Accounting Ch 18

Front 1

Fixed costs are costs that remain the same per unit regardless of changes in the activity level.

Back 1

False
Fixed costs are costs that remain the same in total regardless of changes in the activity level (“Fixed Cost”).

Front 2

What type of cost remains the same per unit at every level of activity?

Back 2

Variable cost.
A variable cost remains the same per unit at every level of activity.

Front 3

Which statement describes a fixed cost?

Back 3

When activity declines, its cost per unit increases
Fixed costs remain the same in total, but as activity declines, the costs per unit increases.

Front 4

Variable costs are costs that

Back 4

remain the same per unit at every activity level.

all of these answer choices are correct.

include direct materials and direct labor for a manufacturer.

vary in total directly and proportionately with changes in the activity level.
Variable costs vary in total directly and proportionately with changes in the activity level and include direct materials and direct labor for a manufacturer.

Front 5

The range over which a company expects to operate during a year is called the relevant range of the activity index.

Back 5

True

Front 6

Why is determination of a relevant range important?

Back 6

Cost behavior outside the relevant range may be distorted
At this level costs may not behave the same as they do within the relevant range.

Front 7

Which of the following is likely to contain a linear relationship between costs and activities?

Back 7

Relevant range.
Outside of the relevant range, costs do not always behave in a linear fashion.

Front 8

The relevant range is

Back 8

the range over which the company expects to operate during a year.
The relevant range is the range over which the company expects to operate during a year.

Front 9

Mixed costs change proportionately with changes in the activity level.

Back 9

False
Mixed costs change in total but not proportionately with changes in the activity level (“Mixed Costs”).

Front 10

Mixed costs

Back 10

are costs that vary as activity level changes, but do not stay the same per unit like variable cost.

Front 11

Delivery costs at Hernandez, Inc. appear below for specific months of operations:

Month Amount Units Produced
March $20,000 16,000
April $18,000 12,000

Back 11

Mixed.
ixed costs have the same total costs at all activity levels, so this rules out fixed costs. Variable costs have the same cost per unit no matter how many units. The cost per unit at each activity level is:

$20,000/16,000 = $1.25
$18,000/12,000 = $1.50

Since the cost per unit differs at the two activity levels, it cannot be variable, so it must be mixed.

Front 12

Delivery costs at Walco, Inc. appear below for specific months of operations:

Month Amount Units Produced
June $9,680 11,000
July $8,100 10,800


Which type of costs are delivery costs at Walco?

Back 12

Mixed.
Fixed costs have the same total costs at all activity levels, so this rules out fixed costs. Variable costs have the same cost per unit no matter how many units. The cost per unit at each activity level is:

$9,680/11,000 = $0.88
$8,100/10,800 = $0.75

Since the cost per unit differs at the two activity levels, this cannot be variable, so it must be mixed.

Front 13

Mixed costs consist of a

Back 13

variable cost element and a fixed cost element.
Mixed costs consist of a variable cost element and a fixed cost element.

Front 14

Your phone service provider offers a plan that is classified as a mixed cost. The cost per month is $50 flat rate for the first 1,000 minutes plus $0.35 for each minute exceeding 1,000 minutes. If you use 1,200 minutes this month, your cost will be

Back 14

$120
Your cost will include the fixed cost component (flat service fee) which does not increase plus the variable cost (usage charge) for the additional 200 minutes which will increase your cost to $50 + ($0.35 x 200 minutes) = $120.

Front 15

Costs that change in total but not proportionately with changes in the activity level are

Back 15

mixed costs.
Mixed costs change in total but not proportionately with changes in the activity level (“Mixed Costs”).

Front 16

An example of a mixed cost is

Back 16

utility costs.

Front 17

Winston Company’s high and low level of activity last year was 60,000 units produced in April and 20,000 units produced in December. Machine maintenance costs were $52,000 in April and $20,000 in December. Using the high-low method, estimated total maintenance cost for a month in which 40,000 units will be produced is

Back 17

$36,000.
Variable cost per unit ($.80) = change in total costs ($52,000 - $20,000) / high minus low activity level (60,000 – 20,000). Fixed cost element = total cost at high level ($52,000) – variable cost at high level ($48,000 =$.80 x 60,000 units) = $4,000. Maintenance costs are therefore $4,000 fixed cost per month + $.80 variable cost per unit, and at 40,000 units, the maintenance costs = $4,000 fixed cost per month + ($.80 x 40,000 units) = $36,000 (“High-Low Method”).

