2

Objective: 1

AACSB: Analytical thinking

6) Which of the following is an assumption of CVP analysis?

A) Total costs can be divided into a fixed component and a component that is variable with respect to the level of output.

B) When graphed, total costs curve upward.

C) The unit-selling price is variable as it is subject to demand and supply.

D) Total costs can be divided into inventoriable and period costs with respect to the level of output. Answer: A

Diff: 2

Objective: 1

AACSB: Analytical thinking

7) Which of the following is true of CVP analysis?

A) Costs may be separated into separate inventoriable and period components with respect to the level of output.

B) Total revenues and total costs are linear in relation to output units.

C) Unit selling price, unit variable costs, and unit fixed costs are known and remain constant.

D) Proportion of different products will vary according to demand and supply when multiple products are sold. Answer: B

Diff: 2

Objective: 1

AACSB: Analytical thinking

8) A revenue driver is defined as ________. A) any factor that affects costs and revenues B) any factor that affects revenues

C) the only factor that can influence a change in selling price D) the only factor that can influence a change in demand Answer: B

Diff: 1

Objective: 1

AACSB: Analytical thinking

9) As per CVP, operating income calculations use ________. A) net income and dividends

B) income tax expense and net income C) contribution margins and fixed costs

D) nonoperating revenues and nonoperating expenses Answer: C

Diff: 1

Objective: 1

AACSB: Analytical thinking

10) Which of the following is true about the assumptions underlying basic CVP analysis? A) Selling price varies with demand and supply of the product.

B) Only selling price and variable cost per unit are known and constant.

C) Only selling price, variable cost per unit, and total fixed costs are known and constant.

D) Selling price, variable cost per unit, fixed cost per unit, and total fixed costs are known and constant. Answer: C

Diff: 1

Objective: 1

AACSB: Analytical thinking

11) The contribution margin income statement ________. A) reports gross margin

B) is allowed for external reporting to shareholders C) categorizes costs as either direct or indirect

D) can be used to predict future profits at different levels of activity Answer: D

Diff: 1

Objective: 1

AACSB: Analytical thinking

12) Contribution margin equals ________. A) revenues minus period costs B) revenues minus product costs C) revenues minus variable costs D) revenues minus fixed costs Answer: C

Diff: 1

Objective: 1

AACSB: Analytical thinking

Answer the following questions using the information below:

Shine Jewelry sells 400 units resulting in $7,000 of sales revenue, $3,000 of variable costs, and $1,500 of fixed costs.

13) Contribution margin per unit is ________. A) $4.00 B) $11.00 C) $10.00 D) $8.00 Answer: C

Explanation: C) ($7,000 ? $3,000) / 400 units = $10 per unit

Diff: 2

Objective: 1

AACSB: Application of knowledge

14) Calculate the variable cost per unit. A) $11.00 B) $7.00 C) $8.00 D) $7.50 Answer: D

Explanation: D) $3,000 / 400 = $7.50

Diff: 2

Objective: 1

AACSB: Application of knowledge

Answer the following questions using the information below:

Tally Corp. sells softwares during the recruiting seasons. During the current year, 11,000 softwares were sold resulting in $440,000 of sales revenue, $110,000 of variable costs, and $48,000 of fixed costs. 15) Contribution margin per software is ________. A) $10.00 B) $30.00 C) $40.00 D) $36.00 Answer: B

Explanation: B) ($440,000 ? $110,000) / 11,000 = $30 per software

Diff: 2

Objective: 1

AACSB: Application of knowledge

16) If sales increase by $60,000, operating income will increase by ________. A) $10,000 B) $40,000 C) $45,000 D) $60,000 Answer: D

Explanation: D) Price = $440,000 / 11,000 = $40.00 Sales in softwares = $60,000 / $30.00 = 2,000 softwares

Operating income increase = 2,000 softwares × $30.00 per = $60,000

Diff: 2

Objective: 1

AACSB: Application of knowledge

17) Pacific Company sells only one product for $11 per unit, variable production costs are $3 per unit, and selling and administrative costs are $1.50 per unit. Fixed costs for 10,000 units are $5,000. The operating income is ________. A) $6.50 per unit B) $6.00 per unit C) $5.50 per unit D) $5.00 per unit Answer: B

Explanation: B) Operating income = $11 ? $3 ? $1.50 - ($5,000 / 10,000) = $6.00

Diff: 2

Objective: 1

AACSB: Application of knowledge

18) The contribution income statement highlights ________. A) gross margin

B) the segregation of costs into period costs and inventoriable costs C) different product lines D) variable and fixed costs Answer: D

Diff: 1

Objective: 1

AACSB: Analytical thinking

19) Fixed costs equal $15,000, unit contribution margin equals $25, and the number of units sold equal 1,150. Operating income is ________. A) $28,750 B) $13,750 C) $15,000 D) $14,750 Answer: B

Explanation: B) (1,150 × $25) ? $15,000 = $13,750

Diff: 2

Objective: 1

AACSB: Application of knowledge

Answer the following questions using the information below:

Northern Star sells several products. Information of average revenue and costs is as follows: Selling price per unit $20.00 Variable costs per unit: Direct material $4.00 Direct manufacturing labor $1.60 Manufacturing overhead $0.40 Selling costs $2.00 Annual fixed costs $96,000 The company sells 12,000 units at the end of the year.

20) The contribution margin per unit is ________. A) $11.00 B) $12.00 C) $4.00 D) $14.00 Answer: B

Explanation: B) Contribution margin per unit = ($20 ? $4 ? $1.60 ? $0.40 ? $2) = $12

Diff: 2

Objective: 1

AACSB: Application of knowledge

21) If direct labor and direct material costs increase by $1 each, contribution margin ________. A) increases by $20,000 B) increases by $14,000 C) decreases by $24,000 D) decreases by $14,000 Answer: C

Explanation: C) Contribution margin = ($20 ? $5 ? $2.60 ? $0.40 ? $2) × 12,000 = $120,000.

Diff: 3

Objective: 1

AACSB: Application of knowledge

Answer the following questions using the information below:

Bell Company sells several products. Information of average revenue and costs is as follows: Selling price per unit $28.50 Variable costs per unit: Direct material $5.25 Direct manufacturing labor $1.15 Manufacturing overhead $0.25 Selling costs $1.85 Annual fixed costs $110,000 The company sells 10,000 units.

22) The contribution margin per unit is ________. A) $15 B) $20 C) $22 D) $125

Answer: B

Explanation: B) Contribution margin per unit = $28.50 ? $5.25 ? $1.15 ?$0.25 ? $1.85 = $20.00

Diff: 2

Objective: 1

AACSB: Application of knowledge

23) What is the proportion of variable costs to total costs? A) 45.00% B) 48.56% C) 53.56% D) 43.56% Answer: D

Explanation: D) Total variable costs = $5.25 + $1.15 + $0.25 + $1.85 = $8.50 × 10,000 = $85,000 Total costs = $85,000 + $110,000 = $195,000.

Variable cost proportion = $85,000 / $195,000 = 43.56%

Diff: 2

Objective: 1

AACSB: Application of knowledge

Answer the following questions using the information below:

Alex Furniture sells a table for $850. His fixed costs are $25,000, while his variable costs are $500 per table. He currently plans to sell 175 tables this month.

