1. Classify costs as variable costs, fixed costs, or mixed costs.

Problem #4 - Correct

The following information is given for Crimson Co.:

Production (units) 		Total Cost 

June 2,000 $50,000

July 3,000 57,000

August 2,500 52,000

September 3,500 67,500

October 4,800 78,000

Determine the fixed cost.

a. $35,000

b. $40,000

c. $30,000

d. $25,000

Feedback

Correct.

Production 



	Total Cost 

Highest level 4,800 units $78,000

Lowest level 2,000 units $50,000

Difference 2,800 units $28,000

Variable cost per unit = Difference in total cost ÷ Difference in production = $28,000 ÷ 2,800 units = $10 per unit

Fixed cost = Total cost − (Variable cost per unit × Units produced)

Highest level (4,800 units): $78,000 – ($10 × 4,800) = $30,000

Problem #13 - Correct

Mixed costs have characteristics of both:

a. opportunity costs and sunk costs.

b. variable costs and fixed costs.

c. material costs and conversion costs.

d. sunk costs and replacement costs.

Feedback

Correct. Mixed costs are costs that have characteristics of both variable costs and fixed costs.

Problem #14 - Incorrect

Which of the following is a characteristic of variable costs?

a. Variable cost per unit remains the same irrespective of changes in the activity base.

b. Variable cost per unit changes in direct proportion to changes in the activity base.

c. Total variable costs change in inverse proportion to changes in the activity base.

d. Total variable costs remain the same irrespective of changes in the activity base.

Feedback

Incorrect. Variable costs are costs that vary in proportion to changes in the activity base.

Problem #19 - Correct

Which of the following is a characteristic of fixed costs?

a. cost per unit remains the same irrespective of changes in the activity base.

b. Total fixed costs change inversely to changes in the activity base.

c. Fixed cost per unit changes inversely to changes in the activity base.

d. Total fixed costs change in direct proportion to changes in the activity base.

Feedback

Correct. Fixed cost per unit changes inversely to changes in the activity base. Total fixed costs remain the same regardless of changes in the activity base.

2. Compute the contribution margin, the contribution margin ratio, and the unit contribution margin.

Problem #6 - Correct

_____ is the excess of sales over variable costs.

a. Gross profit

b. Contribution margin

c. Incremental margin

d. Net profit

Feedback

Correct. Contribution margin is the excess of sales over variable costs.

Problem #12 - Correct

Any additional contribution margin after covering fixed costs increases _____.

a. operating income

b. opportunity income

c. unrealized income

d. gross income

Feedback

Correct. Once the fixed costs are covered, any additional contribution margin increases operating income.

Problem #17 - Incorrect

Consider the following information for Peach Inc. for the year 2016:

Sales price per unit $15

Variable cost per unit $9

Target profit per unit $4

Calculate the unit contribution margin for Peach Inc.

a. $5

b. $13

c. $11

d. $6

Feedback

Incorrect. The unit contribution margin is useful for analyzing the profit potential of proposed decisions.

Problem #20 - Correct

The _____ indicates the percentage of each sales dollar available to cover fixed costs and to provide operating income.

a. operating profit margin ratio

b. cash flow coverage ratio

c. net profit margin ratio

d. contribution margin ratio

Feedback

Correct. The contribution margin ratio indicates the percentage of each sales dollar available to cover fixed costs and to provide operating income.

3. Using cost-volume-profit equations, determine the break-even point and sales necessary to achieve a target profit.

Problem #2 - Correct

Calculate the break-even point in sales units for Olive Inc. from the information given below:

Unit contribution margin $10

Contribution margin ratio 40%

Fixed costs $80,000

Sales 30,000 units

a. 4,000 units

b. 8,000 units

c. 3,200 units

d. 3,000 units

Feedback

Correct. Break-even sales (units) = Fixed costs ÷ Unit contribution margin = $80,000 ÷ $10 = 8,000 units

Problem #5 - Correct

An increase in the unit selling price _____.

a. decreases the contribution margin and increases the break-even point

b. increases the contribution margin and decreases the break-even point

c. increases the contribution margin and increases the break-even point

d. decreases the contribution margin and decreases the break-even point

Feedback

Incorrect. The break-even point is calculated by dividing the fixed costs by the unit contribution margin or the contribution margin ratio.

