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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

Activity Analysis, Cost Behavior, and Cost Estimation

True / False Questions

1. The determination of cost behavior is called a cost prediction.

FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01

Feedback True: This statement is incorrect regarding the relevant range.


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

2. Cost estimation typically focuses on the future.

FALSE

AACSB: Reflective Thinking


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.

3. Variable costs change in direct proportion to a change in the activity level.

TRUE

AACSB: Reflective Thinking


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

AACSB: Reflective Thinking


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

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03

Feedback True: This statement is incorrect regarding the relevant range.

Feedback False: Correct! This statement is false regarding relevant range.


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

AACSB: Reflective Thinking


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

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04

Feedback True: This statement is false.

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.

8. An example of a discretionary cost is the cost of research and development.

TRUE

AACSB: Reflective Thinking


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.

Feedback False: This statement is true.

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

FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-05

Feedback True: This does not describe least-squares regression.

Feedback False: Correct! This statement about least-squares regression is incorrect.

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

FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-05

Feedback True: This variable is not the independent variable.

Feedback False: Correct! This variable is not the independent variable.


11. Multiple regression is a statistical method that estimates a linear (straight-line) relationship
between one dependent variable and one independent variable.

FALSE

AACSB: Reflective Thinking


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

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-06

Feedback True: This statement is false.

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

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 06-07

Feedback True: This statement is incorrect.

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

14. Outliers are a common data collection problem.

TRUE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 06-07

Feedback True: Correct! Outliers are a common data collection problem.

Feedback False: This statement is true.

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

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 06-08

Feedback True: This statement is incorrect.

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

AACSB: Reflective Thinking


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.

Feedback False: This statement is true.

Multiple Choice Questions

17. The relationship between cost and activity is known as:


A.cost estimation.
B. cost prediction.
C. cost behavior.
D. cost analysis.
E. cost approximation.

AACSB: Reflective Thinking


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.

18. A forecast of a cost at a particular level of activity is known as:


A.cost estimation.
B. cost prediction.
C. cost behavior.
D. cost analysis.
E. cost approximation.

AACSB: Reflective Thinking


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 B: Correct! Cost prediction is 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.

AACSB: Reflective Thinking


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.

Feedback B: Fixed cost does not behave in this manner.

Feedback C: Semivariable cost does not behave in this manner.

Feedback D: Step-variable cost does not behave in this manner.

Feedback E: Step-fixed cost does not behave in this manner.

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?

21. Total Variable Cost Variable Cost Per Unit

A. Increase Increase

B. Increase Remain constant

C. Increase Decrease
D. Remain constant Decrease

E. Decrease Increase

AACSB: Reflective Thinking


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.

Feedback C: This pair of relationships is incorrect.

Feedback D: This pair of relationships is incorrect.

Feedback E: This pair of relationships is incorrect.

21. What type of cost exhibits the behavior shown below?

Manufacturing Volume (Units) Cost Per Unit

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 06-02
Feedback A: Correct! Variable costs are shown.

Feedback B: This is incorrect.

Feedback C: This is incorrect.

Feedback D: This is incorrect.

Feedback E: This is incorrect.

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.

AACSB: Reflective Thinking


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.

Feedback B: This is incorrect.

Feedback C: This is incorrect.

Feedback D: This is incorrect.

Feedback E: This is incorrect.

23. When graphed, a typical variable cost appears as:


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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02
Feedback A: This is incorrect.

Feedback B: This is incorrect.

Feedback C: 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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02
Feedback A: This is incorrect.

Feedback B: This is incorrect.

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

Feedback D: This is incorrect.

Feedback E: This is incorrect.


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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02
Feedback A: This statement is incorrect.

Feedback B: This statement is incorrect.

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

Feedback D: This statement is incorrect.

Feedback E: This statement is incorrect.

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02
Feedback A: This statement is incorrect.

Feedback B: Correct! If Ralston revises it anticipated production slightly upward, it would


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

Feedback C: This statement is incorrect.

Feedback D: This statement is incorrect.

Feedback E: This statement is incorrect.

27. What type of cost exhibits the behavior shown below?

Manufacturing Volume (Units) Total Cost Cost Per Unit

50,000 $150,000 $3.00

80,000 150,000 1.88

1. Variable cost.
B.Fixed cost.
C. Semivariable cost.
D. Step-variable cost.
E. Mixed cost.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium

Learning Objective: 06-02


Feedback A: This is incorrect.

Feedback B: Correct! This is the cost behavior of a fixed cost.

Feedback C: This is incorrect.

Feedback D: This is incorrect.

Feedback E: This is incorrect.

28. When graphed, a typical fixed cost appears as:


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.

AACSB: Reflective Thinking


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.

Feedback B: This is incorrect.

Feedback C: This is incorrect.

Feedback D: This is incorrect.

Feedback E: This is incorrect.


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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02
Feedback A: This is incorrect.