Front 18

Cost-volume-profit analysis assumes that changes in activity are the only factors that affect costs.

Back 18

True

Front 19

When companies prepare a detailed CVP income statement, they provide more detail about specific variable costs but not fixed cost items.

Back 19

False
Companies provide more detail about both specific variable and fixed cost items in a detailed CVP income statement (“CVP Income Statement Revisited”).

Front 20

Which one of the following is not an assumption of cost-volume-profit analysis?

Back 20

Changes in activity and sales mix are the only factors that affect costs.
This statement is not an assumption. Changes in activity are the only factors that affect costs. Sales mix must stay the same.

Front 21

Which one of the following is not an assumption of CVP analysis?

Back 21

Profit for the period is constant.
The assumptions underlying CVP analysis do not include profit for the period.

Front 22

One of the following is not involved in CVP analysis. That factor is

Back 22

fixed costs per unit.
total fixed costs, not fixed costs per unit, are involved in CVP analysis.

Front 23

Cost-volume-profit analysis includes all of the following assumptions except

Back 23

the behavior of costs is curvilinear throughout the relevant range.
Cost-volume-profit analysis assumes the behavior of costs is linear, not curvilinear, throughout the relevant range (“Basic Components”).

Front 24

CVP analysis considers the interrelationships among all of the following components except

Back 24

fixed costs per unit.
CVP analysis involves all of the options except fixed costs per unit (“Basic Components”).

Front 25

On a CVP income statement

Back 25

Sales – Variable costs = Contribution margin.
On a CVP income statement, Sales – Variable costs = Contribution margin.

Front 26

Cournot Company sells 100,000 wrenches for $12 a unit. Fixed costs are $300,000, and net income is $200,000. What should be reported as variable expenses in the CVP income statement?

Back 26

Contribution margin is equal to fixed costs plus net income ($300,000 + $200,000 = $500,000). Since
700,000
variable expenses are the difference between total sales ($1,200,000) and contribution margin ($500,000), $700,000 must be the amount of variable expenses in the CVP income statement.

Front 27

Deighan Company had the following amounts from its income statement:

Sales revenue (800 units) $80,000
Cost of goods sold -fixed 20,000
Cost of goods sold -variable 18,500
Selling expenses - fixed 7,000
Selling expenses - variable 6,000
Administrative expenses - fixed 5,000
Administrative expenses - variable 7,500

How much is Deighan's contribution margin?

Back 27

48,000.
Sales less variable costs equals contribution margin: $80,000 − $18,500 − $6,000 − $7,500 = $48,000

Front 28

Starwise Company had the following amounts from its income statement:

Sales revenue

$100,000
Cost of goods sold -fixed

32,000
Cost of goods sold -variable

25,000
Selling expenses - fixed

9,000
Selling expenses - variable

11,000
Administrative expenses - fixed

12,000
Administrative expenses - variable

8,000

How much is Starwise’s contribution margin?

Back 28

$56,000.

Front 29

The contribution margin ratio is computed by multiplying contribution margin by unit selling price.

Back 29

False
Contribution margin ratio is computed by dividing contribution margin per unit by unit selling price (“Contribution Margin Ratio”).

Front 30

What is contribution margin?

Back 30

The amount available to cover fixed costs and contribute to profits.
Contribution margin is the amount of revenue remaining after deducting variable costs. It can also be described as the amount available to cover fixed costs and to contribute to profits.

Front 31

Which one of the following is correct concerning contribution margin?

Back 31

It is helpful in determining the effect of changes in sales on net income.
n this capacity, it is used extensively in CVP analysis.

Front 32

Contribution margin

Back 32

may be expressed as contribution margin per unit
Contribution margin can be expressed on a per unit basis.

Front 33

When comparing a traditional income statement to a CVP income statement

Back 33

net income will always by identical on both.Net income will always be identical on both a traditional income statement and a CVP income statement.