24) What is the budgeted revenue for the month assuming that Alex sells 175 tables? A) $145,750 B) $148,750 C) $150,000 D) $142,250 Answer: B

Explanation: B) Budgeted revenue = 175 × $850 = $148,750

Diff: 2

Objective: 1

AACSB: Application of knowledge

25) What is the budgeted operating income for the month assuming that Alex sells 175 tables? A) $45,250 B) $37,000 C) $36,250 D) $36,750 Answer: C

Explanation: C) Budgeted operating income = $148,750 ? *(175 × $500) + $25,000+ = $148,750 ? $112,500 = $36,250

Diff: 2

Objective: 1

AACSB: Application of knowledge

26) Winnz sells 8,000 units resulting in $100,000 of sales revenue, $35,000 of variable costs, and $45,000 of fixed costs. The contribution margin percentage is ________. A) 66.67% B) 65.0% C) 37.5% D) 75.0% Answer: B

Explanation: B) ($100,000 ? $35,000) / $100,000 = 65%

Diff: 2

Objective: 1

AACSB: Application of knowledge

27) Which of the following is the mathematical expression of contribution margin ratio? A) Contribution margin ratio = Contribution margin percentage × Revenues (in dollars) B) Contribution margin ratio = Contribution margin percentage × Fixed costs (in dollars) C) Contribution margin ratio = Contribution margin percentage × Variable costs (in dollars) D) Contribution margin ratio = Contribution margin percentage × Operating leverage Answer: A

Diff: 1

Objective: 1

AACSB: Analytical thinking

28) While doing cost-volume-profit analysis, a company should separate costs into fixed and variable components. Answer: TRUE

Diff: 1

Objective: 1

AACSB: Analytical thinking

29) Sales margin = Contribution margin percentage × Revenues (in dollars). Answer: FALSE

Diff: 1

Objective: 1

AACSB: Analytical thinking

30) It is assumed in CVP analysis that the unit selling price, unit variable costs, and unit fixed costs are known and constant. Answer: FALSE

Explanation: It is assumed in CVP analysis that the unit selling price, unit variable costs, and total fixed costs are known and constant.

Diff: 1

Objective: 1

AACSB: Analytical thinking

31) In CVP analysis, the number of output units is the only revenue driver. Answer: TRUE

Diff: 1

Objective: 1

AACSB: Analytical thinking

32) In CVP analysis, the graph of total revenues versus total costs is linear in nature relation to units sold within a relevant range and time period. Answer: TRUE

Diff: 1

Objective: 1

AACSB: Analytical thinking

33) The difference between total revenues and total variable costs is called profit margin. Answer: FALSE

Explanation: The difference between total revenues and total variable costs is called contribution margin.

Diff: 2

Objective: 1

AACSB: Analytical thinking

34) The shorter the time horizon, the lower the percentage of total costs considered fixed. Answer: FALSE

Explanation: The shorter the time horizon, the higher the percentage of total costs considered fixed.

Diff: 2

Objective: 1

AACSB: Analytical thinking

35) The three methods used to study CVP analysis are graphical method, contribution method, and equation method. Answer: TRUE

Diff: 1

Objective: 1

AACSB: Analytical thinking

36) Contribution margin = Contribution margin percentage × Revenues (in dollars). Answer: TRUE

Diff: 1

Objective: 1

AACSB: Analytical thinking

37) A revenue driver is a variable, such as volume, that causally affects revenues. Answer: TRUE

Diff: 1

Objective: 1

AACSB: Analytical thinking

38) Operating income plus total fixed costs equals the contribution margin. Answer: TRUE

Explanation: Total revenues less total variable costs equal the contribution margin.

Diff: 2

Objective: 1

AACSB: Analytical thinking

39) A revenue driver is a variable, such as volume, that causally affects revenues. Answer: TRUE

Explanation: Gross margin is reported on the absorption costing income statement.

Diff: 1

Objective: 1

AACSB: Analytical thinking

40) The classification of costs as variable and fixed depends on the relevant range, the length of the time horizon, and the specific decision situation. Answer: TRUE

Diff: 2

Objective: 1

AACSB: Application of knowledge

41) The difference between total revenues and total variable costs is called contribution margin. Answer: TRUE

Diff: 1

Objective: 1

AACSB: Analytical thinking

42) Contribution margin per unit is a useful tool for calculating contribution margin and operating income.

Answer: TRUE

Explanation: True, because all variable costs are subtracted to compute contribution margin, but only COGS is subtracted to compute gross margin.

Diff: 2

Objective: 1

AACSB: Analytical thinking

43) Arthur's Plumbing reported the following: Revenues $4,500 Variable manufacturing costs $ 900 Variable nonmanufacturing costs $ 810 Fixed manufacturing costs $ 630 Fixed nonmanufacturing costs $ 545

Required:

a. Compute contribution margin.

b. Compute contribution margin percentage. c. Compute gross margin.

d. Compute gross margin percentage. e. Compute operating income. Answer:

a. Contribution margin $4,500 - $900 - $810 = $2,790

b. Contribution margin percentage = ($2,790/$4,500) × 100 = 62% c. Gross margin $4,500 - $900 - $630 = $2,970

d. Gross margin percentage = ($2,970/$4,500) × 100 = 66%

e. Operating income $4,500 - $900 - $810 - $630 - $545 = $1,615

Diff: 3

Objective: 1

AACSB: Application of knowledge

Objective 3.2

1) Winnz sells 8,000 units resulting in $100,000 of sales revenue, $35,000 of variable costs, and $45,000 of fixed costs. To achieve $150,000 in operating income, sales must total ________. A) $440,000 B) $160,000 C) $130,000 D) $300,000 Answer: D

Explanation: D) ($150,000 + $45,000) / 65% = $300,000 in sales

Diff: 2

Objective: 2

AACSB: Application of knowledge

Answer the following questions using the information below:

Star Jewelry sells 500 units resulting in $75,000 of sales revenue, $28,000 of variable costs, and $18,000 of fixed costs.

2) Breakeven point in units is ________. A) 196 units B) 203 units C) 185 units D) 192 units Answer: D

Explanation: D) Contribution margin per unit = ($75,000 ? $28,000) / 500 = $94

Breakeven point = $18,000 / $94 = 191.49 units. Hence breakeven is approximately 192 units.

Diff: 2

Objective: 2

AACSB: Application of knowledge

3) The number of units that must be sold to achieve $40,000 of operating income is ________. A) 677 units B) 717 units C) 617 units D) 650 units Answer: C

Explanation: C) ($75,000 ? $28,000) / 500 = $94

The number of units that must be sold to achieve $40,000 of operating income = ($18,000 + $40,000) / $94 = 617 units

Diff: 2

Objective: 2

AACSB: Application of knowledge

4) Sky High sells helicopters. During the current year, 100 helicopters were sold resulting in $820,000 of sales revenue, $250,000 of variable costs, and $342,000 of fixed costs. Breakeven point in units is ________. A) 80 units B) 64 units C) 60 units D) 78 units Answer: C

Explanation: C) Explanation: Contribution margin per unit = ($820,000 - $250,000) / 100 = $570,000 / 100 = $5,700 per unit.

Breakeven point = $342,000 / $5,700 = 60 units

Diff: 2

Objective: 2

AACSB: Application of knowledge

5) Sky High sells helicopters. During the current year, 100 helicopters were sold resulting in $820,000 of sales revenue, $250,000 of variable costs, and $342,000 of fixed costs. The number of helicopters that must be sold to achieve $300,000 of operating income is ________. A) 113 units B) 102 units C) 96 units D) 100 units Answer: A

Explanation: A) Number of helicopters to be sold to achieve an operating income of $300,000 = ($342,000 + $300,000) / $5,700 = 112.6 units = 113 units

Diff: 2

Objective: 2

AACSB: Application of knowledge

6) At the breakeven point of 2,000 units, variable costs total $4,000 and fixed costs total $6,000. The 2,001st unit sold will contribute ________ to profits. A) $1 B) $2 C) $3 D) $5

Answer: C

Explanation: C) Fixed costs of $6,000/2,000 units = Contribution Margin of $3 per unit.