Feedback B: This is incorrect.

Feedback C: Correct! Straight-line depreciation is a typical example of a fixed cost.

Feedback D: This is incorrect.

Feedback E: 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

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02
Feedback A: This relationship is incorrect.

Feedback B: This relationship is incorrect.

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

Feedback D: This relationship is incorrect.

Feedback E: This relationship is incorrect.

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02
Feedback A: Correct! These are step-fixed costs.

Feedback B: This cost is incorrect.

Feedback C: This cost is incorrect.

Feedback D: This cost is incorrect.

Feedback E: This cost is incorrect.

32. When graphed, a typical step-fixed cost appears as:


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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02
Feedback A: This is incorrect.

Feedback B: This is incorrect.


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

Feedback D: This is incorrect.

Feedback E: This is incorrect.

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02
Feedback A: This is incorrect.

Feedback B: This is incorrect.

Feedback C: This is incorrect.

Feedback D: 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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard

Learning Objective: 06-02


Feedback A: This amount is incorrect.

Feedback B: 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.

Feedback D: This amount is incorrect.

Feedback E: This answer is wrong, because there is a correct amount listed.

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard

Learning Objective: 06-02


Feedback A: Correct! Variable cost per unit = (200,000 x $11) – $800,000 = $1,400,000 ÷
200,000 = $7;

Anticipated level of 205,000 units: ($7 x 205,000) + $800,000 = $2,235,000.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer is wrong, because there is a correct amount listed.

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.

AACSB: Reflective Thinking


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.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer is wrong, because there is a correct amount listed.

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02
Feedback A: This is incorrect.

Feedback B: This is incorrect.

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

Feedback D: This is incorrect.

Feedback E: This is incorrect.

38. A mixed cost is also known as a:


A.semivariable cost.
B. step-fixed cost.
C. variable cost.
D. curvilinear cost.
E. discretionary cost.

AACSB: Reflective Thinking


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.

Feedback B: This is incorrect.

Feedback C: This is incorrect.

Feedback D: This is incorrect.

Feedback E: This is incorrect.

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.

AACSB: Reflective Thinking


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.

Feedback B: This fee is not a fixed cost.

Feedback C: This fee is not a step-fixed cost.

Feedback D: Correct! This cost is known as a semivariable cost.

Feedback E: This fee is not a curvilinear cost.

40. Which of the following is (are) example(s) of a mixed 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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02
Feedback A: This is not a mixed cost.

Feedback B: Correct! An employee’s compensation, consisting of a flat salary plus a


commission, is a mixed cost.

Feedback C: These are not mixed costs.

Feedback D: These are not mixed costs.

Feedback E: Not all of these are mixed costs.


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.

AACSB: Reflective Thinking


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.

Feedback C: This cost is incorrect.

Feedback D: This cost is incorrect.

Feedback E: This cost is incorrect.


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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03
Feedback A: This statement is incorrect.

Feedback B: This statement is incorrect.

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

Feedback D: This statement is incorrect.

Feedback E: This statement is incorrect.

43. Within the relevant range of activity, costs:


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.

AACSB: Reflective Thinking


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.

Feedback B: This statement is incorrect.

Feedback C: This statement is incorrect.

Feedback D: This statement is incorrect.

Feedback E: This statement is incorrect.

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-03


Feedback A: Correct! Within the relevant range a curvilinear cost function can sometime be
graphed as a sloping straight line.

Feedback B: This statement is incorrect.

Feedback C: This statement is incorrect.

Feedback D: This statement is incorrect.

Feedback E: This statement is incorrect.


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.

AACSB: Reflective Thinking


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! A variable cost that has a definitive physical relationship to the activity
measure is called an engineered cost.

Feedback C: This is an incorrect cost type.

Feedback D: This is an incorrect cost type.

Feedback E: This is an incorrect cost type.

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.

AACSB: Reflective Thinking


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.

Feedback C: This is an incorrect cost type.

Feedback D: This is an incorrect cost type.

Feedback E: This is an incorrect cost type.

47. Property taxes 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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04

Feedback A: Correct! Property taxes are an example of a committed fixed cost.

Feedback B: This is an incorrect cost type.

Feedback C: This is an incorrect cost type.

Feedback D: This is an incorrect cost type.

Feedback E: This is an incorrect cost type.

48. Which of the following is not an example of a committed fixed cost?


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

Feedback A: This is a committed fixed cost.

Feedback B: This is a committed fixed cost.

Feedback C: This is a committed fixed cost.

Feedback D: Correct! This is not an example of a committed fixed cost.

Feedback E: This is a committed fixed cost.

49. Committed fixed costs would include:


A.advertising.
B. research and development.
C. depreciation on buildings and equipment.
D. contributions to charitable organizations.
E. expenditures for direct labor.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04

Feedback A: This is not a committed fixed cost.

Feedback B: This is not a committed fixed cost.

