1. As the level of activity increases, how will a mixed cost in total and per unit behave?

A) A above
B) B above
C) C above
D) D above
E) E above

2. Since Anytime Pizza is open 24 hours a day, its pizza oven is constantly on and is, therefore, always using natural gas.
However, when there is no pizza in the oven, the oven automatically lowers its flame and reduces its natural gas usage by
70%. The cost of natural gas would best be described as a:
A) fixed cost.
B) mixed cost.
C) step-variable cost.
D) true variable cost.

3. When the activity level is expected to decline within the relevant range, what effects would be anticipated with
respect to each of the following?

A) A above
B) B above
C) C above
D) D above
E) E above

4. Within the relevant range, variable costs can be expected to:

A) vary in total in direct proportion to changes in the activity level.
B) remain constant in total as the activity level changes.
C) increase on a per unit basis as the activity level increases.
D) increase on a per unit basis as the activity level decreases.
E) none of these.

5. Which of the following is not correct when referring to fixed costs?

A) Whether a cost is committed or discretionary will depend in large part on managements strategy.
B) Discretionary fixed costs arise from annual decisions by management.
C) Fixed costs remain constant in total throughout the relevant range.
D) Committed fixed costs can often be reduced to zero for short periods of time without seriously impairing the long-
run goals of the company.
E) The trend in companies today is toward greater fixed costs relative to variable costs.

6. Which of the following is correct? The break-even point occurs on the CVP graph where:
A) total profit equals total expenses.
B) total profit equals total fixed expenses.
C) total contribution margin equals total fixed expenses.
D) total variable expenses equal total contribution margin.

7. If a company decreases its total fixed expenses while increasing the variable expense per unit, the total expense line
relative to its previous position on a cost-volume-profit graph will:
A) shift upward and have a steeper slope.
B) shift upward and have a flatter slope.
C) shift downward and have a steeper slope.
D) shift downward and have a flatter slope.

8. East Company manufactures and sells a single product with a positive contribution margin. If the selling price and the
variable expense per unit both increase 5% and fixed expenses do not change, what is the effect on the contribution
margin per unit and the contribution margin ratio?

A) A above
B) B above
C) C above
D) D above

9. Mossfeet Shoe Company is a single product firm. Mossfeet is predicting that a price increase next year will not cause
unit sales to decrease. What effect would this price increase have on the following items for next year?

A) A above
B) B above
C) C above
D) D above

10. The contribution margin ratio is equal to:

A) Total manufacturing expenses/Sales.
B) (Sales - Variable expenses)/Sales.
C) 1 - (Gross Margin/Sales).
D) 1 - (Contribution Margin/Sales).

11. Under variable costing, fixed manufacturing overhead is:

A) carried in a liability account.
B) carried in an asset account.
C) ignored.
D) immediately expensed as a period cost.

12. Which of the following is true of a company that uses absorption costing?
A) Net operating income fluctuates directly with changes in sales volume.
B) Fixed production and fixed selling costs are considered to be product costs.
C) Unit product costs can change as a result of changes in the number of units manufactured.
D) Variable selling expenses are included in product costs.

13. Under absorption costing, fixed manufacturing overhead costs:

A) are deferred in inventory when production exceeds sales.
B) are always treated as period costs.
C) are released from inventory when production exceeds sales.
D) none of these.

14. Which of the following costs at a manufacturing company would be treated as a product cost under both absorption
costing and variable costing?

Variable overhead Variable selling and administrative

A) Yes Yes
B) Yes No
C) No Yes
D) No No

15. Under absorption costing, product costs include:

Fixed factory overhead Variable factory overhead
A) No No
B) No Yes
C) Yes Yes
D) Yes No

The Plastechnics Company began operations several years ago. The company purchased a building and, since only half of
the space was needed for operations, the remaining space was rented to another firm for rental revenue of $20,000 per
year. The success of Plastechnics Company's product has resulted in the company needing more space. The renter's
lease will expire next month and Plastechnics will not renew the lease in order to use the space to expand operations
and meet demand. The company's product requires materials that cost $25 per unit. The company employs a
production supervisor whose salary is $2,000 per month. Production line workers are paid $15 per hour to manufacture
and assemble the product. The company rents the equipment needed to produce the product at a rental cost of $1,500
per month. Additional equipment will be needed as production is expanded and the monthly rental charge for this
equipment will be $900 per month. The building is depreciated on the straight-line basis at $9,000 per year.