Problem #18 - Correct

How do changes in fixed costs affect the break-even point?

a. An increase in total fixed costs decreases the break-even point.

b. Any change in fixed costs does not affect the break-even point.

c. A decrease in per-unit fixed costs increases the break-even point.

d. An increase in total fixed costs increases the break-even point.

Feedback

Correct. An increase in fixed costs requires additional units of sales to break even. An increase in fixed costs increases the break-even point, and a decrease in fixed costs decreases the break-even point.

Problem #24 - Correct

Which of the following statements is true about the effect of changes in unit variable cost on the break-even point?

a. An increase in the unit variable cost decreases the contribution margin and increases the break-even point.

b. A decrease in the unit variable cost increases the contribution margin and increases the break-even point.

c. A change in the unit selling price does not affect the break-even point.

d. A decrease in the unit variable cost decreases the contribution margin and decreases the break-even point.

Feedback

Correct. An increase in the unit variable cost decreases the contribution margin and increases the break-even point.

4. Using cost-volume-profit and profit-volume graphs, determine the break-even point and sales necessary to achieve a target profit.

Problem #8 - Correct

A _____ graphically shows sales, costs, and the related profit or loss for various levels of units sold. a. net profit graph

b. total cost function graph

c. break-even graph

d. variable-volume graph

Feedback

Correct. A cost-volume-profit graph, sometimes called a break-even graph, graphically shows sales, costs, and the related profit or loss for various levels of units sold.

Problem #22 - Correct

Which of the following is true of a cost-volume-profit graph?

a. The break-even point is the intersection point of the total sales and fixed cost lines.

b. Operating losses will be incurred when the sales levels are to the left of the break-even point.

c. Operating profits will be earned when the sales levels are on the break-even point.

d. Operating profits will be earned when the sales levels are to the left of the breakeven point.

Feedback

Correct. Operating losses will be incurred when sales levels are to the left of the break-even point.

5. Apply cost-volume-profit relationships to more than one product and in computing operating leverage.

Problem #1 - Correct

Consider the following information for Bright Light Inc.:

Product Unit Selling Price Unit Variable Cost

LED bulbs $10 $4

CFL bulbs $5 $3

Total fixed costs are $41,500. The sales mix of LED bulbs and CFL bulbs is 60% and 40% respectively. Calculate the sales required to earn a target profit of $24,500 for the sales mix of products as given above.

a. 12,000 units

b. 15,000 units

c. 14,975 units

d. 13,985 units

Feedback

Correct. Unit contribution margin for LED bulbs = $10 – $4 = $6

Unit contribution margin for CFL bulbs is $5 – $3 = $2

Unit contribution margin of overall product is ($6 × 60%) + ($2 × 40%) = $4.40

Sales required to earn a target profit of $24,500 = (Fixed costs + Target profit) ÷ Unit contribution margin = ($41,500 + $24,500) ÷ $4.40 = 15,000 units

Problem #3 -Correct

Which of the following statements is true of operating leverage?

a. Companies with high fixed costs will normally have a high operating leverage.

b. Companies with low contribution margin have a high operating leverage.

c. Companies with high operating leverage generate less revenue.

d. Companies with low fixed costs will normally have a high operating leverage.

Feedback

Incorrect. The relationship of a company’s contribution margin to operating income is measured by operating leverage.

Problem #10 - Correct

The relationship of a company’s contribution margin to operating income is measured by _____. a. the operating income ratio

b. the break-even point

c. margin of operations

d. operating leverage

Feedback

Correct. The relationship of a company’s contribution margin to operating income is measured by operating leverage.

Problem #23 - Correct

The difference between contribution margin and operating income is _____.

a. the margin of safety

b. break-even sales

c. fixed costs

d. variable costs

Feedback

Correct. The difference between contribution margin and operating income is fixed costs.

Problem #15 - Correct

Managers can vary selling prices, costs, and volume and can observe the effects of each change on the break-even point and profit using _____.

a. equity analysis

b. risk analysis

c. sensitivity analysis

d. net present value analysis

Feedback

Correct. Managers can vary selling prices, costs, and volume and can observe the effects of each change on the break-even point and profit using sensitivity analysis.

