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CHAPTER 6
COST-VOLUME-PROFIT ANALYSIS: ADDITIONAL ISSUES
SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOMS TAXONOMY

Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT
True-False Statements
a
1. 1 K 7. 3 K 13. 4 C 19. 5 C 25. 7 C
a
2. 1 K 8. 3 AP 14. 4 C 20. 5 K 26. 7 K
a a
3. 2 K 9. 3 AP 15. 4 K 21. 6 K 27. 7 K
a a
4. 2 K 10. 3 K 16. 5 K 22. 6 K 28. 8 K
a a
5. 3 K 11. 3 K 17. 5 K 23. 6 K 29. 8 K
a a
6. 3 K 12. 4 K 18. 5 K 24. 7 AP 30. 8 K
Multiple Choice Questions
a
31. 1 K 50. 2 AP 69. 3 AP 88. 5 C 107. 7 AP
a
32. 1 K 51. 2 K 70. 3 AP 89. 5 K 108. 7 K
a
33. 1 K 52. 2 AP 71. 3 C 90. 5 K 109. 7 K
a
34. 1 AP 53. 2 AP 72. 3 C 91. 5 K 110. 7 C
a
35. 1 AP 54. 2 AP 73. 3 AP 92. 5 K 111. 7 K
a a
36. 1 AP 55. 2 K 74. 3 AP 93. 6 K 112. 7 K
a a
37. 1 AP 56. 2 K 75. 3 AP 94. 6 K 113. 7 K
a a
38. 1 K 57. 2 AP 76. 4 C 95. 6 K 114. 7 AP
a a
39. 1 K 58. 2 AP 77. 4 C 96. 6 K 115. 7 AP
a a
40. 1 AP 59. 2 AP 78. 4 K 97. 6 K 116. 7 AP
a a
41. 1 AP 60. 3 K 79. 4 AP 98. 6 K 117. 7 AP
a a
42. 1 AP 61. 3 C 80. 4 AP 99. 6 K 118. 7 C
a a
43. 2 K 62. 3 AP 81. 5 K 100. 6 K 119. 7 C
a a
44. 2 AP 63. 3 AP 82. 5 C 101. 6 K 120. 7 C
a a
45. 2 AP 64. 3 AP 83. 5 C 102. 6 K 121. 8 K
a a
46. 2 AP 65. 3 AP 84. 5 K 103. 7 AP 122. 8 K
a a
47. 2 AP 66. 3 AP 85. 5 AP 104. 7 AP 123. 8 C
6-2 Test Bank for Managerial Accounting, Sixth Edition abood
a a
48. 2 AP 67. 3 AP 86. 5 AP 105. 7 AP 124. 8 K
a a
49. 2 AP 68. 3 AP 87. 5 C 106. 7 AP 125. 8 K
Brief Exercises
a a
126. 3 AP 128. 4 AP 130. 5 AP 132. 6 AP 134. 7 AP
a a
127. 3 AP 129. 4 AP 131. 6 AP 133. 7 AP
Exercises
a a
135. 3 AP 138. 4 AN 141. 5 AP 144. 7 AP 147. 8 AP
a a a
136. 3 AP 139. 4 AN 142. 6 K 145. 7 AP 148. 8 AP
a a
137. 3 AP 140. 5 AP 143. 6 AP 146. 7 AP
Completion Statements
a
149. 1 K 152. 3 K 155. 5 K 158. 7 K
a a
150. 2 K 153. 4 K 156. 6 K 159. 7 K
a a
151. 3 K 154. 5 K 157. 6 K 160. 8 K
a
This topic is dealt with in an Appendix to the chapter.
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE
Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Study Objective 1
1. TF 32. MC 35. MC 38. MC 41. MC
2. TF 33. MC 36. MC 39. MC 42. MC
31. MC 34. MC 37. MC 40. MC 149. C
Study Objective 2
3. TF 44. MC 47. MC 50. MC 53. MC 56. MC 59. MC
4. TF 45. MC 48. MC 51. MC 54. MC 57. MC 150. C
43. MC 46. MC 49. MC 52. MC 55. MC 58. MC
Study Objective 3
5. TF 10. TF 63. MC 68. MC 73. MC 135. Ex
6. TF 11. TF 64. MC 69. MC 74. MC 136. Ex
7. TF 60. MC 65. MC 70. MC 75. MC 137. Ex
8. TF 61. MC 66. MC 71. MC 126. BE 151. C
9. TF 62. MC 67. MC 72. MC 127. BE 152. C
Study Objective 4
12. TF 14. TF 76. MC 78. MC 80. MC 129. BE 139. Ex
13. TF 15. TF 77. MC 79. MC 128. BE 138. Ex 153. C
Study Objective 5
16. TF 20. TF 84. MC 88. MC 92. MC 154. C
17. TF 81. MC 85. MC 89. MC 130. BE 155. C
18. TF 82. MC 86. MC 90. MC 140. Ex
19. TF 83. MC 87. MC 91. MC 141. Ex
Study Objective 6a
21. TF 93. MC 96. MC 99. MC 102. MC 142. Ex 157. C
22. TF 94. MC 97. MC 100. MC 131. BE 143. Ex
23. TF 95. MC 98. MC 101. MC 132. BE 156. C
Study Objective 7a
24. TF 104. MC 109. MC 114. MC 119. MC 145. Ex
25. TF 105. MC 110. MC 115. MC 120. MC 146. Ex
Cost-Volume-Profit Analysis: Additional Issues 6-3
26. TF 106. MC 111. MC 116. MC 133. BE 158. C

27. TF 107. MC 112. MC 117. MC 134. BE 159. C
103. MC 108. MC 113. MC 118. MC 144. Ex
Study Objective 8a
28. TF 30. TF 122. MC 124. MC 147. Ex 160. C
29. TF 121. MC 123. MC 125. MC 148. Ex
Note: TF = True-False C = Completion Ex = Exercise

MC = Multiple Choice BE = Brief Exercise
The chapter also contains four Short-Answer Essay questions.

CHAPTER STUDY OBJECTIVES

1. Describe the essential features of a cost-volume-profit income statement. The CVP
income statement classifies costs and expenses as variable or fixed and reports contribution
margin in the body of the statement.
2. Apply basic CVP concepts. Contribution margin is the amount of revenue remaining after
deducting variable costs. It can be expressed as a per unit amount or as a ratio. The break-
even point in units is fixed costs divided by contribution margin per unit. The break-even
point in dollars is fixed cost divided by the contribution margin ratio. These formulas can also
be used to determine units or sales dollars needed to achieve target net income, simply by
adding target net income to fixed costs before dividing by the contribution margin. Margin of
safety indicates how much sales can decline before the company is operating at a loss. It
can be expressed in dollar terms or as a percentage.
3. Explain the term sales mix and its effects on break-even sales. Sales mix is the relative
proportion in which each product is sold when a company sells more than one product. For a
company with a small number of products, break-even sales in units is determined by using
the weighted-average unit contribution margin of all the products. If the company sells many
different products, then calculating the break-even point using unit information is not
practical. Instead, in a company with many products, break-even sales in dollars is
calculated using the weighted-average contribution margin ratio.
4 Determine sales mix when a company has limited resources. When a company has
limited resources, it is necessary to find the contribution margin per unit of limited resource.
This amount is then multiplied by the units of limited resource to determine which product
maximizes net income.
5. Understand how operating leverage affects profitability. Operating leverage refers to the
degree to which a companys net income reacts to a change in sales. Operating leverage is
determined by a companys relative use of fixed versus variable costs. Companies with high
fixed costs relative to variable costs have high operating leverage. A company with high
operating leverage will experience a sharp increase (decrease) in net income with a given
increase (decrease) in sales. The degree of operating leverage can be measured by dividing
contribution margin by net income.
a
6. Explain the difference between absorption costing and variable costing. Under
absorption costing, fixed manufacturing costs are product costs. Under variable costing, fixed
manufacturing costs are period costs.
a
7. Discuss net income effects under absorption costing versus variable costing. If
production volume exceeds sales volume, net income under absorption costing will exceed
net income under variable costing by the amount of fixed manufacturing costs included in
ending inventory that results from units produced but not sold during the period. If production
volume is less than sales volume, net income under absorption costing will be less than
under variable costing by the amount of fixed manufacturing costs included in the units sold
during the period that were not produced during the period.
a
8. Discuss the merits of absorption versus variable costing for management decision
making. The use of variable costing is consistent with cost-volume-profit analysis. Net
income under variable costing is unaffected by changes in production levels. Instead, it is
closely tied to changes in sales. The presentation of fixed costs in the variable costing
approach makes it easier to identify fixed costs and to evaluate their impact on the
companys profitability.
TRUE-FALSE STATEMENTS
1. The CVP income statement classifies costs as variable or fixed and computes a
contribution margin.
2. In CVP analysis, cost includes manufacturing costs but not selling and administrative
expenses.
3. When a company is in its early stages of operation, its primary goal is to generate a target
net income.
4. The margin of safety tells a company how far sales can drop before it will be operating at
a loss.
5. Sales mix is a measure of the percentage increase in sales from period to period.
6. Sales mix is not important to managers when different products have substantially
different contribution margins.
7. The weighted-average contribution margin of all the products is computed when

