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chapter 11
d. $100.00
104. Which of the following costs is an example of a fixed cost?
a. Direct labor cost
b. Insurance cost
c. Commission paid
d. Capital stock
105. The point where the sales line and the total costs line intersect on the cost-volume-profit graph represents _____.
a. the maximum possible operating loss
b. the maximum possible operating income
c. the total fixed costs
d. the break-even point
106. Which of the following is an example of a cost that varies in proportion to changes in the activity base?
a. Depreciation on machinery
b. Packaging cost
c. Factory rent
d. Insurance cost
107. Kennedy Co. sells two products, Arks and Bins. Last year, Kennedy sold 32,000 units of Arks and 18,000 units of
Bins. Related data are as follows:
Unit Selling Unit Variable Unit Contribution
Product Price Cost Margin
Arks $ 80 $20 $60
Bins 120 40 80
What was Kennedy's overall product's unit selling price?
a. $97.60
b. $104.00
c. $102.40
d. $94.40
108. Currently, fixed costs are $500,000 and the unit contribution margin is $40. What would be the break-even point in
units if fixed costs are reduced by $80,000?
a. 14,500 units
b. 20,000 units
c. 10,500 units
d. 12,500 units
109. _____ per unit increases or decreases in inverse proportion to its activity level.
a. Variable cost
b. Opportunity cost
c. Contribution cost
d. Fixed cost
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110. _____ analysis is used while selecting the mix of products to sell.
a. Cost-volume-profit
b. Activity-based
c. Discounted
d. Receivables
111. Variable costs as a percentage of sales for Protoveo Inc. are 65%, sales are $500,000, and fixed costs are $125,000.
How much would operating income change if sales decrease by $10,000?
a. $3,500 increase
b. $3,500 decrease
c. $3,250 decrease
d. $3,500 increase
112. Which of the following statements is true if the number of units produced decreases?
a. The total variable cost remains constant.
b. The total variable cost decreases.
c. The variable cost per unit decreases.
d. The variable cost per unit increases.
113. The relative distribution of sales among the various products sold by a business is termed as _____.
a. business's basket of goods
b. contribution margin mix
c. sales mix
d. product portfolio
114. Kennedy Co. sells two products, Arks and Bins. Last year, Kennedy sold 32,000 units of Arks and 18,000 units of
Bins. Related data are as follows:
Unit Selling Unit Variable Unit Contribution
Product Price Cost Margin
Arks $ 80 $20 $60
Bins 120 40 80
What was Kennedy's sales mix last year?
a. 40% Arks, 60% Bins
b. 43% Arks, 57% Bins
c. 54% Arks, 46% Bins
d. 64% Arks, 36% Bins
115. If variable costs per unit decreased because of a decrease in utility rates, the break-even point would _____.
a. decrease
b. increase
c. remain the same
d. increase or decrease
116. The graph of a variable cost per unit when plotted against its related activity base appears as a _____.
a. circle
b. rectangle
c. straight line
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d. curved line
117. A business has a capacity of $4,000,000 of sales, actual sales of $1,500,000, break-even sales of $900,000, fixed
costs of $540,000, and variable costs that are 40% of sales. What is the margin of safety expressed as a percentage of
sales?
a. 40%
b. 42%
c. 33%
d. 35%
118. Compute break-even sales (in units) when fixed costs are $420,000, unit selling price is $66, and unit variable cost is
$42.
a. 17,500 units
b. 10,500 units
c. 11,500 units
d. 20,300 units
119. Which of the following conditions would cause the break-even point to increase?
a. Decrease in total fixed costs
b. Increase in unit selling price
c. Decrease in unit variable cost
d. Increase in unit variable cost
120. Knowing how costs behave to change in the level of activity is useful to management for all the following reasons
except for _____.
a. predicting customer demand
b. predicting profits as sales and production volumes change
c. estimating costs
d. changing an existing product production
121. Rouney Co. has budgeted that factory supervisors' salary will increase by 10%. If selling prices and all other cost
relationships are held constant, next year's break-even point would _____.
a. decrease by 10%
b. increase by 10%
c. remain constant
d. increase at a rate greater than 10%
122. _____ is the excess of sales over variable costs.
a. Fixed cost
b. Contribution margin
c. Operating income
d. Incremental cost
123. The point where the profit line intersects the horizontal axis on the profit-volume graph represents _____.
a. the maximum possible operating loss
b. the maximum possible operating income
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c. the total fixed costs
d. the break-even point
124. Under direct costing, only _____ manufacturing costs are included in the product cost.
a. variable
b. fixed
c. capitalized
d. notional
125. Compute the number of units that must be sold in order to have zero profit when fixed costs are $810,000 and unit
contribution margin is $90.
a. 8,100 units
b. 9,000 units
c. 6,500 units
d. 6,810 units
126. The _____ indicates the percentage of each sales dollar available to cover fixed costs and to provide operating
income.
a. fixed cost ratio
b. volume ratio
c. operating ratio
d. contribution margin ratio
127. The electricity expense in a production plant is an example of a _____.
a. variable cost
b. margin cost
c. fixed cost
d. distribution cost
128. Cost behavior refers to the manner in which _____.
a. a cost changes as the related activity changes
b. a cost is allocated to products
c. a cost is used in setting selling prices
d. a cost is estimated
129. The following is a list of various costs of producing sweatshirts. Classify each cost as either a variable, fixed, or
mixed cost for units produced and sold.
