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Original Title: Managerial Accounting Creating Value in a Dynamic Business Environment 11Th Ed by Hilton – Test Bank

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Managerial Accounting Creating Value in a Dynamic Business Environment 11Th Ed By Hilton – Test Bank

Chapter 06

FALSE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-01

Feedback False: Correct! The determination of cost behavior is called cost estimation.

FALSE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-01

Feedback True: This statement is incorrect because cost estimation often focuses on historical

data.

Feedback False: Correct! Cost estimation often focuses on historical data; cost prediction

focuses on the future.

TRUE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-02

Feedback True: Correct! Variable costs change in direct proportion to a change in the activity

level.

Feedback False: It is true that variable costs change in direct proportion to a change in the

activity level.

4. Cost that are nearly variable, but increase in small steps instead of continuously are called step-

variable costs.

TRUE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-02

Feedback True: Correct! Step-variable costs include mostly variable inputs, but increase in

small steps rather than continuously.

Feedback False: This statement is true and the definition of step-variable costs.

5. The relevant range is that range of activity where a company achieves its maximum efficiency.

FALSE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-03

6. If the organization operates at an activity level outside the relevant range, any cost predictions

based on data from the relevant range may not be very accurate.

TRUE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-03

Feedback True: Correct! Data outside the relevant range may not yield accurate cost

predictions.

Feedback False: This statement is true regarding cost predictions with data outside the relevant

range.

7. A committed cost results from a management decision to spend a particular amount of money

for some purpose.

FALSE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-04

Feedback False: Correct! A discretionary cost rather than a committed cost results from a

management decision to spend a particular amount of money for some purpose.

TRUE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-04

Feedback True: Correct! Research and development costs are discretional costs.

9. The least-squares regression method of cost estimation relies on only two data points.

FALSE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-05

10. In regression analysis, the variable that is being predicted is known as the independent variable.

FALSE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-05

11. Multiple regression is a statistical method that estimates a linear (straight-line) relationship

between one dependent variable and one independent variable.

FALSE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-06

Feedback True: This statement is false because multiple regression estimates the relationship

between one dependent variable and two or more independent variables.

Feedback False: Correct! Multiple regression is a statistical method that estimates a linear

(straight-line) relationship between one dependent variable and two or more independent

variables.

12. When the engineering method is applied to costs other than labor, it is referred to as the

experience method.

FALSE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-06

Feedback False: Correct! When the learning-curve approach is applied to costs other than

labor, it is referred to as the experience-curve approach.

13. Mismatched time periods are not issues in the collection of data for cost estimation.

FALSE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 06-07

Feedback False: Correct! Mismatched time periods is an issue in the collection of data for cost

estimation.

TRUE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 06-07

15. In the least-squares regression method, the cost line is estimated so as to maximize the sum of

the squared deviations between the cost line and the data points.

FALSE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 06-08

Feedback False: Correct! In the least-squares regression method, the cost line is estimated so as

to minimize the sum of the squared deviations between the cost line and the data points.

16. The slope of a regression line measures how steeply the cost line rises as activity increases.

TRUE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 06-08

Feedback True: Correct! This statement provides an accurate description of the slope of a

regression line.

A.cost estimation.

B. cost prediction.

C. cost behavior.

D. cost analysis.

E. cost approximation.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-01

Feedback A: Cost estimation is not the relationship between cost and activity.

Feedback B: Cost prediction is not the relationship between cost and activity.

Feedback C: Correct! Cost behavior is the relationship between cost and activity.

Feedback D: Cost analysis is not the relationship between cost and activity.

Feedback E: Cost approximation is not the relationship between cost and activity.

A.cost estimation.

B. cost prediction.

C. cost behavior.

D. cost analysis.

E. cost approximation.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-01

Feedback A: This is not the correct term for a forecast of a cost at a particular level of activity.

Feedback C: This is not the correct term for a forecast of a cost at a particular level of activity.

Feedback D: This is not the correct term for a forecast of a cost at a particular level of activity.

Feedback E: This is not the correct term for a forecast of a cost at a particular level of activity.

19. Which of the following costs changes in direct proportion to a change in the activity level?

A.Variable cost.

B. Fixed cost.

C. Semivariable cost.

D. Step-variable cost.

E. Step-fixed cost.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-02

Feedback A: Correct! Variable cost changes in direct proportion to a change in activity level.

20. Macon Company has a variable selling cost. If sales volume increases, how will the total variable

cost and the variable cost per unit behave?

A. Increase Increase

C. Increase Decrease

D. Remain constant Decrease

E. Decrease Increase

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-02

Feedback A: This pair of relationships is incorrect.

Feedback B: Correct! If sales volume increases, total variable cost will increase and variable

cost per unit will remain constant.

50,000 $1.95

70,000 1.95

1. Variable cost.

B.Fixed cost.

C. Semivariable cost.

D. Discretionary fixed cost.

E. Step-fixed cost.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-02

Feedback A: Correct! Variable costs are shown.

22. Paige Corporation observed that when 25,000 units were sold, a particular cost amounted to

$75,000, or $3.00 per unit. When volume increased by 10%, the cost totaled $82,500 (i.e., $3.00

per unit). The cost that Paige is studying can best be described as a:

A.variable cost.

B. fixed cost.

C. semivariable cost.

D. discretionary fixed cost.

E. step-fixed cost.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-02

Feedback A: Correct! This cost is a variable cost.

A.a horizontal line.

B. a vertical line.

C. a u-shaped line.

D. a diagonal line that slopes downward to the right.

E. a diagonal line that slopes upward to the right.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-02

Feedback A: This is incorrect.

Feedback D: This is incorrect.

Feedback E: Correct! A typical variable cost appears as a diagonal line that slopes upward to

the right.

24. Norman Company pays a sales commission of 4% on each unit sold. If a graph is prepared, with

the vertical axis representing per-unit cost and the horizontal axis representing units sold, how

would a line that depicts sales commissions be drawn?

A.As a straight diagonal line, sloping upward to the right.

B. As a straight diagonal line, sloping downward to the right.

C. As a horizontal line.

D. As a vertical line.

E. As a curvilinear line.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-02

Feedback A: This is incorrect.

Feedback C: Correct! The line that depicts sales commissions would be drawn as a horizontal

line.

25. A company observed a decrease in the cost per unit. All other things being equal, which of the

following is most likely true?

A.The company is studying a variable cost, and total volume has increased.

B. The company is studying a variable cost, and total volume has decreased.

C. The company is studying a fixed cost, and total volume has increased.

D. The company is studying a fixed cost, and total volume has decreased.

E. The company is studying a fixed cost, and total volume has remained constant.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-02

Feedback A: This statement is incorrect.

Feedback C: Correct! The company is studying a fixed cost, and total volume has increased.

26. Ralston has the following budgeted costs at its anticipated production level (expressed in hours):

variable overhead, $165,000; fixed overhead, $250,000. If Ralston now revises its anticipated

production slightly upward, it would expect:

A.total fixed overhead of $250,000 and a lower hourly rate for variable overhead.

B. total fixed overhead of $250,000 and the same hourly rate for variable overhead.

C. total fixed overhead of $250,000 and a higher hourly rate for variable overhead.

D. total variable overhead of less than $165,000 and a lower hourly rate for variable overhead.

E. total variable overhead of less than $165,000 and a higher hourly rate for variable overhead.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-02

Feedback A: This statement is incorrect.

expect total fixed overhead of $250,000 and the same hourly rate for variable overhead.

1. Variable cost.

B.Fixed cost.

C. Semivariable cost.

D. Step-variable cost.

E. Mixed cost.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Feedback A: This is incorrect.

A.a horizontal line.

B. a vertical line.

C. a u-shaped line.

D. a diagonal line that slopes downward to the right.

E. a diagonal line that slopes upward to the right.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-02

Feedback A: Correct! A typical fixed cost appears as a horizontal line when graphed.

29. Straight-line depreciation is a typical example of a:

A.variable cost.

B. step-variable cost.

C. fixed cost.

D. mixed cost.

E. curvilinear cost.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-02

Feedback A: This is incorrect.

30. Which of the following choices denotes the typical cost behavior of advertising and sales

commissions?

Advertising Sales Commissions

A. Variable Variable

B. Variable Fixed

C. Fixed Variable

D. Fixed Fixed

E. Semivariable Variable

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-02

Feedback A: This relationship is incorrect.

Feedback C: Correct! The typical cost behavior of advertising is fixed and sales commissions

are variable.

31. Costs that remain the same over a wide range of activity, but jump to a different amount

outside that range, are known as:

A.step-fixed costs.

B. step-variable costs.

C. semivariable costs.

D. curvilinear costs.

E. mixed costs.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-02

Feedback A: Correct! These are step-fixed costs.

A.a horizontal line.

B. a vertical line.

C. a series of staggered horizontal lines

D. a diagonal line that slopes downward to the right.

E. a diagonal line that slopes upward to the right.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-02

Feedback A: This is incorrect.

Feedback C: Correct! A typical step-fixed cost appears as a series of staggered horizontal lines

when graphed.

33. Each of Boggart’s production managers (annual salary cost, $45,000) can oversee 60,000

machine hours of manufacturing activity. Thus, if the company has 50,000 hours of

manufacturing activity, one manager is needed; for 75,000 hours, two managers are needed; for

125,000 hours, three managers are needed; and so forth. Boggart’s salary cost can best be

described as a:

A.variable cost.

B. semivariable cost.

C. step-variable cost.

D. fixed cost.

E. step-fixed cost.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-02

Feedback A: This is incorrect.

Feedback E: Correct! Boggart’s salary cost can best be described as a step-fixed cost.

34. Sophie Corporation recently produced and sold 100,000 units. Fixed costs at this level of activity

amounted to $50,000; variable costs were $100,000. How much cost would the company

anticipate if during the next period it produced and sold 102,000 units?

A.$150,000.

B. $151,000.

C. $152,000.

D. $153,000.

E. None of the answers is correct.

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Feedback A: This amount is incorrect.

Feedback C: Correct! Variable cost per unit = $100,000 / 100,000 units = $1 per unit; $102,000

+ $50,000 = $152,000.

35. Organize, Inc. has only variable costs and fixed costs. A review of the company’s records

disclosed that when 200,000 units were produced, fixed manufacturing costs amounted to

$800,000 and the cost per unit manufactured totaled $11. On the basis of this information, how

much cost would the firm anticipate at an activity level of 205,000 units?

A.$2,235,000.