Diff: 2

Objective: 2

AACSB: Application of knowledge

7) The breakeven point is the activity level where ________. A) revenues equal fixed costs B) revenues equal variable costs

C) contribution margin equals total costs

D) revenues equal the sum of variable and fixed costs Answer: D

Diff: 1

Objective: 2

AACSB: Analytical thinking

8) Breakeven point in units is ________.

A) total costs divided by profit margin per unit

B) contribution margin per unit divided by total cost per unit C) fixed costs divided by contribution margin per unit

D) the sum of fixed and variable costs divided by contribution margin per unit Answer: C

Diff: 1

Objective: 2

AACSB: Analytical thinking

9) Sales total $400,000 when variable costs total $300,000 and fixed costs total $50,000. The breakeven point in sales dollars is ________. A) $200,000 B) $120,000 C) $170,000 D) $210,000 Answer: A

Explanation: A) Contribution margin percentage = ($400,000 ? $300,000) / $400,000 = 25%; BE sales = $50,000 / 0.25 = $200,000

Diff: 3

Objective: 2

AACSB: Application of knowledge

10) The breakeven point revenues is calculated by dividing ________. A) fixed costs by total revenues

B) fixed costs by contribution margin percentage C) total revenues by fixed costs

D) contribution margin percentage by fixed costs Answer: B

Diff: 2

Objective: 2

AACSB: Analytical thinking

11) At breakeven point, ________. A) operating income is equal to zero

B) contribution margin minus fixed costs is equal to profits earned C) revenues equal fixed costs minus variable costs

D) breakeven revenues equal fixed costs divided by the variable cost per unit Answer: A

Diff: 2

Objective: 2

AACSB: Analytical thinking

12) The breakeven point decreases if ________. A) the variable cost per unit increases B) the total fixed costs decrease

C) the contribution margin per unit decreases D) the selling price per unit decreases Answer: B

Diff: 2

Objective: 2

AACSB: Application of knowledge

13) Assume only the specified parameters change in a CVP analysis. The contribution margin percentage increases when ________. A) total fixed costs increase B) total fixed costs decrease

C) variable costs per unit increase D) variable costs per unit decrease Answer: D

Diff: 1

Objective: 2

AACSB: Analytical thinking

14) What is the breakeven point in units, assuming a product's selling price is $100, fixed costs are $16,000, unit variable costs are $20, and operating income is $5,200? A) 100 units B) 300 units C) 400 units D) 200 units Answer: D

Explanation: D) Unit contribution margin = $100 ? $20 = $80. Breakeven point in units = $16,000 / $80 = 200 units

Diff: 2

Objective: 2

AACSB: Application of knowledge

15) If unit outputs exceed the breakeven point ________. A) there will be an increase in fixed costs B) total sales revenue will exceed fixed costs C) total sales revenue will exceed variable costs D) there will be a profit Answer: D

Diff: 2

Objective: 2

AACSB: Application of knowledge

16) How many units would have to be sold to yield a target operating income of $23,000, assuming variable costs are $25 per unit, total fixed costs are $2,000, and the unit selling price is $30? A) 4,800 units B) 4,400 units C) 5,000 units D) 5,200 units Answer: C

Explanation: C) Desired sales = ($2,000 + $23,000) / ($30 ? $25) = 5,000 units

Diff: 3

Objective: 2

AACSB: Application of knowledge

17) If the breakeven point is 1,000 units and each unit sells for $50, then ________. A) selling 1,040 units will result in a loss B) selling $60,000 will result in a loss

C) selling $50,000 will result in zero profit D) selling $45,000 will result in profit Answer: C

Explanation: C) 1,000 × $50 = $50,000 of BE sales

Diff: 2

Objective: 2

AACSB: Application of knowledge

18) If breakeven point is 1,000 units, each unit sells for $30, and fixed costs are $10,000, then on a graph the ________.

A) total revenue line and the total cost line will intersect at $30,000 of revenue B) total cost line will be zero at zero units sold C) revenue line will start at $10,000

D) total revenue line and the total cost line will intersect at $40,000 of revenue Answer: A

Diff: 3

Objective: 2

AACSB: Application of knowledge

19) When fixed costs are $50,000 and variable costs are 60% of the selling price, then breakeven sales are ________. A) $115,000 B) $125,000 C) $175,000 D) $275,000 Answer: B

Explanation: B) $50,000 / (1 ? 0.60) = $125,000 in BE sales

Diff: 2

Objective: 2

AACSB: Application of knowledge

Answer the following questions using the information below:

Ruben intends to sell his customers a special round-trip airline ticket package. He is able to purchase the package from the airline carrier for $150 each. The round-trip tickets will be sold for $200 each and the airline intends to reimburse Ruben for any unsold ticket packages. Fixed costs include $5,000 in advertising costs.

20) What is the contribution margin per ticket package? A) $50 B) $100 C) $150 D) $200 Answer: A

Explanation: A) $200 - $150 = $50

Diff: 2

Objective: 2

AACSB: Application of knowledge

21) How many ticket packages will Ruben need to sell to break even? A) 34 packages B) 50 packages C) 100 packages D) 150 packages Answer: C

Explanation: C) $200X - $150X - $5,000 = 0; X = 100

Diff: 2

Objective: 2

AACSB: Application of knowledge

22) How many ticket packages will Ruben need to sell in order to achieve $60,000 of operating income? A) 367 packages B) 434 packages C) 1,100 packages D) 1,300 packages Answer: D

Explanation: D) $200X - $150X - $5,000 = $60,000; X = 1,300

Diff: 2

Objective: 2

AACSB: Application of knowledge

23) For every $25,000 of ticket packages sold, operating income will increase by ________. A) $6,250 B) $12,500 C) $18,750 D) $15,000 Answer: A

Explanation: A) $25,000 × [($200 - $150 / $200)] = $6,250

Diff: 3

Objective: 2

AACSB: Application of knowledge

24) Bovous Stores, Inc., sells several products. Information of average revenue and costs is as follows: Selling price per unit $20.00 Variable costs per unit: Direct material $4.00 Direct manufacturing labor $1.60 Manufacturing overhead $0.40 Selling costs $2.00 Annual fixed costs $96,000

What is the contribution margin percentage? A) 60% B) 66% C) 33% D) 55% Answer: A

Explanation: A) Contribution margin percentage = ($20 ? $4.00 ? $1.60 ? $0.40 ? $2.00) / 20 = 60%

Diff: 2

Objective: 2

AACSB: Application of knowledge

25) Bovous Stores, Inc., sells several products. Information of average revenue and costs is as follows: Selling price per unit $20.00 Variable costs per unit: Direct material $4.00 Direct manufacturing labor $1.60 Manufacturing overhead $0.40 Selling costs $2.00 Annual fixed costs $96,000

The revenues that the company must earn annually to make a profit of $144,000 are ________. A) $378,000 B) $425,000 C) $400,000 D) $450,000 Answer: C