Front 34

Contribution margin is

Back 34

the amount available to cover fixed costs and contribute to income for the company.
Contribution margin is the amount of revenue remaining after deducting variable costs (“CVP Income Statement”).

Front 35

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

Back 35

False
At the break-even point, contribution margin equals total fixed costs (“Contribution Margin Technique”).

Front 36

The amount of income or loss at each level of sales can be derived from the total sales and total cost lines in a CVP graph.

Back 36

true

Front 37

Werth Company produces tie racks. Its estimated fixed costs for the year are $288,000, and the estimated variable costs per unit are $14. Werth expects to produce and sell 60,000 racks at a price of $20 per unit. How many units will be sold at breakeven?

Back 37

48,000
The breakeven point in units is determined as follows:
20X − 14X − 288,000 = 0
 X= 48,000 units

Front 38

Panera Bread sells a box of bagels for $6 with a contribution margin of 62.5%. Its fixed costs are $150,000 per year. How much sales in dollars does Panera Bread need to break-even per year if bagels are its only product?

Back 38

$240,000.
Breakeven sales is calculated by dividing fixed costs by the contribution margin ratio ($150,000/62.5% = $240,000).

Front 39

Brownstone Company’s contribution margin ratio is 30%. If Brownstone’s sales revenue is $100 greater than its break-even sales in dollars, its net income

Back 39

will be $30.
If Brownstone’s sales revenue is $100 greater than its break-even sales in dollars, its net income will be $30 or ($100 X 30%).

Front 40

Gossen Company is planning to sell 200,000 pliers for $4 per unit. The contribution margin ratio is 25%. If Gossen will break even at this level of sales, what are the fixed costs?

Back 40

$200,000.
Contribution margin per unit is $1 ($4 X 25%). Fixed costs / Contribution margin per unit = Break-even point in units. Solving for fixed costs, 200,000 units x $1 per units = $200,000.

Front 41

The break-even point can be

Back 41

computed by using contribution margin.

computed from a mathematical equation.

derived from a cost-volume-profit graph.

all of these answer choices are correct.

Front 42

The break-even point in dollars is computed by dividing

Back 42

fixed costs by contribution margin ratio.
Fixed costs divided by contribution margin ratio yields the break-even point in dollars (“Contribution Margin Technique”).

Front 43

At the break-even point

Back 43

contribution margin equals total fixed costs.

Front 44

Walden Company expects to sell 500,000 units for $6 per unit. The contribution margin ratio is 30%. If Walden will break even at this level of sales, fixed costs are

Back 44

$900,000.
Since the break-even point is $3,000,000 (500,000 x $6), fixed costs are $900,000 ($3,000,000 x .30) (“Contribution Margin Technique”).

Front 45

Benson Company produces flash drives for computers which cost $10 per flash drive to produce. Each flash drive sells for $20 each. During the current month, 1,000 flash drives were sold. Fixed costs for the current month were $4,500. If variable costs increase by 10%, what happens to the breakeven level in units for the month for Benson Company?

Back 45

It increases by 50 units.
Break-even Point in Units–Before (450 units) = Fixed Costs ($4,500) ÷ Contribution Margin per Unit ($20 - $10). Break-even Point in Units–After (500 units) = Fixed Costs ($4,500) ÷ Contribution Margin per Unit [$20 – ($10 x 1.10)]. Break-even Point–After (500 units) – Break-even Point–Before (450 units) = 50 units increase in break-even or 11% increase (50 ÷ 450) (“Break-even Analysis”).

Front 46

Dahlia Company sells a product which has a unit selling price of $5. Variable costs are 60% of the sales and total fixed costs are $200,000. The number of units that the Dahlia Company must sell to break even is

Back 46

100,000 units.
Break-even Point in Units = Fixed Costs ($200,000) ÷ Contribution Margin per Unit [$5- ($5 x .60)] = 100,000 units (“Break-even Analysis”).

Front 47

Maya Company manufactures a product which sells for $20 each. Each unit of product costs $5 to manufacture. Fixed costs normally incurred are $60,000. Maya Company is considering automating the manufacturing process, which would require a capital investment which would increase fixed costs by $30,000. As a result of the automation, variable costs would decrease by 20%. What would the new breakeven level in units be for Maya Company if it decides to automate the manufacturing process?

