1.
Which of the following statements is TRUE with respect to total variable costs?
Correct Answer
C. They will decrease as production decreases within the relevant range
Explanation
Total variable costs are costs that vary with the level of production. As production decreases within the relevant range, the costs associated with producing each unit will also decrease. This is because fixed costs are spread over a smaller number of units, resulting in a decrease in the total variable costs. Therefore, the statement "They will decrease as production decreases within the relevant range" is true.
2.
Which of the following equations represents the total mixed cost?
Correct Answer
A. Y=vx+f
Explanation
The equation y=vx+f represents the total mixed cost because it includes both the variable cost (vx) and the fixed cost (f). The variable cost is represented by the product of the variable rate (v) and the level of activity (x), while the fixed cost is represented by the constant term (f). By adding these two components together, we get the total mixed cost (y).
3.
YouCall offers a calling plan that charges $2.00 per month plus $0.05 per minute of call time. Under this plan, what is the monthly cost if you talk for a total of 100 minutes?
Correct Answer
A. $7.00
Explanation
The monthly cost for the YouCall calling plan is calculated by adding the fixed monthly charge of $2.00 to the cost of the call time. Since the call time is 100 minutes and the charge per minute is $0.05, the cost of the call time would be 100 * $0.05 = $5.00. Adding this to the fixed monthly charge gives a total monthly cost of $2.00 + $5.00 = $7.00.
4.
The following graph indicates which type of total cost behavior?
y=2x+5
Correct Answer
B. Mixed
Explanation
The given equation y=2x+5 represents a mixed cost behavior. In this equation, the variable x represents the level of activity or production volume, while the constant term 5 represents the fixed cost component. The coefficient 2 in front of x indicates the variable cost component, which increases proportionally with the level of activity. Therefore, the equation combines both fixed and variable costs, making it a mixed cost behavior.
5.
Total costs for Watson & Company at 100,000 units are $350,000, while total fixed costs are $150,000. The total variable costs at a level of 200,000 units would be:
Correct Answer
C. $400,000
Explanation
The total costs for Watson & Company at 100,000 units are $350,000, and the total fixed costs are $150,000. To find the total variable costs at a level of 200,000 units, we need to subtract the fixed costs from the total costs. Since the fixed costs remain the same regardless of the number of units produced, the variable costs can be found by subtracting the fixed costs from the total costs at 200,000 units. Therefore, the total variable costs at a level of 200,000 units would be $400,000.
6.
Harbor Manufacturing is trying to predict the cost associated with producing its anchors. At a production level of 4,000 anchors, Harbor Manufacturing’s average cost per anchor is $50.00. If $20,000 of the costs are fixed, and the plant manager uses the cost equation to predict total costs, her forecast for 5,000 anchors will be:
Correct Answer
B. $245,000
Explanation
The cost equation is used to predict total costs based on the production level. In this case, the average cost per anchor is given as $50.00 at a production level of 4,000 anchors. The fixed costs are given as $20,000. To find the total cost for 5,000 anchors, we can use the cost equation: Total Cost = (Average Cost per Anchor * Number of Anchors) + Fixed Costs. Plugging in the values, we get Total Cost = ($50.00 * 5,000) + $20,000 = $250,000 + $20,000 = $270,000. Therefore, the forecast for 5,000 anchors will be $245,000.
7.
Using account analysis, what type of cost is the rental space at $2,000 per month?
Correct Answer
A. Fixed
Explanation
The rental space at $2,000 per month is considered a fixed cost because it remains constant regardless of the level of activity or production. It does not change with the number of units produced or the level of sales. Therefore, it is categorized as a fixed cost in the context of account analysis.
8.
Ricco was reviewing the water bill for his carwash business and determined that the highest bill, $6,000, occurred in July when 2,000 cars were washed and the lowest bill, $4,500, occurred in February when 1,000 cars were washed. An estimate the fixed portion of the water bill would be
Correct Answer
A. $3,000
Explanation
Based on the information provided, we can determine that the fixed portion of the water bill remains the same regardless of the number of cars washed. In February, when 1,000 cars were washed, the bill was $4,500. In July, when 2,000 cars were washed, the bill was $6,000. The difference between the two bills is $1,500. This means that for every additional 1,000 cars washed, the bill increases by $1,500. Therefore, the fixed portion of the water bill would be $3,000.