Problem #21 - Incorrect

Which of the following is an underlying assumption of cost-volume-profit analysis?

a. Within the relevant range of operating activity, the efficiency of operations does not change.

b. The inventory quantities change twice during the relevant period.

c. The sales mix is variable.

d. Total sales and total costs cannot be represented by straight lines.

Feedback

Incorrect. Cost-volume-profit analysis is a useful management tool. The reliability of the cost-volume-profit analysis depends upon several assumptions.

7. Describe and illustrate the use of the margin of safety for managerial decision making and performance analysis.

Problem #7 - Correct

Which of the following statements is true of the margin of safety?

a. It indicates the operating loss that would result due to an increase in variable cost.

b. If the margin of safety is low, even a small decline in sales revenue may result in an operating loss.

c. If the margin of safety is high, even a small decline in sales revenue may result in an operating loss.

d. It indicates the decrease in fixed costs necessary to achieve the target profit.

Feedback

Correct. If the margin of safety is low, even a small decline in sales revenue may result in an operating loss.

Problem #9 - Correct

The _____ indicates a possible decrease in sales that may occur before an operating loss occurs.

a. degree of operating leverage

b. margin of safety

c. break-even point

d. contribution margin

Feedback

Correct. The margin of safety indicates the possible decrease in sales that may occur before an operating loss occurs.

Problem #11 - Correct

The margin of safety is computed by:

a. deducting budgeted sales from current sales.

b. deducting target profit from current sales.

c. deducting variable costs from current sales.

d. deducting breakeven sales from current sales.

Feedback

Correct. The margin of safety is computed by deducting breakeven sales from current sales.

Problem #16 - Correct

From the information given below, calculate the margin of safety expressed in units.

Actual sales $500,000

Sales at the break-even point $375,000

Variable cost per unit $12

Unit selling price $20

a. 6,250 units

b. 7,250 units

c. 5,750 units

d. 6,750 units

Feedback

Correct. Margin of safety in units of current sales = Current sales units – Breakeven sales units = ($500,000 ÷ $20) – ($375,000 ÷ $20) = 25,000 units – 18,750 units = 6,250 units

Problem #1 - Correct

The following information is given for Crimson Co.:

Production (units) 		Total Cost 

June 2,000 $50,000

July 3,000 57,000

August 2,500 52,000

September 3,500 67,500

October 4,800 78,000

Determine the fixed cost.

a. $25,000

b. $30,000

c. $40,000

d. $35,000

Feedback Correct.

Production 



	Total Cost 

Highest level 4,800 units $78,000

Lowest level 2,000 units $50,000

Difference 2,800 units $28,000

Variable cost per unit = Difference in total cost ÷ Difference in production = $28,000 ÷ 2,800 units = $10 per unit

Fixed cost = Total cost − (Variable cost per unit × Units produced)

Highest level (4,800 units): $78,000 – ($10 × 4,800) = $30,000

Problem #2 - Correct

Which of the following is a characteristic of fixed costs?

a. Total fixed costs change in direct proportion to changes in the activity base.

b. Fixed cost per unit changes inversely to changes in the activity base. C. Total fixed costs change inversely to changes in the activity base.

d. Fixed cost per unit remains the same irrespective of changes in the activity base.

Feedback

Correct. Fixed cost per unit changes inversely to changes in the activity base. Total fixed costs remain the same regardless of changes in the activity base.

Problem #3 - Correct

_____ are costs that remain the same in total dollar amount as the activity base changes. a. Fixed costs

b. Mixed costs

c. Total costs

Problem #4 - Correct

Activities that cause costs to change are called _____.

a. cost pools

b. activity bases

c. incremental activities

d. unit activities

Feedback

Correct. Cost behavior is the manner in which a cost changes as a related activity changes. Activities that cause costs to change are called activity bases.

Consider the following information for Optimist Inc.:

Production 

(units) Total Cost

October 1,000 $42,000

November 2,000 55,000

December 1,500 46,000

January 2,500 67,500

February 1,800 50,000

Calculate the variable cost per unit using the high-low method of cost estimation. a. $25

b. $17

c. $42

d. $35

Feedback Correct.