(a) Electricity costs of $0.025 per kilowatt-hour
(b) Warehouse rent of $6,000 per month plus $0.50 per square foot of storage used
(c) Thread
(d) Zip used in sweatshirts
(e) Janitorial costs of $2,000 per month
(f) Advertising costs of $10,000 per month
(g) Plant manager salary
(h) Color dyes for producing different colors of sweatshirts
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(i) Salary of the production supervisor
(j) Straight-line depreciation on sewing machines
(k) Patterns for different designs. Patterns typically last many years before being replaced
(l) Maintenance costs for the company's sewing machine. The cost is $2,000 per year plus $0.001 for each machine
hour of use
(m) Property taxes on factory, building, and equipment
(n) Cotton and polyester cloth
(o) Hourly wages of sewing machine operators
130. Tops Company sells Products D and E and has made the following estimates for the coming year:
Product Unit Selling Price Unit Variable Cost Sales Mix
D $30 $24 60%
E 70 56 40
Fixed costs are estimated at $202,400. Determine (a) the estimated sales in units of the overall product necessary to reach
the break-even point for the coming year, (b) the estimated number of units of each product necessary to be sold to reach
the break-even point for the coming year, and (c) the estimated sales in units of the overall product necessary to realize an
operating income of $119,600 for the coming year.
131. For the past year, Cline Company had fixed costs of $6,552,000, a unit variable cost of $444, and a unit selling price
of $600. For the coming year, no changes are expected in revenues and costs except that a new wage contract will increase
variable costs by $6 per unit. Determine the break-even sales (in units) for (a) the past year and (b) the coming year.
132. For the current year ending April 30, Philip Company expects fixed costs of $70,000, a unit variable cost of $45, and
a unit selling price of $95.
(a) Compute the anticipated break-even sales (in units).
(b) Compute the sales (in units) required to realize an operating profit of $8,000.
133. Lauder Company had fixed costs of $282,500, variable costs of $645,000, and actual sales amounted to $1,100,000.
If the company has a break-even point at $750,000 in sales revenue, determine (a) the margin of safety expressed in
dollars, (b) the margin of safety expressed as a percentage of sales, (c) the contribution margin ratio, and (d) the operating
income.
134. For the current year ending January 31, Ringo Company expects fixed costs of $178,500 and a unit variable cost of
$41.50. For the coming year, a new wage contract will increase the unit variable cost to $45. The selling price of $50 per
unit is expected to remain the same.
(a) Compute the break-even sales (in units) for the current year.
(b) Compute the anticipated break-even sales (in units) for the coming year, assuming the new wage contract is signed.
135. The following are two independent scenarios.
(a) Dream Co. has budgeted sales of $500,000, fixed costs are $240,000, and variable costs are $375,000. What is its
contribution margin ratio?
(b) Pearl Company has sales of $825,000, variable costs are 30% of sales, and fixed costs are $360,000? What is its
operating profit?
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136. The following cost graphs illustrate various types of cost behaviors.
For each of the following costs, identify the cost graph that best describes its cost behavior as the number of units
produced and sold increases.
(a) Per unit cost of direct labor
(b) Rent on warehouse of $10,000 per month
(c) Insurance costs of $2,500 per month
(d) Sales commissions of $5,000 plus $0.05 for each item sold
(e) Total salaries of quality control supervisors. One supervisor must be added for each additional work shift
(f) Total employer pension costs of $0.30 per direct labor hour
(g) Per unit straight-line depreciation costs
(h) Per unit cost of direct materials
(i) Total direct materials cost
(j) Electricity costs of $5,000 per month plus $0.0004 per kilowatt-hour
(k) Per unit cost of plant superintendent's salary
(l) Straight-line depreciation on factory equipment
(m) Repairs and maintenance costs of $3,000 for each 2,000 hours of factory machine usage
(n) Total direct labor cost
137. For the coming year, Belton Company estimates fixed costs of $60,000, the unit variable cost of $25, and the unit
selling price of $50. Determine (a) the break-even point in units of sales, (b) the unit sales required to realize operating
income of $100,000, and (c) the probable operating income if sales total $400,000.
138. Currently, Unicy Company's unit selling price is $25, the variable cost is $17, and the total fixed costs are $85,000. A
proposal is being evaluated to increase the selling price to $27.
(a) Compute the current break-even sales (in units).
(b) Compute the anticipated break-even sales (in units), assuming that the unit selling price is increased and all costs
remain constant.
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139. For the past year, LaPrade Company had fixed costs of $70,000, a unit variable costs of $32, and a unit selling price
of $40. For the coming year, no changes are expected in revenues and costs except that property taxes are expected to
increase by $10,000. Determine the break-even sales (in units) for (a) the past year and (b) the coming year.
140. A company has a margin of safety of 25%, a contribution margin ratio of 30%, and sales of $1,000,000.
(a) What was the break-even point?
(b) What was the operating income?
(c) If neither the relationship between variable costs and sales nor the amount of fixed costs is expected to change in
the next year, how much additional operating income can be earned by increasing sales by $110,000?
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Answer Key
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