Feedback C: Correct! Depreciation on buildings and equipment is a committed fixed cost.

Feedback D: This is not a committed fixed cost.

Feedback E: This is not a committed fixed cost.


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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04

Feedback A: This is not a committed fixed cost.

Feedback B: This is not a committed variable cost.

Feedback C: Correct! Charitable contributions are an example of a discretionary fixed cost.

Feedback D: This is not a discretionary variable cost.

Feedback E: This is not an engineered cost.

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04

Feedback A: Correct! Equipment depreciation would not typically be classified as a


discretionary fixed cost.

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


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

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

Feedback E: 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

A. Promotion Management salaries

B. Building depreciation Charitable contributions

C. Management training Property taxes

D. Equipment rentals Equipment depreciation

E. Research and development Advertising

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04

Feedback A: This pair of costs is incorrect.

Feedback B: Correct! Building depreciation is classified as a committed fixed cost and


charitable contributions are discretionary fixed costs.

Feedback C: This pair of costs is incorrect.

Feedback D: This pair of costs is incorrect.

Feedback E: This pair of costs is incorrect.


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?

54. Can be Cut Back More Easily In Bad


Long Term in Nature
Economic Times

A. Committed Committed

B. Committed Discretionary

C. Discretionary Committed

D. Discretionary Discretionary

No difference between committed


E. Committed
and discretionary

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium

Learning Objective: 06-04

Feedback A: These costs do not match the definitions given.

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.

Feedback C: These costs do not match the definitions given.

Feedback D: These costs do not match the definitions given.

Feedback E: These costs do not match the definitions given.


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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-05
Learning Objective: 06-06

Feedback A: This technique is used to analyze cost behavior.

Feedback B: This technique is used to analyze cost behavior.

Feedback C: This technique is used to analyze cost behavior.

Feedback D: Correct! Linear programming is not used to analyze cost behavior.

Feedback E: This technique is used to analyze cost behavior.

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.

AACSB: Reflective Thinking


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

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

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

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

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-05

Feedback A: While this statement is true, there is a better answer.

Feedback B: While this statement is true, there is a better answer.

Feedback C: While these statements are true, there is a better answer.

Feedback D: While these statements are true, there is a better answer.

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-05

Feedback A: This is not the definition of this method.

Feedback B: This is not the definition of this method.

Feedback C: Correct! The nonstatistical method of cost estimation that calls for the creation of a
scatter diagram is the visual-fit method.

Feedback D: This is not the definition of this method.

Feedback E: This is not the definition of this 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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-05

Feedback A: This method uses more than two data points.


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

Feedback C: This method uses more than two data points.

Feedback D: This method uses more than two data points.

Feedback E: This method uses more than two data points.

Use the following information to answer Questions 59-61.

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.

59. Fulton’s variable cost per copy is:


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

Learning Objective: 06-05

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.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer is wrong, because there is a correct amount listed.


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

Learning Objective: 06-05

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.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer is wrong, because there is a correct amount listed.

61. How much would Fulton pay if it made 5,500 copies?


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

Learning Objective: 06-05

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

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.

Feedback D: This amount is incorrect.

Feedback E: This answer is wrong, because there is a correct amount listed.

Use the following information to answer Questions 62-64.

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:

Month Utilities Machine Hours

January $8,700 800

February 8,360 720

March 8,950 810

April 9,360 920

May 9,625 950

June 9,150 900

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

Learning Objective: 06-05

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: Correct! (High – Low costs) ÷ (High – Low Units) = ($9,625 – $8,360) ÷ (950-
720) = $1,265 ÷ 230 = $5.50 variable cost per unit

Feedback E: This answer is wrong, because there is a correct amount listed.

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

Learning Objective: 06-05

Feedback A: This amount is incorrect.


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).

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer is wrong, because there is a correct amount listed.

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

Learning Objective: 06-05

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

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.

Feedback E: This answer is wrong, because there is a correct amount listed.

Use the following information to answer Questions 65-67.

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

Learning Objective: 06-05

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 B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.


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 A: This amount is incorrect.

Feedback B: This amount is incorrect.

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;

Total costs – Variable costs = Fixed costs; $734,800 – $184,800 = $550,000.

Feedback D: This amount is incorrect.

Feedback E: This amount is incorrect.

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 A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

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;

Total costs – Variable costs = Fixed costs; $734,800 – $184,800 = $550,000.

Using the cost equation at the 23,000 machine hour level: (23,000 x $8.40) + $550,000 =
$743,200.

Feedback E: This amount is incorrect.

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 A: This amount is incorrect.

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;

Calculate Variable cost at High level= 24,000 x $6 = $144,000;

Total cost – Variable cost = Fixed cost;

$234,000 – $144,000 = $90,000.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer is wrong, because there is a correct amount listed.

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

70. May August

Maintenance hours 25,000 29,000

Maintenance cost $1,175,000 $1,247,000

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 A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: 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.