Production 		Total Cost 

Highest level 2,500 units $67,500

Lowest level 1,000 units $42,000

Difference 1,500 units $25,500

Variable cost per unit = Difference in total cost ÷ Difference in production = $25,500 ÷ 1,500 units = $17 per unit

Which of the following statements is true of variable costing?

a. Fixed factory overhead is included in the product cost.

b. Variable factory overhead is not considered while calculating total cost.

c. Fixed factory overhead is treated as an expense for the period in which it is incurred.

d. Variable factory overhead is treated as an expense for the period in which it is incurred.

Mixed costs have characteristics of both:

a. sunk costs and replacement costs.

b. opportunity costs and sunk costs.

c. material costs and conversion costs.

d. variable costs and fixed costs.

_____ are costs that vary in proportion to changes in the activity base.

a. Total costs

b. Semi-variable costs

c. Fixed costs

d. Variable costs

Which of the following is a characteristic of variable costs?

a. Variable cost per unit remains the same irrespective of changes in the

activity base.

b. Variable cost per unit changes in direct proportion to changes in the activity base.

c. Total variable costs remain the same irrespective of changes in the activity base.

d. Total variable costs change in inverse proportion to changes in the activity base.

_____ are costs that remain the same in total dollar amount as the activity base changes. a. Variable costs

b. Total costs

c. Fixed costs

d. Mixed costs

Activities that cause costs to change are called _____.

a. unit activities

b. incremental activities

c. cost pools

d. activity bases

Calculate the contribution margin ratio for Peak Inc. from the information given below:

Sales $100,000

Contribution margin $40,000

Fixed costs $25,000

Operating profit $15,000

a. 10%

b. 25%

c. 40%

d. 15%

The _____ indicates the percentage of each sales dollar available to cover fixed costs and to provide operating income.

a. cash flow coverage ratio

b. contribution margin ratio

c. net profit margin ratio

d. operating profit margin ratio

Any additional contribution margin after covering fixed costs increases _____.

a. opportunity income

b. gross income

c. unrealized income

d. operating income

How do changes in fixed costs affect the break-even point?

a. An increase in total fixed costs decreases the break-even point.

b. An increase in total fixed costs increases the break-even point.

c. A decrease in per-unit fixed costs increases the break-even point.

d. Any change in fixed costs does not affect the break-even point.

An increase in the unit selling price _____.

a. decreases the contribution margin and increases the break-even point

b. decreases the contribution margin and decreases the break-even point

c. increases the contribution margin and increases the break-even point

d. increases the contribution margin and decreases the break-even point

Which of the following is true of the break-even point, assuming all other things are equal?

a. The break-even point changes in the opposite direction as changes in the variable cost per unit.

b. The break-even point changes in the opposite direction as changes in the total fixed costs.

c. The break-even point changes in the opposite direction as changes in the unit selling price.

d. The break-even point changes in the same direction as changes in the unit contribution margin.

Calculate the break-even point in sales dollars for Magenta Inc. from the information given below:

Unit contribution margin $10

Contribution margin ratio 40%

Fixed costs $80,000

Sales 30,000 units

a. $75,000

b. $200,000

c. $150,000

d. $100,000

Calculate the sales mix for Product A and Product B of Opaque Inc. from the information given below.

Product A 		Product B 

Unit contribution margin $20 $25

Units sold 6,000 4,000

Total fixed costs are $250,000.

a. The sales mix is 40% and 60% for Products A and B respectively.

b. The sales mix is 60% and 40% for Products A and B respectively.

c. The sales mix is 75% and 25% for Products A and B respectively.

d. The sales mix is 25% and 75% for Products A and B respectively.

Which of the following is an underlying assumption of cost-volume-profit analysis?

a. The inventory quantities change twice during the relevant period.

b. The sales mix is variable.

c. Within the relevant range of operating activity, the efficiency of operations does not change.

d. Total sales and total costs cannot be represented by straight lines.

Which of the following is an underlying assumption of cost-volume-profit analysis?

a. Costs can be divided into fixed and variable components.

b. Costs are either fixed costs or variable costs but not both.

c. All costs are variable costs.

d. All costs are fixed costs.