B. $2,222,000.

C. $2,214,000.

D. $2,200,000.

E. None of the answers is correct.

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Feedback A: Correct! Variable cost per unit = (200,000 x $11) – $800,000 = $1,400,000 ÷

200,000 = $7;

36. A review of Parson Corporation’s accounting records found that at a volume of 90,000 units, the

variable and fixed cost per unit amounted to $8 and $4, respectively. On the basis of this

information, what amount of total cost would Parson anticipate at a volume of 85,000 units?

A.$1,020,000.

B. $1,040,000.

C. $1,060,000.

D. $1,080,000.

E. None of the answers is correct.

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-02

Feedback A: This amount is incorrect.

Feedback B: Correct! Fixed costs = 90,000 x $4 = $360,000; Total cost = Total Variable +

Total fixed = (85,000 x $8) + $360,000 = $1,040,000.

37. A cost that has both a fixed and variable component is known as a:

A.step-fixed cost.

B. step-variable cost.

C. semivariable cost.

D. curvilinear cost.

E. discretionary cost.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-02

Feedback A: This is incorrect.

Feedback C: Correct! A cost that is both fixed and variable is called semivariable.

A.semivariable cost.

B. step-fixed cost.

C. variable cost.

D. curvilinear cost.

E. discretionary cost.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-02

Feedback A: Correct! A mixed cost is also known as a semivariable cost.

39. Brock Morton has a fast-food franchise and must pay a franchise fee of $45,000 plus 4% of gross

sales. In terms of cost behavior, the fee is known as a:

A.variable cost.

B. fixed cost.

C. step-fixed cost.

D. semivariable cost.

E. curvilinear cost.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-02

Feedback A: This fee is not a variable cost.

I. A building that is used for both manufacturing and sales activities.

II. An employee’s compensation, which consists of a flat salary plus a commission.

III. Depreciation that relates to five different machines.

IV. Maintenance cost that must be split between sales and administrative offices.

A.I only.

B. II only.

C. I and III.

D. I, III, and IV.

E. I, II, III, and IV.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-02

Feedback A: This is not a mixed cost.

commission, is a mixed cost.

41. Which of the following costs exhibits both decreasing and increasing marginal costs over a

specific range of activity?

A.Semivariable cost.

B. Curvilinear cost.

C. Step-fixed cost.

D. Step-variable cost.

E. Fixed cost.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-02

Feedback A: This cost is incorrect.

Feedback B: Correct! Curvilinear costs exhibit both decreasing and increasing marginal costs

over a specific range of activity.

42. The relevant range is that range of activity:

A.where a company achieves its maximum efficiency.

B. where units produced equal units sold.

C. where management expects the firm to operate.

D. where the firm will earn a profit.

E. where expected results are abnormally high.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-03

Feedback A: This statement is incorrect.

Feedback C: Correct! The relevant range is that range of activity where management expects the

firm to operate.

A.can be estimated with reasonable accuracy.

B. can be expected to change radically.

C. exhibit decreasing marginal cost patterns.

D. exhibit increasing marginal cost patterns.

E. cannot be estimated satisfactorily.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-03

Feedback A: Correct! Within the relevant range of activity, costs can be estimated with

reasonable accuracy.

44. Within the relevant range, a curvilinear cost function can sometimes be graphed as a:

A.sloping straight line.

B. jagged line.

C. vertical straight line.

D. curved line.

E. horizontal straight line.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Feedback A: Correct! Within the relevant range a curvilinear cost function can sometime be

graphed as a sloping straight line.

45. A variable cost that has a definitive physical relationship to the activity measure is called a (n):

A.discretionary cost.

B. engineered cost.

C. managed cost.

D. programmed cost.

E. committed cost.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Feedback B: Correct! A variable cost that has a definitive physical relationship to the activity

measure is called an engineered cost.

46. Costs that result from a company’s ownership or use of facilities and its basic organizational

structure are known as:

A.discretionary fixed costs.

B. committed fixed costs.

C. discretionary variable costs.

D. committed variable costs.

E. engineered costs.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-04

Feedback A: This is an incorrect cost type.

Feedback B: Correct! Costs that result from a company’s ownership or use of facilities and its

basic organization structure are known as committed fixed costs.

A.committed fixed cost.

B. committed variable cost.

C. discretionary fixed cost.

D. discretionary variable cost.

E. engineered cost.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-04

A.Property taxes.

B. Depreciation on buildings.

C. Salaries of management personnel.

D. Outlays for advertising programs.

E. Equipment rental costs.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-04

A.advertising.

B. research and development.

C. depreciation on buildings and equipment.

D. contributions to charitable organizations.

E. expenditures for direct labor.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-04

50. Amounts spent for charitable contributions are an example of a (n):

A.committed fixed cost.

B. committed variable cost.

C. discretionary fixed cost.

D. discretionary variable cost.

E. engineered cost.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-04

51. Which of the following would not typically be classified as a discretionary fixed cost?

A.Equipment depreciation.

B. Employee development (education) programs.

C. Advertising.

D. Outlays for research and development.

E. Charitable contributions.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-04

discretionary fixed cost.

Feedback C: This would typically be classified as a discretionary fixed cost.

52. Which of the following choices correctly classifies a committed fixed cost and a discretionary

fixed cost?

53.

Committed Discretionary

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-04

charitable contributions are discretionary fixed costs.

53. Which type of fixed cost (1) tends to be more long-term in nature and (2) can be cut back more

easily in bad economic times without doing serious harm to organizational goals and objectives?

Long Term in Nature

Economic Times

A. Committed Committed

B. Committed Discretionary

C. Discretionary Committed

D. Discretionary Discretionary

E. Committed

and discretionary

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Feedback B: Correct! Fixed costs that are long-term in nature are committed and those that can

be cut back more easily in bad economic times are discretionary.

54. Which of the following techniques is not used to analyze cost behavior?

A.Least-squares regression.

B. High-low method.

C. Visual-fit method.

D. Linear programming.

E. Multiple regression.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-05

Learning Objective: 06-06

55. The high-low method and least-squares regression are used by accountants to:

A.evaluate divisional managers for purposes of raises and promotions.

B. choose among alternative courses of action.

C. maximize output.

D. estimate costs.

E. control operations.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-05

Feedback A: This is not a correct used of these two techniques.

Feedback D: Correct! Both of these techniques are used by accountants to estimate costs.

56. Which of the following statements about the visual-fit method is (are) true?

I. The method results in the creation of a scatter diagram.

II. The method is not totally objective because of the manner in which the cost line is

determined.

III. The method is especially helpful in the determination of outliers.

A.I only.

B. II only.

C. I and II.

D. I and III.

E. I, II, and III.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Feedback E: Correct! All of these statement are true regarding the visual-fit method.

57. The nonstatistical method of cost estimation that calls for the creation of a scatter diagram is

the:

A.least-squares regression method.

B. high-low method.

C. visual-fit method.

D. account analysis method.

E. multiple regression method.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-05

Feedback C: Correct! The nonstatistical method of cost estimation that calls for the creation of a

scatter diagram is the visual-fit method.

58. Which of the following methods of cost estimation relies on only two data points?

A.Least-squares regression.

B. The high-low method.

C. The visual-fit method.

D. Account analysis.

E. Multiple regression.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-05

Feedback B: Correct! The high-low method relies on only two data points.

Fulton and Sons, Inc. presently leases a copy machine under an agreement that calls for a fixed

fee each month and a charge for each copy made. Fulton made 7,000 copies and paid a total of

$360 in March; in May, the firm paid $280 for 5,000 copies. The company uses the high-low

method to analyze costs.

A.$0.040.

B. $0.051.

C. $0.053.

D. $0.056.

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Feedback A: Correct! The variable cost per unit is (High – Low costs) ÷ (High – Low Units) =

($360 – $280) ÷ (7,000 – 5,000) = $0.04 per copy.

60. Fulton’s monthly fixed fee is:

A.$80.

B. $102.

C. $106.

D. $112.

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Feedback A: Correct! Variable costs (using the low level) = 5,000 x $0.040 = $200; Total costs

– variable costs = fixed costs (or $280 – $200 = $80); alternatively, Variable costs (using the

high level): 7,000 x $0.04 = $280; Total costs – variable costs = fixed costs (or $360 – $280 =

$80.

A.$382.50.

B. $322.

C. $300.

D. $292.50

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Feedback C: Correct! The variable cost per unit is (High – Low costs) ÷ (High – Low Units) =

($360 – $280) ÷ (7,000 – 5,000) = $0.04 per copy. Variable costs (using the low level) = 5,000 x

$0.040 = $200; Total costs – variable costs = fixed costs (or $280 – $200 = $80)

Units x Variable cost per unit + Fixed costs = (5,500 x $0.04) + $80 = $300.

Barkoff Enterprises, which uses the high-low method to analyze cost behavior, has determined

that machine hours best explain the company’s utilities cost. The company’s relevant range of

activity varies from a low of 600 machine hours to a high of 1,100 machine hours, with the

following data being available for the first six months of the year:

62. The variable utilities cost per machine hour for Barkoff is:

A.$0.18.

B. $4.50.

C. $5.00.

D. $5.50.

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Feedback D: Correct! (High – Low costs) ÷ (High – Low Units) = ($9,625 – $8,360) ÷ (950-

720) = $1,265 ÷ 230 = $5.50 variable cost per unit

63. The fixed utilities cost per month for Barkoff is:

A.$3,764.

B. $4,400.

C. $4,760.

D. $5,100.

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Feedback B: Correct!

(High – Low costs) ÷ (High – Low Units) = ($9,625 – $8,360) ÷ (950-720) = $1,265 ÷ 230 =

$5.50 variable cost per unit

Variable costs (using the high level) = 950 x $5.50 = $5,225; Total costs – variable costs = fixed

costs (or $9,625 – $5,225 = $4,400).

64. Using the high-low method, the utilities cost for Barkoff associated with 980 machine hours

would be:

A.$9,510.

B. $9,660.

C. $9,700.

D. $9,790.

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Feedback D: Correct!

(High – Low costs) ÷ (High – Low Units) = ($9,625 – $8,360) ÷ (950-720) = $1,265 ÷ 230 =

$5.50 variable cost per unit

Variable costs (using the high level) = 950 x $5.50 = $5,225; Total costs – variable costs = fixed

costs (or $9,625 – $5,225 = $4,400).

At the anticipated 980 machine hours: (980 x $5.50) + $4,400 = $5,390 + $4,400 = $9,790.

Swan, Inc. uses the high-low method to analyze cost behavior. The company observed that at

22,000 machine hours of activity, total maintenance costs averaged $33.40 per hour. When

activity jumped to 25,000 machine hours, which was still within the relevant range, the average

total cost per machine hour was $30.40.