determining the break-even sales for a multi-product firm.
8. If Conan Corporation sells two products with a sales mix of 75% : 25%, and the respective
contribution margins are $100 and $300, then weighted-average unit contribution margin
is $150.
9. If fixed costs are $100,000 and weighted-average unit contribution margin is $50, then the
break-even point in units is 2,000 units.
10. Net income can be increased or decreased by changing the sales mix.
11. The break-even point in dollars is variable costs divided by the weighted-average
contribution margin ratio.
12. When a company has limited resources, management must decide which products to
make and sell in order to maximize net income.
13. When a company has limited resources to manufacture products, it should manufacture
those products which have the highest contribution margin per unit.
14. If a company has limited machine hours available for production, it is generally more
profitable to produce and sell the product with the highest contribution margin per machine
hour.
15. According to the theory of constraints, a company must identify its constraints and find
ways to reduce or eliminate them.
16. Cost structure refers to the relative proportion of fixed versus variable costs that a
company incurs.
17. Operating leverage refers to the extent to which a companys net income reacts to a given
change in fixed costs.
18. The degree of operating leverage provides a measure of a companys earnings volatility.
19. If OBrien Company has a margin of safety ratio of .60, it could sustain a 60 percent
decline in sales before it would be operating at a loss.
20. A company with low operating leverage will experience a sharp increase in net income
with a given increase in sales.
a
21. Variable costing is the approach used for external reporting under generally accepted
accounting principles.
a
22. The difference between absorption costing and variable costing is the treatment of fixed
manufacturing overhead.
a
23. Selling and administrative costs are period costs under both absorption and variable
costing.
a
24. Manufacturing cost per unit will be higher under variable costing than under absorption
costing.
a
25. Some fixed manufacturing costs of the current period are deferred to future periods
through ending inventory under variable costing.
a
26. When units produced exceed units sold, income under absorption costing is higher than
income under variable costing.
a
27. When units sold exceed units produced, income under absorption costing is higher than
income under variable costing.
a
28. When absorption costing is used for external reporting, variable costing can still be used
for internal reporting purposes.
a
29. When absorption costing is used, management may be tempted to overproduce in a given
period in order to increase net income.
a
30. The use of absorption costing facilitates cost-volume-profit analysis.
Answers to True-False Statements

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
a a
1. T 6. F 11. F 16. T 21. F 26. T
a a
2. F 7. T 12. T 17. F 22. T 27. F
a a
3. F 8. T 13. F 18. T 23. T 28. T
a a
4. T 9. T 14. T 19. T 24. F 29. T
a a
5. F 10. T 15. T 20. F 25. F 30. F
MULTIPLE CHOICE QUESTIONS

31. Cost-volume-profit analysis is the study of the effects of
a. changes in costs and volume on a companys profit.
b. cost, volume, and profit on the cash budget.
c. cost, volume, and profit on various ratios.
d. changes in costs and volume on a companys profitability ratios.
32. The CVP income statement classifies costs

a. as variable or fixed and computes contribution margin.
b. by function and computes a contribution margin.
c. as variable or fixed and computes gross margin.
d. by function and computes a gross margin.
33. Contribution margin is the amount of revenue remaining after deducting

a. cost of goods sold.
b. fixed costs.
c. variable costs.
d. contra-revenue.
34. Buerhrles CVP income statement included sales of 2,000 units, a selling price of $100,
variable expenses of $60 per unit, and fixed expenses of $44,000. Contribution margin is
a. $200,000.
b. $120,000.
c. $80,000.
d. $36,000.
35. Buerhrles CVP income statement included sales of 2,000 units, a selling price of $100,
variable expenses of $60 per unit, and fixed expenses of $44,000. Net income is
a. $200,000.
b. $80,000.
c. $76,000.
d. $36,000.
36. For Dye Company, at a sales level of 5,000 units, sales is $75,000, variable expenses
total $40,000, and fixed expenses are $21,000. What is the contribution margin per unit?
a. $2.80
b. $7.00
c. $8.00
d. $15.00
37. If contribution margin is $200,000, sales is $300,000, and net income is $30,000, then
variable and fixed expenses are
Variable Fixed
a. $100,000 $270,000
b. $100,000 $170,000
c. $170,000 $100,000
d. $500,000 $270,000
38. In a CVP income statement, cost of goods sold is generally

a. completely a variable cost.
b. completely a fixed cost.
c. neither a variable cost nor a fixed cost.
d. partly a variable cost and partly a fixed cost.
39. In a CVP income statement, a selling expense is generally

a. completely a variable cost.
b. completely a fixed cost.
c. neither a variable cost nor a fixed cost.
d. partly a variable cost and partly a fixed cost.
40. Vazquez Companys cost of goods sold is $350,000 variable and $200,000 fixed. The
companys selling and administrative expenses are $250,000 variable and $300,000 fixed.
If the companys sales is $1,400,000, what is its contribution margin?
a. $300,000
b. $800,000
c. $850,000
d. $900,000
41. Vazquez Companys cost of goods sold is $350,000 variable and $200,000 fixed. The
companys selling and administrative expenses are $250,000 variable and $300,000 fixed.
If the companys sales is $1,400,000, what is its net income?
a. $300,000
b. $800,000
c. $850,000
d. $900,000
42. Garlands CVP income statement included sales of 3,000 units, a selling price of $100,
variable expenses of $60 per unit, and net income of $50,000. Fixed expenses are
a. $70,000.
b. $120,000.
c. $180,000.
d. $300,000.
43. The contribution margin ratio is

a. sales divided by contribution margin.
b. sales divided by fixed expenses.
c. sales divided by variable expenses.
d. contribution margin divided by sales.
44. For Danks Company, sales is $500,000, variable expenses are $310,000, and fixed
expenses are $140,000. Danks contribution margin ratio is
a. 10%.
b. 28%.
c. 38%.
d. 62%.
45. For Contreras Company, sales is $1,000,000, fixed expenses are $300,000, and the
contribution margin per unit is $72. What is the break-even point?
a. $1,388,889 sales dollars
b. $416,667 sales dollars
c. 13,889 units
d. 4,167 units
46. For Garland Company, sales is $1,000,000, fixed expenses are $300,000, and the
contribution margin ratio is 36%. What is net income?
a. $60,000
b. $108,000
c. $252,000
d. $360,000
47. For Garland Company, sales is $1,000,000, fixed expenses are $300,000, and the
contribution margin ratio is 36%. What are the total variable expenses?
a. $192,000
b. $360,000
c. $640,000
d. $1,000,000
48. In 2008, Masset sold 3,000 units at $500 each. Variable expenses were $350 per unit,
and fixed expenses were $200,000. What was Massets 2008 net income?
a. $250,000
b. $450,000
c. $1,050,000
d. $1,500,000
and fixed expenses were $200,000. The same selling price, variable expenses, and fixed
expenses are expected for 2009. What is Massets break-even point in sales dollars for
2009?
a. $666,667
b. $1,333,333
c. $1,500,000
d. $2,142,857
and fixed expenses were $200,000. The same selling price, variable expenses, and fixed
expenses are expected for 2009. What is Massets break-even point in units for 2009?
a. 1,333
b. 3,000
c. 4,285
d. 6,667
51. The required sales in units to achieve a target net income is