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:

71. May August

Maintenance hours 25,000 29,000

Maintenance cost $1,175,000 $1,247,000

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 $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);

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

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

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:

72. May August

Maintenance hours 25,000 29,000

Maintenance cost $1,175,000 $1,247,000

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);

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

Feedback B: This is not the variable maintenance cost.

Feedback C: This is not the variable maintenance cost.

Feedback D: This is not the fixed maintenance cost.

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:

73. May August

Maintenance hours 25,000 29,000

Maintenance cost $1,175,000 $1,247,000

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 A: This amount is incorrect.

Feedback B: This amount is incorrect.


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).

Feedback D: This amount is incorrect.

Feedback E: This amount is incorrect.

Use the following information to answer Questions 73-75.

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.

Type A Type B Type C Total

5,000 units $4 $9 $4 $17

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

A. Fixed Variable Semivariable

B. Fixed Semivariable Variable

C. Variable Semivariable Fixed

D. Variable Fixed Semivariable

E. Semivariable Variable Fixed

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-02


Learning Objective: 06-05

Feedback A: This answer shows incorrect cost classifications.

Feedback B: This answer shows incorrect cost classifications.

Feedback C: This answer shows incorrect cost classifications.

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

Feedback E: This answer shows incorrect cost classifications.

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

Learning Objective: 06-05

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: Correct! Variable cost = $4 x 10,000 = $40,000; Fixed = $45,000; Semi-variable


= ($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.

Feedback E: This answer is wrong, because there is a correct amount listed.

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

Learning Objective: 06-05

Feedback A: This equation is incorrect.

Feedback B: This equation is incorrect.

Feedback C: This equation is incorrect.

Feedback D: This equation is incorrect.

Feedback E: Correct! $4 variable + $1 from semivariable = $5 x variable; $45,000 fixed +


$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 A: This is incorrect.

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

Feedback C: This is incorrect.

Feedback D: This is incorrect.

Feedback E: This is incorrect.

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

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

Feedback A: This is an incorrect choice.

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

Feedback C: This is an incorrect choice.

Feedback D: This is an incorrect choice.

Feedback E: This is an incorrect choice.

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-05
Feedback A: This is an incorrect choice.

Feedback B: Correct! The fixed operating costs correspond to the intercept.

Feedback C: This is an incorrect choice.

Feedback D: This is an incorrect choice.

Feedback E: 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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-05

Feedback A: Correct! The coefficient of the equation’s independent variable is variable


operating cost per delivery.

Feedback B: This is an incorrect choice.

Feedback C: This is an incorrect choice.

Feedback D: This is an incorrect choice.

Feedback E: This is an incorrect choice.

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 A: This is an incorrect choice.

Feedback B: This is an incorrect choice.

Feedback C: This is an incorrect choice.

Feedback D: This is an incorrect choice.

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

Feedback A: This is a true statement.

Feedback B: This is a true statement

Feedback C: This is a true statement

Feedback D: This is a true statement

Feedback E: Correct! X is the number of units sold, not hours worked.


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:

Scatter Diagram Regression Analysis

Variable cost per unit sold $6.50 $6.80

Total monthly fixed cost $45,000 $42,500

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

Learning Objective: 06-05

Feedback A: This is an incorrect choice.

Feedback B: This is an incorrect choice.

Feedback C: Correct! Regression is more accurate than a scatter diagram, so the answer is:
(18,000 x $6.80) + $42,500 = $164,900.

Feedback D: This is an incorrect choice.

Feedback E: This answer is wrong, because there is a correct amount listed.

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 A: This tool is incorrect.

Feedback B: Correct! To arrive at an objective forecast of revenues for the next accounting
period, multiple regression should be used.

Feedback C: This tool is incorrect.

Feedback D: This tool is incorrect.

Feedback E: This tool is incorrect.

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 06-05
Learning Objective: 06-06

Feedback A: This tool is associated with cost estimation.

Feedback B: This tool is associated with cost estimation.


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

Feedback D: This tool is associated with cost estimation.

Feedback E: This tool is 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

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: Correct! See Exhibit 6-11 in text.

Feedback E: This answer is wrong, because there is a correct amount listed.

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

Learning Objective: 06-07

Feedback A: This is a data collection issue, but there is a better answer.

Feedback B: This is a data collection issue, but there is a better answer.

Feedback C: This is a data collection issue, but there is a better answer.

Feedback D: This is a data collection issue, but there is a better answer.

Feedback E: Correct! All of the answers are issues in data collection.

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

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02

88. Consider the six costs that follow.


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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-02


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.

Supervision $23,000 Meat $3.25

Fixed utilities 9,000 Labor 2.25

Insurance and property taxes 6,400 Variable utilities 0.35

Total fixed $38,400 Total variable $5.85

Production cost per month: Y = $38,400 + $5.85 X

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard

Learning Objective: 06-02


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:

91. At a 40% Utilization At a 90% Utilization


Rate Rate

Cost A:

Total $440,000 $440,000

Per hour $5.50 ?