65. On the basis of this information, the variable cost per machine hour for Swan was:

A.$8.40.

B. $22.00.

C. $25.00.

D. $30.40.

E. $33.40.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Feedback A: Correct! Variable cost per machine hour = (High level cost – Low level cost) ÷

(High units – Low units) = [($30.40 x 25,000) – ($33.40 x 22,000)] ÷ (25,000 – 22,000) =

($760,000 – $734,800) ÷ 3,000 = $8.40.

Feedback E: This amount is incorrect.

66. On the basis of this information, the fixed cost for Swan was:

A.$184,800.

B. $210,000.

C. $550,000.

D. $734,800.

E. $760,000.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

Feedback C: Correct!

Variable cost per machine hour = (High level cost – Low level cost) ÷ (High units – Low units)

= [($30.40 x 25,000) – ($33.40 x 22,000)] ÷ (25,000 – 22,000) = ($760,000 – $734,800) ÷ 3,000

= $8.40.

Total variable costs (using the low level): 22,000 x $8.40 = $184,800;

67. On the basis of this information, what were total maintenance costs when Swan experienced

23,000 machine hours?

A.$193,200.

B. $550,000.

C. $734,800.

D. $743,200.

E. $760,000.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

Feedback D: Correct!

Variable cost per machine hour = (High level cost – Low level cost) ÷ (High units – Low units)

= [($30.40 x 25,000) – ($33.40 x 22,000)] ÷ (25,000 – 22,000) = ($760,000 – $734,800) ÷ 3,000

= $8.40.

Total variable costs (using the low level): 22,000 x $8.40 = $184,800;

Using the cost equation at the 23,000 machine hour level: (23,000 x $8.40) + $550,000 =

$743,200.

68. Tallequah, Inc. uses the high-low method to analyze cost behavior. The company observed that

at 20,000 machine hours of activity, total maintenance costs averaged $10.50 per hour. When

activity jumped to 24,000 machine hours, which was still within the relevant range, the average

total cost per machine hour was $9.75. On the basis of this information, the company’s fixed

maintenance costs were:

A.$24,000.

B. $90,000.

C. $210,000.

D. $234,000.

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

Feedback B: Correct! Variable cost per unit = (High level cost – Low level cost) ÷ (High units –

Low units);

[(24,000 x $9.75) – ($10.50 x 20,000)] ÷ (24,000 – 20,000) = $6 per unit variable cost per unit;

69. The following data relate to the Torrence Company for May and August of the current year:

May and August were the lowest and highest activity levels, and Torrence uses the high-low

method to analyze cost behavior. Which of the following statements is true?

A. The variable maintenance cost is $43 per hour.

B. The variable maintenance cost is $45 per hour.

C. The variable maintenance cost is $47 per hour.

D. The fixed maintenance cost is $725,000 per month.

E. More than one of the other answers is true.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

Feedback D: Correct! Variable cost per unit = (High level cost – Low level cost) ÷ (High units –

Low units);

Calculating Fixed cost at high level: $1,247,000 – (29,000 x $18) = $725,000 fixed cost.

Feedback E: This answer is wrong, because there is only one correct answer listed.

70. Data below relate to the Torrence Company for May and August of the current year:

May and August were the lowest and highest activity levels, and Torrence uses the high-

low method to analyze cost behavior. Which of the following statements is true?

B. The variable maintenance cost is $22 per hour.

C. The variable maintenance cost is $24 per hour.

D. The fixed maintenance cost is $72,000 per month.

E. More than one of the other answers is true.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

Feedback A: Correct! Variable cost per unit = (High level cost – Low level cost) ÷ (High

units – Low units);

Feedback E: This answer is wrong, because there is only one correct answer listed.

71. The following data relate to the Torrence Company for May and August:

May and August were the lowest and highest activity levels, and Torrence uses the high-low

method to analyze cost behavior. If maintenance hours are estimated to be 26,000 hours in

October, which of the following statements is true?

A. The variable maintenance cost is $18 per hour.

B. The variable maintenance cost is $22 per hour.

C. The variable maintenance cost is $24 per hour.

D. The fixed maintenance cost is $72,000 per month.

E. More than one of the other answers is true.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

Feedback A: Correct! Variable cost per unit = (High level cost – Low level cost) ÷ (High units –

Low units);

Feedback E: This answer is wrong, because there is only one correct answer listed.

72. The following data relate to the Torrence Company for May and August:

May and August were the lowest and highest activity levels, and Torrence uses the high-low

method to analyze cost behavior. If maintenance hours are estimated to be 26,000 hours in

October, which of the following statements is true?

A. Total maintenance costs will be $1,175,000.

B. Total maintenance costs will be $1,182,000.

C. Total maintenance costs will be $1,193,000.

D. Total maintenance costs will be $1,221,000.

E. Total maintenance costs will be $1,247,000.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

Feedback C: Correct! Variable cost per unit = (High level cost – Low level cost) ÷ (High units –

Low units);

($1,247,000 – $1,175,000) ÷ (29,000 – 25,000) = $18 variable per unit; Calculating Fixed cost

at high level: $1,247,000 – (29,000 x $18) = $725,000 fixed cost. Total maintenance costs

(calculated at estimated 26,000 hours): $1,193,000= (26,000 x $18) + $725,000).

Shum Manufacturing, which uses the high-low method, makes a product called Kwan. The

company incurs three different cost types (A, B, and C) and has a relevant range of operation

between 2,500 units and 10,000 units per month. Per-unit costs at two different activity levels for

each cost type are presented below.

7,500 units 4 6 3 13

73. The cost types shown above are identified by behavior as:

74.

Type A Type B Type C

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-05

Feedback D: Correct! Based on the per unit costs, Type A is variable, Type B is fixed, and Type

C is semivariable.

74. If Shum produces 10,000 units, the total cost would be:

A.$90,000.

B. $100,000.

C. $110,000.

D. $125,000.

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

= ($22,500 – $20,000) ÷ (5,000 – 2,500) = $1 variable portion;

Fixed portion: $20,000 – ($1 x 5,000) = $15,000; $40,000 + $45,000 + ($1 x 10,000) + $15,000

= $110,000.

Feedback D: This amount is incorrect.

75. The cost formula that expresses the behavior of Shum’s total cost is:

A.Y = $0 + $17X.

B. Y = $20,000 + $13X.

C. Y = $40,000 + $9X.

D. Y = $45,000 + $4X.

E. Y = $60,000 + $5X.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Apply

Difficulty: 3 Hard

$15,000 fixed from semivariable = $60,000.

76. In regression analysis, the variable that is being predicted is known as the:

A.independent variable.

B. dependent variable.

C. explanatory variable.

D. interdependent variable.

E. functional variable.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-05

Feedback B: Correct! The variable that is being predicted is the dependent variable.

77. Almed Products has determined that the number of machine hours worked (MH) drives the

amount of manufacturing overhead incurred (MOH). On the basis of this relationship, a staff

analyst has constructed the following regression equation:

MOH = 240,000 + 8MH

Which of the choices correctly depicts the nature of Almed’s variables?

78.

Dependent Independent

A. MOH MOH

B. MOH MH

C. MH MOH

D. MH MH

E. 8 240,000

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Apply

Difficulty: 3 Hard

Feedback B: Correct! Since MOH is being predicted it is the dependent variable and MH is the

independent variable.

78. Focus, Inc. operates a small package delivery service in the Atlanta suburbs. If the company uses

a regression equation to forecast total operating costs, the equation’s intercept would

correspond to the:

A.variable operating cost per delivery.

B. fixed operating costs.

C. number of deliveries.

D. total variable operating costs.

E. total operating costs.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-05

Feedback A: This is an incorrect choice.

79. Rushmont, Inc. operates a small package delivery service in the Nashville suburbs. If the

company uses a regression equation to forecast total operating costs, the coefficient of the

equation’s independent variable would correspond to the:

A.variable operating cost per delivery.

B. fixed operating costs.

C. number of deliveries.

D. total variable operating costs.

E. total operating costs.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-05

operating cost per delivery.

80. Corrine Corporation, which uses least-squares regression analysis, has derived the following

regression equation for estimates of manufacturing overhead: Y = 495,000 + 5.65X. Which of the

following statements is true if the primary cost driver is machine hours?

A.Total manufacturing overhead is represented by the variable “X.”

B. The company anticipates $495,000 of fixed manufacturing overhead.

C. “X” is commonly known as the dependent variable.

D. “X” represents the number of machine hours.

E. The company anticipates $495,000 of fixed manufacturing overhead and “X” represents the

number of machine hours.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-05

Feedback E: Correct! The company anticipates $495,000 of fixed manufacturing overhead and

“X” represents the number of machine hours.

81. Blaster, Inc. recently conducted a least-squares regression analysis to predict selling expenses.

The company has constructed the following regression equation: Y = 329,000 + 7.80X. Which of

the following statements is false if the primary cost driver is number of units sold?

A.The company anticipates $329,000 of fixed selling expenses.

B. “Y” represents total selling expenses.

C. The company expects both variable and fixed selling expenses.

D. For each unit sold, total selling expenses will increase by $7.80.

E. “X” represents the number of hours worked during the period.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-02

Learning Objective: 06-05

82. Trey, Inc. is studying marketing cost and sales volume, and has generated the following

information by use of a scatter diagram and a least-squares regression analysis:

Trey is now preparing an estimate for monthly sales of 18,000 units. On the basis of the data

presented, compute the most accurate sales forecast possible.

A. $159,500.

B. $162,000.

C. $164,900.

D. $167,400.

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Feedback C: Correct! Regression is more accurate than a scatter diagram, so the answer is:

(18,000 x $6.80) + $42,500 = $164,900.

83. Bogata Enterprises has determined that three variables play a key role in determining company

revenues. To arrive at an objective forecast of revenues for the next accounting period, Bogata

should use:

A.simple regression.

B. multiple regression.

C. a scatter diagram.

D. complex regression.

E. the high-low method.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-06

Feedback B: Correct! To arrive at an objective forecast of revenues for the next accounting

period, multiple regression should be used.

84. Which of the following tools is not associated with cost estimation?

A.Least-squares regression.

B. Multiple regression.

C. Inversion equations.

D. Time and motion (engineering) studies.

E. Learning curves.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 06-05

Learning Objective: 06-06

Feedback C: Correct! Inversion equations are not associated with cost estimation.