a. (sales + target net income) divided by contribution margin per unit.
b. (sales + target net income) divided by contribution margin ratio.
c. (fixed cost + target net income) divided by contribution margin per unit.
d. (fixed cost + target net income) divided by contribution margin ratio.
6 - 10 Test Bank for Managerial Accounting, Sixth Edition abood
52. For Jon Company, sales is $1,000,000, fixed expenses are $300,000, and the contribution
margin ratio is 36%. What is required sales in dollars to earn a target net income of
$200,000?
a. $555,556
b. $833,333
c. $1,388,889
d. $2,777,778
53. Jenks Corporation reported sales of $2,000,000 last year (100,000 units at $20 each),
when the break-even point was 80,000 units. Jenks margin of safety ratio is
a. 20%.
b. 25%.
c. 80%.
d. 120%.
54. For Bobby Company, sales is $1,000,000 (5,000 units), fixed expenses are $300,000, and
the contribution margin per unit is $80. What is the margin of safety in dollars?
a. $50,000
b. $250,000
c. $450,000
d. $700,000
55. Margin of safety in dollars is

a. expected sales divided by break-even sales.
b. expected sales less break-even sales.
c. actual sales less expected sales.
d. expected sales less actual sales.
56. The margin of safety ratio is

a. expected sales divided by break-even sales.
b. expected sales less break-even sales.
c. margin of safety in dollars divided by expected sales.
d. margin of safety in dollars divided by break-even sales.
57. In 2008, McDougal sold 3,000 units at $500 each. Variable expenses were $350 per unit,
and fixed expenses were $195,000. The same variable expenses per unit and fixed
expenses are expected for 2009. If McDougal cuts selling price by 4%, what is
McDougals break-even point in units for 2009?
a. 1,300
b. 1,354
c. 1,440
d. 1,500
58. In 2008, Thornton sold 3,000 units at $500 each. Variable expenses were $250 per unit,
and fixed expenses were $150,000. The same selling price is expected for 2009. Thornton
is tentatively planning to invest in equipment that would increase fixed costs by 20%, while
decreasing variable costs per unit by 20%. What is Thorntons break-even point in units
for 2009?
a. 600
b. 720
c. 750
d. 900
Cost-Volume-Profit Analysis: Additional Issues 6 - 11
59. In 2008, Logan sold 1,000 units at $500 each, and earned net income of $40,000.
Variable expenses were $300 per unit, and fixed expenses were $160,000. The same
selling price is expected for 2009. Logans variable cost per unit will rise by 10% in 2009
due to increasing material costs, so they are tentatively planning to cut fixed costs by
$10,000. How many units must Logan sell in 2009 to maintain the same income level as
2008?
a. 882
b. 1,000
c. 1,056
d. 1,118
60. Sales mix is

a. the relative percentage in which a company sells its multiple products.
b. the trend of sales over recent periods.
c. the mix of variable and fixed expenses in relation to sales.
d. a measure of leverage used by the company.
61. In a sales mix situation, at any level of units sold, net income will be higher if
a. more higher contribution margin units are sold than lower contribution margin units.
b. more lower contribution margin units are sold than higher contribution margin units.
c. more fixed expenses are incurred.
d. weighted-average unit contribution margin decreases.
62. Konerko Company sells two types of computer chips. The sales mix is 30% (Q-Chip) and
70% (Q-Chip Plus). Q-Chip has variable costs per unit of $30 and a selling price of $50.
Q-Chip Plus has variable costs per unit of $35 and a selling price of $65. The weighted-
average unit contribution margin for Konerko is
a. $23.
b. $25.
c. $27.
d. $50.
63. Iguchi Company sells 2,000 units of Product A annually, and 3,000 units of Product B
annually. The sales mix for Product A is
a. 40%.
b. 60%.
c. 67%.
d. cannot determine from information given.
64. Konerko Company sells two types of computer chips. The sales mix is 30% (Q-Chip) and
70% (Q-Chip Plus). Q-Chip has variable costs per unit of $30 and a selling price of $50.
Q-Chip Plus has variable costs per unit of $35 and a selling price of $65. Konerkos fixed
costs are $540,000. How many units of Q-Chip would be sold at the break-even point?
a. 6,000
b. 7,043
c. 10,000
d. 14,000
Use the following information for questions 65 and 66.
Uribe Company has a weighted-average unit contribution margin of $30 for its two products,
Standard and Supreme. Expected sales for Uribe are 40,000 Standard and 60,000 Supreme.
Fixed expenses are $1,800,000.
65. How many Standards would Uribe sell at the break-even point?
a. 24,000
b. 36,000
c. 40,000
d. 60,000
66. At the expected sales level, Uribes net income will be

a. $(300,000).
b. $ - 0 -.
c. $1,200,000.
d. $3,000,000.
Use the following information for questions 6770.
Fields Corporation has two divisions; Sporting Goods and Sports Gear. The sales mix is 65% for
Sporting Goods and 35% for Sports Gear. Fields incurs $2,220,000 in fixed costs. The
contribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is 50%.
67. The weighted-average contribution margin ratio is

a. 37%.
b. 40%.
c. 43%.
d. 50%.
68. The break-even point in dollars is

a. $821,400.
b. $5,162,791.
c. $5,550,000.
d. $6,000,000.
69. What will sales be for the Sporting Goods Division at the break-even point?
a. $1,800,000
b. $2,100,000
c. $3,355,814
d. $3,900,000
70. What will be the total contribution margin at the break-even point?
a. $1,910,233
b. $2,220,000
c. $2,400,000
d. $2,580,000
71. A shift from low-margin sales to high-margin sales

a. may increase net income, even though there is a decline in total units sold.
b. will always increase net income.
c. will always decrease net income.
d. will always decrease units sold.
72. A shift from high-margin sales to low-margin sales

a. may decrease net income, even though there is an increase in total units sold.
b. will always decrease net income.
c. will always increase net income.
d. will always increase units sold.

Innova Discs has two divisionsStandard and Premium. Each division has hundreds of different
types of golf discs and disc golf products. The following information is available:
Standard Division Premium Division Total
Sales $400,000 $600,000 $1,000,000
Variable costs 280,000 360,000
Contribution margin $120,000 $240,000
Total fixed costs $300,000
73. What is the weighted-average contribution margin ratio?

a. 34%
b. 35%
c. 36%
d. 50%
74. What is the break-even point in dollars?

a. $108,000
b. $833,333
c. $857,143
d. $882,353
75. The sales mix percentages for Guillens Chicago and Charlotte Divisions are 70% and
30%. The contribution margin ratios are: Chicago (40%) and Charlotte (30%). Fixed costs
are $555,000. What is Guillens break-even point in dollars?
a. $194,250
b. $1,500,000
c. $1,585,714
d. $1681,818
76. A company can sell all the units it can produce of either Product A or Product B but not
both. Product A has a unit contribution margin of $16 and takes two machine hours to make
and Product B has a unit contribution margin of $30 and takes three machine hours to
make. If there are 1,000 machine hours available to manufacture a product, income will be
a. $2,000 more if Product A is made.
b. $2,000 less if Product B is made.
c. $2,000 less if Product A is made.
d. the same if either product is made.
77. Dye Company can sell all the units it can produce of either Plain or Fancy but not both.
Plain has a unit contribution margin of $96 and takes two machine hours to make and
Fancy has a unit contribution margin of $120 and takes three machine hours to make.
There are 2,400 machine hours available to manufacture a product. What should Dye do?
a. Make Fancy which creates $24 more profit per unit than Plain does.
b. Make Plain which creates $8 more profit per machine hour than Fancy does.
c. Make Plain because more units can be made and sold than Fancy.
d. The same total profits exist regardless of which product is made.
78. What is the key factor in determining sales mix if a company has limited resources?
a. Contribution margin per unit of limited resource
b. The amount of fixed costs per unit
c. Total contribution margin
d. The cost of limited resources
79. Jermaines Vittles can produce and sell only one of the following two products:
Oven Contribution
Hours Required Margin Per Unit
Crackers 0.2 $3
Bread sticks 0.3 $4
The company has oven capacity of 600 hours. How much will contribution margin be if it
produces only the most profitable product?
a. $6,000
b. $8,000
c. $9,000
d. $12,000
80. S-Pods contribution margin is $10 per unit for Product A and $12 for Product B. Product
A requires 2 machine hours and Product B requires 4 machine hours. How much is the
contribution margin per unit of limited resource for each product?
A B
a. $5.00 $3.00
b. $5.00 $3.33
c. $4.00 $3.00
d. $4.00 $3.33
81. Cost structure

