Chapter 20 – Cost Behavior Analysis
TRUE/FALSE
1. Cost behavior is the way prices are adjusted due to changes in costs.
2. Cost behavior is defined as the manner in which costs respond to changes in volume or activity.
3. When managers plan, they may use cost behavior to decide how to change the mix of products to meet
changing demand.
4. Cost behavior analysis is not useful to a service business.
5. Within the relevant range, fixed and variable costs behave differently.
6. Total variable and fixed costs will be the same regardless of how many units are produced.
7. Unit variable costs vary with changes in productive output, whereas total variable costs remain
constant.
8. The relevant range of activity is the range in which actual operations are likely to occur.
9. Fixed costs always remain constant.
10. Unit fixed costs vary inversely with activity or volume.
11. Any cost can be classified as either a variable cost or a fixed cost.
12. Theoretical operating capacity is the level at which management expects to operate during a normal
business environment.
13. Practical capacity is theoretical or ideal capacity reduced by normal and anticipated work stoppages,
such as machine breakdowns.
14. Normal capacity is the average annual level of operating capacity needed to meet expected sales
demand.
15. Total costs that change in direct proportion to changes in productive output, or any other volume
measure, are called variable costs.
16. Linear approximation is a method of converting nonlinear variable costs into linear fixed costs.
17. Practical capacity and normal capacity are synonymous terms.
18. The engineering method of separating costs is sometimes called a time and motion study.
19. Regression analysis can be performed using one or more activities to predict costs.
20. A scatter diagram helps to determine if a linear relationship exists between a cost item and its related
activity measure.
21. Depreciation calculated using the production or units of output method is an example of a fixed cost.
22. Straight-line depreciation on the controller’s computer is an example of a variable cost.
23. Telephone costs are an example of a mixed cost.
24. Mixed costs are fixed and variable costs that are recorded in the same general ledger account.
25. The high-low method allows you to differentiate between fixed and variable costs when dealing with
mixed costs.
26. When using the high-low method, the accountant assumes the fixed portion of mixed costs to be the
lowest fixed amount incurred during the period under review.
27. Contribution Margin Income Statement is prepared to present for external users of financial
information.
28. A contribution margin income statement is formatted to emphasize cost behavior rather than
organizational functions.
29. Contribution margin (CM) is the amount that remains after all fixed costs are subtracted from sales.
30. All variable costs except manufacturing costs are subtracted from sales to determine the total
contribution margin.
31. Operating income is determined by deducting all fixed costs related to production, selling, and
administration from contribution margin.
32. Contribution Margin Income Statement divides costs into product and period costs.
33. The contribution margin income statement enables managers to view revenue and cost relationships on
a per unit basis or as a percentage of sales.
34. Cost-volume-profit analysis assumes a constant sales mix.
35. An increase in the unit sales price will cause the breakeven point to increase.
36. The point at which the total cost line intersects with the total revenue line provides information on the
number of units that must be sold to break even.
37. The breakeven point is the level of activity at which fixed costs are recovered.
38. Margin of safety is the excess of actual sales over break even sales.
39. The objective of breakeven analysis is to find the level of activity at which sales revenue equals the
sum of all variable and fixed costs.
40. A project breaks even when total revenue less all costs is equal to zero.
41. If a company wishes to evaluate the likelihood of success with a new product line, the breakeven point
will provide information about the average amount of profit the company will make.
42. “Breakeven” is the point at which a company will begin to earn a profit.
43. If fixed costs are $180,000, variable costs are $38 per unit, and the product sells for $70, the breakeven
point in sales dollars is $393,750.
44. In a graph of variable costs, the slope of the line is dependent on the variable costs per unit.
45. The graphical approach to cost-volume-profit analysis generally yields more precise results than using
a formula.
46. The contribution margin and the gross margin can be used interchangeably.
47. The contribution margin equals total fixed costs at the breakeven point.
48. Contribution margin is selling price minus unit fixed costs.
49. A product line’s contribution margin represents its contribution to paying off variable costs and to
generating a profit.
50. Adding the contribution margin as a component to cost-volume-profit computations will not change
the resulting amount of breakeven units in a given situation.
