Chapter 3 Fundamentals of Cost-Volume-Profit Analysis

True/False Questions T F 1. The basic profit equation used for cost-volume-profit (CVP) analysis is based on the income statement. ns!er" True #ifficulty" $imple %earnin& 'b(ective" 1

AACSB: Analytic
T F ). *oth total revenues (T+) and total costs (TC) are li,ely to be affected by chan&es in the output. ns!er" True #ifficulty" $imple %earnin& 'b(ective" 1

AACSB: Analytic
T F -. Costs and e.penses are either variable or fi.ed. ns!er" False #ifficulty" $imple %earnin& 'b(ective" 1

AACSB: Analytic
T F

/. Cost-volume-profit (CVP) analysis assumes that the production volume equals sales volume so that chan&es in unit prices can be i&nored. ns!er" False #ifficulty" 0oderate %earnin& 'b(ective" 1

AACSB: Analytic
T F

1. The total contribution mar&in is the unit contribution mar&in multiplied by the number of units minus the fi.ed component of the total costs (TC). ns!er" False #ifficulty" 0oderate %earnin& 'b(ective" 1

AACSB: Analytic
T F

2. 'peratin& profit is the unit contribution mar&in multiplied by the number of units minus the fi.ed component of the total costs (TC). ns!er" True #ifficulty" 0oderate %earnin& 'b(ective" 1

AACSB: Analytic

%anen3 nderson3 0aher Fundamentals of Cost Accounting3 )e 14

5. 6n financial accountin&3 costs are classified as either manufacturin& or non-manufacturin& but not as fi.ed or variable. ns!er" True #ifficulty" $imple %earnin& 'b(ective" 1

AACSB: Analytic
T F 7. 6f the avera&e sellin& price is 8.24 per unit3 the avera&e variable cost is 8.-2 per unit3 and the total fi.ed costs are 8131443 then sales of 113444 units !ill result in operatin& profits of 8-3244. ns!er" False #ifficulty" 0oderate %earnin& 'b(ective" 1

AACSB: Analytic
T F

9. 6f the avera&e sellin& price is 8.24 per unit3 the avera&e variable cost is 8.-2 per unit3 and the total fi.ed costs are 8131443 then sales of 73444 units !ill result in a brea,-even point of 23)14 units. ns!er" True #ifficulty" Comple. %earnin& 'b(ective" 1

AACSB: Analytic
T F 14. 6f the avera&e sellin& price is 8.24 per unit3 the avera&e variable cost is 8.-2 per unit3 and the total fi.ed costs are 8131443 then operatin& profits of 8944 !ill require a sales volume of )3144 units.

AACSB: Analytic
T

ns!er" False #ifficulty" 0oderate %earnin& 'b(ective" 1

F 11. The contribution mar&in ratio is the contribution mar&in per unit divided by the sellin& price per unit.

AACSB: Analytic
T

ns!er" True #ifficulty" 0oderate %earnin& 'b(ective" 1

F 1). 6f the fi.ed costs are 8)3/443 tar&eted operatin& profit is 813)443 and the contribution mar&in ratio is /4:3 then the brea,-even point is 823444.

AACSB: Analytic

ns!er" False #ifficulty" 0oderate %earnin& 'b(ective" 1

11

%anen3 nderson3 0aher Fundamentals of Cost Accounting3 )e

F 1-. 6f the fi.ed costs are 8)3/443 tar&eted operatin& profit is 813)443 sellin& price per unit is 8)3 and the contribution mar&in ratio is /4:3 then the sales volume is 93444 units. ns!er" False #ifficulty" Comple. %earnin& 'b(ective" 1

AACSB: Analytic
T F 1/. The brea,-even point in sales dollars is fi.ed costs divided by the contribution mar&in ratio. ns!er" True #ifficulty" $imple %earnin& 'b(ective" 1

AACSB: Analytic
T F 11. The brea,-even point in sales dollars is !hen the total contribution mar&in equals the total fi.ed costs. ns!er" True #ifficulty" $imple %earnin& 'b(ective" 1

AACSB: Analytic
T F 12. The brea,-even point in sales dollars is !hen the total contribution mar&in equals the total costs. ns!er" False #ifficulty" 0oderate %earnin& 'b(ective" 1

AACSB: Analytic
T F 15. The vertical a.is on the cost-volume-profit (CVP) &raph represents the volume of activity for a period. ns!er" False #ifficulty" $imple %earnin& 'b(ective" 1

AACSB: Analytic
T F 17. n or&ani;ation<s brea,-even point is inversely related to its sales volume.

AACSB: Analytic
T F

ns!er" False #ifficulty" Comple. %earnin& 'b(ective" 1

19. The slope of the total revenue (T+) line on the cost-volume-profit (CVP) &raph is the sellin& price per unit. ns!er" True #ifficulty" $imple %earnin& 'b(ective" 1

AACSB: Analytic
Test *an,3 Chapter 3

1)

F )4. The slope of the profit line in profit-volume analysis is the operatin& profit per unit.