a. refers to the relative proportion of fixed versus variable costs that a company incurs.
b. generally has little impact on profitability.
c. cannot be significantly changed by companies.
d. refers to the relative proportion of operating versus nonoperating costs that a company
incurs.
82. Outsourcing production will

a. reduce fixed costs and increase variable costs.
b. reduce variable costs and increase fixed costs.
c. have no effect on the relative proportion of fixed and variable costs.
d. make the company more susceptible to economic swings.
83. Reducing reliance on human workers and instead investing heavily in computers and
online technology will
a. reduce fixed costs and increase variable costs.
b. reduce variable costs and increase fixed costs.
c. have no effect on the relative proportion of fixed and variable costs.
d. make the company less susceptible to economic swings.
84. Cost structure refers to the relative proportion of

a. selling expenses versus administrative expenses.
b. selling and administrative expenses versus cost of goods sold.
c. contribution margin versus sales.
d. none of the above.
Small Fry Company has sales of $1,000,000, variable costs of $400,000, and fixed costs of
$450,000.
85. Small Frys degree of operating leverage is

a. .80.
b. 1.50.
c. 1.67
d. 4.00.
86. Small Frys margin of safety ratio is

a. .18.
b. .25.
c. .33.
d. .75.
87. Which of the following statements is not true?

a. Operating leverage refers to the extent to which a companys net income reacts to a
given change in sales.
b. Companies that have higher fixed costs relative to variable costs have higher
operating leverage.
c. When a companys sales revenue is increasing, high operating leverage is good
because it means that profits will increase rapidly.
d. When a companys sales revenue is decreasing, high operating leverage is good
because it means that profits will decrease at a slower pace than revenues decrease.
88. Scottie Companys degree of operating leverage is 1.5. Erstadt Corporations degree of
operating leverage is 4.5. Erstadts earnings would go up (or down) by ________ as much
as Scotties with an equal increase (or decrease) in sales.
a. 1/3
b. 2 times
c. 3 times
d. 6 times
89. The margin of safety ratio

a. is computed as actual sales divided by break-even sales.
b. indicates what percent decline in sales could be sustained before the company would
operate at a loss.
c. measures the ratio of fixed costs to variable costs.
d. is used to determine the break-even point.
90. A cost structure which relies more heavily on fixed costs makes the company
a. more sensitive to changes in sales revenue.
b. less sensitive to changes in sales revenue.
c. either more or less sensitive to changes in sales revenue, depending on other factors.
d. have a lower break-even point.
91. A company with a higher contribution margin ratio is

a. more sensitive to changes in sales revenue.
b. less sensitive to changes in sales revenue.
c. either more or less sensitive to changes in sales revenue, depending on other factors.
d. likely to have a lower breakeven point.
92. The degree of operating leverage

a. does not provide a reliable measure of a companys earnings volatility.
b. cannot be used to compare companies.
c. is computed by dividing total contribution margin by net income.
d. measures how much of each sales dollar is available to cover fixed expenses.
a
93. Only direct materials, direct labor, and variable manufacturing overhead costs are
considered product costs when using
a. full costing.
b. absorption costing.
c. variable costing.
d. product costing.
a
94. When a company assigns the costs of direct materials, direct labor, and both variable and
fixed manufacturing overhead to products, that company is using
a. operations costing.
c. variable costing.
d. product costing.
a
95. Companies recognize fixed manufacturing overhead costs as period costs (expenses)
when incurred when using
a. full costing.
c. product costing.
d. variable costing.
a
96. Under absorption costing and variable costing, how are fixed manufacturing costs
treated?
Absorption Variable
a. Product Cost Product Cost
b. Product Cost Period Cost
c. Period Cost Product Cost
d. Period Cost Period Cost
a
97. Under absorption costing and variable costing, how are variable manufacturing costs
treated?
Absorption Variable
a
98. Under absorption costing and variable costing, how are direct labor costs treated?
Absorption Variable
a
99. Fixed selling expenses are period costs
a. under both absorption and variable costing.
b. under neither absorption nor variable costing.
c. under absorption costing, but not under variable costing.
d. under variable costing, but not under absorption costing.
a
100. Which cost is not charged to the product under variable costing?
a. Direct materials
b. Direct labor
c. Variable manufacturing overhead
d. Fixed manufacturing overhead
a
101. Which cost is charged to the product under variable costing?
a. Variable manufacturing overhead
b. Fixed manufacturing overhead
c. Variable administrative expenses
d. Fixed administrative expenses
a
102. Variable costing
a. is used for external reporting purposes.
b. is required under GAAP.
c. treats fixed manufacturing overhead as a period cost.
d. is also known as full costing.
Briscoe Company sells its product for $40 per unit. During 2008, it produced 60,000 units and
sold 50,000 units (there was no beginning inventory). Costs per unit are: direct materials $10,
direct labor $6, and variable overhead $2. Fixed costs are: $480,000 manufacturing overhead,
and $60,000 selling and administrative expenses.
a
103. The per unit manufacturing cost under absorption costing is
a. $16.
b. $18.
c. $26.
d. $27.
a
104. The per unit manufacturing cost under variable costing is
a. $16.
b. $18.
c. $26.
d. $27.
a
105. Cost of goods sold under absorption costing is
a. $900,000.
b. $1,080,000.
c. $1,300,000.
d. $1,560,000.
a
106. Ending inventory under variable costing is
a. $180,000.
b. $260,000.
c. $400,000.
d. $900,000.
a
107. Under absorption costing, what amount of fixed overhead is deferred to a future period?
a. $20,000
b. $80,000
c. $100,000
d. $480,000
a
108. Net income under absorption costing is gross profit less
b. fixed manufacturing overhead and fixed selling and administrative expenses.
c. fixed manufacturing overhead and variable manufacturing overhead.
d. variable selling and administrative expenses and fixed selling and administrative
expenses.
a
109. Net income under variable costing is contribution margin less
b. fixed manufacturing overhead and fixed selling and administrative expenses.
c. fixed manufacturing overhead and variable manufacturing overhead.
d. variable selling and administrative expenses and fixed selling and administrative
expenses.
a
110. The manufacturing cost per unit for absorption costing is
a. usually, but not always, higher than manufacturing cost per unit for variable costing.
b. usually, but not always, lower than manufacturing cost per unit for variable costing.
c. always higher than manufacturing cost per unit for variable costing.
d. always lower than manufacturing cost per unit for variable costing.
a
111. The one primary difference between variable and absorption costing is that under
a. variable costing, companies charge the fixed manufacturing overhead as an expense
in the current period.
b. absorption costing, companies charge the fixed manufacturing overhead as an
expense in the current period.
c. variable costing, companies charge the variable manufacturing overhead as an
d. absorption costing, companies charge the variable manufacturing overhead as an
a
112. Net income under absorption costing is higher than net income under variable costing
a. when units produced exceed units sold.
b. when units produced equal units sold.
c. when units produced are less than units sold.
d. regardless of the relationship between units produced and units sold.
a
113. Some fixed manufacturing overhead costs of the current period are deferred to future
periods under
a. absorption costing.
b. variable costing.
c. both absorption and variable costing.
d. neither absorption nor variable costing.
Jack Company sells its product for $11,000 per unit. Variable costs per unit are: manufacturing,
$6,000, and selling and administrative, $125. Fixed costs are: $30,000 manufacturing overhead,
and $40,000 selling and administrative. There was no beginning inventory at 1/1/07. Production
was 20 units per year in 20072009. Sales was 20 units in 2007, 16 units in 2008, and 24 units in
2009.
a
114. Income under absorption costing for 2008 is
a. $8,000.
b. $14,000.
c. $16,000.
d. $22,000.
a
115. Income under absorption costing for 2009 is
a. $33,000.
b. $39,000
c. $41,000
d. $47,000.
a
116. Income under variable costing for 2008 is
a. $8,000.
b. $14,000
c. $16,000
d. $22,000.
a
117. Income under variable costing for 2009 is
a. $33,000.
b. $39,000.
c. $41,000.
d. $47,000.
a
118. For the three years 20072009,
a. absorption costing income exceeds variable costing income by $6,000.
b. absorption costing income equals variable costing income.
c. variable costing income exceeds absorption costing income by $6,000.
d. absorption costing income may be greater than, equal to, or less than variable costing
income, depending on the situation.
a
119. When production exceeds sales,
a. some fixed manufacturing overhead costs are deferred until a future period under
absorption costing.
b. some fixed manufacturing overhead costs are deferred until a future period under
variable costing.
c. variable and fixed manufacturing overhead costs are deferred until a future period
under absorption costing.
b. variable and fixed manufacturing overhead costs are deferred until a future period
under variable costing.
a
120. When production exceeds sales,
a. ending inventory under variable costing will exceed ending inventory under absorption
costing.
b. ending inventory under absorption costing will exceed ending inventory under variable
costing.
c. ending inventory under absorption costing will be equal to ending inventory under
variable costing.
d. ending inventory under absorption costing may exceed, be equal to, or be less than
ending inventory under variable costing.
a
121. Management may be tempted to overproduce when using
a. variable costing, in order to increase net income.
b. variable costing, in order to decrease net income.
c. absorption costing, in order to increase net income.
d. absorption costing, in order to decrease net income.
a
122. If a division managers compensation is based upon the divisions net income, the
manager may decide to meet the net income targets by increasing production when using
a. variable costing, in order to increase net income.
b. variable costing, in order to decrease net income.
c. absorption costing, in order to increase net income.
d. absorption costing, in order to decrease net income.
a
123. Expected sales for next year for the Huxtable Division is 150,000 units. Bill Cosby,
manager of the Huxtable Division, is under pressure to improve the performance of the
Division. As he plans for next year, he has to decide whether to produce 150,000 units or
180,000 units. The Huxtable Division will have higher net income if Bill Cosby decides to
produce
a. 180,000 units if income is measured under absorption costing.
b. 180,000 units if income is measured under variable costing.
c. 150,000 units if income is measured under absorption costing.
d. 150,000 units if income is measured under variable costing.
a
124. Which of the following is a potential advantage of variable costing relative to absorption
costing?
a. Net income is affected by changes in production levels.
b. The use of variable costing is consistent with cost-volume-profit analysis.
c. Net income computed under variable costing is not closely tied to changes in sales
levels.
d. More than one of the above.
a
125. Companies that use just-in-time processing techniques will
a. have greater differences between absorption and variable costing net income.
b. have smaller differences between absorption and variable costing net income.
c. not be able to use absorption costing.
d. not be able to use variable costing.
Answers to Multiple Choice Questions