The company spends $40,000 per year to market the product. Shipping costs for each unit are $20 per unit.
The company plans to liquidate several investments in order to expand production. These investments currently earn a
return of $8,000 per year.

Required: |
Complete the answer sheet above by placing an "X" under each heading that identifies the cost involved. The "Xs" can
be placed under more than one heading for a single cost, e.g., a cost might be a sunk cost, an overhead cost, and a
product cost. An "X" can thus be placed under each of these headings opposite the cost.

PROBLEMS 1

Baker Company has a product that sells for $20 per unit. The variable expenses are $12 per unit, and fixed
expenses total $30,000 per year.

Required:
a. What is the total contribution margin at the break-even point?
b. What is the contribution margin ratio for the product?
c. If total sales increase by $20,000 and fixed expenses remain unchanged, by how much would net operating
income be expected to increase?
d. The marketing manager wants to increase advertising by $6,000 per year. How many additional units would
have to be sold to increase overall net operating income by $2,000?
Answer:
a. At the break-even, the total contribution margin equals total fixed expenses. Therefore, the total contribution margin
would be $30,000.
b. Contribution margin ratio =Unit contribution margin Selling price = ($20 - $12) $20 = 40%

c. Increase in sales ....................................... $20,000

CM ratio .................................................. 40%
Increase in net operating income ............. $8,000

d. Increase in advertising expenses ................... $6,000

Desired increase in net operating income ..... 2,000
Total required contribution margin ............... $8,000
Contribution margin per unit ...................... $8
Required unit sales ........................................ 1,000

Parkins Company produces and sells a single product. The company's income statement for the most recent month is
given below:

Sales (6,000 units at $40 per unit) .............. $240,000

Less manufacturing costs:
Direct materials ...................................... $48,000
Direct labor (variable) ............................ 60,000
Variable factory overhead ...................... 12,000
Fixed factory overhead ........................... 30,000 150,000
Gross margin ........................................................... 90,000
Less selling and other expenses:
Variable selling and other expenses ....... 24,000
Fixed selling and other expenses ............ 42,000 66,000
Net operating income ......................................... $ 24,000

There are no beginning or ending inventories.

Required:
a. Compute the company's monthly break-even point in units of product.
b. What would the company's monthly net operating income be if sales increased by 25% and there is no change in total
fixed expenses?
c. What dollar sales must the company achieve in order to earn a net operating income of $50,000 per month?
d. The company has decided to automate a portion of its operations. The change will reduce direct labor costs per unit
by 40 percent, but it will double the costs for fixed factory overhead. Compute the new break-even point in units.

Answer:

a. The company's income statement in contribution format would be:

Sales ........................................................... $240,000 $40 100%
Less variable expenses:
Direct materials ...................................... $48,000
Direct labor ............................................. 60,000
Variable factory overhead ...................... 12,000
Variable selling and other expenses ....... 24,000 144,000 24 60%
Contribution margin .................................. 96,000 $16 40%
Less fixed expenses:
Fixed factory overhead ........................... 30,000
Fixed selling and other expense ............. 42,000 72,000
Net operating income ................................ $ 24,000

The break-even point in units would be: $72,000 $16 = 4,500 units.

b. 6,000 125% = 7,500 units

Sales (7,500 units at $40) ................................................ $300,000
Less variable expenses (7,500 units at $24) .................... 180,000
Contribution margin ........................................................ 120,000
Less fixed expenses ......................................................... 72,000
Net operating income ...................................................... $ 48,000

c. ($72,000 + $50,000) 0.40 = $305,000

d. Direct labor costs are presently $10 per unit ($60,000 6,000 units) and will decrease by $4 per unit ($10 40%).
Therefore, the companys new cost structure will be:

Selling price ..................................................... $40 100%

Less variable expenses ($24 $4) ................... 20 50%
Contribution margin ........................................ $20 50%

(2 $30,000 + $42,000) $20 per unit = 5,100 units

Oakford Company, which has only one product, has provided the following data concerning its most recent month of
operations:

Selling price ........................................................... $143

Units in beginning inventory ................................. 0
Units produced ...................................................... 1,200
Units sold ............................................................... 1,000
Units in ending inventory ...................................... 200
Variable costs per unit:
Direct materials .................................................. $33
Direct labor ......................................................... $52
Variable manufacturing overhead ...................... $1
Variable selling and administrative .................... $7
Fixed costs:
Fixed manufacturing overhead ........................... $38,400
Fixed selling and administrative ........................ $4,000

Required: a. Prepare an income statement for the month using the contribution format and the variable costing method.

b. Prepare an income statement for the month using the absorption costing method.

