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Questions
Q:
Hartman Co. has fixed costs of $36,000 and a contribution margin ratio of 24%. If expected sales are $200,000, what is the margin of safety as a percent of sales?
A. 6%.
B. 25%.
C. 33%.
D. 50%.
E. 75%.
Q:
During its most recent fiscal year, Simon Enterprises sold 200,000 electric screwdrivers at a price of $15 each. Fixed costs amounted to $400,000 and pretax income was $600,000. What amount should have been reported as variable costs in the company's contribution margin income statement for the year in question?
A. $2,400,000.
B. $1,600,000.
C. $3,000,000.
D. $2,000,000.
E. $1,000,000.
Q:
The excess of expected sales over the sales level at the break-even point is known as the:
A. Sales turnover.
B. Profit margin.
C. Contribution margin.
D. Relevant range.
E. Margin of safety.
Q:
If a firm's forecasted sales are $250,000 and its break-even sales are $190,000, the margin of safety in dollars is:
A. $ 60,000.
B. $250,000.
C. $190,000.
D. $440,000.
E. $ 24,000.
Q:
The margin of safety is the excess of:
A. Break-even sales over expected sales.
B. Expected sales over variable costs.
C. Expected sales over fixed costs.
D. Fixed costs over expected sales.
E. Expected sales over break-even sales.
Q:
A target income refers to:
A. Income at the break-even point.
B. Income from the most recent period.
C. Income planned for a future period.
D. Income only in a multiproduct environment.
E. Income at the minimum contribution margin.
Q:
Cost-volume-profit analysis is based on three basic assumptions. Which of the following is not one of these assumptions?
A. Total fixed costs remain constant over changes in volume.
B. Curvilinear costs change proportionately with changes in volume throughout the relevant range.
C. Variable costs per unit of output remain constant as volume changes.
D. Sales price per unit remains constant as volume changes.
E. All of these are basic assumptions.
Q:
A term describing a firm's normal range of operating activities is:
A. Relevant range of operations.
B. Break-even level of operations.
C. Margin of safety of operations.
D. Relevant operating analysis.
E. High-low level of operations.
Q:
A company's normal operating range, which excludes extremely high and low volumes that are not likely to occur, is called the:
A. Margin of safety.
B. Contribution range.
C. Break-even point.
D. Relevant range.
E. High-low point.
Q:
Select cost information for Winfrey Enterprises is as follows:
1,000 units of output 5,000 units of output
Total Cost/Unit Total Cost/Unit
Direct materials $5,000 $5.00 $25,000 $5.00
Utilities expense $1,000 $1.00 $ 3,750 $0.75
Rent expense $4,000 $4.00 $ 4,000 $0.80 Based on this information:
A. Both direct materials and rent expense are variable costs.
B. Utilities expense is a mixed cost and rent expense is a variable cost.
C. Utilities expense is a mixed cost and rent expense is a fixed cost.
D. Direct materials is a fixed cost and utilities expense is a mixed cost.
E. Both direct materials and utilities expense are mixed costs.
Q:
An important tool in predicting the volume of activity, the costs to be incurred, the sales to be earned, and the profit to be received is:
A. Target income analysis.
B. Cost-volume-profit analysis.
C. Least-squares regression of costs.
D. Variance analysis.
E. Process costing.
Q:
Which one of the following statements is not true?
A. Total fixed costs remain the same regardless of volume within the relevant range.
B. Total variable costs change with volume.
C. Total variable costs decrease as the volume increases.
D. Fixed costs per unit increase as the volume decreases.
E. Variable costs per unit remain the same regardless of the volume.
Q:
Curvilinear costs always increase:
A. With decreases in volume.
B. In constant proportion to changes in production levels.
C. When management performs break-even analysis.
D. When volume increases, but not at a constant rate.
E. On a per unit basis when volume of activity goes down.
Q:
A cost that can be separated into fixed and variable components is called a:
A. Mixed cost.
B. Step-variable cost.
C. Composite cost.
D. Curvilinear cost.
E. Differential cost.
Q:
A cost that remains constant over a limited range of volume, but increases by a lump sum when volume increases beyond a maximum amount, is a(n):
A. Step-wise cost.
B. Fixed cost.
C. Curvilinear cost.
D. Incremental cost.
E. Opportunity cost.
Q:
A cost that changes with volume, but not at a constant rate, is called a:
A. Variable cost.
B. Curvilinear cost.
C. Step-wise variable cost.
D. Fixed cost.
E. Differential cost.
Q:
A cost that changes in proportion to changes in volume of activity is a(n):
A. Differential cost.
B. Fixed cost.
C. Incremental cost.
D. Variable cost.
E. Product cost.
Q:
A cost that remains the same in total even when volume of activity varies is a:
A. Fixed cost.
B. Curvilinear cost.
C. Variable cost.
D. Step-wise variable cost.
E. Standard cost.
Q:
An important assumption in multiproduct analysis is that the sales mix is known and remains constant.
