COST-VOLUME-PROFIT RELATIONSHIPS

1. Distinguish between variable and fixed costs. Variable costs are costs that vary in total
directly and proportionately with changes in the activity index. Fixed costs are costs that
remain the same in total regardless of changes in the activity index.
2. Explain the significance of the relevant range. The relevant range is the range of activity
in which a company expects to operate during a year. It is important in CV analysis
because the behavior of costs is linear throughout the relevant range.
!. Explain the concept of mixed costs. "ixed costs increase in total but not proportionately
with changes in the activity level. For purposes of CV analysis# mixed costs must be
classified into their fixed and variable elements. $ne method that management may use is
the high%low method.
&. List the five components of cost-volume-profit analysis. The five components of CV
analysis are 'a( volume or level of activity# 'b( unit selling prices# 'c( variable cost per unit#
'd( total fixed costs# and 'e( sales mix.
). Indicate what contribution margin is and how it can be expressed. Contribution margin
is the amount of revenue remaining after deducting variable costs. It can be expressed as a
per unit amount or as a ratio.
*. Identify the three ways to determine the break-even point. The brea+%even point can be
'a( computed from a mathematical e,uation# 'b( computed by using a contribution margin
techni,ue# and 'c( derived from a CV graph.
-. Define margin of safety and give the formulas for computing it. "argin of safety is the
difference between actual or expected sales and sales at the brea+%even point. The
formulas for margin of safety are .ctual 'expected( sales / 0rea+%even sales 1 "argin of
safety in dollars2 "argin of safety in dollars 3 .ctual 'expected( sales 1 "argin of safety
ratio.
4. Give the formulas for determining sales reuired to earn target net income. $ne
formula is5 6e,uired sales 1 Variable costs 7 Fixed costs 7 Target net income. .nother
formula is5 Fixed costs 7 Target net income 3 Contribution margin ratio 1 6e,uired sales.
8. Describe the essential features of a cost-volume-profit income statement. The CV
income statement classifies costs and expenses as variable or fixed and reports
contribution margin in the body of the statement.
91:. Explain the difference between absorption costing and variable costing. ;nder
absorption costing# fixed manufacturing costs are product costs2 under variable costing#
fixed manufacturing costs are period costs.
Test Bank for Managerial Ao!nting" Seon# E#ition
TRUE-FALSE STATEMENTS
1. .n activity index identifies the activity that has a causal relationship with a particular cost.
2. . variable cost remains constant per unit at various levels of activity.
!. . fixed cost remains constant in total and on a per unit basis at various levels of activity.
&. If volume increases# all costs will increase.
). If the activity index decreases# total variable costs will decrease proportionately.
*. Changes in the level of activity will cause unit variable and unit fixed costs to change in
opposite directions.
-. For CV analysis# both variable and fixed costs are assumed to have a linear relationship
within the relevant range of activity.
4. The relevant range of activity is the activity level where the firm will earn income.
8. Costs will not change in total within the relevant range of activity.
1:. The high%low method is used in classifying a mixed cost into its variable and fixed
elements.
11. . mixed cost has both selling and administrative cost elements.
12. The fixed cost element of a mixed cost is the cost of having a service available.
1!. For planning purposes# mixed costs are generally grouped with fixed costs.
1&. The difference between the costs at the high and low levels of activity represents the fixed
cost element of a mixed cost.
1). <hen applying the high%low method# the variable cost element of a mixed cost is
calculated before the fixed cost element.
1*. .n assumption of CV analysis is that all costs can be classified as either variable or
fixed.
1-. In CV analysis# the term cost includes manufacturing costs# and selling and
administrative expenses.
14. Contribution margin is the amount of revenues remaining after deducting cost of goods
sold.
18. ;nit contribution margin is the amount that each unit sold contributes towards the
recovery of fixed costs and to income.
2:. The contribution margin ratio is calculated by multiplying the unit contribution margin by
the unit sales price.
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Cost%Volume%rofit 6elationships
21. 0oth variable and fixed costs are included in calculating the contribution margin.
22. The brea+%even point is where total sales e,uals total variable costs.
2!. The brea+%even point is e,ual to the fixed costs plus net income.
2&. If the unit contribution margin is =1 and unit sales are )#::: units above the brea+%even
volume# then net income will be =)#:::.
2). The margin of safety is the difference between contribution margin and fixed costs.
2*. . target net income is calculated by ta+ing actual sales minus the margin of safety.
2-. . CV income statement shows contribution margin instead of gross profit.
24. . CV income statement classifies total costs by functional areas.
928. Variable costing is not acceptable in reporting to stoc+holders under generally accepted
accounting principles.
9!:. If more units are sold than are produced in a period# variable costing income will be
greater than absorption costing income.
Ans&ers to Tr!e-False State'ents
Ite' Ans( Ite' Ans( Ite' Ans( Ite' Ans( Ite' Ans( Ite' Ans(
1. T *. F 11. F 1*. T 21. F 2*. F
2. T -. T 12. T 1-. T 22. F 2-. T
!. F 4. F 1!. F 14. F 2!. F 24. F
&. F 8. F 1&. F 18. T 2&. T 928. T
). T 1:. T 1). T 2:. F 2). F 9!:. T
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Test Bank for Managerial Ao!nting" Seon# E#ition
MULTIPLE CHOICE *UESTIONS
!1. For an activity base to be useful in cost behavior analysis#
a. the activity should always be stated in dollars.
b. there should be a correlation between changes in the level of activity and changes in
costs.
c. the activity should always be stated in terms of units.
d. the activity level should be constant over a period of time.
!2. . variable cost is a cost that
a. varies per unit at every level of activity.
b. occurs at various times during the year.
c. varies in total in proportion to changes in the level of activity.
d. may or may not be incurred# depending on management>s discretion.
!!. . cost which remains constant per unit at various levels of activity is a
a. variable cost.
b. fixed cost.
c. mixed cost.
d. manufacturing cost.
!&. .n increase in the level of activity will have the following effects on unit costs for variable
and fixed costs5
;nit Variable Cost ;nit Fixed Cost
a. Increase ?ecrease
b. 6emains constant 6emains constant
c. ?ecrease 6emains constant
d. 6emains constant ?ecrease
!). . fixed cost is a cost which
a. varies in total with changes in the level of activity.
b. remains constant per unit with changes in the level of activity.
c. varies inversely in total with changes in the level of activity.
d. remains constant in total with changes in the level of activity.
!*. Fixed costs normally will not include
a. property taxes.
b. direct labor.
c. supervisory salaries.
d. depreciation on buildings and e,uipment.
!-. The increased use of automation and less use of the wor+ force in companies has caused
a trend towards an increase in
a. both variable and fixed costs.
b. fixed costs and a decrease in variable costs.
c. variable costs and a decrease in fixed costs.
d. variable costs and no change in fixed costs.
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Cost%Volume%rofit 6elationships
!4. Cost behavior analysis is a study of how a firm>s costs
a. relate to competitors> costs.
b. relate to general price level changes.
c. respond to changes in activity levels within the company.
d. respond to changes in the gross national product.
!8. Cost behavior analysis applies to
a. retailers.
b. wholesalers.
c. manufacturers.
d. all entities.
&:. If a firm increases its activity level#
a. costs should remain the same.
b. most costs will rise.
c. no costs will remain the same.
d. some costs will change# others will remain the same.
&1. .n activity index might be referred to as a cost
a. driver.
b. multiplier.
c. element.
d. correlation.
&2. Cost activity indexes might help classify costs as
a. temporary.
b. permanent.
c. variable.
d. transient.
&!. <hich of the following is not a cost classification@
a. "ixed
b. "ultiple
c. Variable
d. Fixed
&&. If the activity level increases 1:A# total variable costs will
a. remain the same.
b. increase by more than 1:A.
c. decrease by less than 1:A.
d. increase 1:A.
&). <hich of the following costs are variable@
Cost )#::: ;nits 1)#::: ;nits
1 =1::#::: =!::#:::
2 &:#::: 2&:#:::
! 8:#::: 8:#:::
& ):#::: 1):#:::
a. 1 and 2.
b. 1 and &.
c. only 1.
d. only 2.
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Test Bank for Managerial Ao!nting" Seon# E#ition
&*. Changes in activity have a'n( BBBBBBBBB effect on fixed costs per unit.
a. positive
b. negative
c. inverse
d. neutral
&-. <hich of the following is not a fixed cost@
a. ?irect materials
b. ?epreciation
c. Cease charge
d. roperty taxes
&4. The relevant range of activity refers to the
a. geographical areas where the company plans to operate.
b. activity level where all costs are curvilinear.
c. levels of activity over which the company expects to operate.
d. level of activity where all costs are constant.