9.
Below is information about the units produced and manufacturing costs for Snow Enterprises for the past six months.
Month
Number of units produced
Total manufacturing costs
January
7,940
$5,900
February
7,500
$5,460
March
6,400
$5,000
April
6,600
$5,500
May
4,740
$5,100
June
7,800
$5,840
Using the high-low method, what is the monthly fixed manufacturing cost?
Correct Answer
C. $3,915
Explanation
The high-low method involves finding the difference in total manufacturing costs between the highest and lowest production levels, and then dividing that difference by the difference in units produced. In this case, the highest production level is 7,940 units with a total manufacturing cost of $5,900, and the lowest production level is 4,740 units with a total manufacturing cost of $5,100. The difference in units produced is 7,940 - 4,740 = 3,200 units, and the difference in total manufacturing costs is $5,900 - $5,100 = $800. Dividing the difference in costs by the difference in units gives us $800 / 3,200 units = $0.25 per unit. Multiplying this by the average number of units produced (7,340 units) gives us a monthly fixed manufacturing cost of $0.25 * 7,340 units = $1,835. Therefore, the correct answer is $3,915.
10.
Traditional income statements organize costs by:
Correct Answer
A. Function
Explanation
The correct answer is "function". Traditional income statements organize costs by function, which means that costs are categorized based on the specific activities or departments they are associated with. This allows for better analysis and understanding of where costs are being incurred within the organization.
11.
The contribution margin is equal to:
Correct Answer
B. Sales minus variable expenses
Explanation
The contribution margin represents the amount of revenue that is available to cover fixed costs and generate profit after deducting variable expenses. Variable expenses are costs that change in direct proportion to the level of production or sales. By subtracting variable expenses from sales, the contribution margin can be calculated, providing insight into the profitability of each unit sold. This measure helps in determining the impact of changes in sales volume or variable costs on the overall profitability of the business.
12.
Toby’s Farm Store buys portable generators for $500 and sells them for $800. He pays a sales commission of 5% of sales revenue to his sales staff. Toby pays $2,000 a month rent for his store, and also pays $1,800 a month to his staff in addition to the commissions. Toby sold 200 generators in June. If Toby prepares a contribution margin income statement for the month of June, what would be his contribution margin?
Correct Answer
C. $52,000
Explanation
Toby's contribution margin can be calculated by subtracting his variable costs from his sales revenue. In this case, his variable costs include the cost of the generators ($500) and the sales commission (5% of sales revenue). The sales revenue can be calculated by multiplying the selling price ($800) by the number of generators sold (200). So, the sales revenue is $160,000. The cost of generators is $500 per generator, so for 200 generators, it would be $100,000. The sales commission is 5% of the sales revenue, which is $8,000. Therefore, the total variable costs are $100,000 + $8,000 = $108,000. Subtracting the variable costs from the sales revenue, we get $160,000 - $108,000 = $52,000. So, Toby's contribution margin is $52,000.
13.
Which of the following statements is FALSE?
Correct Answer
C. The high-low method only utilizes the data at the highest and lowest cost levels
Explanation
The high-low method does not only utilize the data at the highest and lowest cost levels. It uses these two data points to estimate the fixed and variable components of a mixed cost, but it does not exclusively rely on them. It calculates the variable cost per unit by dividing the change in cost by the change in activity level between the highest and lowest data points. It then uses this variable cost per unit to estimate the fixed cost component. Therefore, the statement that the high-low method only utilizes the data at the highest and lowest cost levels is false.
14.
Which of the following would be considered a committed fixed cost
Correct Answer
B. Depreciation
Explanation
Depreciation is considered a committed fixed cost because it is a non-cash expense that occurs regularly and is necessary for the operation of a business. It represents the gradual decrease in the value of an asset over time, such as equipment or vehicles, and is typically accounted for over the useful life of the asset. Unlike discretionary costs like research and development, office holiday parties, and advertising, depreciation is a fixed cost that is incurred regardless of the level of production or sales. It is a long-term investment that businesses plan and commit to, making it a committed fixed cost.
15.
To compute the unit contribution margin, __________ should be subtracted from the sales price per unit.