Explanation: C) Desired sales = ($96,000 + $144,000) / 0.60 = $400,000

Diff: 2

Objective: 2

AACSB: Application of knowledge

26) Frazer Corp sells several products. Information of average revenue and costs is as follows: Selling price per unit $28.50 Variable costs per unit: Direct material $5.50 Direct manufacturing labor $1.15 Manufacturing overhead $0.85 Selling costs $2.50 Annual fixed costs $125,000

What is the operating income earned if the company sells 15,000 units? A) $162,750 B) $150,000 C) $148,500 D) $152,500 Answer: D

Explanation: D) Contribution = $28.5 - $5.50 ? $1.15 ? $0.85 - $2.50 = $18.50 × 15,000 = $277,500 Operating income = $277,500 - $125,000 = $152,500

Diff: 2

Objective: 2

AACSB: Application of knowledge

27) Frazer Corp sells several products. Information of average revenue and costs is as follows: Selling price per unit $28.50 Variable costs per unit: Direct material $5.50 Direct manufacturing labor $1.15 Manufacturing overhead $0.85 Selling costs $2.50 Annual fixed costs $125,000

If the company decides to lower its selling price by 12.25%, the operating income is reduced by ________. A) $52,500 B) $50,500 C) $55,500 D) $29,500 Answer: A

Explanation: A) $28.50 × 12.25% = $3.50. Therefore the new selling price is $25.00 ($28.50 - $3.50). Contribution = ($25.00 - $5.50 ? $1.15 ? $0.85 - $2.50) × 15,000 = $225,000 Operating income = $225,000 - $125,000 = $100,000.

Diff: 3

Objective: 2

AACSB: Application of knowledge

Answer the following questions using the information below:

The following information is for High Corp: Selling price $60 per unit Variable costs $40 per unit Total fixed costs $125,000

28) The number of units that High Corp must sell to reach targeted operating income of $25,000 is ________. A) 6,000 units B) 7,500 units C) 3,334 units D) 4,334 units Answer: B

Explanation: B) ($125,000 + $25,000)/($60 ? $40) = 7,500 units

Diff: 2

Objective: 2

AACSB: Application of knowledge

29) If targeted operating income is $50,000, then targeted sales revenue is ________. A) $525,052 B) $533,333 C) $498,133 D) $517,072 Answer: A

Explanation: A) ($125,000 + $50,000) / *($60 ? $40) / $60+ = $525,052

Diff: 2

Objective: 2

AACSB: Application of knowledge

Answer the following questions using the information below:

Stephanie's Bridal Shoppe sells wedding dresses. The average selling price of each dress is $1,000, variable costs are $400, and fixed costs are $90,000.

30) What is the Bridal Shoppe's operating income when 200 dresses are sold? A) $30,000 B) $80,000 C) $200,000 D) $100,000 Answer: A

Explanation: A) 200($1,000) - 200($400) - $90,000 = $30,000

Diff: 2

Objective: 2

AACSB: Application of knowledge

21) Query Company sells pillows for $25.00 each. The manufacturing cost, all variable, is $10 per pillow. The company is planning on renting an exhibition booth for both display and selling purposes at the annual crafts and art convention. The convention coordinator allows three options for each participating company. They are:

1. paying a fixed booth fee of $5,010, or

2. paying an $4,000 fee plus 10% of revenue made at the convention, or 3. paying 20% of revenue made at the convention.

Required:

a. Compute the breakeven sales in pillows of each option.

b. Which option should Query Company choose, assuming sales are expected to be 800 pillows? Answer:

a. Option 1 N = Breakeven in pillows $25N - $10N - $5,010 = 0 $15N - $5,010 = 0 N = $5,010/$15 = 334 pillows Option 2 N = Breakeven in pillows $25N - $10N - 0.10($25N) - $4,000 = 0 $12.5N - $4,000 = 0 N = $4,000/$12.5 = 320 pillows Option 3 N = Breakeven in pillows $25N - $10N - 0.20($25N) = 0 $10N - $0 = 0 N = $0/$10 = 0 pillows

b. Option 1 profit for 800 pillows = $15 × 800 - $5,010 = $6,990 Option 2 profit for 800 pillows = $12.5 × 800 - 4,000 = $6,000 Option 3 profit for 800 pillows = $10 × 800 = $8,000 Option 3 is the best choice.

Diff: 3

Objective: 6

AACSB: Analytical thinking

22) Auto Tires has been in the tire business for four years. It rents a building but owns all of its equipment. All employees are paid a fixed salary except for the busy season (April-June), when temporary help is hired by the hour. Utilities and other operating charges remain fairly constant during each month except those in the busy season.

Selling prices per tire average $75 except during the busy season. Because a large number of customers buy tires prior to winter, discounts run above average during the busy season. A 15% discount is given when two tires are purchased at one time. During the busy months, selling prices per tire average $60.

The president of Auto Tires is somewhat displeased with the company's management accounting system because the cost behavior patterns displayed by the monthly breakeven charts are inconsistent; the busy months' charts are different from the other months of the year. The president is never sure if the company has a satisfactory margin of safety or if it is just above the breakeven point.

Required:

a. What is wrong with the accountant's computations?

b. How can the information be presented in a better format for the president? Answer:

a. The accounting system includes some assumptions about the CVP model that does not hold for Auto Tire. The CVP model requires cost and revenue to be linear. During the busy months, the company has costs and revenues which behave differently than during the other months of the year. The revenue line turns down (less slope) with the average selling price per tire decreasing from $75 to $60. The variable costs line probably turns upward (increasing slope) with the additional hourly workers being added to the work force.

b. The accountant may want to present two sets of information regarding the revenue and cost

behaviors of the company: one for the busy season and one for the other months of the year. It would show that while the breakeven point actually increases during the busy months (a negative), the marginal income increases because of increased sales (a positive).

Diff: 3

Objective: 6

AACSB: Analytical thinking

23) Dolph and Evan started the DE Restaurant in 20X3. They rented a building, bought equipment, and hired two employees to work full time at a fixed monthly salary. Utilities and other operating charges remain fairly constant during each month.

During the past two years, the business has grown with average sales increasing 1% a month. This

situation pleases both Dolph and Evan, but they do not understand how sales can grow by 1% a month while profits are increasing at an even faster pace. They are afraid that one day they will wake up to increasing sales but decreasing profits.

Required:

Explain why the profits have increased at a faster rate than sales. Use the terms variable costs and fixed costs in your response.

Answer: The fixed cost per meal served is decreasing with increased volumes, while the contribution margin per meal served remains constant. Apparently, most of the restaurant's expenses are fixed.

Therefore, as sales pass the breakeven point the profit will increase even faster because the fixed expenses have already been covered. This allows sales to cover only variable expenses before contributing to the profit margin, thereby causing it to increase at a faster rate.

Diff: 3

Objective: 6

AACSB: Analytical thinking

24) Freddie's Company has mostly fixed costs and Valerie's Company has mostly variable costs. Which company has the greatest risk of a net loss? Explain why.

Answer: Freddie's Company has the greatest risk of net loss because more units are required to reach breakeven point than for Valerie. Freddie's Company is operating at a higher operating leverage than Valerie's Company and hence faces a larger risk of loss during economic downturn.

Diff: 2

Objective: 6

AACSB: Analytical thinking

25) Suppose a company decided to automate a production line. Explain what effects this would have on a company's cost structure using CVP terminology. Could these changes have any possible negative effect on the firm?