&8. <hich of the following is not a plausible explanation of why variable costs often behave in
a curvilinear fashion@
a. Cabor specialiDation
b. $vertime wages
c. Total variable costs are constant within the relevant range
d. .vailability of ,uantity discounts
):. Firms operating at 1::A capacity
a. are common.
b. are the exception rather than the rule.
c. have no fixed costs.
d. have no variable costs.
)1. <hich of the following would be the least controllable fixed costs@
a. roperty taxes
b. 6ent
c. 6esearch and development
d. "anagement training programs
)2. <hich one of the following is a name for the range over which a company expects to
operate@
a. "ixed range
b. Fixed range
c. Variable range
d. 6elevant range
)!. If graphed# fixed costs that behave in a curvilinear fashion resemble
a. an E%curve.
b. an inverted E%curve.
c. a straight line.
d. a stair%step pattern.
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Cost%Volume%rofit 6elationships
)&. The graph of variable costs that behave in a curvilinear fashion will
a. approximate a straight line within the relevant range.
b. be sharply +in+ed on both sides of the relevant range.
c. be downward sloping.
d. be a stair%step pattern.
)). . mixed cost contains
a. a variable cost element and a fixed cost element.
b. both selling and administrative costs.
c. both retailing and manufacturing costs.
d. both operating and nonoperating costs.
)*. .t the high level of activity in Fovember# -#::: machine hours were run and power costs
were =12#:::. In .pril# a month of low activity# 2#::: machine hours were run and power
costs amounted to =*#:::. ;sing the high%low method# the estimated fixed cost element of
power costs is
a. =12#:::.
b. =*#:::.
c. =!#*::.
d. =4#&::.
)-. <ynne Company>s high and low level of activity last year was *:#::: units of product
produced in "ay and 2:#::: units produced in Fovember. "achine maintenance costs
were =!8#::: in "ay and =1)#::: in Fovember. ;sing the high%low method# determine an
estimate of total maintenance cost for a month in which production is expected to be
&)#::: units.
a. =!!#-):.
b. =!*#:::.
c. =28#2):.
d. =!:#:::.
)4. <hich of the following is not true about the graph of a mixed cost@
a. It is possible to determine the amount of the fixed cost from the graph.
b. There is a total cost line on the graph.
c. The fixed cost portion of the graph is the same amount at all levels of activity.
d. The variable cost portion of the graph is rectangular in shape.
)8. <hich of the following is not a mixed cost@
a. Car rental fee
b. Glectricity
c. ?epreciation
d. Telephone Gxpense
*:. In using the high%low method# the fixed cost
a. is determined by subtracting the total cost at the high level of activity from the total
cost at the low activity level.
b. is determined by adding the total variable cost to the total cost at the low activity level.
c. is determined before the total variable cost.
d. may be determined by subtracting the total variable cost from either the total cost at
the low or high activity level.
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Test Bank for Managerial Ao!nting" Seon# E#ition
*1. If .merican .irlines cuts its domestic fares by !:A#
a. its fixed costs will decrease.
b. profit will increase by !:A.
c. a profit can only be earned by decreasing the number of flights.
d. a profit can be earned either by increasing the number of passengers or by decreasing
variable costs.
;se the following information for ,uestions *2/*&.
"onth "iles Total Cost
Hanuary 4:#::: =1!)#:::
February ):#::: 1::#:::
"arch -:#::: 12:#:::
.pril 8:#::: 1*:#:::
*2. In applying the high%low method# which months are relevant@
a. Hanuary and February
b. Hanuary and .pril
c. February and .pril
d. February and "arch
*!. In applying the high%low method# what is the unit variable cost@
a. =1.*:.
b. =1.):.
c. =1.4:.
d. cannot be determined from the information given.
*&. In applying the high%low method# what is the fixed cost@
a. =2)#:::.
b. =&:#:::.
c. =2:#:::.
d. =*:#:::.
*). For analysis purposes# the high%low method usually produces a'n(
a. reasonable estimate.
b. precise estimate.
c. overstated estimate.
d. understated estimate.
**. The high%low method is criticiDed because it
a. is not a graphical method.
b. is a mathematical method.
c. ignores much of the available data by concentrating on only the extreme points.
d. doesn>t provide reasonable estimates.
*-. The high%low method is often employed in analyDing
a. fixed costs.
b. mixed costs.
c. variable costs.
d. conversion costs.
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Cost%Volume%rofit 6elationships
*4. In CV analysis# the term IcostI
a. includes only manufacturing costs.
b. means cost of goods sold.
c. includes manufacturing costs plus selling and administrative expenses.
d. excludes all fixed manufacturing costs.
*8. <hich one of the following is not an assumption of CV analysis@
a. .ll units produced are sold.
b. .ll costs are variable costs.
c. Eales mix remains constant.
d. The behavior of costs and revenues are linear within the relevant range.
-:. CV analysis does not consider
a. level of activity.
b. fixed cost per unit.
c. variable cost per unit.
d. sales mix.
-1. <hich of the following is not an underlying assumption of CV analysis@
a. Changes in activity are the only factors that affect costs.
b. Cost classifications are reasonably accurate.
c. 0eginning inventory is larger than ending inventory.
d. Eales mix is constant.
-2. CV analysis is not important in
a. calculating depreciation expense.
b. setting selling prices.
c. determining the product mix.
d. utiliDing production facilities.
-!. To which function of management is CV analysis most applicable@
a. lanning
b. $rganiDing
c. ?irecting
d. Controlling
-&. Contribution margin
a. is always the same as gross profit margin.
b. excludes variable selling costs from its calculation.
c. is calculated by subtracting total manufacturing costs per unit from sales revenue per
unit.
d. e,uals sales revenue minus variable costs.
-). If a company had a contribution margin of =2::#::: and a contribution margin ratio of
&:A# total variable costs must have been
a. =!::#:::.
b. =12:#:::.
c. =)::#:::.
d. =4:#:::.
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Test Bank for Managerial Ao!nting" Seon# E#ition
-*. <hich of the following would not be an acceptable way to express contribution margin@
a. Eales minus variable costs
b. Eales minus unit costs
c. ;nit selling price minus unit variable costs
d. Contribution margin per unit divided by unit selling price
--. . company has contribution margin per unit of =14 and a contribution margin ratio of &:A.
<hat is the unit selling price@
a. =!:.::.
b. =&).::.
c. =-.2:.
d. Cannot be determined.
-4. Eales are =2):#::: and variable costs are =1):#:::. <hat is the contribution margin
ratio@
a. *-A
b. &:A
c. *:A
d. cannot be determined because amounts are not expressed per unit.
-8. . company has total fixed costs of =12:#::: and a contribution margin ratio of 2:A. The
total sales necessary to brea+ even are
a. =&4:#:::.
b. =*::#:::.
c. =1):#:::.
d. =1&&#:::.
4:. . company sells a product which has a unit sales price of =)# unit variable cost of =! and
total fixed costs of =1::#:::. The number of units the company must sell to brea+ even is
a. ):#::: units.
b. 2:#::: units.
c. 2::#::: units.
d. !!#!!! units.
41. The brea+%even point is where
a. total sales e,uals total variable costs.
b. contribution margin e,uals total fixed costs.
c. total variable costs e,ual total fixed costs.
d. total sales e,uals total fixed costs.
42. The brea+%even point cannot be determined by
a. computing it from a mathematical e,uation.
b. computing it using contribution margin.
c. reading the prior year>s financial statements.
d. deriving it from a CV graph.
4!. Fixed costs are =*::#::: and the variable costs are -)A of the unit selling price. <hat is
the brea+%even point in dollars@
a. =1#&::#:::.
b. =1#4::#:::.
c. =2#&::#:::.
d. =4::#:::.
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Cost%Volume%rofit 6elationships
4&. Fixed costs are =8::#::: and the contribution margin per unit is =1):. <hat is the
brea+%even point@
a. =2#2):#:::.
b. =*#:::#:::.
c. 2#2): units.
d. *#::: units.
4). Etarr Company has the following data5
Variable costs are -:A of the unit selling price.
The contribution margin ratio is !:A.
The contribution margin per unit is =)::.