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
a a
31. a 45. d 59. d 73. c 87. d 101. a 115. c
a a
32. a 46. a 60. a 74. b 88. c 102. c 116. a
a a
33. c 47. c 61. a 75. b 89. b 103. c 117. d
a a
34. c 48. a 62. c 76. c 90. a 104. b 118. b
a a
35. d 49. a 63. a 77. b 91. a 105. c 119. a
a a
36. b 50. a 64. a 78. a 92. c 106. a 120. b
a a a
37. b 51. c 65. a 79. c 93. c 107. b 121. c
a a a
38. d 52. c 66. c 80. a 94. b 108. d 122. c
a a a
39. d 53. a 67. a 81. a 95. d 109. b 123. a
a a a
40. b 54. b 68. d 82. a 96. b 110. c 124. b
a a a
41. a 55. b 69. d 83. b 97. a 111. a 125. b
a a
42. a 56. c 70. b 84. d 98. a 112. a
a a
43. d 57. d 71. a 85. d 99. a 113. a
a a
44. c 58. a 72. a 86. b 100. d 114. b
BRIEF EXERCISES
BE 126
Haldi Corporation sells three different sets of sportswear. Sleek sells for $30 and has variable
costs of $18; Smooth sells for $50 and has variable costs of $30; Potent sells for $90 and has
variable costs of $45. The sales mix of the three sets is: Sleek, 50%; Smooth, 30%; and Potent,
20%.
Instructions
What is the weighted-average unit contribution margin?
Solution 126 (68 min.)

Sleek: 50% ($30 $18) = $ 6
Smooth: 30% ($50 $30) = 6
Potent: 20% ($90 $45) = 9
Weighted-average unit contribution margin $21
BE 127
Garrett Corporation sells two product lines. The sales mix of the product lines is: Standard, 60%;
and Deluxe, 40%. The contribution margin ratio of each line is: Standard, 35%; and Deluxe, 45%.
Garretts fixed costs are $1,950,000.
Instructions
What is the dollar amount of Deluxe sales at the break-even point?

Standard: 60% 35% = 21%
Deluxe: 40% 45% = 18%
Weighted-average contribution margin ratio 39%
$1,950,000 39% = $5,000,000 break-even point in dollars
Dollar amount of Deluxe sales at the break-even point: $5,000,000 40% = $2,000,000.
BE 128
Carpenter Company provided the following information concerning two products:
Product 12 Product 43
Contribution margin per unit $20 $15
Machine hours required for one unit 2.5 hours 1.5 hours
Instructions
Compute the contribution margin per unit of limited resource for each product. Which product
should Carpenter tell its sales personnel to push to customers?

Product 12: $20 2.5 hours = $8
Product 43: $15 1.5 hours = $10
Sales personnel should push Product 43.
BE 129
Ace Company makes two products, footballs and baseballs. Additional information follows:
Footballs Baseballs
Units 2,000 3,000
Sales $60,000 $25,000
Fixed costs 10,000 5,250
Net income $26,000 $ 6,000
Yards of leather per unit 1.25 0.25
Profit per unit $13.00 $2.00
Contribution margin per unit $18.00 $3.75
BE 129 (cont.)
Assume that Ace is able to order an additional 2,000 yards of leather and wishes to maximize its
income. Of the additional units it produces, at least 400 of each product are necessary for sales.
Instructions
How many units of each must be produced?

Footballs Baseballs
Contribution margin per yard $18 1.25 = $14.40 $3.75 .25 = $15
Produce more baseballs since CM per constraint is more.
Minimum for footballs: 400 1.25 yd. = 500 yd.

Material remaining for baseballs: 2,000 500 = 1,500 yd.
# of baseballs: 1,500 .25 = 6,000 baseballs
BE 130
Norton Corporation is considering buying new equipment for its factory. The new equipment will
reduce variable labor costs but increase depreciation expense. Contribution margin is expected to
increase from $250,000 to $300,000. Net income is expected to remain the same at $100,000.
Instructions
Compute the degree of operating leverage before and after the purchase of the new equipment
and interpret your results.