Answer:
a. Variable costing income statement
Sales ....................................................................... $143,000
Less variable expenses:
Variable cost of goods sold:
Beginning inventory ........................................ $ 0
Add variable manufacturing costs ................... 103,200
Goods available for sale .................................. 103,200
Less ending inventory ..................................... 17,200
Variable cost of goods sold ................................ 86,000
Variable selling and administrative .................... 7,000 93,000
Contribution margin .............................................. 50,000
Less fixed expenses:
Fixed manufacturing overhead ........................... 38,400
Fixed selling and administrative ........................ 4,000 42,400
Net operating income ............................................ $ 7,600

b. Absorption costing income statement

Sales ....................................................................... $143,000
Less cost of goods sold:
Beginning inventory .............................................. $ 0
Add cost of goods manufactured ........................... 141,600
Goods available for sale ........................................ 141,600
Less ending inventory ........................................... 23,600 118,000
Gross margin ......................................................... 25,000
Less selling and administrative expenses:
Variable selling and administrative ....................... 7,000
Fixed selling and administrative ............................ 4,000 11,000
Net operating income ............................................ $ 14,000
Answer:
a. Earnings per share = (Net Income - Preferred Dividends) Average number of common shares outstanding* = ($273 -
$10) 18 = $14.61

*Number of common shares outstanding = Common stock Par value = $180 $10 = 18

b. Price-earnings ratio = Market price per share Earnings per share (see above) = $210 $14.61 = 14.4

c. Dividend payout ratio = Dividends per share* Earnings per share (see above) = $7.94 $14.61 = 54.4%

*Dividends per share = Common dividends Common shares** = $143 18 = $7.94 **See above

d. Dividend yield ratio = Dividends per share* Market price per share = $7.94 $210.00 = 3.78% *See above

e. Return on total assets = Adjusted net income* Average total assets** = $294 $2,465 = 11.93%

*Adjusted net income = Net income + [Interest expense (1-Tax rate)] = $273 + [$30 (1 - 0.30)] = $294
**Average total assets = ($2,500 + $2,430)2 = $2,465

f. Return on common stockholders equity = (Net income - Preferred dividends) Average common stockholders equity*
= ($273 - $10)$1,740 = 15.11%

*Average common stockholders equity = ($1,800 + $1,680)2 = $1,740

g. Book value per share = Common stockholders equity Number of common shares outstanding* = $1,800 18 =
$100.00

*Number of common shares outstanding = Common stock Par value = $180 $10 = 18

Chapter 16 Financial Statement Analysis

Garrison, Managerial Accounting, 12th Edition 921

h. Working capital = Current assets - Current liabilities = $500 - $290 = $210

i. Current ratio = Current assets Current liabilities = $500 $290 = 1.72

j. Acid-test ratio = Quick assets* Current liabilities = $310 $290 = 1.07

*Quick assets = Cash + Marketable securities + Current receivables = $130 + $180 = $310

k. Accounts receivable turnover = Sales on account Average accounts receivable* = $2,300 $180 = 12.78

*Average accounts receivable = ($180 + $180)2 = $180

l. Average collection period = 365 days Accounts receivable turnover* = 365 12.78 = 28.6 days *See above

m. Inventory turnover = Cost of goods sold Average inventory* = $1,610 $175 = 9.20

*Average inventory = ($170 + $180)2 = $175

n. Average sale period = 365 days Inventory turnover* = 365 9.20 = 39.7 days *See above

o. Times interest earned = Net operating income Interest expense = $420 $30 = 14.00

p. Debt-to-equity ratio = Liabilities Stockholders equity= $600 $1,900 = 0.32