51. If fixed costs are $24,000, variable costs are $25 per unit, and the product sells for $45, the total
contribution margin at the breakeven point is $1,200.
52. Sales mix is the proportion of each product’s unit sales relative to the company’s total sales dollars.
53. The weighted-average contribution margin is computed by multiplying each product’s unit contribution
margin by the sales mix percentage of each product.
54. The weighted-average breakeven point is the breakeven point for the entire company.
55. Last year, RC Rancho’s revenue was $120,000,000, variable costs were $90,000,000 and fixed costs
were $15,000,000. RC Rancho’s contribution margin ratio was 25 percent.
56. Breakeven, simply, is when total costs equal total revenues.
57. In breakeven analysis adjusted for a profit factor, increasing the unit sales price will decrease the
number of units needed to meet the targeted profit.
58. If a company wants to know how many units of a certain product it must sell to make a desired level of
profit, it should add the amount of profit to the numerator in the breakeven analysis.
59. If targeted sales are 12,000 units, the sales price per unit is $70, fixed costs are $130,000, and variable
costs are $40 per unit, then planned profit must be $230,000.
60. If fixed costs are increased, then a breakeven analysis with an adjustment for profit will yield an
increase in the number of sales or targeted sales units.
61. Adding a desired profit level to breakeven computations will lower the number of sales units.
62. In cost-volume-profit analysis, sales revenue is computed by multiplying units sold by the selling price
per unit, and the targeted profit is projected by management.
63. For profit planning purposes, the following equation is used: Target Sales Units = (FC + P) ÷ CM per
Unit.
64. Breakeven sales in dollars can be obtained without knowing the contribution margin per unit.
65. If direct materials costs are decreased, the breakeven point will decrease.
66. Cost-volume-profit analysis assumes costs and revenues have a close linear approximation.
67. Service businesses do not have any overhead costs.
68. Cost-volume-profit analysis is not appropriate for service businesses.
69. Cost-volume-profit analysis cannot be used to estimate a targeted profit for service businesses.
MULTIPLE CHOICE
1. Which of the following would not require the use of cost behavior analysis?
a.
Transferring production costs from one department to another
b.
Projecting anticipated costs of a new project
c.
Buying an existing business
d.
Changing an existing product or service
2. Which of the following statements most accurately explains the behavior of costs?
a.
There is no norm; rather, costs can be fixed, variable, or a combination of both.
b.
The majority of costs are variable per unit of production.
c.
The majority of costs are fixed per unit of production.
d.
Costs can be fixed or variable but usually not a combination of both.
3. Which of the following statements is true regarding fixed and variable costs?
a.
Both costs are constant when considered on a total basis.
b.
Variable costs are constant in total, and fixed costs are constant per unit.
c.
Both costs are constant when considered on a per unit basis.
d.
Fixed costs are constant in total, and variable costs are constant per unit.
4. An insurance company pays its employees a commission of 6 percent on each sale. What is the proper
classification of the cost of sales commissions?
a.
Constant cost
b.
Variable cost
c.
Mixed cost
d.
Fixed cost
5. A retail manager is preparing a budget for the coming year and is considering the various costs of the
retail store. What is the best approach for the manager to take when budgeting for the cost of the
store’s merchandise?
a.
The total costs will stay the same as last year, but the unit cost will change with each sale.
b.
The total cost of merchandise for the year and the unit cost will remain constant with each
sale.
c.
The total cost of merchandise for the year will depend on the amount of sales, but the unit
cost of each sale will stay fairly constant.
d.
The total costs will stay the same as last year, and the unit cost will remain constant with
each sale.
6. The typical relationship between variable costs and volume may be described best as follows:
a.
Costs increase in an erratic, unpredictable fashion with changes in volume.
b.
Costs stay fairly constant with changes in volume.
c.
Costs increase with changes in volume up to a certain point and then remain constant.
d.
Costs increase in direct proportion to increases in volume.
7. Which of the following costs is a variable manufacturing cost?
a.
Depreciation costs computed using the straight-line method
b.
Factory rent
c.
President’s salary
d.