AACSB: Analytic
T F )1.

ns!er" False #ifficulty" 0oderate %earnin& 'b(ective" )

n or&ani;ation<s cost structure is the proportion of fi.ed and variable costs to total costs.

ns!er" True #ifficulty" $imple %earnin& 'b(ective" )

AACSB: Analytic
T F )). 'r&ani;ations in the same industry have similar cost structures (e.&.3 airlines)3 althou&h cost structures vary !idely amon& different industries. ns!er" True #ifficulty" 0oderate %earnin& 'b(ective" )

AACSB: Analytic
T F )-. n or&ani;ation<s operatin& levera&e is hi&h !hen it has a lo! proportion of variable costs in its total costs.

ns!er" True #ifficulty" 0oderate %earnin& 'b(ective" )

AACSB: Analytic
T F )/. n increase in the sellin& price per unit !ill decrease an or&ani;ation<s operatin& levera&e3 assumin& no other chan&e in its cost structure.

ns!er" False #ifficulty" Comple. %earnin& 'b(ective" )

AACSB: Analytic
T F )1. The brea,-even point for an or&ani;ation !ith a lo! operatin& levera&e !ill be relatively hi&her than the brea,-even point for an or&ani;ation !ith a hi&h operatin& levera&e. ns!er" False #ifficulty" Comple. %earnin& 'b(ective" )

AACSB: Analytic
T F )2. The mar&in of safety is the difference bet!een the actual operatin& profit and the brea,even operatin& point. ns!er" False #ifficulty" 0oderate %earnin& 'b(ective" )

AACSB: Analytic

1-

%anen3 nderson3 0aher Fundamentals of Cost Accounting3 )e

F )5.

n increase in an or&ani;ation<s fi.ed costs !ill result in a lo!er mar&in of safety.

AACSB: Analytic
T

ns!er" True #ifficulty" Comple. %earnin& 'b(ective" )

F )7. 6n practice3 the mar&in of safety can be e.pressed in sales dollars or as a percent of the brea,-even point.

AACSB: Analytic

ns!er" False #ifficulty" 0oderate %earnin& 'b(ective" )

F )9. $preadsheets can be used to analy;e =!hat-if= scenarios (i.e.3 chan&es in the current data or sets of alterative data).

AACSB: Analytic
T F -4.

ns!er" True #ifficulty" $imple %earnin& 'b(ective" -

n increase in an or&ani;ation<s ta. rate !ill cause an increase in its brea,-even point.

ns!er" False #ifficulty" 0oderate %earnin& 'b(ective" /

AACSB: Analytic
T F -1. *efore-ta. operatin& profits are equal to the after-ta. operatin& profits divided by (1 > ta. rate).

AACSB: Analytic
T

ns!er" True #ifficulty" $imple %earnin& 'b(ective" /

F -). 6f an or&ani;ation<s before- and after-ta. operatin& incomes are 8143444 and 534443 respectively3 then its ta. rate is -4:.

AACSB: Analytic
T

ns!er" True #ifficulty" 0oderate %earnin& 'b(ective" /

F --. 6f an or&ani;ation<s fi.ed costs are 8)3/443 ta. rate is /4:3 and contribution mar&in is 813)443 then its after-ta. operatin& profits are 813274.

Test *an,3 Chapter 3

1/

AACSB: Analytic

ns!er" True #ifficulty" 0oderate %earnin& 'b(ective" /

F -/. 6f the fi.ed costs are 8)3/443 tar&eted before-ta. operatin& profit is 813)443 ta. rate is )1:3 sellin& price per unit is 8)3 and contribution mar&in ratio is /4:3 then the sales volume is 93444 units. ns!er" False #ifficulty" Comple. %earnin& 'b(ective" /

AACSB: Analytic
T F -1. Cost-volume-profit (CVP) analysis is more complicated for or&ani;ations !ith multiple products because each product has a different contribution mar&in ratio. ns!er" True #ifficulty" $imple %earnin& 'b(ective" /

AACSB: Analytic
T F -2. The ?@ 0anufacturin& Company sells t!o products3 ? and @. ? has a hi&her contribution mar&in ratio than @. 6f the product mi. shifts to!ards @3 the company<s brea,-even point in total units (i.e.3 ? plus @) !ill increase.

AACSB: Analytic
T

ns!er" True #ifficulty" Comple. %earnin& 'b(ective" /

F -5. 6n multi-product cost-volume-profit (CVP) analysis3 the fi.ed product mi. method and the !ei&hted avera&e contribution mar&in method &ive different brea,-even points.

AACSB: Analytic
Multiple Choice Questions

ns!er" False #ifficulty" 0oderate %earnin& 'b(ective" /

Part A" Conceptual Auestions -7. Cost-volume-profit (CVP) analysis is a simple but po!erful tool to assist mana&ement ma,e operatin& decisions. Bhich of the follo!in& does not represent a potential use of CVP analysisC ) bility to compute the brea,-even point. *) bility to determine optimal sales volumes. C) ids in evaluatin& ta. plannin& alternatives. #) ids in determinin& optimal pricin& policies.

AACSB: Analytic

ns!er" C #ifficulty" $imple %earnin& 'b(ective" 1

11

%anen3 nderson3 0aher Fundamentals of Cost Accounting3 )e

-9. Bhich of the follo!in& !ould not cause the brea,even point to chan&eC ) $ales price increases. *) Fi.ed costs decreases. C) $ales volume decreases. #) Variable costs per unit increases. D) Product mi. shifts to!ards the cheaper products. ns!er" C #ifficulty" 0oderate %earnin& 'b(ective" 1

AACSB: Analytic
/4. 6f the fi.ed costs for a product decrease and the variable costs (as a percenta&e of sales dollars) decrease3 !hat !ill be the effect on the contribution mar&in ratio and the brea,even point respectivelyC Contribution *rea,even 0ar&in +atio Point ) decreased increased *) increased decreased C) decreased decreased #) increased increased

AACSB: Analytic

ns!er" * #ifficulty" 0oderate %earnin& 'b(ective" 1

/1. The *lue Company is currently sellin& its sin&le product for 811. Variable costs are estimated to remain at 54: of the current sellin& price and fi.ed costs are estimated to be 8/3744 per month. 6f *lue increases its sellin& price by 14:3 its variable cost ratio !ill ) not chan&e *) decrease C) increase

AACSB: Analytic

ns!er" * #ifficulty" 0oderate %earnin& 'b(ective" 1

+esponse" 811(.54) E 814.14 811(1.14) E 812.14 814.14F812.14 E 2-.2: (vs. 54:)