Contribution margin Net Income = Degree of operating leverage
Before: $250,000 $100,000 = 2.5
After $300,000 $100,000 = 3.0
After the new equipment is purchased, Nortons earnings would go up (or down) by 1.2 times (3
2.5) as much as it would have before the purchase, with an equal increase (or decrease) in sales.
a
BE 131
Huskie Company produces footballs. It incurred the following costs this year:
Direct materials $25,000
Direct labor 31,000
Fixed manufacturing overhead 22,000
Variable manufacturing overhead 38,000
Fixed selling and administrative expenses 23,000
Variable selling and administrative expenses 14,000
Instructions
What are the total product costs for the company under variable costing?
a

Direct labor 31,000
Total product costs under variable costing $94,000
a
BE 132
Huskie Company produces footballs. It incurred the following costs this year:
Direct labor 31,000
Fixed selling and administrative expenses 23,000
Variable selling and administrative expenses 14,000
Instructions
What are the total product costs for the company under absorption costing?
a
Direct materials $ 25,000

Direct labor 31,000
Total product costs under absorption costing $116,000
a
BE 133
During 2008, Nowak Corporation produced 60,000 units and sold 55,000 for $10 per unit.
Variable manufacturing costs were $4 per unit. Annual fixed manufacturing overhead was
$120,000 ($2 per unit). Variable selling and administrative costs were $1 per unit sold, and fixed
selling and administrative costs were $30,000.
Instructions
Prepare a variable costing income statement.
a
Sales (55,000 $10) $550,000
Variable cost of goods sold (55,000 $4) $220,000
Variable selling and administrative expenses (55,000 $1) 55,000 275,000
Contribution margin 275,000
Fixed selling and administrative expenses 30,000 150,000
Net income $125,000
a
BE 134
During 2008, Nowak Corporation produced 60,000 units and sold 55,000 for $10 per unit.
Variable manufacturing costs were $4 per unit. Annual fixed manufacturing overhead was
$120,000 ($2 per unit). Variable selling and administrative costs were $1 per unit sold, and fixed
selling and administrative costs were $30,000.
Instructions
Prepare an absorption costing income statement.
a
Sales (55,000 $10) $550,000
Cost of goods sold (55,000 $6) 330,000
Gross margin 220,000
Variable selling and administrative expenses (55,000 $1) $55,000
Net income $135,000
EXERCISES
Ex. 135
Trail King manufactures mountain bikes. It has fixed costs of $5,360,000. Trail Kings sales mix
and contribution margin per unit is shown as follows:
Sales Mix Contribution Margin
Destroyer 20% $120
Voyager 55% $ 60
Rebel 25% $ 40
Instructions
Compute the number of each type of bike that the company would need to sell in order to break
even under this product mix.

Weighted-Average
Sales Mix Contribution Margin Contribution Margin
Destroyer 20% $120 $24
Voyager 55% $ 60 $33
Rebel 25% $ 40 $10
$67
Total break-even sales = $5,360,000 $67 = 80,000 bikes
Sales Mix
Destroyer 20% 80,000 = 16,000 bikes
Voyager 55% 80,000 = 44,000 bikes
Rebel 25% 80,000 = 20,000 bikes
Ex. 136
Account-Able Company provides primarily two lines of service: accounting and tax. Accounting-
related services represent 60% of its revenue and provide a contribution margin ratio of 30%. Tax
services represent 40% of its revenue and provide a 45% contribution margin ratio. The
companys fixed costs are $9,000,000.
Instructions
(a) Calculate the revenue from each type of service that the company must achieve to break
even.
(b) The company has a desired net income of $1,800,000. What amount of revenue would
Account-Able earn from tax services if it achieves this goal with the current sales mix?

(a) Contribution Weighted-Average
Sales Mix Margin Ratio Contribution Margin Ratio
Accounting 60% 30% 18%
Tax 40% 45% 18%
36%
Total break-even sales = $9,000,000 .36 = $25,000,000
Sales Mix
Accounting 60% $25,000,000 = $15,000,000
Tax 40% $25,000,000 = $10,000,000
(b) Sales to achieve target net income = ($9,000,000 + $1,800,000) .36 = $30,000,000
Sales Mix
Tax 40% $30,000,000 = $12,000,000
Ex. 137
Mad City Flash Company sells computers and video game systems. The business is divided into
two divisions along product lines. Variable costing income statements for the current year are
presented below:
Computers VG Systems Total
Sales $700,000 $300,000 $1,000,000
Variable costs 420,000 210,000 630,000
Contribution margin $280,000 $ 90,000 370,000
Fixed costs 259,000
Net income $ 111,000
Instructions
(a) Determine the sales mix and contribution margin ratio for each division.
(b) Calculate the companys weighted-average contribution margin ratio.
(c) Calculate the companys break-even point in dollars.
(d) Determine the sales level, in dollars, for each division at the break-even point.

(a) Sales mix:
Computers: $700,000 ($700,000 + $300,000) = 70%
VG Systems $300,000 ($700,000 + $300,000) = 30%
Contribution margin ratio:
Computers: $280,000 $700,000 = 40%
VG Systems: $ 90,000 $300,000 = 30%
(b) Weighted-average contribution margin ratio = (70% 40%) + (30% 30%) = 37%
(c) Break-even point in dollars = $259,000 .37 = $700,000
(d) Sales dollars at break-even point:

Computers: $700,000 .70 = $490,000
VG Systems: $700,000 .30 = $210,000
Ex. 138
Movie House Company has 4,000 machine hours available to produce either Product 22 or
Product 44. The cost accounting department developed the following unit information for each
product:
Product 22 Product 44
Sales price $20 $40
Direct materials 5 8
Direct labor 3 2
Variable manufacturing overhead 4 5
Fixed manufacturing overhead 3 5
Machine time required 15 minutes 60 minutes
Instructions
Management wants to know which product to produce in order to maximize the companys
income. Taking into consideration the constraints under which the company operates, prepare a
report to show which product should be produced and sold.

Contribution margin per unit Product 22 Product 44
Sales price $20 $40
Variable costs
Direct material $5 $8
Direct labor 3 2
Variable overhead 4 12 5 15
Contribution margin $ 8 $25
Machine hours required: 1/4 hr 1 hr
Contribution margin per unit of limited resource:
($8 .25) $ 32
($25 1) $ 25
Machine hours available 4,000 4,000
Contribution margin $128,000 $100,000
The company should produce and sell Product 22.
Ex. 139
PHR Company manufactures and sells two products. Relevant per unit data concerning each
product are given below:
Product
Standard Deluxe
Selling price $50 $75
Variable costs $24 $30
Machine hours 2 3
Instructions
(a) Compute the contribution margin per unit of limited resource for each product.
(b) If 1,000 additional machine hours are available, which product should be manufactured?

(a) Product
Standard Deluxe
Contribution margin per unit $26 $45
Machine hours required 2 3
Contribution margin per unit of limited resource $13 $15
(b) The Deluxe product should be manufactured because it results in the highest contribution
margin per machine hour: $15 1,000 = $15,000.
Ex. 140
The following CVP income statements are available for Antique Company and Contemporary
Company.
Antique Company Contemporary Company
Sales revenue $700,000 $700,000
Contribution margin 350,000 560,000
Fixed costs 150,000 360,000
Net income $200,000 $200,000
Instructions
(a) Compute the degree of operating leverage for each company.
(b) Assume that sales revenue decreases by 20%. Prepare a CVP income statement for each
company.

(a) Contribution Margin Net Income = Degree of Operating Leverage
Antique $350,000 $200,000 = 1.75
Contemporary $560,000 $200,000 = 2.80
Solution 140 (cont.)

(b) Antique Company Contemporary Company
Sales revenue $560,000* $560,000*
Variable costs 280,000** 112,000***
Fixed costs 150,000 360,000
Net income $130,000 $ 88,000
*$700,000 .8
**($350,000 $700,000) $560,000
***($140,000 $700,000) $560,000
Ex. 141
An investment banker is analyzing two companies that specialize in the production and sale of
gourmet cappuccino and chai mixes. Fireside Company uses a labor-intensive approach and
Stirring Moments Company uses a mechanized system. Variable costing income statements for
the two companies are shown below:
Fireside Stirring Moments
Sales $1,000,000 $1,000,000
Fixed costs 150,000 500,000
Net Income $ 200,000 $ 200,000
The investment banker is interested in acquiring one of these companies. However, she is
concerned about the impact that each companys cost structure might have on its profitability.
Instructions
(a) Calculate each companys degree of operating leverage.
(b) Determine the effect on each companys net income if sales decrease by 10% and if sales
increase by 20%. Do not prepare income statements.