85. A staff assistant at Warrington Corporation recently determined that the first five units

completed in a new manufacturing process took 500 hours to complete, or an average of 100

hours per unit. The assistant also found that when the cumulative output produced doubles, the

average labor time declines by 20%. On the basis of this information, how many total hours

would Warrington use if it produces a cumulative amount of 40 units?

A.128.

B. 160.

C. 1,280.

D. 2,048.

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-06

86. Which of the following is not an issue in the collection of data for cost estimation?

A.Outliers.

B. Missing data.

C. Mismatched time periods.

D. Inflation.

E. All of the answers are issues in data collection.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Essay Questions

87. Consider the graphs that follow (the horizontal axis represents activity; the vertical axis

represents total dollars).Required:

For items A-I that follow, choose the graph that best represents the cost behavior pattern

described. Note: Graphs can be used more than once.

A. Straight-line depreciation on machinery.

B. The cost of chartering a private airplane. The cost is $800 per hour for the first 6 hours of a

flight; it then drops to $600 per hour.

C. The wages of table service personnel in a restaurant. The employees are part-time workers

who can be called upon for as little as 4 hours at a time.

D. Weekly wages of store clerks who work 40 hours each week. One clerk is hired for every 125

sales made during the month.

E. The cost of tires used in the production of trucks.

F. Outbound shipping charges that increase at a decreasing rate as sales rise because the firm

can use more efficient modes of transportation (e.g., full trailer loads, full rail cars, etc.).

Gradually, however, at high levels of sales, freight costs start to increase at an increasing rate,

which reflects more transactions made to customers in far-away locations.

G. Equipment leasing costs that are computed at $2 per machine hour worked. The company

pays a maximum of $120,000 per month.

H. The monthly cost of a franchise fee for a fast-food restaurant. The franchisee must pay

$20,000 plus 5% of gross dollar sales.

I. The cost of electricity during peak demand periods, which is based on the following schedule:

Up to 20,000 kilowatt hours (KWH): $4,000

Above 20,000 kilowatt hours: $4,000 + $0.02 per KWH

Solution:

1. 2 B. 4 C. 7 D. 5 E. 1 F. 8 G. 9 H. 6 I. 3

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-02

1. Advertising and promotion costs of a do-it-yourself retailer

2. Surgical supplies used in a hospital’s operating room

3. Aircraft depreciation charges of an airline

4. Utility charges that include a minimum-use fee, for a small business

5. Annual business licensing fee paid by a daycare center

6. Truck fuel consumed by a road construction company

Required:

A. Classify each of these costs as variable, committed fixed, discretionary fixed, or semivariable.

B. Briefly describe the behavior of a per-unit variable cost as activity changes.

C. What elements are present in a semivariable cost that cause it to behave in a semivariable

manner?

D. Generally speaking, does management have more flexibility when dealing with committed

fixed costs or discretionary fixed costs?

Solution:

1. 1. Discretionary fixed

2. Variable

3. Committed fixed

4. Semivariable

5. Committed fixed

6. Variable

B. Per-unit variable costs remain constant as activity levels change.

C. Semivariable, or mixed costs, contain both a variable and fixed component.

D. Discretionary fixed costs.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-04

89. Rolling Hills Bistro produces one of the best sausage products in Tennessee. The company’s

controller compiled the following information by analyzing the accounting records:

1. Meat costs the company $3.25 per pound of sausage produced.

2. Compensation of production employees is $2.25 per pound of sausage produced.

3. Supervisory salaries total $23,000 per month.

4. The company incurs utility costs of $9,000 per month plus $0.35 per pound of sausage

produced.

5. Insurance and property taxes average $6,400 per month.

Required:

A. Classify each cost as variable, fixed, or semivariable.

B. Write a formula to express the behavior of the firm’s production costs. (Use the form Y = a +

bX, where X denotes the quantity of sausage produced.)

Solution:

1. 1. Variable

2. Variable

3. Fixed

4. Semivariable

5. Fixed

B.

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

90. Vargis Corporation has a machining capacity of 200,000 hours per year. Utilization of capacity is

normally 75%; it has been as low as 40% and as high as 90%. An analysis of the accounting

records revealed the following selected costs:

Rate Rate

Cost A:

Cost B:

Total ? $1,944,000

Cost C:

Required:

A. Classify each of the costs as being either variable, fixed, or semivariable.

B. Calculate amounts for the two unknowns in the preceding table.

C. Calculate the total amount that Vargis would expect at a 75% utilization rate for Cost A, Cost

B, and Cost C.

D. Develop an equation that Vargis can use to predict total cost for any level of hours within its

range of operation.

Solution:

Cost B: Variable (constant per-hour figures)

Cost C: Semivariable (changing total and per-hour figures)

B. Cost A: $440,000 ¸ (200,000 hours ´ 90%) = $2.44

Cost B: (200,000 hours ´ 40%) ´ $10.80 = $864,000

C. Analysis of Cost C (variable portion):

($1,330,000 – $680,000) ¸ [(200,000 ´ 90%) – (200,000 ´ 40%)] = $6.50 per hour

Total cost at 40% utilization $680,000

Cost A $440,000

Cost B (150,000 x $10.80) 1,620,000

Cost C:

Fixed cost: $440,000 + $160,000 = $600,000

Equation: Y = $600,000 + $17.30X

where Y = total cost and X = number of hours

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-02

Learning Objective: 06-05

91. Cheyenne Corporation operates a small medical lab in Wyoming that conducts minor medical

procedures (including blood tests and x-rays) for a number of doctors. The lab consumes various

medical supplies and is staffed by two technicians, both of whom are paid a monthly salary. In

addition, there is an on-site office manager who is also paid by the month.

Required:

A. If the lab’s patient count increases by 15%, will the lab’s total operating costs increase by

15%? Explain.

B. Cheyenne is considering opening an additional lab in a new suburban medical building. What

will likely happen to the lab’s level of fixed cost incurrence? Why?

C. What analysis methods would be available to the office manager and/or Cheyenne

management if a close look at the lab’s cost behavior is desired?

Solution:

1. No. The lab has a mixture of both variable and fixed costs. Variable costs (such as supplies) will

increase, directly paralleling the increase in clients. The salaries of the technicians and office

manager are step-fixed in nature, meaning that a 15% hike in client load will likely do nothing to

these expenditures. A possibility exists, though, that an increase in patient load could create the

need for an added technician.

B. Fixed costs typically do not change when activity changes. However, the opening of a new

branch will create the need for added technicians and presumably another office manager, thus

causing costs to rise. In addition, facility rental charges will increase and there will be an added

cost if the firm leases and/or depreciates equipment. Note: This answer assumes that the

original facility will continue with existing personnel and not implement a job-sharing

arrangement through a cutback in operating hours.

C. Possible methods include account classification, visual fit, high-low, and least-squares

regression.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-05

92. The following selected data were taken from the accounting records of Colorado Enterprises:

(variable), (2) property taxes (fixed), and (3) plant maintenance (semivariable). July’s

overhead costs were $170,000 for machine supplies, $24,000 for property taxes, and

$1,080,000 for plant maintenance.

Required:

A. Determine the machine supplies and property taxes for May.

B. By using the high-low method, analyze Colorado’s plant maintenance cost and

calculate the monthly fixed portion and the variable cost per machine hour.

C. Assume that present cost behavior patterns continue into future months. Estimate the

total amount of manufacturing overhead the company can expect in September if 56,000

machine hours are worked.

Solution:

2. Machine supplies: $170,000 ¸ 68,000 hours = $2.50 per hour; 46,000 hours ´ $2.50 = $115,000

Property taxes: Fixed at $24,000

B. Plant maintenance in May: $889,000 – $115,000 – $24,000 = $750,000

Variable plant maintenance: ($1,080,000 – $750,000) ¸ (68,000 – 46,000) = $15 per hour

Fixed plant maintenance:

C.

Manufacturing overhead at 56,000 hours:

Plant maintenance:

Fixed 60,000

Total $1,064,000

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-02

Learning Objective: 06-05

93. Lichtenstein Imports needs to determine the variable utilities rate per machine hour in order to

estimate cost for August. Relevant information is as follows.

Machine Hours

Month Utilities Cost

Worked

Lichtenstein anticipates producing 5,000 units in August, each unit requiring 1.5 hours of

machine time. The company uses the high-low method to analyze costs.

Required:

A. Calculate the variable and fixed components of the utilities cost.

B. Using the data calculated above, estimate the utilities cost for August.

C. Compare the high-low method versus the visual-fit method with respect to (1) number of data

observations used in the analysis and (2) objectivity of the results.

Solution:

1. Variable cost:

($11,400 – $9,440) ¸ (7,000 – 4,200) = $0.70 per hour

B.

Variable cost (5,000 x 1.5 x $0.70) $5,250

C. The high-low method uses only two data observations, the highest and the

lowest, whereas the visual-fit method utilizes all data points that have been

gathered (except outliers). Many analysts would say the visual-fit method is

advantageous in this regard.

However, the visual-fit method lacks total objectivity because of the manner in

which the cost line is fit through the data points (drawn by “visual

approximation”). The high-low method is therefore said to be more objective.

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

94. Trane Medical Clinic offers a number of specialized medical services. A review of data for the

year just ended revealed variable costs of $32 per patient day; annual fixed costs of $480,000,

which are incurred evenly throughout the year; and semivariable costs that displayed the

following behavior at the “peak” and “valley” of activity:

January (2,400 patient days): $258,400

August (2,900 patient days): $278,900

Required:

A. Calculate the total cost for an upcoming month (2,800 patient days) if current cost behavior

patterns continue. Trane uses the high-low method to analyze cost behavior.

B. There is a high probability that Trane’s volume will increase in forthcoming months as

patients take advantage of new scientific advances. Can the data and methodology used in part

(a) for predicting the costs of 2,800 patient days be employed to estimate the costs for, say, 3,800

patient days? Why or why not?

Solution:

($278,900 – $258,400) ¸ (2,900 – 2,400) = $41 per patient day

Analysis of semivariable cost (fixed portion):

Total cost for 2,900 patient days $278,900

Semivariable cost:

B. No. The “peak” and “valley” of operation were 2,900 patient days and

2,400 patient days, respectively. The 3,800-patient-day data point is well

outside this range of observed cost relationships and recent activity (i.e., the

relevant range). Costs can change outside of this range (e.g., fixed costs may

be higher), and the lack of past experience will likely create unknowns for the

analyst.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-02

Learning Objective: 06-03

Learning Objective: 06-05

95. Hogan Mining extracts ore for eight different companies in South Dakota. The firm anticipates

variable costs of $65 per ton along with annual fixed overhead of $840,000, which is incurred

evenly throughout the year. These costs exclude the following semivariable costs, which are

expected to total the amounts shown for the high and low points of ore extraction activity:

March (850 tons): $39,900

August (1,300 tons): $46,200

Hogan uses the high-low method to analyze cost behavior.