The fixed costs are =&::#:::.
<hich of the following does not express the brea+%even point@
a. =&::#::: 7 .-:J 1 J
b. =&::#::: 7 .!:J 1 J
c. =&::#::: 3 =):: 1 J
d. =&::#::: 3 .!: 1 J
4*. . CV graph does not include a
a. variable cost line.
b. fixed cost line.
c. sales line.
d. total cost line.
4-. The brea+%even point in units is computed by dividing fixed costs by the
a. contribution margin ratio.
b. contribution margin per unit.
c. total contribution margin.
d. unit selling price.
44. In a CV graph# the brea+%even point is at the intersection of the sales line and the
a. fixed cost line.
b. variable cost line.
c. total cost line.
d. mixed cost line.
48. The amount by which actual or expected sales exceeds brea+%even sales is referred to as
a. contribution margin.
b. unanticipated profit.
c. margin of safety.
d. target net income.
8:. 0ar+ley Company had actual sales of =)::#::: and a brea+%even point of =&::#:::. Its
margin of safety ratio was
a. 2:A
b. 2)A.
c. 4:A.
d. 12)A.
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Test Bank for Managerial Ao!nting" Seon# E#ition
81. In evaluating the margin of safety# the
a. brea+%even point is not relevant.
b. higher the ratio# the greater the margin of safety.
c. higher the dollar amount# the lower the margin of safety.
d. higher the ratio# the lower the fixed costs.
82. The margin of safety ratio is computed using the following formula5
a. actual sales / brea+%even sales.
b. 'actual sales / brea+%even sales( 3 actual sales.
c. 'actual sales / brea+%even sales( 3 brea+%even sales.
d. 'actual sales / expected sales( 3 brea+%even sales.
8!. . company desires to sell a sufficient ,uantity of products to earn a profit of =4:#:::. If
the unit sales price is =2:# unit variable cost is =12# and total fixed costs are =1*:#:::#
how many units must be sold to earn net income of =4:#:::@
a. &)#::: units
b. !:#::: units
c. 2&#::: units
d. 14#::: units
8&. Kow much sales are re,uired to earn a target net income of =4:#::: if total fixed costs are
=1::#::: and the contribution margin ratio is &:A@
a. =2):#:::.
b. =&:)#:::.
c. =&):#:::.
d. =2::#:::.
8). .n income obLective set by management for individual product lines is called
a. brea+%even income.
b. contribution net income.
c. CV net income.
d. target net income.
8*. The formula for computing re,uired sales in units to meet target net income is the sum of
target net income plus
a. fixed costs divided by contribution margin ratio.
b. variable costs divided by contribution margin ratio.
c. fixed costs divided by contribution margin per unit.
d. variable costs divided by contribution margin per unit.
8-. . company re,uires =4):#::: in sales to meet its target net income. Its contribution
margin is !:A# and fixed costs are =1):#:::. <hat is the target net income@
a. =2))#:::.
b. =18)#:::.
c. =!):#:::.
d. =1:)#:::.
84. Mrant Company has fixed costs of =*::#::: and variable costs are &:A of sales. <hat
are the re,uired sales if Mrant Company desires net income of =*:#:::@
a. =1#1::#:::.
b. =1#:::#:::.
c. =1#*):#:::.
d. =1#)::#:::.
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Cost%Volume%rofit 6elationships
88. 6eese Company re,uires sales of =2#:::#::: to cover its fixed costs of =8::#::: and
to earn net income of =&::#:::. <hat percent are variable costs of sales@
a. 2:A.
b. !)A.
c. &)A.
d. *)A.
1::. .n increase in the unit variable cost will generally cause an increase in all of the following
except
a. the brea+%even point.
b. contribution margin.
c. total variable costs.
d. unit selling price.
1:1. <hich is the true statement@
a. In a CV income statement# costs and expenses are classified only by function.
b. The CV income statement is prepared for both internal and external use.
c. The CV income statement shows contribution margin instead of gross profit.
d. In a traditional income statement# costs and expenses are classified as either variable
or fixed.
1:2. The following information is available for Couis Company5
Eales =*::#::: Total fixed expenses =1):#:::
Cost of goods sold !8:#::: Total variable expenses !*:#:::
. CV income statement would report
a. gross profit of =21:#:::.
b. contribution margin of =&):#:::.
c. gross profit of =2&:#:::.
d. contribution margin of =2&:#:::.
1:!. The e,uation which reflects a CV income statement is
a. Eales 1 Cost of goods sold 7 $perating expenses 7 Fet income.
b. Eales 7 Fixed costs 1 Variable costs 7 Fet income.
c. Eales / Variable costs 7 Fixed costs 1 Fet income.
d. Eales / Variable costs / Fixed costs 1 Fet income.
1:&. The CV income statement
a. is distributed internally and externally.
b. classifies cost by functions.
c. discloses contribution margin in the body of the statement.
d. will reflect a different net income than the traditional income statement.
1:). . CV income statement presents all of the following except
a. contribution margin per unit.
b. contribution margin ratio.
c. total contribution margin.
d. unit variable expenses.
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Test Bank for Managerial Ao!nting" Seon# E#ition
91:*. ;nder absorption costing# all of the following are product costs except
a. fixed overhead.
b. variable overhead.
c. variable manufacturing costs.
d. selling and administrative expenses.
91:-. ;nder variable costing# fixed manufacturing costs are
a. charged to the product.
b. not reported in the income statement.
c. considered to be a period cost.
d. reported on the balance sheet as a prepayment.
91:4. The costing approach that charges all manufacturing costs to the product is referred to as
a. variable costing.
b. contribution margin costing.
c. direct costing.
d. absorption costing.
91:8. If more units are produced than are sold during a period# variable costing income
a. will be greater than absorption costing income.
b. will be less than absorption costing income.
c. will be the same as absorption costing income.
d. may be either greater or less than absorption costing income.
911:. Variable costing is acceptable for
a. financial statement purposes.
b. income tax purposes.
c. internal use by management only.
d. income tax purposes and for internal use by management.
Ans&ers to M!lti2le C3oie *!estions
Ite' Ans( Ite' Ans( Ite' Ans( Ite' Ans( Ite' Ans( Ite' Ans( Ite' Ans(
!1. b &!. b )). a *-. c -8. b 81. b 1:!. d
!2. c &&. d )*. c *4. c 4:. a 82. b 1:&. c
!!. a &). b )-. d *8. b 41. b 8!. b 1:). b
!&. d &*. c )4. d -:. b 42. c 8&. c 91:*. d
!). d &-. a )8. c -1. c 4!. c 8). d 91:-. c
!*. b &4. c *:. d -2. a 4&. d 8*. c 91:4. d
!-. b &8. c *1. d -!. a 4). b 8-. d 91:8. b
!4. c ):. b *2. c -&. d 4*. a 84. a 911:. c
!8. d )1. a *!. b -). a 4-. b 88. b
&:. d )2. d *&. a -*. b 44. c 1::. b
&1. a )!. d *). a --. b 48. c 1:1. c
&2. c )&. a **. c -4. b 8:. a 1:2. d
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Cost%Volume%rofit 6elationships
E4ERCISES
E5( 000
Carson Company manufactures a single product. .nnual production costs incurred in the
manufacturing process are shown below for the production of 2#::: units. The ;tilities and
"aintenance are mixed costs. The fixed portions of these costs are =2:: and =!::# respectively.
Costs Incurred
roduction in ;nits 2#::: !#:::
roduction Costs
a. ?irect "aterials = &#::: @
b. ?irect Cabor 1*#::: @
c. ;tilities 1#2:: @
d. 6ent !#::: @
e. Indirect Cabor &#*:: @
f. Eupervisory Ealaries 1#):: @
g. "aintenance 8:: @
h. ?epreciation 2#):: @
Instr!tions
Calculate the expected costs to be incurred when production is !#::: units. ;se your +nowledge
of cost behavior to determine which of the other costs are fixed or variable.