(a) Contribution Margin Net Income = Degree of Operating Leverage
Fireside $350,000 $200,000 = 1.75
St. Moments $700,000 $200,000 = 3.50
(b) Degree of % Change in

% Change in Sales Operating Leverage = Net Income
Fireside (10%) 1.75 = (17.5%)
St. Moments (10%) 3.50 = (35.0%)
Fireside 20% 1.75 = 35.0%
St. Moments 20% 3.50 = 70.0%
a
Ex. 142
Indicate with a check mark whether each of the following would be a product cost or a period cost
under an absorption or a variable system for Carson Company.
Absorption Variable
Product Period Product Period
a. Direct materials ________ ________ ________ _______
b. Direct labor ________ ________ ________ _______
c. Factory utilities ________ ________ ________ _______
d. Factory rent ________ ________ ________ _______
e. Indirect labor ________ ________ ________ _______
f. Factory supervisor salaries ________ ________ ________ _______
g. Factory maintenance (variable) ________ ________ ________ _______
h. Factory depreciation ________ ________ ________ _______
i. Sales salaries ________ ________ ________ _______
j. Sales commissions ________ ________ ________ _______
a
Absorption Variable
Product Period Product Period
a. Direct materials ___ __ ____ ___ ___ ___ __ ____
b. Direct labor ___ __ ____ ___ ___ ___ __ ____
c. Factory utilities ___ __ ____ ___ ___ ___ __ ____
d. Factory rent ___ __ ____ ___ ___ ____ __ ___
e. Indirect labor ___ __ ____ ___ ___ ___ __ ____
f. Factory supervisor salaries ___ __ ____ ___ ___ ____ __ ___
g. Factory maintenance (variable) ___ __ ____ ___ ___ ___ __ ____
h. Factory depreciation ___ __ ____ ___ ___ ____ __ ___
i. Sales salaries ____ ___ ___ ___ ___ ____ __ ___
j. Sales commissions ____ ___ ___ ___ ___ ____ __ ___
a
Ex. 143
Fresh Air Products Company manufactures and sells a variety of camping products. Recently the
company opened a new plant to manufacture a deluxe portable cooking unit. Cost and sales data
for the first month of operations are shown below:
Manufacturing Costs
Fixed Overhead $120,000
Variable overhead $3 per unit
Direct labor $12 per unit
Direct material $30 per unit
Beginning inventory 0 units
Units produced 12,000
Units sold 11,000
a
Ex. 143 (cont.)
Selling and Administrative Costs
Fixed $200,000
Variable $4 per unit sold
The portable cooking unit sells for $110. Management is interested in the opening months results
and has asked for an income statement.
Instructions
Assume the company uses absorption costing. Calculate the production cost per unit and prepare
an income statement for the month of June, 2008.
a
Per Unit
Direct materials $30
Direct labor 12
Variable overhead 3
Fixed overhead ($120,000 12,000) 10
Total cost $55
Fresh Air Products Company

Income Statement (Absorption Costing)
For the Month Ending June 30, 2008
Sales (11,000 $110) $1,210,000
Less: Cost of goods sold (11,000 $55) 605,000
Gross profit 605,000
Less: Selling and administrative costs
Variable (11,000 $4) $ 44,000
Fixed 200,000 244,000
a
Ex. 144
Momentum Bikes Company manufactures a basic road bicycle. Production and sales data for the
most recent year are as follows (no beginning inventory):
Variable production costs $90 per bike
Fixed production costs $500,000
Variable selling and administrative costs $22 per bike
Fixed selling and administrative costs $520,000
Selling price $200 per bike
Production 20,000 bikes
Sales 18,000 bikes
Instructions
(a) Prepare a brief income statement using absorption costing.
(b) Compute the amount to be reported for inventory in the year-end absorption costing balance
sheet.
a
(a) Sales (18,000 $200) $3,600,000
Less: Cost of goods sold (18,000 $115*) 2,070,000
Gross profit 1,530,000
Less: selling and administrative costs
[(18,000 $22) + $520,000] 916,000
*Variable production costs $ 90 per bike

Fixed production costs ($500,000 20,000) 25 per bike
Total cost of goods sold per unit $115 per bike
(b) (20,000 18,000) $115 = $230,000
a
Ex. 145
Momentum Bikes Company manufactures a basic road bicycle. Production and sales data for the
most recent year are as follows (no beginning inventory):
Variable production costs $90 per bike
Fixed production costs $500,000
Variable selling and administrative costs $22 per bike
Fixed selling and administrative costs $520,000
Selling price $200 per bike
Production 20,000 bikes
Sales 18,000 bikes
Instructions
(a) Prepare a brief income statement using variable costing.
(b) Compute the amount to be reported for inventory in the year-end variable costing balance
sheet.
a
(a) Sales (18,000 $200) $3,600,000
Less: Variable costs
Variable cost of goods sold (18,000 $90) $1,620,000
Variable selling and admin. costs (18,000 $22) 396,000 2,016,000
Contribution margin 1,584,000
Less: Fixed costs
Fixed production costs 500,000
Fixed selling and administrative costs 520,000 1,020,000
(b) (20,000 18,000) $90 = $180,000

a
Ex. 146
Dolan Company produces sporting equipment. In 2008, the first year of operations, Dolan
produced 25,000 units and sold 22,000 units. In 2009, the production and sales results were
exactly reversed. In each year, selling price was $100, variable manufacturing costs were $40 per
unit, variable selling expenses were $8 per unit, fixed manufacturing costs were $540,000, and
fixed administrative expenses were $200,000.
Instructions
(a) Compute the net income under variable costing for each year.
(b) Compute the net income under absorption costing for each year.
(c) Reconcile the differences each year in income from operations under the two costing
approaches.
a
(a) 2008: [22,000 ($100 $40 $8)] ($540,000 + $200,000)] = $404,000
2009: [25,000 ($100 $40 $8)] ($540,000 + $200,000)] = $560,000
(b) 2008: [22,000 ($100 $40 $21.60)] ($200,000 + ($22,000 $8)] = $468,800
2009: {[25,000 $100) [3,000 ($40 + $21.60)] [22,000 ($40 + $24.55)]} [$200,000
+ (25,000 $8)] = $495,200
(c) The variable costing and the absorption costing income can be recorded as follows:
2008 variable costing income $404,000
Fixed manufacturing costs deferred at 12/31/08
under absorption costing (3,000 $21.60) 64,800
2008 absorption costing income $468,800
2009 variable costing income $560,000
Fixed manufacturing costs expensed in 2009
under absorption costing (3,000 $21.60) (64,800)
2009 absorption costing income $495,200
a
Ex. 147
McCartney Pumps is a division of UK Controls Corporation. The division manufactures and sells
a pump that is used in a wide variety of applications. During the coming year, it expects to sell
30,000 units for $20 per unit. George Harrison, division manager, is considering producing either
30,000 or 50,000 units during the period. Other information is presented in the schedule below:
Division Information 2008
Beginning inventory 0
Expected sales in units 30,000
Selling price per unit $20
Variable manufacturing cost per unit $7
Fixed manufacturing overhead costs (total) $300,000
Fixed manufacturing overhead costs per unit
Based on 30,000 units ($300,000 30,000) $10
Based on 50,000 units ($300,000 50,000) $6
Manufacturing cost per unit
Based on 30,000 units ($7 variable + $10 fixed) $17
Selling and administrative expenses (all fixed) $25,000
a
Ex. 147 (cont.)
Instructions
(a) Prepare and absorption costing income statement with one column showing the results if
30,000 units are produced and one column showing the results if 50,000 units are produced.
(b) Why is income different for the two production levels when sales is 30,000 units either way?
a
(a) McCartney Pumps Division
Income Statement (Absorption Costing)
For the Year Ended 2008
30,000 Produced 50,000 Produced
Sales (30,000 units $20) $600,000 $600,000
Cost of goods sold 510,000 (30,000 $17) 390,000 (30,000 $13)
Gross profit 90,000 210,000
Fixed selling and admin. expenses 25,000 25,000
Net income $ 65,000 $185,000
(b) Net income is $120,000 higher when 50,000 units are produced because under absorption
costing, $120,000 of fixed manufacturing costs (20,000 $6) are deferred to the next year.
a
Ex. 148
McCartney Pumps is a division of UK Controls Corporation. The division manufactures and sells
a pump that is used in a wide variety of applications. During the coming year, it expects to sell
30,000 units for $20 per unit. George Harrison, division manager, is considering producing either
30,000 or 50,000 units during the period. Other information is presented in the schedule below:
Division Information 2008
Beginning inventory 0
Expected sales in units 30,000
Selling price per unit $20
Variable manufacturing cost per unit $7
Fixed manufacturing overhead costs (total) $300,000
Fixed manufacturing overhead costs per unit
Based on 30,000 units ($300,000 30,000) $10
Based on 50,000 units ($300,000 50,000) $6
Manufacturing cost per unit
Selling and administrative expenses (all fixed) $25,000
Instructions
Prepare a variable costing income statement with one column showing the results if 30,000 units
are produced and one column showing the results if 50,000 units are produced.
a
McCartney Pumps Division
Income Statement (Variable Costing)
For the Year Ended 2008
30,000 Produced 50,000 Produced
Sales (30,000 units $20) $600,000 $600,000
Variable cost of goods sold (30,000 $7) 210,000 210,000
Fixed manufacturing overhead 300,000 300,000
Net income $ 65,000 $ 65,000
COMPLETION STATEMENTS
149. The ______________ income statement classifies cost as variable or fixed and computes
a contribution margin.
150. _________________ tells a company how far sales can drop before it will be operating at
a loss.
151. ___________________ is the relative percentage in which a company sells its multiple
products.
152. When more than one product is sold, the break-even point can be determined by dividing
fixed expenses by _______________________.
153. When a company has ________________, management must decide which products to
make and sell in order to maximize net income.
154. ___________________ refers to the relative proportion of fixed versus variable costs that
a company incurs.
155. The _________________________ provides a measure of a companys earnings volatility