Cost B:
Total ? $1,944,000

Per hour $10.80 $10.80

Cost C:

Total $680,000 $1,330,000

Per hour $8.50 $7.39

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

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:

2. Cost A: Fixed (same total amount at each level of activity)


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

Analysis of Cost C (fixed portion):


Total cost at 40% utilization $680,000

Variable cost (200,000 x 40% x $6.50) 520,000

Fixed cost $160,000

75% utilization: 200,000 x 75% = 150,000 hours

Cost A $440,000
Cost B (150,000 x $10.80) 1,620,000

Cost C:

Variable portion (150,000 x $6.50) 975,000

Fixed portion 160,000

Total cost $3,195,000

10. Variable cost per hour: $10.80 + $6.50 = $17.30


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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-02


Learning Objective: 06-05

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

Month Machine Hours Manufacturing Overhead

May 46,000 $889,000

June 60,000 1,130,000

July 68,000 1,274,000

August 52,000 980,000

Manufacturing overhead consists of three different costs; (1) machine supplies


(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:

Total plant maintenance for 68,000 hours $1,080,000

Less: Variable plant maintenance (68,000 x $15) 1,020,000

Fixed cost $60,000

C.
Manufacturing overhead at 56,000 hours:

Machine supplies at $2.50 per hour $140,000

Property Taxes 24,000

Plant maintenance:

Variable at $15 per hour 840,000

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

April 4,500 $9,560

May 4,200 9,440

June 6,500 10,725

July 7,000 11,400

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

Total cost for 7,000 hours $11,400

Less: Variable cost (7,000 x $0.70) 4,900

Fixed cost $6,500

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

Fixed cost 6,500

Total cost $11,750

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.

AACSB: Analytic
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:

1. Analysis of semivariable cost (variable portion) :


($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

Less:Variable cost (2,900 x $41) 118,900

Fixed cost $160,000

Variable cost (2,800 x $32) $89,600

Fixed cost ($480,000 ÷ 12 months) 40,000

Semivariable cost:

Variable portion (2,800 x $41) 114,800

Fixed portion 160,000

Total cost $404,400

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:

800 to 1,099 tons $ 70,000

1,100 to 1,399 tons 90,000

1,400 + tons 110,000

1. From a cost behavior perspective, what type of cost is this?


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:

A. Analysis of semivariable cost (variable portion):

($46,200 – 39,900) ÷ (1,300 – 850) = $14 per ton

Analysis of semivariable cost (fixed portion):

Total cost for 1,300 tons $46,200

Less:Variable cost (1,300 x $14) 18,200

Fixed cost $28,000

Variable Portion (875 x $14) $12,250

Fixed Portion 28,000

Total $40,250

B.

Semivariable cost: $40,250


Variable cost (875 x $65) 56,875

Fixed cost ($840,000 ÷ 12 months) 70,000

Total cost $167,125

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

Learning Objective: 06-05

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:

Total cost (A + B + C) $8,162,000

Less: Cost A $2,320,000

Cost C 1,662,000 3,982,000


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

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard

Learning Objective: 06-05

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.

AACSB: Reflective Thinking


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).

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-02

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy

Learning Objective: 06-03


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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-04

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-05

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-05


Learning Objective: 06-06

Chapter 7

Cost-Volume-Profit Analysis

Answer Key

True / False Questions


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

TRUE

AACSB: Reflective Thinking


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.

Feedback False: This is a correct statement about the break-even point.

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

FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01

Feedback True: This is not the definition of total contribution margin.

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

Feedback True: Correct! The contribution-margin ratio is calculated as unit contribution


margin divided by the selling price per unit.

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

4. The contribution margin ratio can also be expressed as a percentage.

TRUE

AACSB: Reflective Thinking


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

AACSB: Reflective Thinking


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.

Feedback False: This is a true statement about relevant range.

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

AACSB: Reflective Thinking


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.

Feedback False: This is a true statement.

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 True: This statement is false.

Feedback False: Correct! The difference between budgeted sales revenue and break-even sales
revenue is not the operating leverage.

8. The safety margin is another name for the breakeven point.

FALSE

AACSB: Reflective Thinking


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

AACSB: Reflective Thinking


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.

Feedback False: This statement is true.

10. Total contribution margin is an important assumption in multiproduct CVP analysis.

FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-05

Feedback True: This statement is false.

Feedback False: Correct! Total contribution margin is not an important assumption in


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

AACSB: Reflective Thinking


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.

Feedback False: This assumption is true.


12. Sensitivity analysis has become relatively easy to perform with the advent of personal
computers and spreadsheet software.

TRUE

AACSB: Reflective Thinking


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.

Feedback False: This statement is true.