Back 47

5,625 units.
Break-even point in units–after automation (5,625 units) = fixed costs-after automation ($60,000 + $30,000) ÷ contribution margin per unit-after automation, $16 [$20 – ($5 x .80)] (“Break-even Analysis”).

Front 48

Target net income is an income objective for individual product lines set by management.

Back 48

True

Front 49

Moss, Inc. has total fixed costs of $56,000 and a contribution margin ratio of 40%. Moss wants to generate net income totaling $35,000. How much will sales revenue be at Moss’ target net income?

Back 49

$227,500
Moss must generate sales of $227,500 to earn a net income of $35,000.
Sales revenues required to attain target net income of $35,000 = fixed costs of $56,000 + target net income of $35,000 ÷ contribution margin ratio of 40% = $227,500.

Front 50

Palms, Inc. wants to sell enough palm trees to earn a profit of $20,000. If the unit sales price is $40, unit variable cost is $22, and total fixed costs are $120,400, how many trees must be sold to earn a profit of $20,000?

Back 50

7,800
Palms, Inc. must sell 7,800 trees to earn a profit of $20,000. Required unit sales = fixed costs + target profit / unit contribution margin [($120,400 + $20,000) /($40 - 22) = 7,800 units].

Front 51

The mathematical equation for computing required sales to obtain target net income is: Required sales =

Back 51

variable costs + fixed costs + target net income.

Front 52

Required sales in dollars to meet a target net income is computed by dividing

Back 52

fixed costs plus target net income by contribution margin ratio.
Fixed costs plus target net income divided by contribution margin ratio yields required sales to meet a target net income (“Target Net Income”).

Front 53

Bergman Company has total fixed costs of $350,000 and a contribution margin ratio of 20%. Bergman’s target net income is $250,000. Sales in dollars to meet the target net income would be

Back 53

3,000,000
! Sales in dollars to meet the $250,000 target net income would be $3,000,000 = ($350,000 + $250,000) / .20 (“Target Net Income”).

Front 54

Simmons Company has required sales of $1,500,000 to meet its target net income. It has fixed costs of $200,000 and the contribution margin ratio is 40%. The company’s target net income is

Back 54

400,000
The company’s target net income is $400,000 = ($1,500,000 x .40) - $200,000) (“Target Net Income”).

Front 55

Margin of safety is the difference between actual sales and sales at the break-even point.

Back 55

TRUE

Front 56

Smith Company produces desk lamps. The information for June indicated that the selling price was $25 per unit, variable costs were $15 per unit, and fixed costs totaled $6,000. Smith currently sells 1,100 lamps and earns $5,000 of profit. How much is Smith’s margin of safety in dollars?

Back 56

$12,500.
First determine the sales dollars to break even = 25x - 15x - 6,000 = 0
x = 600 units. 600 units x $25 selling price per unit = $15,000 sales revenue. Compare the sales at breakeven with the current sales to determine margin of safety = Sales at $5,000 profit level = $27,500 (1,100 units x $25) - $15,000 breakeven sales = $12,500.

Front 57

Smith Company produces desk lamps. The information for June indicated that the selling price was $25 per unit, variable costs were $15 per unit, fixed costs totaled $6,000, and the margin of safety in dollars was $12,500. Smith currently sells 1,100 lamps and earns $5,000 of profit. How much is Smith’s margin of safety ratio?

Back 57

45.5
The margin of safety ratio = margin of safety in dollars divided by actual sales = $12,500/($25*1,100) = 45.5%.

Front 58

Marshall Company had actual sales of $600,000 when break-even sales were $420,000. What is the margin of safety ratio?

Back 58

30
he margin of safety ratio is computed by dividing the margin of safety in dollars of $180,000 ($600,000 - $420,000) by actual sales of $600,000. The result is 30% ($180,000/$600,000).

Front 59

Margin of safety is computed as

Back 59

actual sales – break-even sales.

Front 60

The margin of safety ratio is computed by dividing

Back 60

margin of safety in dollars by actual sales.

Front 61

Redman Company had actual sales $800,000 and its break-even sales were $600,000. Morgan’s margin of safety ratio is

Back 61

25
The margin of safety ratio is 25% ($800,000 - $600,000) / $800,000). (“Margin of Safety”).