and can be used to compare companies.
a
156. Under _____________________ all manufacturing costs are charged to, or absorbed by,
the product.
a
157. Fixed manufacturing costs are treated as period costs under ______________________.
a
158. When production exceeds sales, a portion of the _____________________ is deferred to
a future period as part of the cost of ending inventory under absorption costing, but not
under variable costing.
a
159. When units produced exceed units sold, income under absorption costing is ___________
than income under variable costing.
a
160. Management may be tempted to overproduce in a given period in order to increase net
income if _______________ is used for internal decision making.
Answers to Completion Statements

149. CVP 155. degree of operating leverage
a
150. Margin of safety 156. absorption costing
a
151. Sales mix 157. variable costing
a
152. weighted-average unit contribution 158. fixed manufacturing overhead
a
153. limited resources 159. higher
a
154. Cost structure 160. absorption costing
SHORT-ANSWER ESSAY QUESTIONS

S-A E 161
A CVP income statement is frequently prepared for internal use by management. Describe the
features of the CVP income statement that make it more useful for management decision-making
than the traditional income statement that is prepared for external users.
Solution 161
Several features of the CVP income statement make it more useful for internal decision-making.
The CVP income statement classifies costs as either fixed or variable, rather than by function.
Being able to identify the behavior of costs in this manner can aid management in controlling
those costs.
Also, the CVP income statement shows the contribution margin, rather than a gross profit. This
helps management establish the extent to which their sales are able to cover their fixed costs,
and to analyze the impact on net income of changes in sales or costs.
S-A E 162
Jacob Andrews, president of Video Adventure, has heard about operating leverage and asks you
to explain this term. What is operating leverage? How does a company increase its operating
leverage?
Solution 162
Operating leverage refers to the change in net income that a company experiences when there is
a change in net sales revenue. Companies that have higher fixed costs relative to variable costs
have higher operating leverage. In that case, the companys profits will increase rapidly when
sales revenue increases, but decrease rapidly when sales revenue decreases. A company can
increase its operating leverage by increasing its reliance on fixed costs, with a corresponding
decrease in variable costs.
a
S-A E 163
Define variable costing and absorption costing. What are some of the benefits to a manager from
using variable costing instead of absorption costing for internal decision making?
a
Solution 163
Variable costing is a system for determining product costs that is used primarily for making
managerial decisions. This system determines product costs by considering only direct materials,
direct labor, and variable manufacturing overhead. In contrast, absorption costing is used by
some managers and also for external reporting. Under absorption costing, product costs include
direct materials, direct labor, and both fixed and variable manufacturing overhead costs.
Some of the benefits to a manager from using variable costing instead of absorption costing for
internal decision-making include: variable costing already has to be used when constructing a
contribution margin income statement, variable costing puts greater focus on cost behaviors,
fixed expenses do not get tied up in inventory under variable costing, variable costing is better
suited for cost-volume-profit analysis, variable costing produces income statements that are
closer to net cash flows than absorption costing, and the method ties in with standard costing and
flexible budgeting more effectively.
a
S-A E 164
How do differences in production and sales levels affect income under absorption and variable
costing?.
a
Solution 164
If production equals sales in any given period, the net incomes under both absorption and
variable costing will be equal. Under this scenario, fixed manufacturing overhead will not differ,
because the direct cost expense under variable costing will be equal to the product cost
component of fixed overhead under absorption costing.
If production exceeds sales, absorption costing net income will be greater than variable costing
net income. Absorption costing net income is higher because some fixed manufacturing overhead
costs will be deferred in the inventory account until the products are sold, whereas under variable
costing, all fixed manufacturing overhead costs will be expensed.
If sales exceed production, absorption costing net income will be less than variable costing net
income. Absorption costing net income is less because some fixed manufacturing overhead costs
from the previous period will now be expensed when the older product is sold, whereas under
variable costing, only fixed manufacturing overhead costs of the current period will be expensed.

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CHAPTER 6

COST-VOLUME-PROFIT ANALYSIS: ADDITIONAL ISSUES

SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOMS TAXONOMY

26. TF 106. MC 111. MC 116. MC 133. BE 158. C

Note: TF = True-False C = Completion Ex = Exercise

The chapter also contains four Short-Answer Essay questions.

CHAPTER STUDY OBJECTIVES

7. The weighted-average contribution margin of all the products is computed when

Answers to True-False Statements

MULTIPLE CHOICE QUESTIONS

32. The CVP income statement classifies costs

33. Contribution margin is the amount of revenue remaining after deducting

38. In a CVP income statement, cost of goods sold is generally

39. In a CVP income statement, a selling expense is generally

43. The contribution margin ratio is

51. The required sales in units to achieve a target net income is

55. Margin of safety in dollars is

56. The margin of safety ratio is

60. Sales mix is

Use the following information for questions 65 and 66.

66. At the expected sales level, Uribes net income will be

Use the following information for questions 6770.

67. The weighted-average contribution margin ratio is

68. The break-even point in dollars is

71. A shift from low-margin sales to high-margin sales

72. A shift from high-margin sales to low-margin sales

Use the following information for questions 73 and 74.

73. What is the weighted-average contribution margin ratio?

74. What is the break-even point in dollars?

81. Cost structure

82. Outsourcing production will

84. Cost structure refers to the relative proportion of

Use the following information for questions 85 and 86.

85. Small Frys degree of operating leverage is

86. Small Frys margin of safety ratio is

87. Which of the following statements is not true?

89. The margin of safety ratio

91. A company with a higher contribution margin ratio is

92. The degree of operating leverage

Use the following information for questions 103107.

Use the following information for questions 114118.

Answers to Multiple Choice Questions

Solution 126 (68 min.)

Solution 127 (68 min.)

$1,950,000 39% = $5,000,000 break-even point in dollars

Solution 128 (35 min.)

Solution 129 (57 min.)

Minimum for footballs: 400 1.25 yd. = 500 yd.

Solution 130 (46 min.)

Direct materials $25,000

Direct materials $ 25,000

Solution 135 (812 min.)

Solution 136 (1015 min.)

Solution 137 (1520 min.)

(c) Break-even point in dollars = $259,000 .37 = $700,000

(d) Sales dollars at break-even point:

Solution 138 (1012 min.)

Solution 139 (68 min.)

Solution 140 (1520 min.)

Solution 140 (cont.)

Solution 141 (810 min.)

(b) Degree of % Change in

Fresh Air Products Company