Q:
The proportion of sales volumes for various products is known as the composite mix.
Q:
Cost-volume-profit analysis cannot be used when a firm produces and sells more than one product.
Q:
On a typical cost-volume-profit graph, unit sales are shown on the horizontal axis and both dollars of sales and dollars of costs are represented on the vertical axis.
Q:
A cost-volume-profit (CVP) chart is a graph that plots volume on the horizontal axis and costs and sales on the vertical axis.
Q:
A graphic depiction of the break-even point is known as a cost-volume-profit (CVP) chart.
Q:
The contribution margin ratio is the percent by which the margin of safety exceeds the break-even point.
Q:
To calculate the break-even point in units, one must know unit fixed cost, unit variable cost, and sales price.
Q:
The contribution margin per unit is the price at which a unit must be sold in order for the company to break even.
Q:
The break-even point is the sales level at which a company neither earns a profit nor incurs a loss.
Q:
A break-even point can be calculated either in units or in dollars.
Q:
The high-low method is used to derive an estimated line of cost behavior by graphically connecting the two cost amounts identified with the highest and lowest volume levels.
Q:
To determine the slope of the variable cost from a scatter diagram, divide the change in volume by the change in cost.
Q:
Scatter diagrams plot volume on the vertical axis and cost on the horizontal axis.
Q:
There are only two methods to derive an estimated line of cost behavior; the high-low method and the scatter diagram.
Q:
A visual line fit to points in a scatter diagram may be used to identify the approximate relation between past cost and volume.
Q:
The high-low method can be used to derive an estimated line of cost behavior.
Q:
The high-low method of deriving an estimated cost line uses all the data points available.
Q:
Least-squares regression is a statistical method for deriving an estimated line of cost behavior.
Q:
Degree of operating leverage (DOL) is defined as total contribution margin in dollars divided by pretax income.
Q:
The extent, or relative size, of fixed costs in the total cost structure is known as operating leverage.
Q:
The contribution margin per unit is equal to the sales price per unit minus the variable costs per unit.
Q:
Contribution margin is the amount of sales that exceeds total variable costs.
Q:
The method most likely to produce the most precise line of cost behavior is the scatter diagram.
Q:
The margin of safety can be expressed in units of product, in dollars, or as a percent of sales.
Q:
The dollar amount of sales needed to achieve a target after-tax income is computed by dividing the sum of fixed costs plus the desired after-tax income plus income taxes by the contribution margin ratio.
Q:
The margin of safety is the amount that sales can drop before the company incurs a loss.
Q:
Cost-volume-profit analysis can be used to predict the effects of reduced selling prices, increased fixed costs, and reduced variable costs on break-even points.
Q:
Cost-volume-profit analysis provides approximate, but not precise, answers to questions about costs, volumes, and profits.
Q:
Cost-volume-profit analysis is a precise tool for perfectly predicting the profit consequences of cost changes, price changes, and volume changes.
Q:
Cost-volume-profit analysis is frequently based on the assumption that the production level is the same as the sales level.
Q:
The relevant range of operations excludes extremely high and low levels of production that are not likely to occur.
Q:
The relevant range of operations includes extremely high and low levels of production that are unlikely to occur.
Q:
A step-wise variable cost can be separated into a fixed component and a variable component.
Q:
As the level of output activity increases, the variable cost per unit remains constant.
Q:
As the level of output activity increases, fixed cost per unit remains constant.
Q:
Dividing a mixed cost into its separate fixed and variable cost components makes it more difficult to perform cost-volume-profit analysis.
Q:
The ratio of the volumes of the various products sold by a company is called the ______________________________.
Q:
A graphic presentation of cost-volume-profit data is known as a __________________ graph (or chart); this presentation is also sometimes called a ______________ chart.
Q:
The ______________________ is the sales level at which a company neither earns a profit nor incurs a loss.
Q:
_____________ is a statistical method of identifying an estimated line of cost behavior.
Q:
One aid in measuring cost behavior involves creating a display of the data about past costs in graphical form. Such a visual display is called a ______________________.
Q:
Examining strategies that impact several estimates in the CVP analysis is known as _______________________.
Q:
The difference between the unit sales price and the unit variable cost of an item is defined as the _________________________.
Q:
The unit contribution margin divided by the selling price per unit is the _____________.
Q:
There are at least three different methods to separate costs into fixed and variable. These methods are the _______________, _______________, and _______________ methods.
Q:
Solving problems to determine the relationship of cost, volume, and profit often commences with the measurement of the ________ point. Further analysis emphasizing profitability may be accomplished by measuring the __________ and _________________.
Q:
Three important assumptions in cost-volume-profit analysis is that (1) _______________ per unit is constant, (2) _____________ per unit is constant, and (3) ______________ are constant in total.