/). D.pense is a fi.ed cost e.pense3 * is a variable cost. #urin& the current year the volume of output has decreased. 6n terms of cost per unit of output3 !e !ould e.pect that ) e.pense has remained unchan&ed. *) e.pense * has decreased.
Test *an,3 Chapter 3 12

C) e.pense has decreased. #) e.pense * has remained unchan&ed. ns!er" # #ifficulty" $imple %earnin& 'b(ective" 1

AACSB: Analytic
/-. 6f both the variable cost per unit and the sellin& price per unit decrease3 the ne! contribution mar&in ratio in relation to the old contribution mar&in ratio !ill be" ) lo!er. *) Gi&her. C) Hnchan&ed. #) Iot enou&h information to tell. ns!er" # #ifficulty" Comple. %earnin& 'b(ective" 1

AACSB: Analytic
//. company<s brea,-even point !ill not be increased by" ) an increase in total fi.ed costs. *) a decrease in the sellin& price per unit. C) an increase in the variable cost per unit. #) a decrease in the contribution mar&in ratio. D) an increase in the number of units produced and sold. ns!er" D #ifficulty" 0oderate %earnin& 'b(ective" 1

AACSB: Analytic
/1. Bhich of the follo!in& chan&es to a company<s contribution income statement !ill al!ays lo!er the brea,even point (either in units or in dollars)C ) $ales price increases by 14: and sales volume decreases by 1:. *) $ales price decreases by 1: and sales volume increases by 11:. C) Variable costs increase by 14: and fi.ed costs decrease by 1:. #) Variable costs decrease by 1: and fi.ed costs increase by 14:. ns!er" #ifficulty" Comple. %earnin& 'b(ective" 1

AACSB: Analytic
/2. 'peratin& levera&e refers to the e.tent to !hich an or&ani;ation<s cost structure is made up of" ) differential costs. *) opportunity costs. C) fi.ed costs. #) relevant costs. D) product costs. ns!er" C #ifficulty" $imple %earnin& 'b(ective" )

AACSB: Analytic
/5. decrease in the mar&in of safety !ould be caused by a(n)" ) increase in the total fi.ed costs. *) increase in total revenue (sales).
%anen3 nderson3 0aher Fundamentals of Cost Accounting3 )e

15

C) decrease in the brea,-even point. #) decrease in the variable cost per unit. ns!er" #ifficulty" Comple. %earnin& 'b(ective" )

AACSB: Analytic
/7. fter-ta. operatin& profits are equal to the before-ta. operatin& profits !hen !hich of the follo!in& occurs" ) income ta.es are added. *) income ta.es are subtracted. C) multiplied by (1 > ta. rate). #) divided by (1 > ta. rate). ns!er" # #ifficulty" $imple %earnin& 'b(ective" / (*oth * and # are correct)

AACSB: Analytic
Part B" Computational Auestions /9. t a brea,-even point of /44 units3 variable costs !ere 8/44 and fi.ed costs !ere 8)44. Bhat !ill the /41st unit sold contribute to operatin& profits before income ta.esC ) 8 .14 *) 81.44 C) 81.14 #) 8).44 D) some other ans!er JJJJJJJJJJJJJJJ.

AACSB: Analytic

ns!er"

#ifficulty" $imple %earnin& 'b(ective" 1

+esponse" Variable costs E 8/44F/44 E 81.44 /44 E 8)44F(sellin& price - 81.44)K sellin& price E 81.14 81.14 1.44 E 8 .14 14. *arnes Corporation manufactures s,ateboards and is in the process of preparin& ne.t year<s bud&et. The pro forma income statement for the current year is presented belo!. $ales Cost of sales" #irect materials #irect labor Variable overhead Fi.ed overhead Lross profit $ellin& and L M Variable Fi.ed 'peratin& income 8131443444 8)143444 1143444 513444 1443444 )443444 )143444

1513444

/143444 8 /513444

Test *an,3 Chapter 3

17

The brea,even point (rounded to the nearest dollar) for *arnes Corporation for the current year is ) 81/23-/1. *) 82-23-2/. C) 85)935-4. #) 81713717. D) 821731-5. ns!er" * #ifficulty" $imple %earnin& 'b(ective" 1

AACSB: Analytic
+esponse" 8)143444 N 1143444 N 513444 N )443444 E 82513444 (8131443444 - 2513444)F131443444 E 11: (81443444 N )143444)F.11 E 82-23-2/ 11. *arnes Corporation manufactures s,ateboards and is in the process of preparin& ne.t year<s bud&et. The pro forma income statement for the current year is presented belo!. $ales Cost of sales" #irect materials #irect labor Variable overhead Fi.ed overhead Lross profit $ellin& and L M Variable Fi.ed 'peratin& income 8131443444 8)143444 1143444 513444 1443444 )443444 )143444

1513444

/143444 8 /513444

For the comin& year3 the mana&ement of *arnes Corporation anticipates a 14 percent increase in sales3 a 1) percent increase in variable costs3 and a 8/13444 increase in fi.ed e.penses. The brea,even point for ne.t year !ould be ) 85)934)5. *) 872)314-. C) 8)1/3417. #) 8/5/3444. D) 85443444.

AACSB: Analytic

ns!er"

#ifficulty" $imple %earnin& 'b(ective" 1

+esponse" (8131443444 . 1.14) - (82513444 . 1.1))F8132143444 E .1/1717 (8-143444 N /13444)F.1/1717 E 85)934)5 1). Oou have been provided !ith the follo!in& information"

19

%anen3 nderson3 0aher Fundamentals of Cost Accounting3 )e

$ales %ess variable e.penses Contribution mar&in %ess fi.ed e.penses 'peratin& profit

Per Unit 811 9 2

Total 8/13444 )53444 173444 1)3444 8 23444

6f sales decrease by 144 units3 ho! much !ill fi.ed e.penses have to be reduced by to maintain the current operatin& profit of 823444C ) 893444. *) 853144. C) 823444. #) 8-3444. D) $ome other ans!er JJJJJJJJJJJ. ns!er" # #ifficulty" Comple. %earnin& 'b(ective" 1

AACSB: Analytic
+esponse" 8/13444F11 E -3444 units P(811 - 9)(-3444 - 144)Q -FC E 823444 FC E 893444K thus FC !ill have to decrease by 8-3444 1-. ROS Company<s sales are 85143444 !ith operatin& profits of 81-43444. 6f the contribution mar&in ratio is /4:3 !hat did the fi.ed costs amount toC ) 8-543444. *) 8-443444. C) 8)543444. #) 81543444. D) 81-43444.