13. Many operating managers find the traditional income-statement format difficult to use, because
it does not separate revenues and expenses.

FALSE

AACSB: Reflective Thinking


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

AACSB: Reflective Thinking


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.

Feedback False: This is a true statement.

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

FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-08

Feedback True: This statement about financial leverage is false.

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

AACSB: Reflective Thinking


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.

Feedback False: This statement about cost structures is true.

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

FALSE

AACSB: Reflective Thinking


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

AACSB: Reflective Thinking


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.

Feedback False: This is a true statement.

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

FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-10

Feedback True: This statement is false concerning lower fixed costs.

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

AACSB: Reflective Thinking


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.

Feedback False: This statement about higher break-even is true.

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

FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-11

Feedback True: This statement is false.

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

AACSB: Reflective Thinking


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.

Feedback False: This is a true statement.

Multiple Choice Questions


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

Learning Objective: 07-01

Feedback A: This is not the break-even point.

Feedback B: This is not the break-even point.

Feedback C: Correct! Breakeven in units = Total Fixed costs ÷ Fixed cost per unit; $400,000 ÷
[$50 – ($50 x 60%)] = 20,000 units

Feedback D: This is not the break-even point.

Feedback E: This statement is not true.

24. Each unit that Narchie sells will:


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

Learning Objective: 07-01

Feedback A: Correct! Revenue per unit – Variable cost per unit = Marginal increase in profit
per unit; $50 – (60% x 50) = $20.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: There is a correct amount listed.

Feedback E: This amount is incorrect.


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 A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: Correct! (Total Fixed cost + Target profit) ÷ Margin percentage = Total Sales
Dollars; ($400,000 + $22,000) ÷ ($20 /$50) = $1,055,000.

Feedback E: There is a correct answer listed.

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

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: There is a correct answer listed.

27. CVP analysis can be used to study the effect of:


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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01

Feedback A: This statement is correct, but there is a better answer.

Feedback B: This statement is correct, but there is a better answer.

Feedback C: This statement is correct, but there is a better answer.

Feedback D: This statement is correct, but there is a better answer.

Feedback E: All of these statements correctly describe CVP analysis.

28. The break-even point is that level of activity where:


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.

AACSB: Reflective Thinking


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.

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

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

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

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

29. The break-even point is that level of activity where:


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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01

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

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.

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

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

30. The unit contribution margin is calculated as the difference between:


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.

AACSB: Reflective Thinking


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?

33. Contribution Margin Break-even Point

A. Increase Increase

B. Increase Decrease

C. Decrease Increase

D. Decrease Decrease

E. Increase No effect

AACSB: Reflective Thinking


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?

34. Contribution Margin Break-Even Point

A. Increase Increase

B. Increase Decrease

C. Decrease Increase

D. Decrease Decrease

E. Increase No effect

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-01

Feedback A: This relationship is incorrect.

Feedback B: This relationship is incorrect.

Feedback C: Correct! If a company increases its variable cost per unit, then contribution margin
decreases and break-even point increases.

Feedback D: This relationship is incorrect.


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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 07-01

Feedback A: This relationship is incorrect if fixed costs increase.

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

Feedback C: This relationship is incorrect if fixed costs increase.

Feedback D: This relationship is incorrect if fixed costs increase.

Feedback E: There is only one correct answer listed.

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-01

Feedback A: This relationship is incorrect if the fixed costs decrease.

Feedback B: Correct! If fixed costs decrease, the break-even point decreases.

Feedback C: This relationship is incorrect if the fixed costs decrease.

Feedback D: This relationship is incorrect if the fixed costs decrease.

Feedback E: There is only one correct answer listed.

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-01

Feedback A: Correct! Assuming no change in sales volume, an increase in company’s per-unit


contribution margin would increase income.

Feedback B: This relationship is incorrect assuming an increase in per-unit contribution margin.

Feedback C: This relationship is incorrect assuming an increase in per-unit contribution


margin.

Feedback D: This relationship is incorrect assuming an increase in per-unit contribution


margin.

Feedback E: This relationship is incorrect assuming an increase in per-unit contribution 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.

AACSB: Reflective Thinking


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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-01
Feedback A: This statement is incorrect.

Feedback B: This statement is incorrect.

Feedback C: This statement is incorrect.

Feedback D: 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 A: This amount is incorrect.

Feedback B: Correct! One unit in excess of break-even volume will yield $20 profit (or $50 –
$30).

Feedback C: This amount is incorrect.

Feedback D: This statement is incorrect.

Feedback E: This statement is incorrect.


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

Learning Objective: 07-01

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

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.

Feedback D: This amount is incorrect.

Feedback E: There is a correct answer listed.

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 A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

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.

Feedback E: There is a correct answer listed.

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

Sales revenue $8,000,000

Variable costs 5,000,000

Fixed costs 2,200,000

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

Feedback A: This amount is incorrect.