Required:

A. Calculate the semivariable cost for an upcoming month when 875 tons will be extracted.

B. Calculate the total cost for that same month.

C. Hogan uses Martinez Trucking to haul extracted ore. Martinez’s monthly charges are as

follows:

2. If Hogan plans to extract 875 tons, is the company being very “cost effective” with respect to

Martinez’s billing rates? Briefly discuss.

Solution:

Total $40,250

B.

Variable cost (875 x $65) 56,875

C. 1. Step-fixed.

2. No. Notice that the bill will be $70,000 for Hogan’s tonnage, and the company could have

Martinez haul up to 1,099 tons for the same cost. Ideally, Hogan should try to move to the right

side of the step to get a better return on its investment.AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-02

96. T.L. Franklin Corporation has three costs: A, which is variable; B, which is fixed; and C, which is

semivariable. The company uses the high-low method and extracted the following data from its

accounting records:

· At 180,000 hours of activity, Cost A totaled $2,610,000.

· At 140,000 hours, the low point during the period, Cost C totaled $1,498,000; at 200,000 hours,

the high point, Cost C’s fixed portion amounted to $1.75 per hour.

· At 160,000 hours of activity, the sum of Costs A, B, and C amounted to $8,162,000.

Required:

A. Compute the variable portion (total) of Cost C at 140,000 hours of activity.

B. Compute Cost C (total) at 160,000 hours of activity.

C. Compute Cost B (total) at 160,000 hours of activity.

Solution:

1. Cost C’s fixed portion will total the same amount, $350,000 (200,000 hours ´ $1.75), at both

200,000 hours and 140,000 hours. Thus, the variable portion of C at 140,000 hours will be

$1,148,000 ($1,498,000 – $350,000).

B. The variable portion of Cost C is $8.20 per hour ($1,148,000 ¸ 140,000 hours). Cost C will

therefore total $1,662,000 [(160,000 hours ´ $8.20) + $350,000].

C. At 160,000 hours, Cost A equals $2,320,000 [($2,610,000 ¸ 180,000 hours) ´ 160,000 hours].

Thus:

Cost B $4,180,000

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-02

Learning Objective: 06-05

97. Shortly after being hired as an analyst with Hidden Cove Rentals in Coastal North Carolina, Matt

Loman was asked to prepare a report that focused on the company’s order processing costs—a

cost driven largely by the number of rental invoices written. Matt knew that he could use

several different tools to analyze cost behavior, including scatter diagrams, least-squares

regression, and the high-low method. In addition, he knew that he could present the results of

his analysis in the form of algebraic equations. Those equations follow.

Scatter diagram: OP = $56,000 + $6.80RI

Least-squares regression: OP = $59,000 + $6.75RI

High-low method: OP = $53,500 + $7.25RI

where OP = total order processing costs and RI = number of rental invoices written

Matt had analyzed data over the past 12 months and built equations based on these data,

purposely including the slowest month of the year and the busiest month so that things would

“tend to even out.” He observed that February was especially slow because of a paralyzing ice

storm, one that forced the company to close for four days.

Required:

A. Will scatter diagrams, least-squares regression, and the high-low method normally result in

the same equation? Why?

B. Assuming the use of least-squares regression, explain what the $59,000 and $6.75 figures

represent.

C. Assuming the use of a scatter diagram, predict the order processing cost of an upcoming

month when Hidden Cove expects to write 2,500 rental invoices.

D. Did Matt err in constructing the equations on data of the past 12 months? Briefly discuss. If

“yes,” determine which of the three tools is likely to be affected the most and explain why.

Solution:

6. No. The three methods produce equations by different means. Scatter diagrams and least-

squares regression rely on an examination of all data points. The scatter diagram, however,

requires an analyst to fit a line through the points by visual approximation, or “eyeballing.” In

contrast, least-squares regression involves the use of statistical formulas to derive the best

possible fit of the line through the points. Finally, the high-low method is based on an analysis of

only two data points: the highest and the lowest.

B. These amounts represent the fixed and variable elements of the company’s order processing

cost. Fixed cost totals $59,000, and Hidden Cove incurs $6.75 of variable cost for each invoice

written.

C. OP = $56,000 + $6.80RI; OP = $56,000 + ($6.80 ´ 2,500); OP = $73,000

D. Yes, he did err by including February data. February is not representative because of the

effects of the ice storm. The month is an outlier and should be eliminated from the data set.

The equation constructed by using the high-low method is likely to be affected the most since

the equation is based on only two data points. One of those two points should have been

excluded from the analysis.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

Learning Objective: 06-07

98. Duke Corporation uses least-squares regression to analyze a variety of operating costs. A staff

assistant determined that monthly machine hours (MH) have a strong cause-and-effect

relationship with total maintenance costs, and generated the following statistics:

Intercept: $170,000

b coefficient: $3.80

Total machine hours for the year: 36,500

Required:

A. Construct the company’s regression equation.

B. Based on your answer in part “A,” identify Duke’s dependent variable and independent

variable.

C. What does the b coefficient really represent?

D. Predict the company’s maintenance cost in a month when 3,200 machine hours are worked.

Solution:

3. Y = $170,000 + $3.80MH

B. Y (total maintenance cost) is the dependent variable; MH (machine hours) is the independent

variable.

C. The b coefficient represents both the slope of the regression line and the variable

maintenance cost per machine hour.

D. Y = $170,000 + $3.80MH

Y = $170,000 + ($3.80 ´ 3,200)

Y = $182,160

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

99. Townson Company is making plans for the introduction of a new product, which has a target

selling price of $7 per unit. The following estimates of manufacturing costs have been derived

for 6 million units, to be produced during the first year:

Direct material: $6,000,000

Direct labor: $2,100,000 (at $14 per hour)

Overhead costs have not yet been estimated, but monthly data on total production and

overhead for the past 12 months have been analyzed by using least-squares regression. The

major overhead cost driver is direct labor hours, with the following results:

Computed values:

Fixed overhead cost: $3,200,000

Coefficient of independent variable: $2.25

Required:

A. Prepare the company’s regression equation (Y = a + bX) to estimate overhead.

B. Calculate the predicted overhead cost at an activity level of 6,300,000 units.

C. What is Townson’s dependent variable in this case?

Solution:

2. Y = $3,200,000 + $2.25X

B. Direct labor:

For 6 million units, direct labor totals 150,000 hours ($2,100,000 ¸ $14).

For 1 unit, direct labor totals 0.025 hours (150,000 ¸ 6,000,000).

For 6,300,000 units, direct labor totals 157,500 hours (6,300,000 ´ 0.025).

Y = $3,200,000 + (157,500 ´ $2.25) = $3,554,375

C. The dependent variable is Y, or total overhead cost.

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

Learning Objective: 06-08

100. Compare and contrast the following types of costs: (1) variable and step-variable and (2)

fixed and step-fixed.

Solution:

(1) A variable cost changes in direct proportion to a change in an activity level or cost driver,

with a typical example being direct material. A step-variable cost is nearly variable, but it

increases in small steps rather than continuously (e.g., additional direct labor).

(2) A fixed cost remains unchanged as the activity level varies (e.g., rent). In contrast, a step-

fixed cost remains fixed over a sizable range of activity, but jumps to a different amount for

activities outside that range (e.g., the salaries of new employees who are needed because of

volume changes).

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

101. Define the term “relevant range” and explain its importance in understanding cost

behavior.

Solution:

The relevant range is the range of activity within which management expects a company to

operate. This can be based on past experience and/or sales projections.

This concept is important because management need not concern itself with extremely high or

low levels of activity that are unlikely to occur. Also, observed cost relationships are typically

valid within the relevant range and can therefore be used for purposes of estimation at other

levels within that range.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

102. Differentiate between committed costs and discretionary costs. Be sure to present two

examples of each and explain which of the two cost types would likely be cut should a company

encounter financial difficulties.

Solution:

A committed cost is a fixed amount that stems from an organization’s ownership or use of

facilities, and its basic organizational structure. Property taxes, rent, and salaries of top

management are examples of committed costs.

A discretionary cost, also a fixed amount, occurs as a result of a management decision to spend a

particular amount of money for some purpose. Examples are advertising, training, promotion,

and contributions to charitable organizations.

The distinction between committed and discretionary costs is that committed costs can be

changed only by major decisions with long-term implications. Discretionary costs can be

changed in the short run and, thus, are cost-cutting targets should an organization encounter

financial difficulties.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

103. Both the visual-fit and high-low methods of cost estimation have inherent limitations.

Briefly identify the major deficiency associated with each method.

Solution:

The visual-fit method suffers from a lack of objectivity. Given that the cost line is created by

visual approximation or “eyeballing,” different cost analysts will likely produce different lines.

The high-low method, on the other hand, is objective. However, it uses only two data points and

ignores the rest, thus generalizing about cost behavior by relying on only a very small percentage

of possible data observations.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

104. Distinguish between least-squares regression and multiple regression as cost estimation

methods.

Solution:

In the least-squares regression (LSR) method, the cost line is positioned to minimize the sum of

the squared deviations between the cost line and the data points. The cost line fit to the data

using LSR is called a regression line. The statistical equation for this line is represented by the

formula: Y = a + bX, with X denoting activity level (independent variable) and Y denoting the

total cost (dependent variable).

The multiple-regression line has all the same properties of the simple LSR line, but more than

one independent variable is taken into consideration. The use of more independent variables can

better explain accompanying changes in cost.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-06

Chapter 7

Cost-Volume-Profit Analysis

Answer Key

1. The break-even point is that level of activity where total revenue equals total cost.

TRUE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-01

Feedback True: Correct! The break-even point is that level of activity where total revenue equals

total cost.

2. Total contribution margin is defined as total sales revenue plus total variable expenses.

FALSE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-01

Feedback False: Correct! This is not the definition of total contribution margin.

3. The contribution-margin ratio is calculated as unit contribution margin divided by the selling

price per unit.

TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-02

margin divided by the selling price per unit.

TRUE

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-02

Feedback True: Correct! The contribution margin ratio can be expressed as a percentage.

Feedback False: This is a correct statement about the contribution margin ratio.

5. The relevant range is the range of activity in which management of a company expects to

operate.

TRUE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-03

Feedback True: Correct! The relevant range is the range of activity in which management of a

company expects to operate.

6. On the CVP graph, the break-even point is determined by the intersection of the total-revenue

line and the total-expense line.