Answer: An automated production line would increase fixed costs through extra depreciation on the new machinery and also decrease variable costs due to the elimination of direct labor as a result of

automation. This would increase the breakeven point. This could possibly have a negative effect on the firm if demand for the product produced by this production line is expected to decline in the future. With high fixed costs and low demand, a decline in profits might be more severe due to the presence of unchanging fixed costs as volume drops.

Diff: 2

Objective: 6

AACSB: Analytical thinking

26) If a company has a degree of operating leverage of 3.0 and sales increase by 25%, then ________. A) total fixed costs will increase by 75% B) total costs will increase by 75% C) profit will increase by 30% D) profit will increase by 75% Answer: D

Explanation: D) 3.0 × 25% = 75%

Diff: 3

Objective: 6

AACSB: Application of knowledge

27) If a company would like to increase its degree of operating leverage it should ________. A) increase its sales relative to its fixed costs B) increase its sales relative to its variable costs

C) increase its variable costs relative to its fixed costs D) increase its fixed costs relative to its variable costs Answer: D

Diff: 2

Objective: 6

AACSB: Application of knowledge

Objective 3.7

Answer the following questions using the information below:

The following information is for Alex Corp: Product X: Revenue $15.00 Variable Cost $2.50 Product Y: Revenue $25.00 Variable Cost $10.00 Total fixed costs $50,000

1) What is the breakeven point assuming the sales mix consists of two units of Product X and one unit of Product Y?

A) 1,000 units of Y and 2,000 units of X B) 1,113 units of Y and 2,025 units of X C) 2,313 units of Y and 4,025 units of X D) 1,250 units of Y and 2,500 units of X Answer: D

Explanation: D) D) N = units of product Y; and 2N = units of product X; ($15.00 ? $2.50) × 2N + ($25.00 ? $10.00) × N ? $50,000 = 0 $25N + $15N = $50,000 $40N = $50,000 N = 1,250 units

Product Y = 1,250 units; Product X = 2,500 units

Diff: 3

Objective: 7

AACSB: Application of knowledge

3) Black Pearl, Inc., sells a single product. The company's most recent income statement is given below.

Sales $50,000 Less variable expenses (30,000) Contribution margin 20,000 Less fixed expenses (12,500) Net income $ 7,500

Required:

a. Contribution margin ratio is ________%

b. Breakeven point in total sales dollars is $ ________

c. To achieve $40,000 in net income, sales must total $ ________

d. If sales increase by $50,000, net income will increase by $ ________ Answer:

a. Contribution margin ratio is $20,000 / $50,000 = 40% b. Fixed costs $12,500 / 0.40 CM% = $31,250 in sales

c. [Fixed costs $12,500 + Net income $40,000] / 0.40 CM% = $131,250 in sales d. $50,000 × 0.40 CM% = $20,000 increase in net income

Diff: 3

Objective: 3

AACSB: Application of knowledge

4) The selling price per unit is $25, variable cost per unit $15, and fixed cost per unit is $4. When this company operates above the breakeven point, the sale of one more unit will increase net income by $6. Answer: FALSE

Explanation: The sale of one more unit will increase net income by $10, ($25 - $15 = $10).

Diff: 2

Objective: 3

AACSB: Application of knowledge

5) A company with sales of $50,000, variable costs of $35,000, and fixed costs of $25,000 will earn a net income of $15,000. Answer: FALSE

Explanation: Net income = $50,000 - $35,000 - $25,000 = ($10,000)

Diff: 2

Objective: 3

AACSB: Application of knowledge

6) Which of the following statements about net income (NI) is true? A) NI = operating income plus nonoperating revenue. B) NI = operating income plus operating costs. C) NI = operating income less income taxes.

D) NI = operating income less cost of goods sold. Answer: C

Diff: 1

Objective: 3

AACSB: Analytical thinking

Answer the following questions using the information below:

Assume the following cost information for Fernandez Company: Selling price $120 per unit Variable costs $80 per unit Total fixed costs $80,000 Tax rate 40%

7) What minimum volume of sales dollars is required to earn an after-tax net income of $30,000? A) $465,000 B) $330,000 C) $390,000 D) $165,000 Answer: C

Explanation: C) Minimum volume of sales dollars is required = [$80,000 + ($30,000/0.6)] / [($120 - $80) / $120] = $390,000

Diff: 3

Objective: 3

AACSB: Application of knowledge

8) What is the number of units that must be sold to earn an after-tax net income of $42,000? A) 3,750 units B) 4,625 units C) 3,050 units D) 1,875 units Answer: A

Explanation: A) Required number of units = [$80,000 + ($42,000 / 0.6)] / ($120 - $80) = 3,750 units

Diff: 3

Objective: 3

AACSB: Application of knowledge

9) In CVP analysis, focusing on target net income rather than operating income ________. A) will increase the breakeven point B) will decrease the breakeven point C) will not change the breakeven point

D) will help managers construct a better capital policy Answer: C

Diff: 2

Objective: 3

AACSB: Analytical thinking

10) Which of the following is true of net income?

A) Net income is operating income divided by income tax rate.

B) Net income is operating income plus operating revenues minus operating costs minus income taxes. C) Net income is operating income plus nonoperating revenues minus nonoperating costs minus income taxes.

D) Net income is operating income minus nonoperating revenues minus nonoperating costs minus sales taxes.

Answer: C

Diff: 2

Objective: 3

AACSB: Analytical thinking

11) If selling price per unit is $40, variable costs per unit are $25, total fixed costs are $20,000, the tax rate is 30%, and the company sells 5,000 units, net income is ________. A) $32,158 B) $26,548 C) $28,500 D) $38,500 Answer: D

Explanation: D) Net income = *(($40 ? $25) × 5,000) ? $20,000+ × (1.0 ? 0.3) = $38,500

Diff: 2

Objective: 3

AACSB: Application of knowledge

12) The planned operating income is calculated by ________. A) dividing net income by tax rate B) dividing net income by 1 ? tax rate C) multiplying net income by tax rate D) multiplying net income by 1 ? tax rate Answer: B

Diff: 2

Objective: 3

AACSB: Analytical thinking

13) If Beta Corp's net income is $210,000 and the tax rate is 30%, then the company's planned operating income is ________. A) $325,000 B) $300,000 C) $273,000 D) $357,000 Answer: B

Explanation: B) Operating income = $210,000 / (0.70) = $300,000

Diff: 2

Objective: 3

AACSB: Application of knowledge

14) The Marietta Company has fixed costs of $60,000 and variable costs are 75% of the selling price. To realize profits of $10,000 from sales of 50,000 units, the selling price per unit ________. A) must be $1.20 B) must be $6.00 C) must be $5.60 D) must be $4.23 Answer: C

Explanation: C) Breakeven sales = ($60,000 + $10,000) / 0.25 = $280,000 Selling price = $280,000 / 50,000 units = $5.60 per unit

Diff: 2

Objective: 3

AACSB: Application of knowledge

15) An increase in the tax rate will increase the breakeven point. Answer: FALSE

Explanation: A change in the tax rate will not change the breakeven point.

Diff: 2

Objective: 3

AACSB: Application of knowledge

16) A firm operating at breakeven point will pay an income tax of 10%. Answer: FALSE

Explanation: A firm operating at breakeven point will not pay income tax as operating income is $0.

Diff: 2

Objective: 3

AACSB: Analytical thinking

17) All else being constant, an increase in operating income will result in an increase in net income. Answer: TRUE

Diff: 1

Objective: 3

AACSB: Application of knowledge

18) If planned net income is $30,000 and the tax rate is 30%, then planned operating income would be $39,000.