Q:
A __________ cost is one that includes both fixed and variable cost components; a ______________ cost is one that reflects a step pattern.
Q:
A _______________ cost is one that remains unchanged in amount when volume of activity varies from period to period within a relevant range. A ______________ cost is one that changes in proportion to changes in volume of activity.
Q:
Bristol Companys contribution margin income statement is presented below. Sales for the current period consisted of 7,500 units. Compute the companys break-even point in (a) units, and (b) dollars. Compute the margin of safety in (c) dollars and (d) percent. Bristol Company Contribution Margin Income Statement Sales
$225,000 Variable costs
135,000 Contribution margin
90,000 Fixed costs
48,000 Net income
$42,000
Q:
Q:
Spruce Company is considering the production and sale of a new product with the following sales and cost data: unit sales price, $350; unit variable costs, $180; total fixed costs, $399,500; and projected sales, $910,000. Round your answers to the nearest whole unit or dollar.
(a) Calculate break-even in units.
(b) Calculate break-even in dollars (use four decimal places when calculating the contribution margin ratio).
(c) Calculate number of units that would need to be sold to generate an after-tax profit of $420,000 assuming a 30% tax rate.
(d) Calculate dollar sales that would be needed to generate the same profit as above.
(e) Calculate the margin of safety stated as a percentage using the $910,000 projected sales level.
Be sure to label each calculation and show all calculations.
Q:
Wilton Company is analyzing two alternative methods of producing its product. The production manager indicates that variable costs can be reduced 40% by installing a machine that automates production, but fixed costs would increase. Alternative 1 shows costs before installing the machine; Alternative 2 shows costs after the machine is installed. (a) Compute the break-even point in units and dollars for both alternatives. (b) Prepare a forecasted income statement for both alternatives assuming that 30,000 units will be sold. The statements should report sales, total variable costs, contribution margin, fixed costs, income before taxes, income taxes, and net income. Below the income statement, compute the degree of operating leverage. Which alternative would you recommend and why? Alternative 1
Alternative 2 Variable costs per unit...........................
$20
? Fixed costs...........................
$200,000
$274,400 Selling price per unit...........................
$40
$40 Income tax rate...........................
25%
25%
Q:
Browning Company sells a mix of three related products. Total fixed costs are $144,000. The following additional information is available for Browning Company.
Sales Mix Variable Sales
Cost/Unit Price/Unit X
4
$5
$9 Y
4
$8
$14 Z
2
$7
$15 Use the weighted average method to determine the company's break-even point for composite units.
Q:
Thomas Co. produces and sells Ultra, Super, and Mega, and has total fixed costs of $52,000. Sales and cost data follow:
Ultra Super Mega
Sales price per unit.. $6 $8 $10
Variable costs per unit 4 6 7
Sales mix.... 3 2................................... 1
Calculate the break-even point in composite units.
Q:
Joseph Co. has three products A, B, and C, and its fixed costs are $69,000. The sales mix for its products are 3 units of A, 4 units of B, and 1 unit of C. Information about the three products follows:
A B C Projected sales in dollars..
$192,000
$192,000
$64,000 Selling price per unit.
$40
$30
$40 Contribution margin ratio...
30%
35%
35% (a) Calculate the company's break-even point in composite units and sales dollars.
(b) Calculate the number of units of each individual product to be sold at the break-even point.
Q:
A firm sells two different products, A and B. For each unit of B, the firm sells two units of A. Total fixed costs for this firm are $1,260,000. Additional selling prices and cost information for both products follow: Product
Selling
Price per unit
Variable
Costs per unit A.
$72
$40 B.
48
28 Required:
(a) Calculate the contribution margin per composite unit.
(b) Calculate the break-even point in units of each individual product.
(c) If pretax income before taxes of $294,000 is desired, how many units of A and B must be sold?
Q:
Identify items a, b, and c in the cost-volume-profit graph shown below.
Q:
The following information describes a product expected to be produced and sold by Hadley Company:
Selling price............................................................. $80 per unit
Variable costs............................................................. $32 per unit
Total fixed costs............................................................. $630,000
Required:
(a) Calculate the contribution margin ratio.
(b) Calculate the break-even point in dollar sales.
(c) What dollar amount of sales would be necessary to achieve a pretax income of $120,000?
Q:
Wilson Co. is preparing next period's forecasts. Total fixed costs are expected to be $300,000 and the contribution margin ratio is expected to be 30%. The applicable income tax rate is 25%. (a) Calculate the company's break-even point in dollar sales.
(b) If sales are $1,800,000 above the break-even point, what will income be (i) pretax income and (ii) after-tax income?
Q:
A firm provides the following sales data:
Expected unit sales.. 5,000 Unit variable cost.. $10
Unit selling price. $16 Total fixed cost. $12,000 Required:
(a) Calculate the break-even point in dollar sales.
(b) Calculate the margin of safety in dollar sales.