AACSB: Analytic

ns!er" # #ifficulty" $imple %earnin& 'b(ective" 1

+esponse" (85143444 . ./4) - FC E 81-43444 FC E 81543444 1/. The follo!in& costs have been estimated based on sales of -43444 units" #irect materials #irect labor 0anufacturin& overhead $ellin& and administrative Total Annual Costs 8-443444 )143444 )143444 1143444 Percent That Is Variable 144: 144 14 )1

Bhat sellin& price !ill yield a contribution mar&in of /4:C ) 819.-7 *) 8/-.51 C) 8-9.17
Test *an,3 Chapter 3 24

#) 8--.)1 D) $ome other ans!er JJJJJJJJJJJJJJJJJJJJJ. ns!er" C #ifficulty" Comple. %earnin& 'b(ective" 1

AACSB: Analytic
+esponse" (8-443444 N 8)143444 N 81)13444 N 8-53144)F-43444 E 8)-.51 ($P - 8)-.51)F$P E ./4 $P E 8-9.17 11. Fo!ler 0anufacturin& Company has a fi.ed cost of 8))13444 for the production of tubes. Dstimated sales are 1143444 units. before ta. profit of 81)13444 is desired by the controller. 6f the tubes sell for 81 each3 !hat unit contribution mar&in is required to attain the profit tar&etC ) 8-.44. *) 8).--. C) 81./5. #) 8 .94. D) $ome other ans!er JJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJ.

AACSB: Analytic

ns!er" * #ifficulty" $imple %earnin& 'b(ective" 1

+esponse" (C0 per unit . 1143444) - ))13444 E 81)13444 C0 per unit E 8).-12. ?? 0otors 6nc. employs /1 sales personnel to mar,et their line of lu.ury automobiles. The avera&e car sells for 8)-34443 and a 2 percent commission is paid to the salesperson. ?? 0otors is considerin& a chan&e to the commission arran&ement !here the company !ould pay each salesperson a salary of 8)3444 per month plus a commission of ) percent of the sales made by that salesperson. The amount of total monthly car sales at !hich ?? 0otors !ould be indifferent as to !hich plan to select is ) 8)3)143444. *) 8-3444.444. C) 8131443444. #) 813)143444. D) 8/31443444. ns!er" #ifficulty" Comple. %earnin& 'b(ective" )

AACSB: Analytic
+esponse" 8)3444 N (.4))(units)(8)-3444) E (.42)(units)(8)-3444) Hnits E ).15-91).15-91-(/1)(8)-3444) E 8)3)143444 15. The follo!in& data relate to a year<s bud&eted activity for Patsy corporation3 a sin&le product company"

21

%anen3 nderson3 0aher Fundamentals of Cost Accounting3 )e

Per Unit $ellin& price Variable manufacturin& costs Variable sellin& costs Fi.ed manufacturin& costs (based on 1443444 units) Fi.ed sellin& costs (based on 1443444 units)

81.44 81.44 8).44 8 .)1 8 .21

Total fi.ed costs remain unchan&ed !ithin the relevant ran&e of )13444 units to total capacity of 1243444 units. Bhat is the bud&eted operatin& levera&e assumin& the Patsy Corporation produced and sold 1143444 unitsC ) 1.-51. *) 1.144. C) 1.29). #) -.225. D) /.444. F) $ome other ans!er JJJJJJJJJJJJJJJ. ns!er" C #ifficulty" Comple. %earnin& 'b(ective" )

AACSB: Analytic
+esponse" P(81.44 - 1.44 - ).44) T1143444Q E 8))43444 8))43444F8))43444 - P(8.)1 N .21) T 1443444Q E 1.29) 17. Liven the follo!in& information" $ales Fi.ed D.penses Variable D.penses 813444 )3444 13514

Bhat !ould e.pected net income be if the company e.perienced a 14 percent increase in fi.ed costs and 14 percent increase in sales volumeC ) 813514. *) 813114. C) 813)14. #) 813-51. D) $ome other ans!er JJJJJJJJJJJJJ.

AACSB: Analytic

ns!er" # #ifficulty" $imple %earnin& 'b(ective" -

+esponse" P813444 - 813514)1.14Q (8)3444) - (1.14) E 813-51 19. Liven the follo!in& data" $ales %ess variable e.penses
Test *an,3 Chapter 3

Per Unit 811 9

Total 8/13444 )53444

2)

Contribution mar&in %ess fi.ed e.penses Iet income

Per Unit 2

Total 173444 1)3444 8 23444

6f sales decrease by 144 units3 by !hat : !ould fi.ed e.penses have to be reduced by to maintain current net incomeC ) 14.4:. *) --.-:. C) )1.4:. #) 12.5:. D) $ome other percenta&e JJJJJJJJJJJJ. ns!er" C #ifficulty" Comple. %earnin& 'b(ective" -

AACSB: Analytic
+esponse" 8/13444F11 E -3444 units P(811 - 9) T (-3444 - 144)Q -FC E 823444 FC E 893444K thus FC !ill have to decrease by 8-3444 8-3444F1)3444 E )1: 24. The #ooley Co. manufactures t!o products3 baubles and trin,ets. The follo!in& are pro(ections for the comin& year" BAUBLE Units Amount $ales Costs" Fi.ed Variable 6ncome before ta.es 143444 )3444 23444 73444 8143444 T!I"#ET Units Amount 13444 /3244 /3444 73444 8143444