Sol!tion 000 '12/14 min.(
Costs Incurred
roduction in ;nits 2#::: !#:::
roduction Costs
a. ?irect "aterials = &#::: = *#:::
b. ?irect Cabor 1*#::: 2&#:::
c. ;tilities 1#2:: 1#-::
d. 6ent !#::: !#:::
e. Indirect Cabor &#*:: *#8::
f. Eupervisory Ealaries 1#):: 1#)::
g. "aintenance 8:: 1#2::
h. ?epreciation 2#):: 2#)::
a. Variable =&#::: 3 2#::: 1 =2.:: per unit2 !#::: N =2.:: 1 =*#:::
b. Variable =1*#::: 3 2#::: 1 =4.:: per unit2 !#::: N =4.:: 1 =2&#:::
c. "ixed =1#2:: / =2:: 1 =1#:::2 =1#::: 3 2#::: 1 =.): per unit of variable costs2
!#::: N =.): 1 =1#)::2 =1#):: 7 =2:: 'fixed( 1 =1#-::
d. Fixed =!#:::
e. Variable =&#*:: 3 2#::: 1 =2.!: per unit2 !#::: N =2.!: 1 =*#8::
f. Fixed =1#)::
g. "ixed =8:: / =!:: 1 =*:: variable portion2 =*:: 3 2#::: 1 =.!:
!#::: N =.!: 1 =8::2 =8:: 7 =!:: 'fixed portion( 1 =1#2::
h. Fixed =2#)::
$-
0
$
Test Bank for Managerial Ao!nting" Seon# E#ition
E5( 00%
Him Vannon is considering opening a Owi+ $il Change Center. Ke estimates that the following
costs will be incurred during his first year of operations5 6ent =*#:::# ?epreciation on e,uipment
=-#:::# <ages =1!#-::# "otor oil =1.2: per ,uart. Ke estimates that each oil change will re,uire
) ,uarts of oil. $il filters will cost =!.:: each. Ke must also pay The Owi+ Corporation a franchise
fee of =1.2) per oil change since he will operate the business as a franchise. In addition# utility
costs are expected to behave in relation to the number of oil changes as follows5
Fumber of $il Changes ;tility Costs
&#::: = *#:::
*#::: = -#!::
8#::: = 8#*::
12#::: =12#*::
1*#::: =1)#:::
"r. Vannon anticipates that he can provide the oil change service with a filter at =2:.:: each.
Instr!tions
'a( ;sing the high%low method# determine variable costs per unit and total fixed costs.
'b( ?etermine the brea+%even point in number of oil changes and sales dollars.
'c( <ithout regard to your answers in parts 'a( and 'b(# determine the oil changes re,uired to
earn net income of =2:#:::# assuming fixed costs are =24#::: and the contribution margin
per unit is =1:.
Sol!tion 00% '18/2& min.(
'a( Eeparation of mixed costs5
'=1)#::: / =*#:::( =8#:::
Change in costPChange in ,uantity5 QQQQQQQQQ 1 QQQ
'1*#::: / &#:::( 12#:::
1 =.-) per oil change
Variable costs5 Fixed costs5
$il ') ,uarts N =1.2:( =*.:: 6ent = *#:::
Filters !.:: ?epreciation -#:::
Franchise fee 1.2) <ages 1!#-::
;tility costs 'variable( .-) ;tility costs !#:::9
Total variable =11.:: Total =28#-::
9=*#::: / '&#::: x .-)( 1 =!#:::
'b( '1( 0rea+%even oil changes in units5
Fixed costs =28#-::
QQQQQQQQQQQQ 1 QQQQ 1 !#!:: oil changes
Contribution margin per unit =8.::9
'2( 0rea+%even sales in dollars5
Fixed costs =28#-::
QQQQQQQQQQQ 1 QQQQ 1 =**#:::
Contribution margin ratio .&)9
$-
0
,
Cost%Volume%rofit 6elationships
Sol!tion 00% 'cont.(
9Eelling price per unit 'a( =2:.::
Variable cost per unit 11.::
Contribution margin per unit 'b( = 8.::
Contribution margin ratio 'a( 3 'b( &)A
'c( Fixed costs 7 Fet income =24#::: 7 =2:#:::
QQQQQQQQQQQQ% 1 QQQQQQQQQ 1 &#4:: oil changes
Contribution margin per unit =1:
E5( 00)
Oelly Kayes operates a bed and brea+fast hotel in a resort area in the Emo+y "ountains.
?epreciation on the hotel is =*:#::: per year. Oelly employs a maintenance person at an annual
salary of =!:#::: per year and a cleaning person at an annual salary of =2&#::: per year. 6eal
estate taxes are =1:#::: per year. The rooms rent at an average price of =): per person per
night including brea+fast. $ther costs are laundry service at =&.:: per person per night and the
cost of food which is =*.:: per person per night.
Instr!tions
'a( ?etermine the number of rentals and the sales revenue Oelly needs to brea+ even using the
contribution margin techni,ue.
'b( If the current level of rentals is &#:::# by what percentage can rentals decrease before Oelly
has to worry about having a net loss@
'c( Oelly is considering upgrading the brea+fast service to attract more business and increase
prices. This will cost an additional =).:: for food costs per person per night. Oelly feels she
can increase the room rate to =*) per person per night. ?etermine the number of rentals
and the sales revenue Oelly needs to brea+ even if the changes are made.
Sol!tion 00) '22/2- min.(
'a( Variable costs per person per night5 Fixed costs5
Caundry = &.:: ?epreciation = *:#:::
0rea+fast *.:: "aintenance !:#:::
Total variable =1:.:: Cleaning 2&#:::
6eal estate taxes 1:#:::
Total fixed =12&#:::
0rea+%even number of persons per night rentals5
Fixed costs =12&#:::
QQQQQQQQQQQQQQQQQQ 1 QQQQQ 1 !#1:: rentals
Contribution margin per person per night =&:9
9Eales price per unit =):.::
Variable cost per unit 1:.::
Contribution margin per unit =&:.::
$-
0
-
Test Bank for Managerial Ao!nting" Seon# E#ition
Sol!tion 00) 'cont.(
0rea+%even sales in dollars5
Fixed costs =12&#:::
QQQQQQQQQQQ 1 QQQQQ 1 =1))#:::
Contribution margin ratio 4:A99
99Contribution margin per unit 'a( =&:
Eales price per unit 'b( =):
Contribution margin ratio 'a( 3 'b( 1 4:A
'b( "argin of safety5
.ctual rentals % 0rea+%even rentals '&#::: / !#1::(
QQQQQQQQQQQQQQQQ 1 QQQQQQQ 1 22.)A
.ctual rentals &#:::
'c( Variable costs per person per night5 Fixed costs5
Caundry = &.:: ?epreciation = *:#:::
0rea+fast 11.:: "aintenance !:#:::
Total variable =1).:: Cleaning 2&#:::
6eal estate tax 1:#:::
Total fixed =12&#:::
0rea+%even number of persons per night rentals5
Fixed costs =12&#:::
QQQQQQQQQQQQQQQQQQ 1 QQQQQ 1 2#&4: rentals
Contribution margin per person per night =):9
9Eales price per unit =*)
Variable cost per unit 1)
Contribution margin per unit =):
0rea+%even point in sales dollars5 2#&4: N =*) 1 =1*1#2::
E5( 00+
Kerbart Company gathered the following information on power costs and factory machine usage
for the last six months5
"onth ower Cost Factory "achine Kours
Hanuary =2&#&:: 1!#8::
February !1#!:: 1-#*::
"arch 28#::: 1*#4::
.pril 22#!&: 1!#2::
"ay 18#8:: 11#*::
Hune 1&#4:: *#*::
$-
0
.
Cost%Volume%rofit 6elationships
E5( 00+ 'cont.(
Instr!tions
;sing the high%low method of analyDing costs# answer the following ,uestions and show
computations to support your answers.
'a( <hat is the estimated variable portion of power costs per factory machine hour@
'b( <hat is the estimated fixed power cost each month@
'c( If it is estimated that 1:#::: factory machine hours will be run in Huly# what is the expected
total power costs for Huly@
Sol!tion 00+ '1:/1) min.(
'a( Variable power cost per factory machine hour5
=!1#!:: / =1&#4:: =1*#)::
QQQQQQQQQ 1 QQQQ 1 =1.): per factory machine hour
1-#*:: / *#*:: 11#:::
'b( "onthly fixed power cost5
Kigh Cow
'February( 'Hune(
Total costs =!1#!:: =1&#4::
Cess5 Variable costs
1-#*:: N =1.): 2*#&::
*#*:: N =1.): 8#8::
Total fixed costs = &#8:: = &#8::
'c( Gstimated total power costs for Huly5
Variable cost '1:#::: N =1.):( =1)#:::
Fixed cost &#8::
Total estimated power cost =18#8::
E5( 00$
The "ays Clinic has the following monthly telephone records and costs5
Calls Costs
2#::: =2#&::
1#):: 2#1::
2#2:: 2#*::
2#):: 2#4::
2#!:: 2#-::
1#-:: 2#2::
Instr!tions
Identify the fixed and variable cost elements using the high%low method.