Feedback B: Correct! Sales – Variable costs = Contribution margin; $8,000,000 – $5,000,000 =


$3,000,000; Contribution margin ÷ units = Contribution margin per unit; $3,000,000 ÷ 20,000
= $150.
Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: There is a correct answer listed.

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

Sales revenue $8,000,000

Variable costs 5,000,000

Fixed costs 2,200,000

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 A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

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

Feedback E: There is a correct answer listed.


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

Sales revenue $6,800,000

Variable costs 2,800,000

Fixed costs 2,500,000

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.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-01

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

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

Feedback D: This amount is incorrect.

Feedback E: There is a correct answer listed.

45. A recent income statement of Carson Corporation reported the following data:
Sales revenue $2,500,000

Variable costs 1,500,000

Fixed costs 800,000

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.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-01

Feedback A: Correct! Total Contribution Margin = $2,500,000 – $1,500,000 = $1,000,000; Per


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.

Feedback B: This answer is incorrect.

Feedback C: This answer is incorrect.

Feedback D: This answer is incorrect.

Feedback E: There is a correct answer listed.

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 A: This answer is incorrect.

Feedback B: This answer is incorrect.

Feedback C: Total Fixed costs ÷ Contribution margin per unit = Breakeven point in units;
$360,000 ÷ ($12 – $8) = 90,000 units.

Feedback D: This answer is incorrect.

Feedback E: This answer is incorrect.

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.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-01

Feedback A: This answer is incorrect.

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.

Feedback D: This answer is incorrect.

Feedback E: There is a correct answer listed.

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.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-01

Feedback A: This answer is incorrect.

Feedback B: This answer is incorrect.

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.

Feedback D: This answer is incorrect.

Feedback E: There is a correct answer listed.

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 A: This answer is incorrect.

Feedback B: Sales price per unit – Contribution margin per unit = Variable cost per unit; $40 –
($480,000 ÷ 120,000) = $36.

Feedback C: This answer is incorrect.

Feedback D: This answer is incorrect.

Feedback E: This answer is incorrect.

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

Learning Objective: 07-01

Feedback A: This answer is incorrect.

Feedback B: This answer is incorrect.

Feedback C: This answer is incorrect.


Feedback D: Correct! Unit contribution margin x Breakeven units = Total Fixed costs; $6 x
24,000 = $144,000.

Feedback E: There is a correct answer listed.

51. The contribution-margin ratio is:


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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02

Feedback A: This statement is inaccurate regarding the contribution –margin ratio.

Feedback B: This statement is inaccurate regarding the contribution –margin ratio.

Feedback C: This statement is inaccurate regarding the contribution –margin ratio.

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

Feedback E: This statement is inaccurate regarding the contribution –margin ratio.

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

Sales price $60

Variable cost per unit 20

Fixed cost per unit 4

The company’s contribution-margin ratio is closest to:


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

Learning Objective: 07-02

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: Correct! Contribution margin percentage = (Sales price per unit – Variable cost) ÷
Sales Price per unit ($60 – $20) ÷ $60 = 0.67

Feedback E: There is a correct answer listed.

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02

Feedback A: This equation is incorrect.


Feedback B: This equation is incorrect.

Feedback C: Correct! Breakeven sales revenue is calculated as Fixed costs ÷ CMR.

Feedback D: This equation is incorrect.

Feedback E: This equation is incorrect.

Use the following information to answer Questions 54-61.

54. Refer to the figure above. Line A is the:


A.total revenue line.
B. fixed cost line.
C. variable cost line.
D. total cost line.
E. profit line.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 07-03

Feedback A: Correct! Line A is the total revenue line.

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

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

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


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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 07-03

Feedback A: Correct! Line C represents the level of fixed cost.

Feedback B: This is not the correct label for Line C.

Feedback C: This is not the correct label for Line C.

Feedback D: This is not the correct label for Line C.

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

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 07-03

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 07-03

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

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

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

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


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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 07-03

Feedback A: The vertical distance does not represent fixed cost.

Feedback B: The vertical distance does not represent variable cost.

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 D: The vertical distance does not represent semivariable cost.

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

Learning Objective: 07-03

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.

Feedback E: There is a correct answer listed.

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 07-03

Feedback A: The vertical distance does not represent fixed cost.

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 D: The vertical distance does not represent semivariable cost.

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 07-03

Feedback A: This does not show the profit.

Feedback B: This does not show the profit.

Feedback C: This does not show the profit.

Feedback D: Correct! Profit would be shown on the graph by the letter G.

Feedback E: This does not show the profit.


Use the following information to answer Questions 62-64.

62. Refer to the figure above. Line A is the:


A.fixed cost line.
B. variable cost line.
C. total cost line.
D. total revenue line.
E. profit line.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium Learning Objective: 07-03

Feedback A: Line A is not the fixed cost line.

Feedback B: Line A is not the variable cost line.