8 )3444

8 13/44

Go! many *aubles !ill be sold at the brea,even point3 assumin& that the facilities are (ointly used and the sales mi. !ill remain constantC ) 93944 *) 73744 C) 23244 #) 13444 D) -3-44 ns!er" C #ifficulty" Comple. %earnin& 'b(ective" /

AACSB: Analytic
+esponse" (823444F8143444)(143444F113444) N (8/3444F813444)(13444F113444) E .22225 (8)3444 N /3244)F.22225 E 93944 total units

2-

%anen3 nderson3 0aher Fundamentals of Cost Accounting3 )e

93944 T (143444F113444) E 23244

Part C" Professional D.amination Auestions

21. 6f sales dollars are used to measure activity levels3 total costs and total revenues may be read from the R and O a.is as follo!s" (CP adapted3 1F94) ) *) C) #) Total Costs R or O R or O O only O only Total +evenues R or O R only R or O R only

AACSB: Analytic

ns!er" # #ifficulty" $imple %earnin& 'b(ective" 1

2). *rea,even analysis assumes that over the relevant ran&e (CP 3 adapted 1F9-)" ) Total Fi.ed Costs are nonlinear. *) Total Costs are unchan&ed. C) Hnit Variable Costs are unchan&ed. #) Hnit +evenues are nonlinear. ns!er" C #ifficulty" $imple %earnin& 'b(ective" 1

AACSB: Analytic
2-. t the brea,-even point the contribution mar&in equals total" (CP adapted3 11F9-) ) Variable costs *) $ales revenues C) $ellin& and administrative costs #) Fi.ed costs

AACSB: Analytic

ns!er" # #ifficulty" $imple %earnin& 'b(ective" 1

2/. The relevance of a particular cost to a decision is determined by the" (C0 adapted3 1)F92) ) ris,iness of the decision. *) number of decision variables. C) amount of the cost. #) potential effect on the decision. D) accuracy of the cost.

AACSB: Analytic
Test *an,3 Chapter 3

ns!er" # #ifficulty" $imple %earnin& 'b(ective" )

2/

21. 6n a decision analysis situation3 !hich one of the follo!in& costs is not li,ely to contain a variable cost componentC (C0 adapted3 2F92) ) %abor *) 'verhead C) #epreciation #) $ellin& D) 0aterial

AACSB: Analytic

ns!er" C #ifficulty" $imple %earnin& 'b(ective" 1

22. 'n ?anuary 13 )4423 %a,e Co. increased its direct labor !a&e rates. ll other bud&eted costs and revenues !ere unchan&ed. Go! did this increase affect %a,e<s bud&eted brea,-even point and bud&eted mar&in of safetyC (CP adapted3 1F9)) ) *) C) #) *ud&eted brea,-even point 6ncrease 6ncrease #ecrease #ecrease *ud&eted mar&in of safety 6ncrease #ecrease #ecrease 6ncrease

AACSB: Analytic

ns!er" * #ifficulty" 0oderate %earnin& 'b(ective" 1

25. #urin& )4423 Thor %ab supplied hospitals !ith a comprehensive dia&nostic ,it for 81)4. t a volume of 743444 ,its3 Thor had fi.ed costs of 8134443444 and a profit before income ta.es of 8)443444. #ue to an adverse le&al decision3 Thor<s )445 liability insurance increased by 813)443444 over )442. ssumin& the volume and other costs are unchan&ed3 !hat should the )445 price be if Thor is to ma,e the same 8)443444 profit before income ta.esC (CP adapted3 1F9/) ) 81)).14 *) 81-1.44 C) 811).14 #) 8)/4.44 D) some other ans!er JJJJJJJJJJJJJJJ. ns!er" * #ifficulty" 0oderate %earnin& 'b(ective" 1

AACSB: Analytic
+esponse" P(81)4 VC)743444Q - 8134443444 E 8)443444 VC E 8141 P(8$P - 8141)743444Q - 8)3)443444 E 8)443444 $P E 81-1

21

%anen3 nderson3 0aher Fundamentals of Cost Accounting3 )e

27. The follo!in& information pertains to $yl Co." $ales Variable Costs Fi.ed Costs 87443444 1243444 /43444

Bhat is $yl<s brea,even point in sales dollarsC (CP adapted3 11F9)) ) 8)443444 *) 81243444 C) 8 143444 #) 8 /43444 D) some other ans!er JJJJJJJJJJJJJJJ. ns!er" C #ifficulty" $imple %earnin& 'b(ective" 1

AACSB: Analytic
+esponse" (87443444 - 1243444)F87443444 E 74: 8/43444F.74 E 8143444 29 The follo!in& pertains to Clove Co. for the year endin& #ecember -13 )447" *ud&eted $ales *rea,even $ales *ud&eted Contribution 0ar&in Cashflo! *rea,even Clove<s mar&in of safety is" ( CP adapted3 1F9)) ) 8-443444 *) 8/443444 C) 81443444 #) 87443444 D) some other ans!er JJJJJJJJJJJJJJJ. ns!er" #ifficulty" $imple %earnin& 'b(ective" 1 8134443444 5443444 2443444 )443444

AACSB: Analytic
+esponse" 8134443444 - 85443444 E 8-443444 54. @ator 6nc. manufactures industrial components. 'ne of its products that is used as a subcomponent in auto manufacturin& is @*-92. The sellin& price and cost per unit data for 93444 units of @*-92 is as follo!s. $ellin& Price
Test *an,3 Chapter 3

Per Hnit #ata 8114

22

#irect 0aterials #irect %abor Variable 0anufacturin& 'verhead Fi.ed 0anufacturin& 'verhead Variable $ellin& Fi.ed $ellin& and dministrative Total Costs 'peratin& 0ar&in