Answer: FALSE

Explanation: If planned net income is $30,000 and the tax rate is 30%, then planned operating income would be $42,857, *$30,000 / (1.0 ? 0.3) = $42,857+.

Diff: 1

Objective: 3

AACSB: Application of knowledge

19) The Holiday Card Company, a producer of specialty cards, has asked you to complete several calculations based upon the following information: Income tax rate 30% Selling price per unit $6.60 Variable cost per unit $5.28 Total fixed costs $46,200.00

Required:

a. What is the breakeven point in cards?

b. What sales volume is needed to earn an after-tax net income of $13,028.40? c. How many cards must be sold to earn an after-tax net income of $18,480? Answer:

a. Breakeven point in units = $46,200/($6.60 ? $5.28) = 35,000 units

b. Operating income = $13,028.40 / 0.70 = $18,612 $18,612 + $46,200 = $64,812 Contribution per unit = $6.60 ? $5.28 = $1.32 Breakeven sales in units = $64,812 / $1.32 = 49,100 units Breakeven sales = 49,100 units × $6.60 = $324,060

c. Operating income = $18,480/0.70 = $26,400 $26,400 + $46,200 = $72,600 Breakeven sales in units = $72,600 / $1.32 = 55,000 units

Diff: 2

Objective: 3

AACSB: Application of knowledge

20) James Corporation gathered the following information: Variable costs $550,000 Income tax rate 40% Contribution-margin ratio 30%

Required:

a. Compute total fixed costs assuming a breakeven volume in dollars of $2,000,000. b. Compute sales volume in dollars to produce an after-tax net income of $150,000. Answer:

a. Fixed costs = $2,000,000 × 0.30 = $600,000

b. Desired sales = ($600,000 + ($150,000 × (1?0.40)) / 0.30 = $2,833,333.33 or $2,833,334 units rounding up to the next whole unit.

Diff: 3

Objective: 3

AACSB: Application of knowledge

21) Explain net income and what implications can tax have on it that influences a manager's decision? Answer: Net income is operating income plus nonoperating revenues such as interest revenue minus nonoperating costs such as interest cost minus income taxes. Some decisions might not result in a large operating income, but their tax consequences make them attractive because they have a positive effect on net income–the measure that drives shareholders' dividends and returns.

Diff: 2

Objective: 3

AACSB: Analytical thinking

Objective 3.4

1) Assume only the specified parameters change in a cost-volume-profit analysis. If the contribution margin increases by $6 per unit, then ________. A) fixed costs increases by $6 per unit

B) operating profits decreases by $6 per unit C) fixed costs decreases by $6 per unit

D) operating profits increases by $6 per unit Answer: D

Diff: 2

Objective: 4

AACSB: Application of knowledge

2) Which of the following forms a part of decision making in CVP analysis? A) selection of inventory method for financial reporting purposes B) decision to form a capital policy C) decision to advertise

D) decision to improve the efficiency of the work force Answer: C

Diff: 1

Objective: 4

AACSB: Analytical thinking

3) All else being equal, a reduction in selling price will ________. A) increase contribution margin B) reduce fixed costs

C) increase variable costs D) reduce operating income Answer: D

Diff: 2

Objective: 4

AACSB: Application of knowledge

4) All else being equal, an increase in advertising expenditures will ________. A) reduce operating income B) reduce contribution margin C) increase variable costs D) increase selling price Answer: A

Diff: 2

Objective: 4

AACSB: Application of knowledge

5) Blistre Company operates on a contribution margin of 20% and currently has fixed costs of $500,000. Next year, sales are projected to be $3,000,000. An advertising campaign is being evaluated that costs an additional $80,000. How much would sales have to increase to justify the additional expenditure? A) $320,000 B) $380,000 C) $400,000 D) $600,000 Answer: C

Explanation: C) Required sales = $80,000 / 0.2 = $400,000

Diff: 2

Objective: 4

AACSB: Application of knowledge

6) Tony Manufacturing produces a single product that sells for $80. Variable costs per unit equal $30. The company expects total fixed costs to be $78,000 for the next month at the projected sales level of 2,500 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately.Suppose management believes that a $75,000 increase in the monthly advertising expense will result in a considerable increase in sales. Sales must increase by ________ to justify this additional expenditure? A) 1,698 units B) 1,500 units C) 1,550 units D) 1,339 units Answer: B

Explanation: B) $80X ? $30X ? $75,000 = 0; X = 1,500 units to cover the expenditures

Diff: 3

Objective: 4

AACSB: Application of knowledge

7) Tony Manufacturing produces a single product that sells for $80. Variable costs per unit equal $30. The company expects total fixed costs to be $78,000 for the next month at the projected sales level of 2,500 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately.Suppose that management believes that a 10% reduction in the selling price will result in a 10% increase in sales. If this proposed reduction in selling price is implemented ________.

A) operating income will decrease by $9,500 B) operating income will increase by $10,000 C) operating income will decrease by $6,000 D) operating income will increase by $11,300 Answer: A

Explanation: A) Reduction in revenues = $80 × 10% = $8 × 2,500 units = ($20,000) Increase in contribution = 2,500 units × 10% = 250 units × ($72 ? $30) = 10,500 Change in operating income ($9,500) Diff: 3

Objective: 4

AACSB: Application of knowledge

8) Craylon Manufacturing produces a single product that sells for $100. Variable costs per unit equal $25. The company expects total fixed costs to be $60,000 for the next month at the projected sales level of 1,000 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. Suppose that management believes that a $10,000 increase in the monthly advertising expense will result in a considerable increase in sales. Sales must increase by ________ to justify this additional expenditure. A) 123 units B) 134 units C) 243 units D) 143 units Answer: B

Explanation: B) $10,000/($100 ? $25) = 133.33 units to cover the expenditure

Diff: 2

Objective: 4

AACSB: Application of knowledge

9) Craylon Manufacturing produces a single product that sells for $100. Variable costs per unit equal $25. The company expects total fixed costs to be $60,000 for the next month at the projected sales level of 1,000 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. What is the effect on operating income with the increase of advertising expenses?

A) Operating income will decrease by $10,000. B) Operating income will increase by $11,000. C) Operating income will decrease by $18,000. D) Operating income will increase by $17,000. Answer: A

Explanation: A) Operating income without advertising expenses = $100 - 25 = $75 × 1,000 = 75,000 - 60,000 = $15,000

Operating income with advertising expenses =75,000 - (60,000 + 10,000) = $5,000

Diff: 3

Objective: 4

AACSB: Application of knowledge

10) If contribution margin decreases by $1 per unit, then operating profits will increase by $1 per unit. Answer: FALSE

Explanation: If contribution margin decreases by $1 per unit, then operating profits will decrease by $1 per unit.

Diff: 1

Objective: 4

AACSB: Application of knowledge

11) If variable costs per unit increase, then the breakeven point will decrease. Answer: FALSE

Explanation: If variable costs per unit increase, then the breakeven point will also increase.

Diff: 2

Objective: 4

AACSB: Application of knowledge

12) A planned increase in advertising would be considered an increase in variable costs in CVP analysis. Answer: FALSE

Explanation: A planned increase in advertising would be considered an increase in fixed costs in CVP analysis.

Diff: 1

Objective: 4

AACSB: Analytical thinking

13) A planned decrease in selling price would be expected to cause an increase in the quantity sold. Answer: TRUE

Diff: 1

Objective: 4

AACSB: Analytical thinking

14) In 2015, Craylon Company has sales of $1,000,000, variable costs of $250,000, and fixed costs of $200,000. In 2016, the company expects annual property taxes to decrease by $15,000.