Feedback C: Line A is not the total cost line.

Feedback D: Line A is not the total revenue line.

Feedback E: Correct! Line A is the profit line.


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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 07-03

Feedback A: The triangular area does not represent fixed cost.

Feedback B: The triangular area does not represent variable cost.

Feedback C: Correct! The triangular area between the horizontal axis and Line A to the right of
4,000 represents profit.

Feedback D: The triangular area does not represent loss.

Feedback E: The triangular area does not represent sales revenue.

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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium Learning Objective: 07-03

Feedback A: The triangular area does not represent fixed cost.

Feedback B: The triangular area does not represent variable cost.

Feedback C: The triangular area does not represent profit.

Feedback D: Correct! The triangular area between the horizontal axis and Line A to the left of
4,000 represents loss.

Feedback E: The triangular area does not represent sales revenue.

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

Units sold 8,000

Sales revenue $9,600,000

Variable costs 6,000,000

Fixed costs 2,600,000

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

Learning Objective: 07-04

Feedback A: This amount is incorrect.


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.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: There is a correct answer listed.

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 A: This amount is incorrect.

Feedback B: This amount is incorrect.

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.

Feedback D: This amount is incorrect.

Feedback E: This amount is incorrect.


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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 07-04

Feedback A: This is not the relationship presented by the contribution margin.

Feedback B: This is not the relationship presented by the contribution-margin ratio.

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.

Feedback E: This is not the relationship presented by the operating leverage.

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

Sales revenue $840,000

Contribution margin 504,000

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

Learning Objective: 07-04

Feedback A: This amount is not equal to the safety margin.

Feedback B: Correct! The safety margin is Sales – Breakeven Sales or $840,000 – $750,000 =
$90,000.

Feedback C: This amount is not equal to the safety margin.

Feedback D: This amount is not equal to the safety margin.

Feedback E: This amount is not equal to the safety margin.

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.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-04

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.


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.

Feedback D: This amount is incorrect.

Feedback E: There is a correct answer listed.

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.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-04

Feedback A: This is incorrect.

Feedback B: This is incorrect.

Feedback C: This is incorrect.

Feedback D: This is incorrect.

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.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-04

Feedback A: This is incorrect.

Feedback B: This is incorrect.

Feedback C: This is incorrect.

Feedback D: This is incorrect.

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

72. If a company desires to increase its safety margin, it should:


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.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 07-04

Feedback A: This would not increase safety margin.


Feedback B: This would not increase safety margin.

Feedback C: This would not increase safety margin.

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

Feedback E: This would not increase safety margin.

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.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-04

Feedback A: This statement is incorrect.

Feedback B: This amount is incorrect.

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.

Feedback D: This amount is incorrect.

Feedback E: There is a correct answer listed.


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

75. Current Operation Anticipated Operation

Fixed costs $38,000 $48,000

Selling price $16 $22

Variable costs $10 $12

Sales (units) 9,000 6,000

Should Markham Industries make the change?


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

AICPA: FN Risk Analysis

Blooms: Evaluate

Difficulty: 3 Hard

Learning Objective: 07-04

Feedback A: This statement is incorrect.

Feedback B: This statement is incorrect.

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.

Feedback D: This statement is incorrect.

Feedback E: This statement is incorrect.


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?

76. Drop in Sales Price Increase in Sales Volume

A. Increase Increase

B Increase Decrease

C. Increase No effect

D. Decrease Increase

E. Decrease Decrease

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-04

Feedback A: This is an incorrect depiction of the two changes on break-even point.

Feedback B: This is an incorrect depiction of the two changes on break-even point.

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.

Feedback D: This is an incorrect depiction of the two changes on break-even point.

Feedback E: This is an incorrect depiction of the two changes 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.

AACSB: Reflective Thinking


AICPA: BB Resource Management

AICPA: FN Risk Analysis

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 07-05

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.

Product Sales Volume (Units) Selling Price Variable Cost

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

Learning Objective: 07-05

Feedback A: This is not the weighted-average unit contribution margin.

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.

Feedback C: This is not the weighted-average unit contribution margin.

Feedback D: This is not the weighted-average unit contribution margin.

Feedback E: There is a correct answer listed.

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 B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: There is a correct answer listed.

Feedback E: There is sufficient information given to calculate the units of A sold to break even.

Use the following information to answer Questions 79-82.

Ahmed & Co. makes and sells two types of shoes, Plain and Fancy. Data concerning these
products are as follows:

Plain Fancy

Unit selling price $20.00 $35.00

Variable cost per unit 12.00 24.50

Sixty percent of the unit sales are Plain, and annual fixed expenses are $45,000.

79. The weighted-average unit contribution margin is:


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 A: This is only the contribution margin for the Plain.

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.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: There is a correct answer listed.

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

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: Correct! Total fixed costs ÷ Weighted average CM = Breakeven units;

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.