)4 11 1) -4 14 94 8 24

#urin& the ne.t year3 sales of @*-92 are e.pected to be 143444 units. ll costs !ill remain the same e.cept for fi.ed manufacturin& overhead3 !hich !ill increase )4:3 and material3 !hich !ill increase 14:. The sellin& price per unit for ne.t year !ill be 8124. *ased on this data3 @ator 6nc.<s contribution mar&in for ne.t year !ill be" (C0 adapted3 1)F91) ) 8 77)3444 *) 8 9743444 C) 8 95)3444 #) 8134743444 D) some other ans!er JJJJJJJJJJJJJJJ. ns!er" # #ifficulty" 0oderate %earnin& 'b(ective" 1

AACSB: Analytic
+esponse" P(8124 - )) 11 > 1) - -)143444 unitsQ E 8134743444 Hse the follo!in& to ans!er questions 51-5/" #onnelly Corporation manufactures and sells T-shirts imprinted !ith colle&e names and slo&ans. %ast year3 the shirts sold for 85.14 each3 and the variable cost to manufacture them !as 8).)1 per unit. The company needed to sell )43444 shirts to brea, even. The net income last year !as 8134/4. #onnelly<s e.pectations for the comin& year include the follo!in&" (C0 adapted) The sales price of the T-shirts !ill be 89 Variable cost to manufacture !ill increase by one-third Fi.ed costs !ill increase by 14: The income ta. rate of /4: !ill be unchan&ed. 51. The sellin& price that !ould maintain the same contribution mar&in rate as last year is ) 8 9.44. *) 8 7.)1. C) 814.44. #) 8 9.51. D) $ome other amount JJJJJJJJJJJJJJJ. ns!er" C #ifficulty" Comple. %earnin& 'b(ective" /

AACSB: Analytic
+esponse" (85.14 - ).)1)F85.14 E 54:

25

%anen3 nderson3 0aher Fundamentals of Cost Accounting3 )e

P$P - ().)1 . 1.-)QF$P E 54: $P E 814.44

5). The number of T-shirts #onnelly Corporation must sell to brea, even in the comin& year is ) 153444. *) 193)14. C) )43444. #) ))3444. D) $ome other amount JJJJJJJJJJJJJJJJ.

AACSB: Analytic

ns!er" * #ifficulty" Comple. %earnin& 'b(ective" /

+esponse" FC (last year) E (85.14 - ).)1) . )43444 units E 81413444 FC (this year) E 81413444 . 1.14 E 81113144 81113144F(9 - -) E 193)14 5-. $ales for the comin& year are e.pected to e.ceed last year<s by 13444 units. 6f this occurs3 #onnelly<s sales volume in the comin& year !ill be ) ))3244 units. *) )13924 units. C) )-3/44 units. #) )13444 units. D) $ome other amount JJJJJJJJJJJJJJJ.

AACSB: Analytic

ns!er"

#ifficulty" Comple. %earnin& 'b(ective" /

+esponse" 8134/4F(1 - ./4) E 873/44 (81413444 N 873/44)F(85.14 - ).)1) E )43924 units sold last year )43924 N 13444 E )13924 5/. 6f #onnelly Corporation !ishes to earn 8))3144 in net income for the comin& year3 the company<s sales volume in dollars must be ) 8)1-3514. *) 8)1532)1. C) 8)453444. #) 8))93144. D) $ome other amount JJJJJJJJJJJJJJJ. ns!er" C #ifficulty" Comple. %earnin& 'b(ective" /

AACSB: Analytic
+esponse" 8))3144F(1 - ./4) E 8-53144 (81113144 N 8-53144)F(89 - - ) E )-3444 units
Test *an,3 Chapter 3 27

)-3444 . 89 E 8)453444

Essay Questions 51. The @atie Corporation has bud&eted fi.ed costs of 81)13444 and an estimated sellin& price of 812.14 per unit. The contribution mar&in ratio is /4: and the company plans to sell )13444 units in )445. e!uired" (a) Compute the mar&in of safety ratio for )445. (b) Compute the operatin& levera&e for )445. ns!er" (a) *D E 81)13444F./4 E 8-1)3144 Dstimated sales E )13444 units R 812.14 E 8/1)3144 0ar&in of safety E (8/1)3144 > -1)3144)F/1)3144 E )/.): (b) C0 E 8/1)3144(./4) E 81213444 'peratin& profits E 81213444 > 1)13444 E 8/43444 'peratin& levera&e E 81213444F/43444 E /.1)1

AACSB: Analytic
52. The president of 0L Dnterprises is considerin& e.pandin& sales by producin& three different versions of their product. Dach !ill be tar&eted by the mar,etin& department to different income levels and hence !ill be produced from three different qualities of materials. fter revie!in& the sales forecasts3 the sales department feels that for every item of sold3 / of 0 can be sold and 7 of L can be sold. The follo!in& information has been assembled by the sales department and the production department. $ales price (per unit) 0aterial Cost #irect %abor Variable 'verhead A 811.44 1.44 ).44 ).44 $ 814.44 /.44 1.14 1.14 % 81.44 ).44 1.)1 1.)1

The fi.ed costs associated !ith the manufacture of these three products are 8513444 per year. e!uired" #etermine the number of units of each product that !ould be sold at the brea,even point. ns!er" Bei&hted avera&e C0 E P(11-9)(1) N (14-5)(/) N (1 > /.14)(7)QF(1 N / N 7) E 81.29)-1

29

%anen3 nderson3 0aher Fundamentals of Cost Accounting3 )e

*D E 8513444F1.29)-1 E //3-19 total units E //3-19 T (1F1-) E -3/14 0 E //3-19 T (/F1-) E 1-32-5 L E //3-19 T (7F1-) E )53)5/