$-
0
/
Test Bank for Managerial Ao!nting" Seon# E#ition
Sol!tion 00$ '1:/1) min.(
Kigh calls minus low calls5 2#):: / 1#):: 1 1#:::
Change in cost5 =2#4:: / =2#1:: 1 =-::
=-:: 3 1#::: 1 =.-: variable cost per call
Kigh Cow
Total Cost =2#4:: =2#1::
Cess5 Variable costs
2#):: N =.-: 1#-):
1#):: N =.-: 1#:):
Total fixed costs =1#:): =1#:):
E5( 00,
The i Oappa $mega fraternity has an annual alumni golf outing. . local caterer provides lunch
and a tent. The fraternity pays a flat fee for the tent and an additional amount for each fraternity
brother served. Kowever# in the past the brothers have never been able to determine how much
the caterer is going to charge. $ne of the brothers# who is an accounting maLor# is convinced that
the cost is a mixed cost. In an effort to determine how much the caterer will charge this year# he
has found cost and attendance data for the past five years.
.ttendance Caterer Cost
21* =&#&-:
14- !#88:
2)4 )#&!:
!1: *#&):
248 *#:):
Instr!tions
a. ;se the high%low method to compute the variable component of the catererRs charge.
b. Compute the fixed component of the catererRs charge.
Sol!tion 00, '*/8 min.(
a. .ttendance Caterer Cost
Kigh !1: =*#&):
Cow 14- !#88:
?ifference 12! =2#&*:
Variable cost5 =2#&*: 3 12! 1 =2:
b. .ctivity Cevel
Kigh Cow
Total Cost =*#&): =!#88:
Cess variable costs
!1: N =2: *#2::
14- N =2: !#-&:
Total fixed costs = 2): = 2):
$-
%
1
Cost%Volume%rofit 6elationships
E5( 00-
;nruh Company reports the following results for the month of Fovember5
Eales '12#::: units( =*::#:::
Variable costs &):#:::
Contribution margin 1):#:::
Fixed costs 11:#:::
Fet income = &:#:::
"anagement is considering the following independent courses of action to increase net income.
1. Increase selling price by 1:A with no change in total variable costs.
2. 6educe variable costs to *-A of sales.
!. 6educe fixed costs by =!:#:::.
Instr!tions
If maximiDing net income is the obLective# which is the best course of action@
Sol!tion 00- '1)/2: min.(
1. Current selling price is5 =*::#::: 3 12#::: units 1 =):
Increase =): by 1:A5 =): N 1.1: 1 =))
6evised sales =**:#:::
Variable costs &):#:::
Contribution margin 21:#:::
Fixed costs 11:#:::
Fet income =1::#:::
2. Eales =*::#:::
Variable costs 'reduce variable costs to *-A of sales( &:2#:::
Contribution margin 184#:::
Fixed costs 11:#:::
Fet income = 44#:::
!. Eales =*::#:::
Variable costs &):#:::
Contribution margin 1):#:::
Fixed costs 'reduce fixed costs by =!:#:::( 4:#:::
Fet income = -:#:::
Increasing the price will increase net income from =&:#::: to =1::#:::. $ption '2( will only
increase net income to =44#:::# while option '!( will increase net income to only =-:#:::.
$-
%
0
Test Bank for Managerial Ao!nting" Seon# E#ition
E5( 00.
Mrange Company had a net loss of =1::#::: in 2::1 when the selling price per unit was =2:# the
variable costs per unit were =12# and the fixed costs were =&::#:::. "anagement expects per
unit data and total fixed costs to be the same in 2::2. "anagement has set a goal of earning net
income of =1::#::: in 2::2.
Instr!tions
'a( Compute the units sold in 2::1.
'b( Compute the number of units that would have to be sold in 2::2 to reach management>s
desired net income level.
'c( .ssume that Mrange Company sells the same number of units in 2::2 as they did in 2::1.
<hat would the selling price have to be in order to reach the target net income@
Sol!tion 00. '1)/2: min.(
'a( ;nits sold in 2::1 Fixed costs / Fet loss
1 QQQQQQQQQQQQ
Contribution margin per unit
=&::#::: / =1::#:::
1 QQQQQQQQQQ
=2: % =12
1 =!::#::: 3 =4 1 !-#):: units
'b( ;nits needed in 2::2 Fixed costs 7 Fet income
1 QQQQQQQQQQQQ
Contribution margin per unit
=&::#::: 7 =1::#:::
1 QQQQQQQQQQ
=2: % =12
1 =)::#::: 3 =4 1 *2#):: units
'c( Eelling price needed in 2::2 Variable costs 7 Fixed costs 7 Fet income
1 QQQQQQQQQQQQQQQQQQQ
!-#):: units
!-#)::'=12( 7 =&::#::: 7 =1::#:::
1 QQQQQQQQQQQQQQQQ
!-#):: units
=8):#:::
1 QQQQ 1 =2).!!
!-#)::
$-
%
%
Cost%Volume%rofit 6elationships
E5( 00/
In the month of Eeptember# Fixon Company sold ):: units of product. The average sales price
was =!:. ?uring the month# fixed costs were =*#::: and variable costs were *:A of sales.
Instr!tions
'a( ?etermine the contribution margin in dollars# per unit# and as a ratio.
'b( ;sing the contribution margin techni,ue# compute the brea+%even point in dollars and in
units.
Sol!tion 00/ '12/1- min.(
'a( Contribution margin in dollars
Eales '):: N =!:( =1)#:::
Cess5 Variable costs '=1)#::: N *:A( 8#:::
Contribution margin = *#:::
Contribution margin per unit
;nit sales price =!:
Cess5 Variable cost per unit '=!: N *:A( 14
Contribution margin per unit =12
Contribution margin ratio
=12 3 =!: 1 &:A
'b( 0rea+%even sales 'in dollars(
Fixed costs 3 Contribution margin ratio
=*#::: 3 &:A 1 =1)#:::
0rea+%even sales 'in units(
Fixed costs 3 Contribution margin per unit
=*#::: 3 =12 1 ):: units
E5( 0%1
In 2::1# Mreen Company had a brea+%even point of =4::#::: based on a selling price of =1: per
unit and fixed costs of =!2:#:::. In 2::2# the selling price and variable costs per unit did not
change# but the brea+%even point increased to =8):#:::.
Instr!tions
'a( Compute the variable cost per unit and the contribution margin ratio for 2::1.
'b( ;sing the contribution margin ratio# compute the increase in fixed costs for 2::2.
$-
%
)
Test Bank for Managerial Ao!nting" Seon# E#ition
Sol!tion 0%1 '1)/2: min.(
'a( Fixed Costs
;nit contribution margin 1 QQQQQQQQQQQQ
0rea+%even Eales in units
=!2:#:::
1 QQQQQQQQ
'=4::#::: 3 =1:(
=!2:#:::
1 QQQQQ 1 =&.::
4:#:::
Variable cost per unit 1 =1: / =& 1 =*
Contribution margin ratio 1 =& 3 =1: 1 &:A
'b( Fixed costs 1 0rea+%even Eales N C" 6atio
1 =8):#::: N &:A 1 =!4:#:::
Therefore# fixed costs increased =*:#::: '=!4:#::: / =!2:#:::(.
E5( 0%0
The income statement for Cornish Company for 2::2 appears below.
C$6FIEK C$".FS
Income Etatement
For the Sear Gnded ?ecember !1# 2::2
QQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQ
Eales '&:#::: units( ................................................................................... =1#:::#:::
Variable expenses ..................................................................................... *::#:::
Contribution margin .................................................................................... &::#:::
Fixed expenses .......................................................................................... &*:#:::
Fet income 'loss( ....................................................................................... = ' *:#:::(
Instr!tions
.nswer the following independent ,uestions and show computations using the contribution
margin techni,ue to support your answers5
1. <hat was the company>s brea+%even point in sales dollars in 2::2@
2. Kow many additional units would the company have had to sell in 2::! in order to earn net
income of =*:#:::@
!. If the company is able to reduce variable costs by =2.:: per unit in 2::! and other costs and
unit revenues remain unchanged# how many units will the company have to sell in order to
earn a net income of =):#:::@
$-
%
+
Cost%Volume%rofit 6elationships
Sol!tion 0%0 '1)/2: min.(
1. =&*:#:::
QQQQ 1 =1#1):#:::
&:A
2. =&*:#::: 7 =*:#:::
QQQQQQQQQ 1 =1#!::#::: Total sales needed.