TRUE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-03

Feedback True: Correct! On the CVP graph, the break-even point is determined by the

intersection of the total-revenue line and the total-expense line.

7. The difference between budgeted sales revenue and break-even sales revenue is the operating

leverage.

FALSE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-04

Feedback False: Correct! The difference between budgeted sales revenue and break-even sales

revenue is not the operating leverage.

FALSE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-04

Feedback True: This is not a true statement.

Feedback False: Correct! Safety margin is not another name for the breakeven point.

9. For any organization selling multiple products, the relative proportion of each type of

productsoldis called the sales mix.

TRUE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-05

Feedback True: Correct! For any organization selling multiple products, the relative proportion

of each type of product sold is called the sales mix.

FALSE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-05

multiproduct CVP analysis.

11.

Cost-volume-profit analysis is based on certain general assumptions. One of these assumptions

is that product prices will remain constant as volume varies within the relevant range.

TRUE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-06

Feedback True: Correct! Cost-volume-profit analysis is based on certain general assumptions.

One of these assumptions is that product prices will remain constant as volume varies within the

relevant range.

12. Sensitivity analysis has become relatively easy to perform with the advent of personal

computers and spreadsheet software.

TRUE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-06

Feedback True: Correct! Sensitivity analysis has become relatively easy to perform with the

advent of personal computers and spreadsheet software.

13. Many operating managers find the traditional income-statement format difficult to use, because

it does not separate revenues and expenses.

FALSE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-07

Feedback True: This statement regarding the traditional income statement format is false.

Feedback False: Correct! This statement regarding the traditional income statement format is

false.

14. The management functions of planning, control, and decision making all are facilitated by an

understanding of cost-volume-profit relationships.

TRUE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-07

Feedback True: Correct! The management functions of planning, control, and decision making

all are facilitated by an understanding of cost-volume-profit relationships.

15. The extent to which an organization uses fixed costs in its cost structure is measured by financial

leverage.

FALSE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-08

Feedback False: Correct! The extent to which an organization uses fixed costs in its cost

structure is not measured by financial leverage.

16. Cost structures differ widely among industries and among firms within an industry.

TRUE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-08

Feedback True: Correct! Cost structures differ widely among industries and among firms within

an industry.

17. Activity-based costing systems should not be used in conjunction with cost-volume-profit

analyses.

FALSE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-09

Feedback True: An activity based costing system can be used in conjunction with CVP analysis.

Feedback False: Correct! An activity based costing system can be used in conjunction with CVP

analysis.

18. An ABC cost-volume-profit analysis recognizes that some costs that are fixed with respect to

sales volume may not be fixed with respect to other important cost drivers.

TRUE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-09

Feedback True: Correct! An ABC cost-volume-profit analysis recognizes that some costs that are

fixed with respect to sales volume may not be fixed with respect to other important cost drivers.

19. Companies with advanced manufacturing technology tend to have lower fixed costs.

FALSE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-10

Feedback False: Correct! Companies with advanced manufacturing technology do not tend to

have lower fixed costs.

20. Companies with advanced manufacturing technology tend to have higher break-even points.

TRUE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-10

Feedback True: Correct! Companies with advanced manufacturing technology tend to have

higher break-even points.

21. The requirement that companies pay income taxes does not affect their cost-volume-profit

relationships.

FALSE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-11

Feedback False: Correct! The requirement that companies pay income taxes affects their cost-

volume-profit relationships.

22. When a firm is required to pay taxes on income, it is important to distinguish between after-tax

(AT) income and before-tax (BT) income.

TRUE

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-11

Feedback True: Correct! When a firm is required to pay taxes on income, it is important to

distinguish between after-tax (AT) income and before-tax (BT) income.

Use the following information to answer Questions 23-26.

Narchie sells a single product for $50. Variable costs are 60% of the selling price, and the

company has fixed costs that amount to $400,000. Current sales total 16,000 units.

23. Narchie:

A.will break-even by selling 8,000 units.

B. will break-even by selling 13,333 units.

C. will break-even by selling 20,000 units.

D. will break-even by selling 1,000,000 units.

E. cannot break-even because it loses money on every unit sold.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Feedback C: Correct! Breakeven in units = Total Fixed costs ÷ Fixed cost per unit; $400,000 ÷

[$50 – ($50 x 60%)] = 20,000 units

A.increase profit by $20.

B. increase profit by $30.

C. increase profit by $50.

D. increase profit by some other amount.

E. decrease profit by $5.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Feedback A: Correct! Revenue per unit – Variable cost per unit = Marginal increase in profit

per unit; $50 – (60% x 50) = $20.

25. In order to produce a target profit of $22,000, Narchie’s dollar sales must total:

A.$8,440.

B. $21,100.

C. $1,000,000.

D. $1,055,000.

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 07-04

Feedback D: Correct! (Total Fixed cost + Target profit) ÷ Margin percentage = Total Sales

Dollars; ($400,000 + $22,000) ÷ ($20 /$50) = $1,055,000.

26. If Narchie sells 24,000 units, its safety margin will be:

A.$200,000.

B. $400,000.

C. $1,000,000.

D. $1,200,000.

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 07-04

Feedback A: Correct! Breakeven in units = Total Fixed costs ÷ Fixed cost per unit = $400,000 ÷

[$50 – ($50 x 60%)] = 20,000 units; Margin of Safety = (Current units – Breakeven units) x

Sales price per unit; (24,000 – 20,000) x $50 = $200,000

A.changes in selling prices on a company’s profitability.

B. changes in variable costs on a company’s profitability.

C. changes in fixed costs on a company’s profitability.

D. changes in product sales mix on a company’s profitability.

E. All of the answers are correct.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-01

A.total revenue equals total cost.

B. variable cost equals fixed cost.

C. total contribution margin equals the sum of variable cost plus fixed cost.

D. sales revenue equals total variable cost.

E. profit is greater than zero.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-01

Feedback A: Correct! The break-even point is the level of activity where total revenue equals

total cost.

A.variable cost equals fixed cost.

B. contribution margin equals fixed cost.

C. total contribution margin equals the sum of variable cost plus fixed cost.

D. sales revenue equals total variable cost.

E. sales revenue equals fixed cost.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-01

Feedback B: Correct! The break-even point is that level of activity where contribution margin

equals fixed cost.

Feedback C: This is not the correct definition of the break-even point.

A.selling price and fixed cost per unit.

B. selling price and variable cost per unit.

C. selling price and product cost per unit.

D. fixed cost per unit and variable cost per unit.

E. fixed cost per unit and product cost per unit.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-01

Feedback A: This is not the correct calculation of the unit contribution margin.

Feedback B: Correct! This is the correct calculation of the unit contribution margin.

Feedback C: This is not the correct calculation of the unit contribution margin.

Feedback D: This is not the correct calculation of the unit contribution margin.

Feedback E: This is not the correct calculation of the unit contribution margin.

31. Which of the following would produce the largest increase in the contribution margin per unit?

A.A 7% increase in selling price.

B. A 15% decrease in selling price.

C. A 14% increase in variable cost.

D. A 17% decrease in fixed cost.

E. A 23% increase in the number of units sold.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 07-01

Feedback A: Correct! An increase in selling price will increase the contribution margin per unit.

Feedback B: A decrease in selling price will decrease the contribution margin per unit.

Feedback C: An increase in cost will decrease the contribution margin per unit.

Feedback D: A decrease in fixed cost will not affect the per unit contribution margin.

Feedback E: An increase in the number sold will not affect the per unit contribution margin.

32. Which of the following occurs if a company was able to reduce its variable cost per unit?

A. Increase Increase

B. Increase Decrease

C. Decrease Increase

D. Decrease Decrease

E. Increase No effect

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 07-01

Feedback A: This is not the correct relationship if a company reduces its variable cost per unit.

Feedback B: Correct! If a company reduces its variable cost per unit, then its contribution

margin increases and its break-even point decreases.

Feedback C: This is not the correct relationship if a company reduces its variable cost per unit.

Feedback D: This is not the correct relationship if a company reduces its variable cost per unit.

Feedback E: This is not the correct relationship if a company reduces its variable cost per unit.

33. Which of the following would occur if a company increases its variable cost per unit?

A. Increase Increase

B. Increase Decrease

C. Decrease Increase

D. Decrease Decrease

E. Increase No effect

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 07-01

Feedback C: Correct! If a company increases its variable cost per unit, then contribution margin

decreases and break-even point increases.

Feedback E: This relationship is incorrect.

34. Which of the following occurs if a company experiences an increase in its fixed costs?

A.Net income would increase.

B. The break-even point would increase.

C. The contribution margin would increase.

D. The contribution margin would decrease.

E. More than one of the answers would occur.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 07-01

Feedback B: Correct! If fixed costs increase, the break-even point will increase.

35. Which of the following occurs if a company experiences a decrease in its fixed costs?

A.Income would decrease.

B. The break-even point would decrease.

C. The contribution margin would increase.

D. The contribution margin would decrease.

E. More than one of the answers would occur.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 07-01

36. Assuming no change in sales volume, an increase in company’s per-unit contribution margin

would:

A.increase income.

B. decrease income.

C. have no effect on income.

D. increase fixed costs.

E. decrease fixed costs.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 07-01

contribution margin would increase income.

margin.

margin.

37. A company that desires to lower its break-even point should strive to:

A.decrease selling prices.

B. reduce variable costs.

C. increase fixed costs.

D. sell more units.

E. achieve more than one of the answers listed.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 07-01

Feedback A: This relationship is incorrect, if a company wants to lower its break-even point.

Feedback B: Correct! If a company wants to lower its break-even point, it should strive to

reduce variable costs.

Feedback C: This relationship is incorrect, if a company wants to lower its break-even point.

Feedback D: This relationship is incorrect, if a company wants to lower its break-even point.

Feedback E: This relationship is incorrect, if a company wants to lower its break-even point.

38. A company has fixed costs of $900 and a per-unit contribution margin of $3. Which of the

following statements is true?

A.Each unit “contributes” $3 toward covering the fixed costs of $900.

B. The situation described is not possible and there must be an error.

C. Once the break-even point is reached; the company will increase income at the rate of $3 per

unit.

D. The firm will definitely lose money in this situation.

E. Each unit “contributes” $3 toward covering the fixed costs of $900 and once the break-even

point is reached, the company will increase income at the rate of $3 per unit.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 07-01

Feedback A: This statement is incorrect.

Feedback E: Correct! The company will increase income at a rate of $3 per unit, once breakeven

is reached.