Correct Answer
C. All variable costs
Explanation
To compute the unit contribution margin, all variable costs should be subtracted from the sales price per unit. The unit contribution margin represents the amount of revenue that is available to cover fixed costs and contribute to profit after deducting variable costs. By subtracting all variable costs, such as direct materials, direct labor, and variable overhead, from the sales price per unit, the company can determine the amount of revenue that is left over to cover fixed costs and generate profit.
16.
Managers can quickly forecast the total contribution margin by multiplying the projected:
Correct Answer
A. Sales revenue by the contribution margin ratio
Explanation
The correct answer is sales revenue by the contribution margin ratio. This is because the contribution margin ratio represents the percentage of each sales dollar that contributes to covering fixed costs and generating profit. By multiplying the projected sales revenue by the contribution margin ratio, managers can estimate the total contribution margin, which is the amount left after subtracting variable costs from sales revenue. This calculation helps managers understand the profitability of their products or services and make informed decisions regarding pricing, cost control, and overall business strategy.
17.
Anthony Office Supplies sells refills on printer ink cartridges for $16 per refill. Variable costs are $4 per refill. Fixed costs are $2,000 per month. What is the contribution margin ratio for the printer ink cartridge refills?
Correct Answer
D. 75%
Explanation
The contribution margin ratio is calculated by subtracting the variable costs from the selling price and then dividing it by the selling price. In this case, the selling price is $16 and the variable costs are $4. Therefore, the contribution margin per refill is $16 - $4 = $12. To calculate the contribution margin ratio, divide the contribution margin per refill by the selling price and multiply by 100. So, ($12 / $16) x 100 = 75%.
18.
If the sale price per unit is $38, variable expenses per unit are $21, and total fixed expenses are $56,950, what will the breakeven sales in units be?
Correct Answer
D. 3,350
Explanation
The breakeven point is the point at which total revenue equals total expenses, resulting in zero profit or loss. To calculate the breakeven sales in units, we need to divide the total fixed expenses by the contribution margin per unit. The contribution margin per unit is the difference between the sale price per unit and the variable expenses per unit. In this case, the contribution margin per unit is $38 - $21 = $17. Dividing the total fixed expenses of $56,950 by the contribution margin per unit of $17 gives us the breakeven sales in units of 3,350.
19.
If the sale price per unit is $64, total fixed expenses are $90,000, and the breakeven sales in dollars is $360,000, what will the variable expense per unit be?
Correct Answer
D. $48.00
Explanation
The breakeven sales in dollars is calculated by dividing the total fixed expenses by the contribution margin ratio, which is the difference between the sale price per unit and the variable expense per unit. In this case, the breakeven sales in dollars is $360,000 and the total fixed expenses are $90,000. Therefore, the contribution margin ratio is 360,000/90,000 = 4. The sale price per unit is given as $64. To find the variable expense per unit, we subtract the contribution margin ratio from the sale price per unit: $64 - $16 = $48.00.
20.
Healthy Greetings Corporation produces and sells fruit baskets for special events. The unit selling price is $60, unit
variable costs are $45, and total fixed costs are $2,670. What are breakeven sales in dollars?
Correct Answer
D. $10,680
Explanation
The breakeven sales in dollars can be calculated by dividing the total fixed costs by the contribution margin ratio. The contribution margin ratio is calculated by subtracting the unit variable costs from the unit selling price and then dividing it by the unit selling price. In this case, the contribution margin ratio is ($60 - $45) / $60 = 0.25. Therefore, the breakeven sales in dollars would be $2,670 / 0.25 = $10,680.
21.
Which of the following statements is TRUE if the fixed costs increase while the sales price per unit and variable costs per unit remain constant?
Correct Answer
D. The contribution margin stays the same and the breakeven point increases
Explanation
If the fixed costs increase while the sales price per unit and variable costs per unit remain constant, the contribution margin (sales price per unit minus variable costs per unit) will stay the same. However, since the fixed costs have increased, the breakeven point (the point at which total revenue equals total costs) will increase. This means that the company will need to sell more units to cover the higher fixed costs and reach the breakeven point. Therefore, the correct answer is that the contribution margin stays the same and the breakeven point increases.
22.
Which of the following will decrease the breakeven point in units assuming no other changes in the cost-volume-profit relationship?