&:A
=1#!::#:::
QQQQQ 1 )2#::: total units to be sold
=2)
&:#::: actual units sold
12#::: additional units to be sold
Note: 6e,uired sales in units can be obtained directly by dividing fixed costs plus profit by
contribution margin per unit5
'=&*:#::: 7 =):#:::( 3 '=2) / =1)( 1 )2#::: units
!. 2::2 Variable cost per unit 1 =1) '=*::#::: 3 &:#::: units(
Variable cost reduction 1 2
2::! Variable cost per unit =1!
Gxpected contribution margin =12 '=2) / =1!(
=&*:#::: 7 =):#:::
QQQQQQQQQ 1 &2#):: units
=12
E5( 0%%
6ush Company developed the following information for its product5
er ;nit
Eales price =8:
Variable cost *!
Contribution margin =2-
Total fixed costs =1#!):#:::
Instr!tions
.nswer the following independent ,uestions and show computations using the contribution
margin techni,ue to support your answers.
1. Kow many units must be sold to brea+ even@
2. <hat is the total sales that must be generated for the company to earn a profit of =*:#:::@
!. If the company is presently selling -)#::: units# but plans to spend an additional =1!)#::: on
an advertising program# how many additional units must the company sell to earn the same
net income it is now ma+ing@
&. ;sing the original data in the problem# compute a new brea+%even point in units if the unit
sales price is increased 2:A# unit variable cost is increased by 1:A# and total fixed costs are
increased by =184#:::.
$-
%
$
Test Bank for Managerial Ao!nting" Seon# E#ition
Sol!tion 0%% '1)/2: min.(
1. =1#!):#:::
QQQQQ 1 ):#::: units to be sold to brea+ even.
=2-
2. Contribution margin ratio 1 !:A '=2- 3 =8:(.
=1#!):#::: 7 =*:#:::
QQQQQQQQQQ 1 =&#-::#::: total sales
.!:
!. =1!)#:::
QQQQ 1 )#::: additional units
=2-
&. Few sales price =1:4.:: '=8: N 1.2:(
Few variable cost *8.!: '=*! N 1.1:(
Few contribution margin = !4.-:
Few total fixed costs =1#)&4#::: '=1#!):#::: 7 =184#:::(
=1#)&4#:::
QQQQQ 1 &:#::: units is the new brea+%even point.
=!4.-:
E5( 0%)
Oeller Company estimates that variable costs will be *:A of sales and fixed costs will total
=1#*::#:::. The selling price of the product is =1:# and )::#::: units will be sold.
Instr!tions
;sing the mathematical e,uation#
'a( Compute the brea+%even point in units and dollars.
'b( Compute the margin of safety in dollars and as a ratio.
'c( Compute net income.
Sol!tion 0%) '1)/2: min.(
'a( 0rea+%even sales in units
=1:J 1 =*J 7 =1#*::#:::
=&J 1 =1#*::#:::
J 1 &::#::: units
0rea+%even point in dollars
&::#::: units N =1: 1 =&#:::#:::
'b( "argin of safety in dollars
=)#:::#::: / =&#:::#::: 1 =1#:::#:::
"argin of safety ratio
=1#:::#::: 3 =)#:::#::: 1 2:A
$-
%
,
Cost%Volume%rofit 6elationships
Sol!tion 0%) 'cont.(
'c( Fet Income
Eales =)#:::#:::
Variable Costs '!#:::#:::(
Fixed Costs '1#*::#:::(
Fet Income = &::#:::
E5( 0%+
.lley Company ma+es student boo+ bags that sell for =2: each. For the coming year#
management expects fixed costs to be =14:#:::. Variable costs are =1) per unit.
Instr!tions
'a( Compute brea+%even sales in dollars using the mathematical e,uation.
'b( Compute brea+%even sales using the contribution margin ratio.
'c( Compute the margin of safety ratio assuming actual sales are =1#:::#:::.
'd( Compute the sales re,uired to earn net income of =8:#:::# using the mathematical
e,uation.
Sol!tion 0%+ '18/2& min.(
'a( 0rea+%even Eales
=2:J1 =1)J 7 =14:#:::
=)J 1 =14:#:::
J 1 !*#::: units2 !*#::: N =2:Punit 1 =-2:#:::
'b( Contribution "argin per ;nit 1 ;nit Eelling rice / ;nit Variable Cost
C" 1 =2: / =1) 1 =)
Contribution "argin per ;nit
Contribution "argin 6atio 1 QQQQQQQQQQQQQ
;nit Eelling rice
C" 6atio 1 =) 3 =2: 1 2)A
Fixed Costs
0rea+%even Eales 1 QQQQQQQQQQQQ
Contribution "argin 6atio
1 =14:#::: 3 2)A 1 =-2:#:::
'c( Eales =1#:::#:::
Cess5 0rea+%even Eales -2:#:::
"argin of Eafety = 24:#:::
"argin of Eafety
"argin of Eafety 6atio 1 QQQQQQQ
.ctual Eales
1 =24:#::: 3 =1#:::#::: 1 24A
$-
%
-
Test Bank for Managerial Ao!nting" Seon# E#ition
Sol!tion 0%+ 'cont.(
'd( 6e,uired Eales 1 Variable Costs 7 Fixed Costs 7 Targeted Fet Income
=2:J1 =1)J 7 =14:#::: 7 =8:#:::
=)J 1 =2-:#:::
J 1 )&#::: units2 )&#::: N =2:Punit 1 =1#:4:#:::
E5( 0%$
Too+ Company developed the following information for the product it sells5
Eales price =): per unit
Variable cost of goods sold =2! per unit
Fixed cost of goods sold =-::#:::
Variable selling expense 1:A of sales price
Variable administrative expense =2.:: per unit
Fixed selling expense =&::#:::
Fixed administrative expense =!::#:::
For the year ended ?ecember !1# 2::2# Too+ Company produced and sold 4:#::: units of
product.
Instr!tions
'a( repare a CV income statement using the contribution margin format for Too+ Company
for 2::2.
'b( <hat was the company>s brea+%even point in units in 2::2@ ;se the contribution margin
techni,ue.
'c( <hat was the company>s margin of safety in dollars in 2::2@
Sol!tion 0%$ '2:/2) min.(
'a( T$$O C$".FS
Income Etatement
For the Sear Gnded ?ecember !1# 2::2
QQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQ
Eales ........................................................................................ =&#:::#:::
Variable expenses
Cost of goods sold .............................................................. =1#4&:#:::
.dministrative ..................................................................... 1*:#:::
Eelling expenses ................................................................. &::#:::
Total variable expenses ...................................................... 2#&::#:::
Contribution margin .................................................................. 1#*::#:::
Fixed expenses
Cost of goods sold .............................................................. -::#:::
Eelling ................................................................................. &::#:::
.dministrative ..................................................................... !::#:::
Total fixed expenses ........................................................... 1#&::#:::
Fet income ............................................................................... = 2::#:::
$-
%
.
I
B
H
6
7
E
A
F
C
Cost%Volume%rofit 6elationships
Sol!tion 0%$ 'cont.(
'b( 0rea+%even point was -:#::: units in 2::2.
Variable costs per unit Contribution margin per unit
Cost of goods sold =2! Eales price =):
.dministrative 2 Variable cost !:
Eelling ) Contribution margin =2:
=!:
=1#&::#::: 3 =2: 1 -:#::: units to brea+ even.
'c( "argin of safety in dollars was =)::#:::
.ctual sales =&#:::#:::
0rea+%even sales '-:#::: N =):( !#)::#:::
"argin of safety = )::#:::
E5( 0%,
Cane Company has prepared the following cost%volume%profit graph5
Instr!tions
For the items listed below# enter to the left of the item# the letter in the graph which best
corresponds to the item.