Direct labor costs
8. The variable cost per unit ____________ as the number of sales increase.
a.
decreases
b.
changes
c.
remains constant
d.
increases
9. Suppose a company rents a building for $250,000 a year for the purpose of manufacturing between
80,000 and 140,000 units (the relevant range of activity). The rental cost per unit of production will
__________ as production levels increase.
a.
behave in a nonlinear fashion
b.
increase
c.
decrease
d.
remain fixed
10. As production increases, what should you expect to happen to the fixed costs per unit?
a.
Increase
b.
Decrease
c.
Remain the same
d.
Either increase or decrease, depending on the variable cost
11. The level of operating capacity that is needed to meet expected sales demand is called
a.
practical capacity.
b.
normal capacity.
c.
ideal capacity.
d.
excess capacity.
12. Theoretical capacity reduced by normal and anticipated work stoppages is called
a.
practical capacity.
b.
normal capacity.
c.
ideal capacity.
d.
excess capacity.
13. Theoretical capacity refers to
a.
extra machinery and equipment kept on hand.
b.
the maximum productive output possible.
c.
an output level that allows for normal work stoppages.
d.
the operating capacity that will meet expected sales demand.
14. In terms of cost behavior, supervisory salaries and direct labor are classified as
a.
fixed and variable, respectively.
b.
both variable.
c.
both fixed.
d.
mixed and fixed, respectively.
15. In terms of cost behavior, telephone expense and direct materials are classified as
a.
variable and fixed, respectively.
b.
fixed and variable, respectively.
c.
mixed and fixed, respectively.
d.
mixed and variable, respectively.
16. The engineering method of separating costs
a.
is generally used to estimate the cost of activities and new products.
b.
is sometimes called a time and motion study.
c.
is expensive to use because it is so detailed.
d.
All of the above are correct.
17. Repair bills for large machinery may include a flat fee for the visit to the company’s premises plus
additional labor charges per hour of repair work and various costs of replacement parts needed. What
type of cost is the repair?
a.
Selling cost
b.
Variable cost
c.
Fixed cost
d.
Mixed cost
18. A retail organization’s sales salaries consist of a base amount plus a commission of 5 percent on each
sale. Which of the following would properly classify the cost of sales salaries?
a.
Fixed and product
b.
Mixed and period
c.
Mixed and product
d.
Variable and product
19. The high-low method
a.
calculates variable costs per unit by dividing the difference in the high and low activity
levels by the high and low costs.
b.
assumes that the fixed portion of the mixed cost is the lowest monthly cost incurred during
the period under consideration.
c.
allows differentiation between fixed and variable costs when dealing with mixed costs.
d.
combines the fixed and variable portions of a cost to determine the total cost.
20. Given the following cost and activity observations for Leno Enterprises’ utilities, use the high-low
method to calculate Leno’s variable utilities cost per machine hour.
Cost
Machine Hours
September
$4,100
22,000
October
3,700
18,000
November
3,900
19,000
December
4,500
28,000
a.
$0.08
b.
$4.86
c.
$0.25
d.
$12.50
21. You have calculated, using the high-low method, a variable cost per machine hour of $0.80 for your
production power costs. Power costs at 6,000 machine hours are $5,400; at 9,000 machine hours, they
are $7,800. What are the total fixed costs that you would use to estimate production power costs for
your company at any level within your relevant range?
a.
$600
b.
$6,400
c.
$2,400
d.
$4,800
22. Given the following cost and activity observations for Notwen Company’s maintenance costs, use the
high-low method to calculate Notwen’s monthly fixed costs for maintenance.
Cost
January
$130,000
February
180,500
March
151,100
a.
$11,250
b.
$4,550
c.
$3,750
d.
$2,650
23. Dapper Hat Makers is in the business of designing and producing specialty hats. The material used for
derbies costs $4.50 per unit, and Dapper pays each of its two full-time employees $250 per week. If
the employees make 50 derbies in one week, what is the fixed cost per derby? (Round to two decimal
places where necessary.)
a.
$4.50
b.
$5.00
c.
$10.00
d.
$14.50
24. Dapper Hat Makers is in the business of designing and producing specialty hats. The material used for
derbies costs $4.50 per unit, and Dapper pays each of its two full-time employees $250 per week. If
Employee A makes 15 derbies in one week, what is the variable cost per derby? (Round to two
decimal places where necessary.)
a.