Required:

a. Calculate operating income and the breakeven point for 2015. b. Calculate the breakeven point for 2016. Answer:

a. In 2015, operating income is $1,000,000 sales revenue ? $250,000 variable costs ? $200,000 fixed costs = $550,000. The breakeven point for 2015 is $266,667 in total sales dollars. Contribution margin ratio = ($1,000,000 - $250,000) / $1,000,000 = 0.75. Breakeven sales = $200,000 / 0.75 = $266,667.

b. The breakeven point for 2016 is $246,667 in total sales dollars. Estimated fixed costs for 2016 = $200,000 ? $15,000 = $185,000.

Breakeven sales = $185,000 total fixed costs / 75% CM ratio = $246,667.

Diff: 3

Objective: 4

AACSB: Application of knowledge

15) Furniture, Inc., sells lamps for $30. The unit variable cost per lamp is $22. Fixed costs total $9,600.

Required:

a. What is the contribution margin per lamp? b. What is the breakeven point in lamps?

c. How many lamps must be sold to earn a pretax income of $8,000? d. What is the margin of safety, assuming 1,500 lamps are sold? Answer:

a. Contribution margin per lamp = $30 - $22 = $8

b. N = Breakeven point in lamps $30N - $22N - $9,600 = 0 $8N - $9,600 = 0 N = $9,600/$8 = 1,200 lamps

c. N = Target sales in lamps $30N - $22N - $9,600 - $8,000 = 0 $8N - $17,600 = 0 N = $17,600/$8 = 2,200 lamps

d. Margin of safety = Sales - Breakeven sales = ($30.00 × 1,500) - $36,000 = $9,000

Diff: 3

Objective: 4

AACSB: Application of knowledge

16) Tom's Tire Tower, Inc., sells tires for $110. The unit variable cost per tire is $85. Fixed costs total $475,000.

Required:

a. What is the contribution margin per tire? b. What is the breakeven point in tires?

c. How many tires must be sold to earn a pretax income of $450,000? d. What is the margin of safety, assuming 33,000 tires are sold? Answer:

a. Contribution margin per tire = $110 - $85 = $25

b. N = Breakeven point in tires $110N - $85N - $475,000 = 0 $25N - $475,000 = 0 N = $475,000/$25 = 19,000 tires

c. N = Target sales in tires $110N - $85N - $450,000 -$ 475,000 = 0 $25N - $925,000 = 0 N = $925,000/$25 = 37,000 tires

d. Margin of safety = Sales - Breakeven sales = ($110 × 33,000) - ($110 × 19,000) = $1,540,000

Diff: 3

Objective: 4

AACSB: Application of knowledge

Objective 3.5

1) The margin of safety is the difference between ________. A) budgeted expenses and breakeven expenses B) budgeted revenues and breakeven revenues

C) actual operating income and budgeted operating income D) actual sales margin and budgeted sales margin Answer: B

Diff: 1

Objective: 5

AACSB: Analytical thinking

2) To apply CVP analysis in the hotel industry, which of the following is the most important measure of output?

A) number of room-nights occupied B) number of visitors

C) number of dishes on the menu D) number of employees Answer: A

Diff: 2

Objective: 5

AACSB: Application of knowledge

3) Stones Manufacturing, sells a marble slab for $1,000. Fixed costs are $30,000, while the variable costs are $400 per slab. The company currently plans to sell 200 slabs this month. What is the margin of safety assuming 75 slabs are budgeted? A) $40,000 B) $38,000 C) $25,000 D) $33,000 Answer: C

Explanation: C) Breakeven in number of slabs = $30,000 / ($1,000 ? $400) = 50 slabs Actual sales 75 slabs × $1,000 = $75,000 Breakeven sales 50 slabs × $1,000 = $50,000 Margin of safety 25 slabs $25,000 Diff: 3

Objective: 5

AACSB: Application of knowledge

4) Globus Autos sells a single product. 8,000 units were sold resulting in $80,000 of sales revenue, $20,000 of variable costs, and $10,000 of fixed costs. If variable costs decrease by $1 per unit, the new margin of safety is ________. A) $65,000 B) $73,567 C) $68,235 D) $66,765 Answer: C

Explanation: C) Variable cost per unit = $20,000 / 8,000 = $2.50 Contribution margin percentage = [$10 ? ($2.50 ? $1.00)+ / $10 = 85%

New breakeven point = *$10 ? ($2.50 ? $1.00)+ / $10 = 85%; $10,000 / 0.85 = $11,765 Old breakeven point = $10 - 2.50 = $7.50 / $10 = 75%; $10,000 / 0.75 = $13,333 Margin of safety = $80,000 - $11,765 = $68,235

Diff: 3

Objective: 5

AACSB: Application of knowledge

5) Globus Autos sells a single product. 8,000 units were sold resulting in $80,000 of sales revenue, $20,000 of variable costs, and $10,000 of fixed costs. If a change is made in one parameter of CVP analysis, it is an example of ________. A) sensitivity analysis B) incremental budgeting C) variance analysis D) multiple cost drivers Answer: A

Diff: 1

Objective: 5

AACSB: Analytical thinking

6) Sensitivity analysis is a \the originally predicted data are not achieved or if an underlying assumption changes. Answer: TRUE

Diff: 1

Objective: 5

AACSB: Analytical thinking

7) Margin of safety measures the difference between budgeted revenues and breakeven revenues. Answer: TRUE

Diff: 1

Objective: 5

AACSB: Analytical thinking

8) If a company's breakeven revenue is $1,000 and its budgeted revenue is $1,250, then its margin of safety percentage is 20%. Answer: TRUE

Explanation: The margin of safety percentage is 20% as the denominator of the ratio is the budgeted level and not the breakeven level. 1,250 - 1,000 = $250 / $1,250 = 20%

Diff: 2

Objective: 5

AACSB: Analytical thinking

9) Sensitivity analysis helps to evaluate the risk associated with decisions. Answer: TRUE

Diff: 1

Objective: 5

AACSB: Analytical thinking

10) Alex Miller, Inc., sells car batteries to service stations for an average of $30 each. The variable cost of each battery is $20 and monthly fixed manufacturing costs total $10,000. Other monthly fixed costs of the company total $8,000.

Required:

a. What is the breakeven point in batteries?

b. What is the margin of safety, assuming sales total $60,000?

c. What is the breakeven level in batteries, assuming variable costs increase by 20%?

d. What is the breakeven level in batteries, assuming the selling price goes up by 10%, fixed manufacturing costs decline by 10%, and other fixed costs decline by $100? Answer:

a. N = Breakeven units $30N - $20N - $10,000 - $8,000 = 0 $10N - $18,000 = 0 N = $18,000/$10 = 1,800 batteries

b. Margin of safety = $60,000 - ($30 × 1,800) = $6,000

c. N = Breakeven units $30N - $24N - $10,000 - $8,000 = 0 $6N - $18,000 = 0 N = $18,000/$6 = 3,000 batteries

d. N = Breakeven units $33N - $20N - $9,000 - $7,900 = 0 $13N - $16,900 = 0 N = $16,900/$13 = 1,300 batteries

Diff: 3

Objective: 5

AACSB: Application of knowledge

11) Explain sensitivity analysis and how do managers use sensitivity analysis to evaluate its implications? Answer: Sensitivity analysis is a \change if the original predicted data are not achieved or if an underlying assumption changes. The

analysis answers questions such as \by 5% from the original prediction?\increases by 10%?\commits to funding a project.