39. Partner Industries sells a single product for $50 that has a variable cost of $30. Fixed costs

amount to $5 per unit when anticipated sales targets are met. If the company sells one unit in

excess of its break-even volume, profit will be:

A.$15.

B. $20.

C. $50.

D. an amount that cannot be derived based on the information presented.

E. an amount other than $15, $20, or $50 and one that can be derived based on the information

presented.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 07-01

Feedback B: Correct! One unit in excess of break-even volume will yield $20 profit (or $50 –

$30).

40. At a volume of 20,000 units, Almount Industries reported sales revenues of $1,000,000, variable

costs of $300,000, and fixed costs of $260,000. The company’s contribution margin per unit is:

A.$22.

B. $28.

C. $35.

D. $37.

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Feedback C: Correct! Contribution margin per unit = (Total Sales – Total variable costs) ÷

Number of units; ($1,000,000 – $300,000) ÷ 20,000 = $35 per unit.

41. At a volume of 20,000 units, Almount Industries reported sales revenues of $1,000,000, variable

costs of $300,000, and fixed costs of $260,000. The company’s break-even point in units is:

A.7,027 (rounded).

B. 8,667 (rounded).

C. 9,286 (rounded).

D. 7,429 (rounded).

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 07-01

Feedback D: Correct! Contribution margin per unit = (Total Sales – Total variable costs) ÷

Number of units; ($1,000,000 – $300,000) ÷ 20,000 = $35 per unit; Breakeven in units = Total

Fixed costs ÷ Contribution margin per unit; $260,000 ÷ $35 = 7,429 units.

42. A recent income statement of Benton Corporation reported the following data:

If these data are based on the sale of 20,000 units, the contribution margin per unit would be:

A. $40.

B. $150.

C. $290.

D. $360.

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 07-01

$3,000,000; Contribution margin ÷ units = Contribution margin per unit; $3,000,000 ÷ 20,000

= $150.

Feedback C: This amount is incorrect.

43. A recent income statement of Benton Corporation reported the following data:

If these data are based on the sale of 20,000 units, the break-even point would be:

A. 9,565 units (rounded).

B. 11,000 units (rounded).

C. 7,586 units (rounded).

D. 14,667 units (rounded).

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 07-01

Feedback D: Correct! Contribution margin ÷ units = Contribution margin per unit; $3,000,000

÷ 20,000 = $150; Total Fixed costs ÷ Contribution margin per unit = Number of units;

$2,200,000 ÷ $150 = 14,667 units

44. A recent income statement of Safety Corporation reported the following data:

If these data are based on the sale of 20,000 units, the break-even point would be:

A. 7,500 units.

B. 11,628 units.

C. 12,500 units.

D. 33,333 units.

E. None of the answers is correct.

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 07-01

Feedback C: Correct! Total Sales revenue – Total Variable costs = Total contribution margin;

$6,800,000 – $2,800,000 = $4,000,000; Total contribution margin ÷ Number of units =

Contribution margin per unit; $4,000,000 ÷ 20,000 = $200; Total fixed costs ÷ Contribution

margin per unit = Number of Breakeven units; $2,500,000 ÷ $200 = 12,500 units

45. A recent income statement of Carson Corporation reported the following data:

Sales revenue $2,500,000

If these data are based on the sale of 5,000 units, the break-even sales would be:

A. $2,000,000.

B. $2,206,000.

C. $2,500,000.

D. $10,000,000.

E. None of the answers is correct.

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 07-01

Unit contribution margin = $1,000,000 ÷ 5,000 = $200; Fixed costs ÷ Contribution margin per

unit = Breakeven (in units); $800,000 ÷ $200 = 4,000 units; Breakeven sales = 4,000 units x

$500 sales price = $2,000,000.

46. Hsu, Inc. sells a single product for $12. Variable costs are $8 per unit and fixed costs total

$360,000 at a volume level of 60,000 units. Assuming that fixed costs do not change, Hsu’s

break-even point would be:

A.30,000 units.

B. 45,000 units.

C. 90,000 units.

D. negative because the company loses $2 on every unit sold.

E. a positive amount other than the specific amounts given.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 07-01

Feedback C: Total Fixed costs ÷ Contribution margin per unit = Breakeven point in units;

$360,000 ÷ ($12 – $8) = 90,000 units.

47. Sarafine, Inc. sells a single product for $20. Variable costs are $8 per unit and fixed costs total

$120,000 at a volume level of 5,000 units. Assuming that fixed costs do not change, Sarafine’s

break-even sales would be:

A.$160,000.

B. $200,000.

C. $300,000.

D. $480,000.

E. None of the answers is correct.

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 07-01

Feedback B: Total Fixed costs ÷ Contribution margin per unit = Breakeven point in units;

$120,000 ÷ ($20 – $8) = 10,000 units; Breakeven sales = 10,000 units x $20 sales price =

$200,000.

Feedback C: This answer is incorrect.

48. Bargain Town recently reported sales revenues of $800,000, a total contribution margin of

$300,000, and fixed costs of $180,000. If sales volume amounted to 10,000 units, the company’s

variable cost per unit must have been:

A.$12.

B. $32.

C. $50.

D. $92.

E. None of the answers is correct.

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 07-01

Feedback C: Total Sales – Total Contribution Margin = Total Variable costs; Total Variable

costs ÷ Number of units = Variable cost per unit; ($800,000 – $300,000) ÷ 10,000 = $50.

49. Dane Company has a break-even point of 120,000 units. If the firm’s sole product sells for $40

and fixed costs total $480,000, the variable cost per unit must be:

A.$4.

B. $36.

C. $44.

D. an amount that cannot be derived based on the information presented.

E. an amount other than $4, $36, or $44, but one that can be derived based on the information

presented.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 07-01

Feedback B: Sales price per unit – Contribution margin per unit = Variable cost per unit; $40 –

($480,000 ÷ 120,000) = $36.

50. Starlight Co. makes and sells only one product. The unit contribution margin is $6 and the break-

even point in unit sales is 24,000. The company’s fixed costs are:

A.$4,000.

B. $14,400.

C. $40,000.

D. $144,000.

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Feedback D: Correct! Unit contribution margin x Breakeven units = Total Fixed costs; $6 x

24,000 = $144,000.

A.the difference between the selling price and the variable cost per unit.

B. fixed cost per unit divided by variable cost per unit.

C. variable cost per unit divided by the selling price.

D. unit contribution margin divided by the selling price.

E. unit contribution margin divided by fixed cost per unit.

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-02

Feedback D: Correct! The contribution-margin ratio is unit contribution margin divided by the

selling price.

52. At a volume level of 500,000 units, Sullivan reported the following information:

A. 0.33.

B. 0.40.

C. 0.60.

D. 0.67.

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Feedback D: Correct! Contribution margin percentage = (Sales price per unit – Variable cost) ÷

Sales Price per unit ($60 – $20) ÷ $60 = 0.67

53. Which of the following expressions can be used to calculate break-even sales revenue with the

contribution-margin ratio (CMR)?

A.CMR ¸ fixed costs.

B. CMR ´ fixed costs.

C. Fixed costs ¸ CMR.

D. (Fixed costs + variable costs) ´ CMR.

E. (Sales revenue – variable costs) ¸ CMR.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 07-02

Feedback B: This equation is incorrect.

A.total revenue line.

B. fixed cost line.

C. variable cost line.

D. total cost line.

E. profit line.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 1 Easy

Feedback E: This is not the correct label for Line A.

55. Refer to the figure above. Line C represents the level of:

A.fixed cost.

B. variable cost.

C. semivariable cost.

D. total cost.

E. mixed cost.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 1 Easy

56. Refer to the figure above. The slope of line A is equal to the:

A.fixed cost per unit.

B. selling price per unit.

C. profit per unit.

D. variable cost per unit.

E. unit contribution margin.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 1 Easy

Feedback A: The slope of line A is not equal to the fixed cost per unit.

Feedback B: Correct! The slope of line A is equal to the selling price per unit.

Feedback C: The slope of line A is not equal to the profit per unit.

Feedback D: The slope of line A is not equal to the variable cost per unit.

Feedback E: The slope of line A is not equal to the unit contribution margin.

57. Refer to the figure above. The slope of line B is equal to the:

A.fixed cost per unit.

B. selling price per unit.

C. variable cost per unit.

D. profit per unit.

E. unit contribution margin.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 1 Easy

Feedback C: Correct! The slope of Line B is equal to the variable cost per unit.

Feedback E: This is not the slope of Line B.

58. Refer to the figure above. The vertical distance between the total cost line (Line B) and the total

revenue line (Line A) represents:

A.fixed cost.

B. variable cost.

C. profit or loss at that volume.

D. semivariable cost.

E. the safety margin.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 1 Easy

Feedback C: Correct! The vertical distance between the total cost line (Line B) and the total

revenue line (Line A) represents profit or loss at that volume.

Feedback E: The vertical distance does not represent the safety margin.

59. Refer to the figure above. Assume that the company whose cost structure is depicted in the

figure expects to produce a loss for the upcoming period. The loss would be shown on the

graph:

A.by the area immediately above the break-even point.

B. by the area immediately below the total cost line.

C. by the area diagonally to the right of the break-even point.

D. by the area diagonally to the left of the break-even point.

E. none of the answers is correct.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 1 Easy

Feedback A: This is not the area where the loss would be shown on the graph.

Feedback B: This is not the area where the loss would be shown on the graph.

Feedback C: This is not the area where the loss would be shown on the graph.

Feedback D: Correct! The loss would be shown on the graph by the area diagonally to the left of

the break-even point.

60. Refer to the figure above. At a given sales volume, the vertical distance between the fixed cost

line and the total cost line represents:

A.fixed cost.

B. variable cost.

C. profit or loss at that volume.

D. semivariable cost.

E. the safety margin.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 1 Easy

Feedback B: Correct! The vertical distance between the fixed cost line and the total cost line

represents variable cost.

Feedback C: The vertical distance does not represent profit or loss at that volume.

Feedback E: The vertical distance does not represent the safety margin.

61. Refer to the figure above. Assume that the company whose cost structure is depicted in the

figure expects to produce a profit for the upcoming accounting period. The profit would be

shown on the graph by the letter:

A.D.

B. E.

C. F.

D. G.

E. H.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Use the following information to answer Questions 62-64.

A.fixed cost line.

B. variable cost line.

C. total cost line.

D. total revenue line.

E. profit line.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

63. Refer to the figure above. The triangular area between the horizontal axis and Line A, to the

right of 4,000, represents:

A.fixed cost.