Correct Answer
A. An increase int he sale price per unit
Explanation
An increase in the sale price per unit will decrease the breakeven point in units because it will result in higher revenue per unit sold. This means that fewer units need to be sold in order to cover the fixed costs and start generating profit. With a higher sale price per unit, each unit contributes more towards covering the fixed costs, reducing the number of units needed to reach the breakeven point.
23.
Julia's Catering has a monthly target operating income of $6,000. Variable expenses are 40% of sales and monthly fixed expenses are $3,600. What is the monthly margin of safety in dollars if the business achieves its operating income goal?
Correct Answer
A. $10,000
Explanation
The monthly margin of safety is the amount by which actual sales can decline before the company starts incurring losses. In this case, the monthly target operating income is $6,000. Since variable expenses are 40% of sales, the contribution margin ratio is 60% (100% - 40%). To achieve the target operating income of $6,000, the company needs to generate sales of $10,000 ($6,000 / 60%). Therefore, the monthly margin of safety, if the business achieves its operating income goal, is $10,000.
24.
The higher the operating leverage factor, the:
Correct Answer
A. Greater the impact of volume on operating income
Explanation
The higher the operating leverage factor, the greater the impact of volume on operating income. This means that as the operating leverage factor increases, any change in the volume of sales or production will have a larger effect on the operating income of the company. This is because a higher operating leverage factor indicates that a larger portion of the company's costs are fixed, rather than variable. Therefore, any increase in sales volume will result in a proportionally larger increase in operating income, and vice versa.
25.
Southwest Electric Co-op has variable expenses of 20% of sales and monthly fixed expenses of $150,000. The monthly target operating income is $50,000. What is Southwest Electric Co-op’s operating leverage factor at the target level of operating income?
Correct Answer
C. 4.00
Explanation
The operating leverage factor is a measure of how sensitive a company's operating income is to changes in sales. It is calculated by dividing the contribution margin (sales minus variable expenses) by the operating income. In this case, the variable expenses are 20% of sales, so the contribution margin is 80% of sales. The target operating income is $50,000. Dividing the contribution margin ($50,000) by the target operating income ($50,000) gives us an operating leverage factor of 4.00. This means that for every 1% increase in sales, the operating income will increase by 4%.
26.
Which of the following describes a sunk cost?
Correct Answer
C. A historical cost that is always irrelevant
Explanation
A sunk cost is a historical cost that is always irrelevant. This means that the cost has already been incurred and cannot be recovered, regardless of the decision made. Therefore, it should not be considered when making future decisions.
27.
Which would be a consideration for making special orders
Correct Answer
D. All of the above
Explanation
When making special orders, there are several considerations to take into account. One consideration is the available capacity to fill the order. This means assessing whether the company has the resources and capabilities to meet the requirements of the special order without compromising regular operations. Another consideration is whether the price of the order will cover the incremental costs of filling it. This involves analyzing the additional expenses incurred in fulfilling the special order and ensuring that the price charged is sufficient to offset these costs. Lastly, it is important to evaluate if the special order will have any long-term impact on regular sales. This involves assessing whether fulfilling the special order will cannibalize regular sales or create any negative effects in the future. Therefore, all of these factors need to be considered when making special orders.
28.
Clear Sky Sailmakers manufactures sails for sailboats. The company has the capacity to produce 15,000 sails per year, but is currently producing and selling 10,000 sails per year. The following information relates to current production:
Sale price per unit
$250
Variable costs per unit:
Manufacturing
$165
Marketing and administrative
$50
Total fixed costs:
Manufacturing
$750,000
Marketing and administrative
$200,000
If a special sales order is accepted for 2,500 sails at a price of $205 per unit, fixed costs increase by $14,000, and variable marketing and administrative costs for that order are $25 per unit, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)
Correct Answer
A. Increase by $23,500
Explanation
The special sales order for 2,500 sails at a price of $205 per unit would generate additional revenue of $512,500 ($205 x 2,500). The variable marketing and administrative costs for that order would be $62,500 ($25 x 2,500). The fixed costs would increase by $14,000. Therefore, the operating income would increase by $436,000 ($512,500 - $62,500 - $14,000), which is equal to $23,500 more than the current operating income.