Diff: 2

Objective: 5

AACSB: Analytical thinking

12) ________ is the process of varying key estimates to identify those estimates that are the most critical to a decision.

A) The graph method B) A sensitivity analysis

C) The degree of operating leverage D) Sales mix Answer: B

Diff: 1

Objective: 5

AACSB: Analytical thinking

Objective 3.6

Answer the following questions using the information below:

Southwestern College is planning to hold a fund raising banquet at one of the local country clubs. It has two options for the banquet: OPTION one: Crestview Country Club a. Fixed rental cost of $1,000 b. $12 per person for food OPTION two: Tallgrass Country Club a. Fixed rental cost of $3,000 b. A caterer who charges $8.00 per person for food

Southwestern College has budgeted $1,800 for administrative and marketing expenses. It plans to hire a band which will cost another $800. Tickets are expected to be $30 per person. Local business supporters will donate any other items required for the event.

1) Which option provides the least amount of risk? A) Option one B) Option two

C) Both options provide the same amount of risk. D) Option one is risk-free Answer: A

Diff: 1

Objective: 6

AACSB: Analytical thinking

2) Which option has the lowest breakeven point? A) Option one B) Option two

C) Both options have the same breakeven point.

D) The lowest breakeven point cannot be determined. Answer: A

Explanation: A)

Option one: $30X - $12X - $1,000 - $1,800 - $800 = 0; X = $200 Option two: $30X - $8X - $3,000 - $1,800 - $800 = 0; X = $255

Diff: 2

Objective: 6

AACSB: Analytical thinking

3) Which option provides the greatest operating income if 600 people attend? A) Option one B) Option two

C) Operating incomes are identical.

D) Both the options have 0 operating income as they are operating at breakeven point. Answer: B

Explanation: B) Option one: $18 × 600 - $3,600 = $7,200; Option two: $22 × 600 - $5,600 = $7,600

Diff: 3

Objective: 6

AACSB: Application of knowledge

4) Which option provides the greatest degree of operating leverage if 600 people attend? A) Option one B) Option two

C) Both options provide equal degrees of operating leverage. D) Operating leverage is indeterminable. Answer: B

Explanation: B) Option one: $18 × 600 / $7,200 = 1.50; Option two: $22 × 600 / $7,600 = 1.74

Diff: 3

Objective: 6

AACSB: Application of knowledge

5) Option one: Fixed costs of $10,000 and a breakeven point of 500 units. Option two: Fixed costs of $20,000 and a breakeven point of 700 units.

Which option should you choose if you are expecting to produce 600 units? A) Option one as sales is higher than breakeven B) Option two as sales is lower than breakeven

C) Option two as it would lead to a higher operating income D) Option one as fixed costs is more Answer: A

Explanation: A) Option one will result in operating income while Option 2 will result in an operating loss.

Diff: 2

Objective: 6

AACSB: Application of knowledge

6) Sales of Blistre Autos are 350,000, variable cost is 200,000, fixed cost is 75,000, tax rate is 20%. Calculate the operating leverage of the company. A) 1.00 time B) 1.50 times C) 2.50 times D) 2.00 times Answer: D

Explanation: D) Operating income $350,000 - $200,000 - $75,000 = $75,000 Operating leverage $150,000 / $75,000 = 2 times

Diff: 2

Objective: 6

AACSB: Application of knowledge

7) In a company with low operating leverage, ________. A) fixed costs are more than the contribution margin

B) contribution margin and operating income are inversely related C) there is a higher possibility of net loss than a higher-leveraged firm D) less risk is assumed than in a highly leveraged firm Answer: D

Diff: 1

Objective: 6

AACSB: Analytical thinking

8) If the contribution margin ratio is 0.40, targeted operating income is $80,000, and targeted sales volume in dollars is $500,000, then the degree of operating leverage is ________. A) 1.50 times B) 2.00 times C) 2.50 times D) 3.00 times Answer: C

Explanation: C) 0.40 = X / $500,000 = $200,000 contribution. Operating leverage = $200,000 / $80,000 = 2.50

Diff: 3

Objective: 6

AACSB: Application of knowledge

9) If the contribution margin ratio is 0.40, targeted operating income is $50,000, and fixed costs are $75,000, then sales volume in dollars is ________. A) $250,000 B) $312,500 C) $275,000 D) $350,000 Answer: B

Explanation: B) X = (50,000 + 75,000)/.4; X = $312,500

Diff: 2

Objective: 6

AACSB: Application of knowledge

10) If the contribution margin ratio is 0.25, targeted operating income is $50,000, and targeted sales volume in dollars is $250,000, then total fixed costs are ________. A) $11,500 B) $15,000 C) $20,000 D) $12,500 Answer: D

Explanation: D) (X + $50,000)/0.25 = $250,000; X = 12,500

Diff: 3

Objective: 6

AACSB: Application of knowledge

11) Fixed costs ________.

A) are considered variable costs over the long run B) provide less operating leverage C) reduce the risk of loss

D) are graphed as a steeply sloped line Answer: A

Diff: 1

Objective: 6

AACSB: Analytical thinking

12) When a greater proportion of costs are fixed costs, then ________.

A) a small increase in sales results in a small decrease in operating income B) when demand is low the risk of loss is high

C) a decrease in sales reduces the total fixed cost per unit D) a decrease in sales reduces the cost per unit Answer: B

Diff: 2

Objective: 6

AACSB: Application of knowledge

13) Companies with a greater proportion of direct costs have a greater risk of loss than companies with a greater proportion of indirect costs. Answer: FALSE

Explanation: Companies with a greater proportion of fixed costs have a greater risk of loss than companies with a greater proportion of variable costs.

Diff: 2

Objective: 6

AACSB: Application of knowledge

14) The degree of operating leverage at a specific level of sales helps the managers calculate the effect that potential changes in sales will have on operating income. Answer: TRUE

Diff: 1

Objective: 6

AACSB: Analytical thinking

15) If a company increases fixed costs, then the breakeven point will be lower. Answer: FALSE

Explanation: If a company increases fixed costs, then the breakeven point will be higher.

Diff: 2

Objective: 6

AACSB: Application of knowledge

16) Companies that are substituting variable costs for fixed costs receive a greater per unit return above the breakeven point. Answer: FALSE

Explanation: Companies that are substituting fixed costs for variable costs receive a greater per unit return above the breakeven point.

Diff: 2

Objective: 6

AACSB: Application of knowledge

17) A company with a higher degree of operating leverage is at greater risk during economic downturns because of its higher fixed costs. Answer: TRUE

Explanation: A company with a low degree of operating leverage is at lesser risk during downturns in the economy.

Diff: 2

Objective: 6

AACSB: Application of knowledge

18) The risk-return tradeoff across alternative cost structures can be measured as operating leverage. Answer: TRUE

Diff: 1

Objective: 6

AACSB: Analytical thinking

19) If a company has a degree of operating leverage of 4.0, that means a 10% increase in sales will result in a 40% increase in operating income. Answer: TRUE

Explanation: If a company has a degree of operating leverage of 2.0, that means a 20% increase in sales will result in a 40% increase in operating income.

Diff: 2

Objective: 6

AACSB: Application of knowledge

20) When a company has the least fixed costs, the company is operating at a very high operating leverage. Answer: FALSE

Explanation: When a company has the least fixed costs, the company is operating at a low operating leverage.

Diff: 1

Objective: 6

AACSB: Application of knowledge

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