$4.50
b.
$15.00
c.
$16.67
d.
$21.17
25. Which of the following is a fixed cost?
a.
Direct materials
b.
Personnel manager’s salary
c.
Operating supplies
d.
Direct labor
26. Using the high-low method and the information below, compute the monthly variable cost per
telephone hour for SKP Corporation.
Month
Telephone Hours Used
Telephone Expenses
April
100
$4,500
May
110
4,800
June
150
5,400
a.
$18.00
b.
$36.00
c.
$34.64
d.
$45.00
27. The delivery trucks of Italiana’s Pizzeria incurred maintenance costs of $2,400 during its busiest month
of 20xx, in which 8,000 miles were driven collectively. During its slowest month, $1,800 in
maintenance costs were incurred, resulting from 5,000 miles being driven. Using the high-low method,
what maintenance cost would the company expect to incur at 6,800 miles of driving?
a.
$2,160
b.
$2,060
c.
$2,310
d.
$2,010
28. Using the high-low method and the information below, compute the monthly total fixed costs for SKP
Corporation.
Month
Telephone Hours Used
Telephone Expenses
April
100
$4,500
May
110
4,800
June
150
5,400
a.
$1,800
b.
$2,700
c.
$3,640
d.
$4,500
29. Retleb Manufacturing Company noticed that, during its busiest month of 20xx, maintenance costs
totaled $15,400, resulting from the production of 32,000 units. During its slowest month, $12,600 in
maintenance costs were incurred, resulting from the production of 24,000 units. Using the high-low
method, what maintenance cost would the company expect to incur at a volume of 20,000 units?
a.
$7,000
b.
$11,200
c.
$8,400
d.
$2,800
30. During this past year, a small publishing company sold 60,000 copies of Super Travel paperbacks (its
only product) at $5 per book; total fixed costs were $14,000; and total variable costs were $3 per book.
What is this company’s breakeven point in units?
a.
9,800 units
b.
7,000 units
c.
28,000 units
d.
14,000 units
31. The equation for finding the breakeven point may be written as
a.
S – VC – FC = 0.
b.
VC – FC = S.
c.
S + FC = VC.
d.
S + VC + FC = 0.
32. The breakeven point is
a.
where fixed and variable costs reach the upper level of the relevant range.
b.
the level of activity where all fixed costs are recovered.
c.
where total revenue equals total costs.
d.
where fixed costs meet variable costs.
33. When fixed costs are $46,500, the variable cost is $12 per unit, and the product sells for $22 per unit,
the breakeven point is
a.
4,650 units.
b.
9,300 units.
c.
2,325 units.
d.
6,975 units.
34. The new Corina watch has an expected selling price per watch of $42, the projected variable cost per
unit is $24, and estimated fixed costs per month are $31,680.
The breakeven point in watches per month is
a.
1,535 watches.
b.
2,010 watches.
c.
1,760 watches.
d.
2,200 watches.
35. The new Corina watch has an expected selling price per watch of $42, the projected variable cost per
unit is $24, and estimated fixed costs per month are $31,680.
The breakeven point in sales dollars is
a.
$63,360.
b.
$42,240.
c.
$73,920.
d.
$52,800.
36. In a graph of cost-volume-profit analysis, the
a.
total revenue line typically begins at a required minimum level.
b.
slope of the total cost line is dependent on the variable cost per unit.
c.
total cost line normally begins at zero.
d.
sales level at which total cost and total revenue lines intersect is also equal to fixed costs.
37. At production levels beyond the breakeven point,
a.
fixed costs are not recovered.
b.
profit is negative.
c.
variable costs are zero.
d.
profit is positive.
38. The equation that will provide the breakeven point in units (SP = selling price) is
a.
BE units = (SP – VC) ÷ FC per unit.
b.
VC per unit + FC = SP per unit BE units.
c.
BE units = FC ÷ CM per unit.
d.
SP per unit – VC per unit = FC ÷ BE units.