29.
Spahr Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 5,000 units, are as follows:
Direct materials
$2.00
Direct labor
$4.00
Variable manufacturing overhead
$3.00
Fixed manufacturing overhead
$1.00
Total cost
$10.00
The fixed overhead costs are unavoidable. Assuming no other use for its facilities, what is the highest price per unit that Spahr Company should be willing to pay for the part?
Correct Answer
D. $9
Explanation
The highest price per unit that Spahr Company should be willing to pay for the part is $9. This is because the total cost of producing the part is $10, which includes $1 of fixed manufacturing overhead costs that are unavoidable. Therefore, the variable costs of producing the part (direct materials, direct labor, and variable manufacturing overhead) amount to $9. Spahr Company should not be willing to pay more than the total variable costs to purchase the part.
30.
The Schmidt Corporation has in its inventory 4,000 damaged radios that cost $50,000. The radios can be sold in their present condition for $32,000, or repaired at a cost of $43,000 and sold for $66,000. What is the opportunity cost of selling the radios in their present condition?
Correct Answer
A. $23,000
Explanation
The opportunity cost of selling the radios in their present condition is $23,000. This is because if the company chooses to sell the radios as they are, they will receive $32,000. However, if they decide to repair the radios and sell them, they would earn $66,000. Therefore, the opportunity cost is the difference between these two amounts, which is $23,000.
31.
When deciding whether to outsource a product or service, managers should consider which of the following?
Correct Answer
D. All of the above
Explanation
When deciding whether to outsource a product or service, managers should consider the quality of the product or service, the delivery schedule, and the cost charged. Quality is important to ensure that the outsourced product or service meets the required standards. The delivery schedule is crucial to ensure that the outsourced product or service is delivered on time. The cost charged is a significant factor as it affects the overall budget and profitability. Considering all these factors together allows managers to make an informed decision about outsourcing.
32.
The internal financial statements of Pierce Solutions show that their product, LX90, incurred an operating loss in the most recent year. There were 20,000 units of LX90 sold in that year. Selected financial information about product LX90 follows.
Total sales revenue
$ 160,000
Variable costs
$ 100,000
Contribution margin
$ 60,000
Fixed costs
$ 70,000
Net operating loss
$ (10,000)
If product LX90 were to be dropped, the company would avoid $16,000 in fixed costs per year.
If Pierce Solutions were to drop product LX90, the change in annual operating income would be a(n):
Correct Answer
B. Decrease in total operating income of $44,000
Explanation
If product LX90 were to be dropped, the company would avoid $16,000 in fixed costs per year. Since the product incurred a net operating loss of $10,000, dropping the product would result in a decrease in total operating income of $44,000. This is because the company would not only avoid the $10,000 loss from LX90 but also save $16,000 in fixed costs, resulting in a total decrease of $44,000 in operating income.
33.
The income statement for Champion Parts is divided by its two product lines, Part L2 and Part C6, as follows:
Part L2
Part C6
Total
Sales revenue
$680,000
$275,000
$955,000
Variable expenses
$450,000
$210,000
$660,000
Contribution margin
$230,000
$65,000
$295,000
Fixed expenses
$75,000
$75,000
$150,000
Operating income (loss)
$155,000
$(10,000)
$145,000
If fixed costs are unavoidable and Champion Parts drops the Part C6 line, how will operating income change?
Correct Answer
A. Will decrease by $65,000
Explanation
If Champion Parts drops the Part C6 line, the variable expenses associated with Part C6 will be eliminated, resulting in a decrease in total variable expenses by $65,000. Since fixed expenses remain the same and are unavoidable, the decrease in variable expenses will directly impact the contribution margin. As a result, the operating income will decrease by the same amount, $65,000. Therefore, the correct answer is "Will decrease by $65,000."
34.
The benefit foregone by not choosing an alternative course of action is referred to as a(n):
Correct Answer
D. Opportunity cost
Explanation
Opportunity cost refers to the benefit that is lost or foregone when one alternative is chosen over another. It represents the value of the next best alternative that is not chosen. In other words, it is the cost of giving up the opportunity to pursue a different course of action. This concept is important in decision-making as it helps to evaluate the potential benefits and drawbacks of different choices and make informed decisions.