AACSB: Analytic
55. $tanley Clipper3 no! retired3 o!ns the Campus *arber $hop. Ge employs five (1) barbers and pays each a base rate of 8144 per month. 'ne of the barbers serves as the mana&er and receives an e.tra 8-44 per month. 6n addition to the base rate3 each barber also receives a commission of 8- per haircut. barber can do as many as )4 haircuts a day3 but the avera&e is 1/ haircuts per day. The Campus *arber $hop is open )/ days a month. 'ther costs are incurred as follo!s" dvertisin& +ent *arber $upplies Htilities 0a&a;ines Cleanin& $upplies $tanley currently char&es 87 per haircut. e!uired" (For parts a throu&h d3 income ta.es can be i&nored (sole proprietors also have to pay ta.esC) (a) Compute the brea,-even point in (1) number of haircuts3 ()) total sales dollars3 and (-) as a percenta&e of capacity. (b) 6n 0arch3 13/44 haircuts !ere &iven. Compute the operatin& profits for the month. (c) $tanley !ants a 8)3124 operatin& profit in pril. Compute the number of haircuts that must be &iven in order to achieve this &oal. (d) 6f 13144 haircuts are &iven in pril3 compute the sellin& price that !ould have to be char&ed in order to have 8)3124 in operatin& profits. (For parts e and f3 assume the Campus *arber $hop is a corporation !ith a -4: ta. rate.) (e) $tanley !ants to earn 8)3124 in after-ta. operatin& profits. Compute the number of haircuts that must be &iven to reach this &oal in ?uly. (f) 6n ?uly3 only 13144 haircuts !ere &iven. Compute the price per haircut that $tanley should have char&ed in ?uly to earn 8)3124 in after-ta. operatin& profits. ns!er" Fi.ed costs E 1(8144) N 8-44 N 8)44 N 8/44 N 8151 N 8)1 E 8-3244 Variable costs E 8-.44 N 84.94 N 84.-1 N 84.11 E 8/./4 per haircut (a) (1) 8-3244F(87 > /./4) E 13444 haircuts ()) 13444 . 87.44 E 873444 (-) 13444F(1 . 1/ . )/) E 19.): (b) P(87.44 > /./4) T 13/44Q - 8-3244 E 813//4 (c) (8-3244 N 8)3124)F(87.44 > /./4) E 13244 haircuts (d) P(8$P > /./4) T 13144Q > -3244 E )3124K $P E 87.)/ per haircut. (e) P(87 > /./) T number of haircutsQ > -3244 E 8)3124F(1 - .-)K number of haircuts E 13717
Test *an,3 Chapter 3 54

8)44 per month 8/44 per month 8.94 per haircut 8151 per month plus 8.-1 per haircut 8 )1 per month 8.11 per haircut

(f) P(8$P > /./4)13144Q > -3244 E )3124F(1 - .-4)K $P E 87.72 per haircut.

AACSB: Analytic

57. Oou have been provided !ith the follo!in& information re&ardin& the %L 0anufacturin& Company" $ales price Variable manufacturin& cost per unit Variable mar,etin& cost per unit Fi.ed manufacturin& costs Fi.ed administrative costs 8 )1 1) 1743444 /43444

This information is based on forecasted sales of )13444 units. e!uired" (a) Bhat are the e.pected operatin& profits for the upcomin& yearC (b) Bhat is the brea,-even point in unitsC (c) Bhat is the brea,-even point in dollarsC (d) 6f 8743444 of operatin& profits is desired3 ho! many units must be soldC (e) Go! much in sales dollars is required to &enerate an operatin& profit of 8513444C ns!er" (a) (b) (c) (d) (e) P(8)1 > 1) > -) T )13444Q > (1743444 N /43444) E 8-43444 8))43444F814 E ))3444 units ))3444 . 8)1 E 81143444 (8))43444 N 743444)F14 E -43444 units (8))43444 N 513444)F14 E )93144 units . 8)1 E 85-53144

AACSB: Analytic
59. lmo Company manufactures and sells ad(ustable canopies that attach to motor homes and trailers. The mar,et covers both ne! unit purchasers as !ell as replacement canopies. lmo developed its )445 business plan based on the assumption that canopies !ould sell at a price of 8/44 each. The variable costs for each canopy !ere pro(ected to be 8)443 and the annual fi.ed costs !ere bud&eted at 81443444. The &oal for lmo<s after-ta. operatin& profits !as 8)/43444K the company<s effective ta. rate is /4: Bhile lmo<s sales usually rise durin& the second quarter3 the 0ay financial statements reported that sales !ere not meetin& e.pectations. For the first five months of )4453 only -14 units had been sold at the established price3 !ith variable costs as planned. 6t !as clear that the )445 afterta. operatin& profit &oal !ould not be reached unless some corrective actions !ere ta,en. lmo<s president assi&ned a mana&ement committee to analy;e the situation and develop several alternative courses of action. The follo!in& mutually e.clusive alternatives !ere presented to the president" (a) +educe the sales price by 8/4. The sales department predicts that !ith the si&nificantly

51

%anen3 nderson3 0aher Fundamentals of Cost Accounting3 )e

reduced price3 )3544 units can be sold durin& the remainder of )445. Total fi.ed and variable unit costs !ill stay as bud&eted. (b) %o!er variable costs per unit by 8)1 throu&h the use of less e.pensive materials and li&htly modified manufacturin& techniques. The sales price !ill also be reduced by 8-4. These chan&es !ill yield sales of )3)44 for the remainder of )445. (c) Cut fi.ed costs by 8143444 and lo!er the sales price by 1:. Variable costs per unit !ill be unchan&ed. $ales of )3444 units can be e.pected for the remainder of )445.