39. A crystal goblet sells for $50 per goblet. The contribution margin per goblet is $14. Total monthly
fixed costs are estimated to be $120,400. The monthly breakeven point in goblets is
a.
8,600 goblets.
b.
17,200 goblets.
c.
4,300 goblets.
d.
60,200 goblets.
40. The breakeven point is the point at which
a.
fixed costs equal variable costs.
b.
contribution margin equals fixed costs.
c.
sales equal variable costs.
d.
fixed costs equal sales.
41. Christian Company’s sales revenue for 20xx was $144,000. Christian’s product sells for $5.50 and has
a 30 percent contribution margin. Christian has fixed costs of $33,000.
What is Christian Company’s breakeven point in sales dollars?
a.
$205,714
b.
$110,000
c.
$144,000
d.
$173,000
42. Christian Company’s sales revenue for 20xx was $144,000. Christian’s product sells for $5.50 and has
a 30 percent contribution margin. Christian has fixed costs of $33,000.
What is Christian Company’s breakeven point in units?
a.
43,200 units
b.
9,900 units
c.
26,182 units
d.
20,000 units
43. At the breakeven point, the contribution margin
a.
is at a maximum.
b.
minus total fixed costs equals a positive number.
c.
equals fixed costs.
d.
is at a minimum.
44. Contribution margin equals sales minus
a.
cost of goods sold.
b.
total costs.
c.
fixed costs.
d.
variable costs.
45. How many total dollars of sales must BAC Company sell to break even if the selling price per unit is
$8.50, variable costs are $4.00 per unit, and fixed costs are $9,000?
a.
$4,000
b.
$8,500
c.
$9,000
d.
$17,000
46. When fixed costs are $18,000 and the contribution margin per unit is $4, the breakeven point is
a.
4,500 units.
b.
2,230 units.
c.
$22,300.
d.
$72,000.
47. How many units must BAC Company sell to break even if the selling price per unit is $8.50, variable
costs are $4.00 per unit, and fixed costs are $9,000?
a.
1,000
b.
1,059
c.
2,000
d.
2,250
48. Trawest, Inc., has prepared the following data:
Unit Sales Price
Unit Variable Costs
Unit Sales
Product A
$34.00
$20.00
35,000
Product B
26.00
14.50
7,000
Product C
18.00
10.50
14,000
The sales mix for Products A, B, and C is
a.
62.5 percent, 12.5 percent, and 25 percent, respectively.
b.
100 percent, 20 percent, and 40 percent, respectively.
c.
100 percent, 25 percent, and 50 percent, respectively.
d.
44 percent, 33 percent, and 23 percent, respectively.
49. Using the contribution margin approach, find the breakeven point in units for Consumer Products if
the selling price per unit is $12, the variable cost per unit is $6, and the fixed costs are $8,040.
a.
670
b.
1,200
c.
1,340
d.
6,000
50. Manix Company has gathered the following data:
Unit Sales Price
Unit Variable Costs
Unit Sales
Product 1
$18.00
$10.00
24,500
Product 2
27.00
17.00
17,500
Product 3
35.00
28.00
28,000
Fixed costs are $233,280. The weighted-average breakeven point is
a.
34,500 units.
b.
28,800 units.
c.
25,200 units.
d.
29,900 units.
51. Field Legal Services is trying to determine the variable and fixed elements of its service overhead. The
following data have been collected from recent activity:
Total Service Overhead
Cases Worked
March
$22,900
112
April
20,800
98
May
26,400
138
The formula for total service overhead costs is
a.
$5,600 + $140 per case.
b.
$5,600 + $40 per case.
c.
$7,823 + $134.62 per case.
d.
$7,080 + $140 per case.
52. Dilly LLC, wants to make a profit of $30,000. It has variable costs of $66 per unit and fixed costs of
$20,000. How much must it charge per unit if 5,000 units are sold?
a.
$51
b.
$36
c.
$66
d.
$76
53. If Oui Watches sells 300 watches at $48 per watch and has variable costs of $20 per watch and fixed
costs of $4,000, what is the projected profit?
a.
$4,000
b.
$4,400
c.
$8,400
d.
$12,000
54. Lakeside has gathered the following data in order to calculate the weighted-average contribution
margin: