141
Income under variable costing
0
0
Beginning inventory (units)
0
800
Ending inventory (units)
800
500
Fixed manufacturing overhead per unit
$ 8.00
$ 8.00
Product cost – Variable Costing
Direct Labor
Variable overhead ($70,000/10,000 units)
172) A manufacturer reports the following information below for its first three years in operation.
Year 1 Year 2 Year 3
$ 76,00 $ 109,00 $ 115,00
Income for year 1 using absorption costing is:
A) $76,000. B) $88,800. C) $111,000. D) $106,600. E) $82,400.
Income under variable costing
0
0
Beginning inventory (units)
0
800
Ending inventory (units)
800
500
Fixed manufacturing overhead per unit
$ 8.00
$ 8.00
173) A manufacturer reports the following information below for its first three years in operation.
Year 1 Year 2 Year 3
$ 76,00 $ 109,00 $ 115,00
Income for year 2 using absorption costing is:
A) $117,000. B) $109,000. C) $111,000. D) $106,600. E) $115,000.
Income under variable costing
0
0
Beginning inventory (units)
0
800
Ending inventory (units)
800
500
Fixed manufacturing overhead per unit
$ 8.00
$ 8.00
174) A manufacturer reports the following information below for its first three years in operation.
Year 1 Year 2 Year 3
$ 76,00 $ 109,00 $ 115,00
Income for year 3 using absorption costing is:
A) $111,000. B) $115,000. C) $109,000. D) $117,000. E) $106,600.
Income under variable costing
0
0
Beginning inventory (units)
0
800
Ending inventory (units)
800
500
Fixed manufacturing overhead per unit
$ 8.00
$ 8.00
175) A manufacturer reports the following information below for its first three years in operation.
Year 1 Year 2 Year 3
$ 76,00 $ 109,00 $ 115,00
Income for year 3-year period using absorption costing is:
A) $305,000. B) $300,000. C) $280,000. D) $308,000. E) $310,000.
150
SHORT ANSWER QUESTIONS
176) Shown below are terms or phrases preceded by letters a through j followed by a list of definitions.
Match the terms or phrases 1 through 10 with the correct definitions by placing the letter of the term
or phrase in the answer space provided at the beginning of each definition.
(a) Mixed cost
(b) Fixed cost
(c) Contribution margin per unit
(d) Curvilinear cost
(e) Variable cost
(f) Step-wise cost
(g) Relevant range of operations
(h) Estimated line of cost behavior
(i) Least-squares regression
(j) Cost-volume-profit analysis
________ (1) The amount that the sale of one unit contributes toward covering fixed costs and
generating profit.
________ (2) A cost that changes in total in proportion to changes in volume of activity.
________ (3) A cost that includes both fixed and variable cost components.
________ (4) A cost that changes as volume changes, but at a nonconstant rate.
________ (5) A line drawn on a graph to fit the relation between cost and unit volume.
________ (6) A statistical method for identifying cost behavior that is more precise than the high-low
method and a scatter diagram.
________ (7) A company‘s normal operating range of production volume; excludes extremely high
and low operating levels that are unlikely to recur.
________ (8) A cost that remains constant over limited ranges of volumes of activity but shifts to
another level when volume changes significantly.
________ (9) A business planning tool that helps managers predict how changes in costs and sales
levels affect profit.
________ (10) A cost that remains unchanged in total amount despite variations in the volume of
activity within a relevant range.
ESSAY QUESTIONS
177) Define variable cost, fixed cost, and mixed cost.
SHORT ANSWER QUESTIONS
178) What are the basic assumptions of CVP analysis with regard to variable cost, fixed cost, and selling
price per unit? (Assume a single product).
ESSAY QUESTIONS
179) Describe what happens to the net income of a company under each of the following assumptions:
(a) Units sold are less than break-even units. (b) Units sold are greater than break-even units. (c)
Units sold are equal to the break-even units.
180) Discuss how CVP analysis can be useful in planning.
181) Describe and compare the three cost estimation methods used to develop a cost equation.
182) What are the unit contribution margin and the contribution margin ratio? What do these measures
reveal about a company’s cost structure?
183) What is operating leverage? How can the degree of operating leverage be used in analyzing
changes in sales?
184) What is a scatter diagram? How is a scatter diagram used to estimate cost behavior?
185) What is the high-low method? Briefly describe how it is applied.
186) Define the break-even point of a company.
187) Briefly describe a CVP chart, including its major components.
188) Describe how a cost-volume-profit analysis would be performed for a company that sells more than
one product when the sales mix is known.
SHORT ANSWER QUESTIONS
189) A company has a goal of earning $128,000 in pre-tax income. The contribution margin ratio is
30%. What dollar amount of sales must be achieved to reach the goal if fixed costs are $64,000?
190) A company has total fixed costs of $200,000. Its product sells for $25 per unit and variable costs
amount to $15 per unit. The company has a target pre-tax income of $50,000. How many units
must be sold to achieve this pre–tax target income?
ESSAY QUESTIONS
191) Proctor Company has fixed costs of $315,000 and a contribution margin ratio of 24%. If sales are
expected to be $1,500,000, what is the percentage of the margin of safety?
192) Johnston Co. anticipates total fixed costs of $120,000 and variable costs equal to 40% of sales.
What is the pretax income if sales are $650,000?
193) Journey Company is considering the production and sale of a new product with the following sales
and cost data: unit sales price $18; unit variable costs $8.50; and total fixed costs of $81,250.
Determine the dollar sales needed to generate a pre-tax income of $44,000, rounded to the nearest
whole dollar.
194) Philadelphia Co. is considering the production and sale of a new product with the following sales
and cost data: unit sales price, $300; unit variable costs, $180; total fixed costs, $270,000; and
projected sales, $900,000. What is the margin of safety:
(a) In dollar sales? And (b) As a percent of sales?
195) Zola Co. has a contribution margin ratio of 40% and would like to determine whether an additional
advertising expenditure of $4,000 would increase sales by $8,000. Calculate the increase or
decrease in net income that would result from this change, and comment on whether Zola should
purchase the additional advertising.
196) Portal Manufacturing has total fixed costs of $520,000. A unit of product sells for $15 and variable
costs per unit are $11.
a) Prepare a contribution margin income statement showing predicted net income (loss) if Portal sells
100,000 units for the year ended December 31.
b) At a minimum, how many units must Portal sell in order not to incur a loss?
197) Crookshank Manufacturing has total fixed costs of $460,000. A unit of product sells for $20 and
variable costs per unit are $11.
Prepare a contribution margin income statement showing predicted net income (loss) if Crookshank
sells 100,000 units for the year ended December 31.
198) Margin Company has total fixed costs of $360,000 and variable costs of $14 per unit. If the unit
sales price is reduced from $24 to $20 and advertising is increased by $10,000, sales will increase
from 40,000 to 65,000 units. Should Margin reduce its per unit sales price and pay for the
additional advertising? (Support your answer with calculations.)