BBBB 1. .ctivity base
BBBB 2. 0rea+%even point
BBBB !. ?ollars
BBBB &. Fixed costs
BBBB ). Coss
BBBB *. rofit
BBBB -. 6evenues
BBBB 4. Total costs
BBBB 8. Variable costs
I
B
H
6
7
E
A
F
C
$-
%
/
Test Bank for Managerial Ao!nting" Seon# E#ition
Sol!tion 0%, '8/1& min.(
1. ? .ctivity base
2. . 0rea+%even point
!. G ?ollars
&. C Fixed costs
). M Coss
*. 0 rofit
-. I 6evenues
4. K Total costs
8. F Variable costs
E5( 0%-
"aryRs 0as+ets# Inc. manufactures a single bas+et that is sold to wholesalers for =2:. The
contribution margin ratio is &:A. "aryRs fixed expenses total =*::#:::.
Instr!tions
'a( Compute the variable cost per unit.
'b( Compute how many bas+ets "ary will have to sell in order to brea+ even.
'c( Compute how many bas+ets "ary will have to sell in order to ma+e a target net income of
=1*#:::.
'd( rove your answer in part 'c( above by preparing a cost%volume%profit income statement at
that level of activity.
Sol!tion 0%- '-/1: min.(
'a( Variable cost per unit5 =2: N '1 / .&:( 1 =12Punit
'b( =*::#::: 3 '=2: N .&:( 1 -)#::: bas+ets
'c( '=*::#::: 7 =1*#:::( 3 =4 1 --#::: bas+ets
'd( Eales '--#::: U =2:( =1#)&:#:::
Variable costs '--#::: U =12( 82&#:::
Contribution margin = *1*#:::
Fixed costs *::#:::
Target net income = 1*#:::
E5( 0%.
Eayler Company earned net income of =)::#::: last year. This year it wants to earn net income
of =*::#:::. The company>s fixed costs are expected to be =!::#:::# and variable costs are
expected to be ):A of sales.
Instr!tions
'a( ?etermine the re,uired sales to meet the target net income of =*::#::: using the
contribution margin techni,ue.
'b( ;sing a CV income statement format# prove your answer.
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Cost%Volume%rofit 6elationships
Sol!tion 0%. '4/12 min.(
Fixed cost 7 Fet income =!::#::: 7 =*::#:::
'a( 6e,uired sales 1 QQQQQQQQQQQ 1 QQQQQQQQQQ 1 =1#4::#:::
Contribution margin ratio .):
'b( Eales =1#4::#:::
Variable costs 8::#:::
Contribution margin 8::#:::
Fixed costs !::#:::
Target net income = *::#:::
8E5( 0%/
Vicious Cycle is a small manufacturer of mountain bi+es. The bi+es sell for =-): each. The
variable costs of each unit include the following5
?irect materials =14:
?irect labor 1-:
"anufacturing overhead ):
In addition# =14:#::: of fixed overhead is incurred annually. Eelling and administrative expenses
are fixed costs totaling =1&:#::: and =1::#:::# respectively.
.t the beginning of the year# there was no beginning finished goods inventory. ?uring the year#
2#::: bi+es were produced. .t the end of the year# there were *:: bi+es in ending finished goods
inventory.
Instr!tions
'a( .ssuming Vicious Cycle uses absorption costing# compute the unit cost for one bi+e.
'b( .ssuming Vicious Cycle uses variable costing# compute the unit cost for one bi+e.
'c( Compute the re,uired sales in units necessary to achieve a target net income of =21:#:::.
'd( Compute the margin of safety ratio for Vicious Cycle assuming actual sales of =1#12)#:::.
8Sol!tion 0%/ '12%1) min.(
'a( ?irect materials =14:
?irect labor 1-:
Variable manufacturing overhead ):
Fixed manufacturing overhead '=14:#::: 3 2#:::( 8:
;nit cost =&8:
'b( ?irect materials =14:
?irect labor 1-:
Variable manufacturing overhead ):
;nit cost =&::
'=14:#::: 7 =1&:#::: 7 =1::#:::( 7 =21:#::: =*!:#:::
'c( 6e,uired sales in units5 QQQQQQQQQQQQQQQQQQQQQ 1 QQQQ
=-): / =&:: =!):
1 1#4:: units
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0
Test Bank for Managerial Ao!nting" Seon# E#ition
8Sol!tion 0%/ 'cont.(
'=1#12)#::: / =8::#:::9(
'd( "argin of safety ratio5 QQQQQQQQQQQ/ 1 2:A
=1#12)#:::
9'=14:#::: 7 =1&:#::: 7 =1::#:::(
QQQQQQQQQQQQQQQQ N =-):
=!):
8E5( 0)1
Tanner Company developed the following unit information for Hanuary# 2::2# its first month of
operations5
er ;nit Total Costs
Eales price =2:
Variable costs
?irect materials )
?irect labor !
Variable manufacturing overhead &
Eelling and administrative expenses 2
Fixed selling and administrative expenses =22#:::
Fixed manufacturing overhead *:#:::
?uring Hanuary# 2:#::: units were produced and 1)#::: units were sold.
Instr!tions
'a( repare an income statement under the variable costing approach using the CV format.
'b( <hat would be the net income 'loss( if the absorption cost approach had been used@
Gxplain any income difference between absorption and variable costing.
8Sol!tion 0)1 '2:/2) min.(
'a( T.FFG6 C$".FS
Income Etatement
For the "onth Gnded Hanuary !1# 2::2
'Variable costing(
QQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQ
Eales '1)#::: units N =2:( ................................................................ =!::#:::
Variable expenses
Inventory# Hanuary 1 .................................................................... = %:%
Variable manufacturing costs '2:#::: units N =12( ...................... 2&:#:::
Cost of goods available for sale ................................................... 2&:#:::
Inventory# Hanuary !1 ')#::: units N =12( ................................... *:#:::
Variable cost of goods sold .......................................................... 14:#:::
Variable selling and administrative expenses '1)#::: N 2( .......... !:#:::
Total variable expenses ......................................................... 21:#:::
Contribution margin ........................................................................... 8:#:::
Fixed expenses
"anufacturing overhead .............................................................. *:#:::
Eelling and administrative ............................................................ 22#:::
Total fixed expenses .............................................................. 42#:::
Income from operations ..................................................................... = 4#:::
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Cost%Volume%rofit 6elationships
8Sol!tion 0)1 'cont.(
'b( If absorption costing had been used# Tanner would report income from operations of
=2!#:::. ;nder absorption costing# fixed manufacturing overhead of =1)#:::9 would be
allocated as a product cost and would be part of the value of the finished goods inventory on
the balance sheet. Therefore# income under absorption costing would be =1)#::: greater
than the =4#::: income under variable costing.
9=*:#::: 3 2:#::: 1 =! unit fixed manufacturing overhead
Gnding inventory 1 )#::: units N =! 1 =1)#:::
8E5( 0)0
?olan Company developed the following information for 2::25
Eelling and .dministrative Gxpenses
Variable =!:#:::
Fixed =):#:::
;nits in beginning inventory %:%
;nits sold 2&#:::
?irect materials used =-)#:::
?irect labor =8)#:::
;nits produced !:#:::
"anufacturing overhead
Variable =1::#:::
Fixed =8:#:::
Instr!tions
.nswer the following ,uestions.
'a( <hat would be the amount of the cost of goods sold under the absorption costing
approach@
'b( <hat would be the cost of the ending inventory under the variable costing approach@
'c( <hich approach would show the greater income for 2::2 and by how much@
8Sol!tion 0)0 '1*/21 min.(
.bsorption Costing Variable Costing
?irect materials............................................................... = -)#::: = -)#:::
?irect labor...................................................................... 8)#::: 8)#:::
Variable manufacturing overhead.................................... 1::#::: 1::#:::
Fixed manufacturing overhead........................................ 8:#::: Q
Total manufacturing costs incurred.................................. =!*:#::: =2-:#:::
roduction in units........................................................... !:#::: !:#:::
roduction unit cost......................................................... =12 =8
'a( Cost of goods sold under the absorption costing approach would be =244#::: '2&#::: units
N =12(.
'b( Cost of ending inventory under the variable costing approach would be =)&#::: '*#::: units
N =8(.
'c( .bsorption costing income in 2::2 would be greater by =14#::: '*#::: units N =!(.
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)
Test Bank for Managerial Ao!nting" Seon# E#ition
COMPLETION STATEMENTS
1!2. Onowledge of cost behavior is important in BBBBBBBBBBBBBBBBBBBBBB analysis.
1!!. . BBBBBBBBBBBBBBBBB cost remains constant per unit at every level of activity.
1!&. ;nit fixed costs BBBBBBBBBBBBBBBBBB with the changes in the level of activity.