B. variable cost.

C. profit.

D. loss.

E. sales revenue.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Feedback C: Correct! The triangular area between the horizontal axis and Line A to the right of

4,000 represents profit.

64. Refer to the figure above. The triangular area between the horizontal axis and Line A, to the left

of 4,000, represents:

A.fixed cost.

B. variable cost.

C. profit.

D. loss.

E. sales revenue.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium Learning Objective: 07-03

Feedback D: Correct! The triangular area between the horizontal axis and Line A to the left of

4,000 represents loss.

65. A recent income statement of McClennon Corporation reported the following data:

If the company desired to earn a target profit of $1,270,000, it would have to sell:

A. 5,778 units.

B. 8,600 units.

C. 10,160 units.

D. 11,908 units.

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Feedback B: Correct! Contribution margin per unit = (Total Sales – Total Variable costs) ÷

Number of Units; ($9,600,000 – $6,000,000) ÷ 8,000 = $450 per unit; (Total Fixed cost +

Target profit) ÷ Contribution Margin per unit = Total Sales Dollars; ($1,270,000 + $2,600,000)

÷ $450 = 8,600 units.

66. Flower Depot, Inc. sells a single product for $10. Variable costs are $4 per unit and fixed costs

total $120,000 at a volume level of 10,000 units. What dollar sales level would Flower Depot

have to achieve to earn a target profit of $240,000?

A.$400,000.

B. $500,000.

C. $600,000.

D. $750,000.

E. $900,000.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 07-04

Feedback C: Correct! Contribution margin Percentage = ($10 – $4)/ $10 = 60%; (Total Fixed

cost + Target profit) ÷ Contribution Margin percentage = Total Sales; ($120,000 + $240,000) ÷

60% = $600,000.

67. The difference between budgeted sales revenue and break-even sales revenue is the:

A.contribution margin.

B. contribution-margin ratio.

C. safety margin.

D. target net profit.

E. operating leverage.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Feedback C: Correct! The difference between budgeted sales revenue and break-even sales

revenue is the safety margin.

Feedback D: This is not the relationship presented by the target net profit.

68. Finn’s budget for the upcoming year revealed the following figures:

Income 54,000

If the company’s break-even sales total $750,000, Finn’s safety margin would be:

A. $(90,000).

B. $90,000.

C. $246,000.

D. $336,000.

E. $696,000.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Feedback B: Correct! The safety margin is Sales – Breakeven Sales or $840,000 – $750,000 =

$90,000.

69. Santa Fe Production sells a single product to wholesalers. The company’s budget for the

upcoming year revealed anticipated unit sales of 31,600, a selling price of $20, variable cost per

unit of $8, and total fixed costs of $360,000. Santa Fe’s safety margin in units is:

A.(13,400).

B. 0.

C. 1,600.

D. 13,600.

E. None of the answers is correct.

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 07-04

Feedback C: Correct! Total Fixed costs ÷ Contribution margin per unit = Number of breakeven

units; $360,000 ÷ ($20 – $8) = 30,000 units breakeven; Sales units – Breakeven units = Margin

of Safety; 31,600 – 30,000 = 1,600 units.

70. Santa Fe Production sells a single product to wholesalers. The company’s budget for the

upcoming year revealed anticipated unit sales of 31,600, a selling price of $20, variable cost per

unit of $8, and total fixed costs of $360,000. If Santa Fe’s unit sales are 200 units less than

anticipated, its break-even point will:

A.increase by $12 per unit sold.

B. decrease by $12 per unit sold.

C. increase by $8 per unit sold.

D. decrease by $8 per unit sold.

E. not change.

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 07-04

Feedback E: Correct! A change in the anticipated sales will not change the break-even point.

71. Santa Fe Production sells a single product to wholesalers. The company’s budget for the

upcoming year revealed anticipated unit sales of 31,600, a selling price of $20, variable cost per

unit of $8, and total fixed costs of $360,000. If Santa Fe’s unit sales are 300 units more than

anticipated, its break-even point will:

A.increase by $12 per unit sold.

B. decrease by $12 per unit sold.

C. increase by $8 per unit sold.

D. decrease by $8 per unit sold.

E. not change.

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 07-04

Feedback E: Correct! A change in the anticipated sales will not change the break-even point.

A.increase fixed costs.

B. decrease the contribution margin.

C. decrease selling prices, assuming the price change will have no effect on demand.

D. stimulate sales volume.

E. attempt to raise the break-even point.

AICPA BB: Critical Thinking

AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Feedback B: This would not increase safety margin.

Feedback D: Correct! If a company desires to increase its safety margin, it should stimulate

sales volume.

73. Morgan Technologies sells a single product at $20 per unit. The firm’s most recent income

statement revealed unit sales of 100,000, variable costs of $800,000, and fixed costs of

$400,000. If a $4 drop in selling price will boost unit sales volume by 20%, the company will

experience:

A.no change in profit because a 20% drop in sales price is balanced by a 20% increase in volume.

B. an $80,000 drop in profit.

C. a $240,000 drop in profit.

D. a $400,000 drop in profit.

E. None of the answers is correct.

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 07-04

Feedback C: Correct! Variable cost per unit = $800,000 ÷ 100,000 = $8; Currently, $20 – 8 =

$12 Contribution margin per unit; Total CM = $8 x 100,000 units = $800,000 – $400,000 total

fixed costs = $800,000 profit; After drop in selling price, the new selling price is ($20 – $4 =

$16); $16 – 8 = $8 contribution margin per unit; New sales units = 100,000 x 1.2 = 120,000;

new units sales; 120,000 units x $8 CM per unit =$960,000 total CM; 960,000 – total fixed costs

$400,000 = $560,000 profit; $800,000 – $560,000 = $240,000 drop in profit.

74. Markham Industries is studying the profitability of a change in operation and has gathered the

following information:

A. Yes, the company will be better off by $6,000.

B. No, because sales will drop by 3,000 units.

C. No, because the company will be worse off by $4,000.

D. No, because the company will be worse off by $22,000.

E. It is impossible to judge because additional information is needed.

AACSB: Analytic

AICPA: BB Resource Management

Blooms: Evaluate

Difficulty: 3 Hard

Feedback C: Correct! Current Operation: $16 – $10 = $6 Contribution Margin per unit;

Total CM = $6 x 9,000 units = $54,000; Anticipated Operation: $22 – $12 = $10 Contribution

Margin per unit; Total CM =$10 x 6,000 units = $60,000; $60,000 – $10,000 additional fixed

costs = $50,000; $54,000 – $50,000 = $4,000 less or worse off.

75. Charriott sells a single product at $14 per unit. The firm’s most recent income statement

revealed unit sales of 80,000, variable costs of $800,000, and fixed costs of $560,000.

Management believes that a $3 drop in selling price will boost unit sales volume by 20%. Which

of the following correctly depicts how these two changes will affect the company’s break-even

point?

A. Increase Increase

B Increase Decrease

C. Increase No effect

D. Decrease Increase

E. Decrease Decrease

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 07-04

Feedback C: Correct! The drop in sales price will increase break-even point and the increase in

sales volume will have no effect on break-even point.

76. All other things being equal, a company that sells multiple products should attempt to structure

its sales mix so the greatest portion of the mix is composed of those products with the highest:

A.selling price.

B. variable cost.

C. contribution margin.

D. fixed cost.

E. gross margin.

AICPA: BB Resource Management

Blooms: Analyze

Difficulty: 3 Hard

Feedback A: Structuring sales mix with the highest selling price would not necessarily help in

selling multiple products.

Feedback B: Structuring sales mix with the highest variable cost would not necessarily help in

selling multiple products.

Feedback C: Correct! A company that sells multiple products should attempt to structure its

sales mix so the greatest portion of the mix is composed of those products with the highest

contribution margin.

Feedback D: Structuring sales mix with the highest fixed cost would not necessarily help in

selling multiple products.

Feedback E: Structuring sales mix with the highest gross margin would not necessarily help in

selling multiple products.

77. McGuire Corporation sells three products: R, S, and T. Budgeted information for the upcoming

accounting period follows.

R 16,000 $14 $9

S 12,000 10 6

T 52,000 11 8

The company’s weighted-average unit contribution margin is:

A. $3.00.

B. $3.55.

C. $4.00.

D. $19.35.

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Feedback B: Correct! Unit CM for R = $14 – $9 = $5; Unit CM for S = $10 – $6 = $4; Unit

CM for T = $11 – $8 = $3; Total units = 16,000 + 12,000 + 52,000 = 80,000 units; Weighted

average unit contribution margin = (Product R total CM + Product S total CM + Product T

total) ÷ total units = [(16,000 x $5) + (12,000 x $4) + (52,000 x $3)] ÷ 80,000 = $3.55.

78. Elise Corporation has the following sales mix for its three products: A, 20%; B, 35%; and C, 45%.

Fixed costs total $400,000 and the weighted-average contribution margin is $100. How many

units of product A must be sold to break-even?

A.800.

B. 4,000.

C. 20,000.

D. None of the answers is correct.

E. Cannot be determined based on the information presented.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 07-05

Feedback A: Correct! Percentage of Fixed cost for Product A = $400,000 x 20% = $80,000;

Breakeven units = $80,000 ÷ $100 = 800 units of A.

Feedback E: There is sufficient information given to calculate the units of A sold to break even.

Ahmed & Co. makes and sells two types of shoes, Plain and Fancy. Data concerning these

products are as follows:

Plain Fancy

Sixty percent of the unit sales are Plain, and annual fixed expenses are $45,000.

A.$4.80.

B. $9.00.

C. $9.25.

D. $17.00.

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 07-05

Feedback B: Correct! Plain = 60% and Fancy = 40% of sales; Plain CM per unit = $20 – $12 =

$8; Fancy CM per unit = $35 – $24.50 = $10.50; Weighted average CM = (% sales of Plain x

CM per unit) + (% sales of Fancy x CM per unit) = (60% x $8) + (40% x $10.50) = $9.00.

80. Assuming that the sales mix remains constant, the total number of units that Ahmed must sell to

break even is:

A.2,432.

B. 2,647.

C. 4,737.

D. 5,000.

E. None of the answers is correct.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 07-05

Plain = 60% and Fancy = 40% of sales; Plain CM per unit = $20 – $12 = $8; Fancy CM per

unit = $35 – $24.50 = $10.50;

Weighted average CM = (% sales of Plain x CM per unit) + (% sales of Fancy x CM per unit) =

(60% x $8) + (40% x $10.50) = $9.00. $45,000 ÷ $9.00 = 5,000 total breakeven units.

Feedback E: There is a correct answer listed.

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