AACSB: Analytic

e!uired" (a) 6f no chan&es are made to the sellin& price or cost structure3 determine the number of units that lmo must sell (1.) in order to brea,-even3 and ().) in order to achieve its after-ta. operatin& profit ob(ective. (b) #etermine !hich one of the alternatives lmo should select to achieve its after-ta. operatin& profit ob(ective. *e sure to support your selection !ith appropriate computations. ns!er" 'nly alternative achieves the tar&eted operatin& profit ob(ective of 8)/434443 althou&h alternative * is close. (a) (1) 81443444F(8/44 > )44) E 144 units ()) P81443444 N )/43444F(1 - ./4)QF(/44 > )44) E )3144 units (b) ( )UP(/44 > )44)-14Q N U(-24 > )44))3544Q > 943444V(1 - ./4) E 8)/13)44 (*) UP(/44 > )44)-14Q N P(-54 > 151))3)44Q > 1443444V(1 - ./4) E 8)-93/44 (C)UP(/44 > )44)-14Q N P(-74 > )44))3444Q > 1443444V(1 - ./4) E 8)4/3444

AACSB: Analytic

74. T-Tunes3 6nc. is considerin& the introduction of a ne! music player !ith the follo!in& price and cost characteristics" $ales price Variable costs Fi.ed costs 8 1)1 each 51 each 1743444 per year

+equired (a) Bhat number must T-Tunes sell to brea, evenC (b) Bhat number must T-Tunes sell to ma,e an operatin& profit of 81)43444 for the yearC Consider requirements (b)3 (c)3 and (d) independent of each other3 assumin& that the pro(ected number for the year is 53144 units. (c) Bhat !ill the operatin& profit beC (d) Bhat is the impact on operatin& profit if the sellin& price per unit decreases by 11:C (e) Bhat is the net income if variable costs per unit increase by 11: and T-Tunes has a -7: ta. rateC
Test *an,3 Chapter 3 5)

ns!er" (a) 81743444F(1)1 > 51) E -3244 (b) (81743444 N 1)43444)F(1)1 > 51) E 23444 (c) P(81)1 > 51)53144Q > 1743444 E 81913444 (d) P(8142.)1 > 51)53144Q > 1743444 E 81/3-513a decrease of 5): (e) U(81)1 > 72.)1)53144Q > 1743444QV(1 - .-7) E 8273175.14

AACSB: Analytic

71. Carson Corporation produces and sells three products. The three products3 lpha3 *eta3 and Lamma3 are sold in a local mar,et and in a re&ional mar,et. t the end of the first quarter of the current year3 the follo!in& income statement (in thousands of dollars) has been prepared" $ales revenue Cost of &oods sold Lross mar&in 0ar,etin& costs dministrative costs Total mar,etin& and administrative 'peratin& profits Total 813)44 /34/4 13124 /)4 )47 2)7 81-) %ocal 8/3444 -3144 944 )/4 124 /44 8144 +e&ional 813)44 9/4 )24 174 /7 8 ))7 -)

0ana&ement has e.pressed special concern !ith the re&ional mar,et because of the e.tremely poor return on sales. This mar,et !as entered a year a&o because of e.cess capacity. 6t !as ori&inally believed that the return on sales !ould improve !ith time3 but after a year3 no noticeable improvement can be seen from the results as reported in the above quarterly statement. 6n attemptin& to decide !hether to eliminate the re&ional mar,et3 the follo!in& information has been &athered" Products $ales revenue Variable manufacturin& costs as a percenta&e of sales revenue Variable mar,etin& costs as a percenta&e of sales revenue Product $ales by 0ar,ets * C 8)3444 24: -: * 813244 54: ): +e&ional 8/44 /44 /44 L 813244 24: ):

%ocal 813244 13)44 13)44

ll administrative costs and fi.ed manufacturin& costs are common to the three products and the t!o mar,ets and are fi.ed for the period. +emainin& mar,etin& costs are fi.ed for the period and separable by mar,et. ll fi.ed costs have been arbitrarily allocated to mar,ets. !e&uired' (a) ssumin& there are no alternative uses for the Carson Corporation<s present capacity3 !ould you recommend droppin& the re&ional mar,etC Bhy or !hy notC (b) Prepare the quarterly income statement sho!in& contribution mar&ins by products. #o not

5-

%anen3 nderson3 0aher Fundamentals of Cost Accounting3 )e

allocate fi.ed costs to products. (c) 6t is believed that a ne! product can be ready for sale ne.t year if the Carson Corporation decides to &o ahead !ith continued research. The ne! product can be produced by simply convertin& equipment presently used in producin& product Lamma. This conversion !ill increase fi.ed costs by 8/43444 per quarter. Bhat must be the minimum contribution mar&in per quarter for the ne! product to ma,e the chan&eover financially feasibleC ns!er" (a.) The re&ional mar,et should not be dropped as this mar,et not only covers all the variable costs and separable fi.ed costs but also &ives net mar,et contribution of 8213444 to!ard the common fi.ed costs. $ales Variable manufacturin& costs Variable 0ar,etin& costs 0ar,etin& costs Iet mar,et contribution E E E E E 813)44 (.2 8/44) N (.5 81/44) N (.2 8/44) E 8524 8)7 8174 8)-) (E 813)44 > 8524 > 8174)

(b.) Auarterly income statement (in thousands)" Product lpha $ales revenue %ess variable costs" 0anufacturin& 0ar,etin& Total variable cost Contribution mar&in %ess fi.ed costs" 0anufacturin& (8/34/4 > 8-3)74) 0ar,etin& (8/)4 > 81)/) dministrative Total fi.ed costs 'peratin& profit 8)3444 13)44 24 13)24 5/4 Product *eta 813244 131)4 -) 1311) //7 Product Lamma 813244 924 -) 99) 247 Total 813)44 -3)74 1)/ -3/4/ 13592 524 )92 )47 13)2/ 8 1-)

(c.) The ne! product must contribute at least 82/7 (E 8247 N 8/4) per quarter so as not to leave the company !orse off !hen product C is replaced.

AACSB: Analytic

Test *an,3 Chapter 3

5/