1!). Total fixed costs are BBBBBBBBBBBBB over various levels of activities# whereas total
variable cost BBBBBBBBBBBBBBBBBB directly and BBBBBBBBBBBBBBBB with changes in the
activity level.
1!*. .n assumption of CV analysis is that variable and fixed costs have a BBBBBBBBBBBBBBB
relationship with an activity base.
1!-. The range over which a company expects to operate is referred to as the BBBBBBBBBBBB
range.
1!4. . cost that has both variable and fixed cost elements is referred to as a BBBBBBBBBBBBBB
cost.
1!8. The amount of revenue remaining after deducting total variable costs is called the
BBBBBBBBBBBBBBBBBBBBBBBBB.
1&:. The BBBBBBBBBBBBBBB point is when total revenues e,uals total costs.
1&1. BBBBBBBBBBBBBBB divided by the contribution margin ratio will give the amount of
BBBBBBBBBBBBBBB to brea+ even.
1&2. The difference between actual or expected sales and brea+%even sales is called the
BBBBBBBBBBBBBBBBBBBBBBBBBB.
1&!. . BBBBBBBBBBBBBBB income statement classifies costs and expenses as variable or fixed
and reports contribution margin.
91&&. ;nder variable costing# BBBBBBBBBBBBBBBBBBBB manufacturing costs are considered to
be period costs.
91&). <hen units produced are greater than units sold# income under BBBBBBBBBBBBBBBB
costing is higher than under BBBBBBBBBBBBBB costing.
Ans&ers to Co'2letion State'ents
1!2. cost%volume%profit 'CV( 1!8. contribution margin
1!!. variable 1&:. brea+%even
1!&. vary inversely 1&1. Fixed costs# sales 'in dollars(
1!). constant# vary# proportionately 1&2. margin of safety
1!*. linear 1&!. CV
1!-. relevant 91&&. fixed
1!4. mixed 91&). absorption# variable
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Cost%Volume%rofit 6elationships
MATCHIN7
1&*. "atch the items in the two columns below by entering the appropriate code letter in the
space provided.
.. .ctivity index M. 0rea+%even point
0. Variable costs K. Contribution margin
C. Fixed costs I. "argin of safety
?. Kigh%low method H. Contribution margin ratio
G. 6elevant range O. Variable costing
F. "ixed costs C. .bsorption costing
BBBB 1. The amount of revenue remaining after deducting variable costs.
BBBB 2. Costs that contain both a variable and a fixed cost element.
BBBB !. The percentage of sales dollars available to cover fixed costs and produce income.
BBBB &. Identifies the activity which causes changes in the behavior of costs.
BBBB ). The difference between actual or expected sales and sales at the brea+%even point.
BBBB *. Costs that vary in total directly and proportionately with changes in the activity level.
BBBB -. The level of activity at which total revenues e,ual total costs.
BBBB 4. The range over which the company expects to operate during the year.
BBBB 8. Costs that remain the same in total regardless of changes in the activity level.
BBBB 1:. . costing approach in which all manufacturing costs are charged to the product.
BBBB 11. . mathematical method that uses the total costs incurred at the high and low levels of
activity.
BBBB 12. . costing approach in which only variable manufacturing costs are product costs and
fixed manufacturing costs are period costs 'expenses(.
Ans&ers to Mat3ing
1. K -. M
2. F 4. G
!. H 8. C
&. . 91:. C
). I 11. ?
*. 0 912. O
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Test Bank for Managerial Ao!nting" Seon# E#ition
SHORT-ANS9ER ESSA: *UESTIONS
S-A E 0+-
. cost%volume%profit graph is fre,uently used in business meetings because it presents a picture
of cost relationships within a company. 0riefly describe the type of information and data that you
would need in order to prepare a CV graph. .fter a CV graph is prepared# what are the maLor
points that could be made from the graph that would be of interest to management@
Sol!tion 0+-
To begin constructing a CV graph# information is needed concerning the maximum estimated
level of sales units and the unit sales price. This is necessary to create the axes and also to plot
the total revenue line from the origin. In addition# the costs must be bro+en down into fixed and
variable components in order to plot both the fixed cost line and the total cost line.
;sing a CV graph# management can readily identify the brea+%even point and can see how
much profit or loss would result from varying levels of sales. The graph also ma+es it easy to
portray the effects of any changes such as costs or selling prices.
S-A E 0+.
. CV income statement is fre,uently prepared for internal use by management. ?escribe the
features of the CV income statement that ma+e it more useful for management decision%ma+ing
than the traditional income statement that is prepared for external users.
Sol!tion 0+.
Eeveral features of the CV income statement ma+e it more useful for internal decision%ma+ing.
The CV income statement classifies costs as either fixed or variable# rather than by function.
0eing able to identify the behavior of costs in this manner can aid management in controlling
those costs.
.lso# the CV income statement shows the contribution margin# rather than a gross profit. This
helps management establish the extent to which their sales are able to cover their fixed costs#
and to analyDe the impact on net income of changes in sales or costs.
S-A E 0+/ 'Gthics(
Mannon Company re,uires its mar+eting managers to submit estimated cost%volume%profit data
on all re,uests for new products# or expansions of a product line.
Cinda $slo is a new manager. Ker calculations show a fixed cost for a new proLect at =1::#:::
and a variable cost of =). Eince the selling price is only =1) for the proposed product# 1:#:::
would need to be sold to brea+ even. That is approximately twice the volume estimate for the first
year. Ehe shares her dismay with Tina Emythe# another manager.
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Cost%Volume%rofit 6elationships
S-A E 0+/ 'cont.(
Tina strongly advises her to revise her estimates. Ehe points out that several of the costs that
had been classified as fixed costs could be considered variable# since they are step costs and
mixed costs. <hen the data has been revised classifying those costs as variable costs# the
proLect appears viable.
Re;!ire#<
1. <ho are the sta+eholders in this decision@
2. Is it ethical for Cinda to revise the costs as indicated@ 0riefly explain.
!. <hat should Cinda do@
Sol!tion 0+/
1. The sta+eholders include5
Cinda $slo
Mannon Company
MannonRs customers
2. It is ethical to revise the costs# certainly. The only problem that exists is the failure to account
for the fixed cost component of the step and mixed costs. .t low volume levels# such as
those anticipated for this proLect# the proLect is li+ely to be less profitable than forecast. To the
extent that Cinda is submitting misleading figures in order to get her proLect approved# she is
behaving unethically.
!. Cinda should try to ma+e the forecasts as accurate as possible by ma+ing a better determina%
tion of cost behavior. If that is not possible within the time she has# she should submit both
sets of figures# and let the selection committee ma+e its determination.
S-A E 0$1 'Communication(
<illiam ?exter has been the manager for two years of the production department of a company
manufacturing toys made of plastic%coated cardboard. $ne of the toys is a paper doll# whose
IclothesI are made of acetate# and stay on the doll with static electricity. The company>s sales
were mainly to large educational institutions until last year# when the dolls were sold for the first
time to a large discount retailer. The dolls were sold out immediately# and enough orders
received to +eep the department at full capacity for the immediate future.
The fixed costs for the department are =):#:::# with =1 per unit variable costs. Gach set consists
of a doll and one set of clothes and sells for =!. The maximum volume is 1::#::: units. <ith the
increased volume# "r. ?exter is considering two options to improve profitability. $ne would
reduce variable costs to =:.-)# and the other would reduce fixed costs to =!)#:::.
Re;!ire#<
Miven the fact that sales are increasing# ma+e a short 'one paragraph( recommendation to "r.
?exter about which option he should choose. Eupport your recommendation with a calculation
showing him how profitability will change with each option.
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Test Bank for Managerial Ao!nting" Seon# E#ition
Sol!tion 0$1
The variable costs should be reduced to =:.-) per unit in order to ensure maximum profitability of
the paper doll product line. The calculations are as follows5
Current rofit 1 '=! N 1::#:::( / '=1 N 1::#:::( / =):#:::
1 =!::#::: / =1::#::: / =):#:::
1 =1):#:::
lan V15 6educe Variable Costs to =:.-)
rofit 1 '=! N 1::#:::( / '=:.-) N 1::#:::( / =):#:::
1 =!::#::: / =-)#::: / =):#:::
1 =1-)#:::
lan V25 6educe Fixed Costs to =!)#:::
rofit 1 '=! N 1::#:::( / '=1 N 1::#:::( / =!)#:::
1 =!::#::: / =1::#::: / =!)#:::
1 =1*)#:::
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