Quiz – Chapter 5 - Solutions

1. If the level of activity increases within the relevant range:

A) variable cost per unit and total fixed costs also increase.
B) fixed cost per unit and total variable cost also increase.
C) total cost will increase and fixed cost per unit will decrease.
D) variable cost per unit and total cost also increase.

A is wrong. Neither variable cost per unit nor total fixed costs change.
B is wrong. Fixed cost per unit decreases as you increase the number of units
produced.
C is correct. Total cost will increase because variable costs increase as production
increases. Fixed costs per unit decrease as production increases.
D is wrong. Variable cost per unit does not change.

2. In describing the cost equation, Y = a + bX, "a" is:

A) the dependent variable, cost.
B) the independent variable, the level of activity.
C) the total fixed costs.
D) the variable cost per unit of activity.

The answer is C. A is the y-intercept and it represents total fixed costs.

3. Quartz Manufacturing Company has developed the following overhead cost

formulas:

Overhead Cost Cost Formulas

Insurance .............................. $400
Depreciation ......................... $900
Maintenance materials ......... $0.15 per machine hour
Utilities................................. $600 plus $0.20 per machine hour

Based on these cost formulas, the total overhead cost expected for Quartz
Manufacturing Company if 1,500 hours are worked is:
A) $1,825.
B) $525.
C) $1,900.
D) $2,425.

The answer is D. The cost formula would have fixed costs of $1,900 ($400 + 900
+ 600). You also have the variable costs of 35 cents (.15 +.20) for each
machine hour. The variable costs are $525 (.35 x 1500). So, the total overhead
cost is $2,425 ($1900 + 525).

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 4. Given the cost formula Y = $15,000 + $2X, total cost at an activity level of 8,000
units is expected to be:
A) $23,000.
B) $31,000.
C) $15,000.
D) $16,000.

B is correct. The cost formula produces a total cost of $31,000 ($15,000 + ($2 x
8,000)).

Use the following to answer questions 5-6:

Frank Company operates a cafeteria for its employees. The number of meals served
each week over the last seven weeks, along with the total costs of operating the
cafeteria are given below:

Week Meals served Cafeteria costs

1 1,500 $4,800
2 1,600 $5,080
3 1,800 $5,280
4 1,450 $4,900
5 1,200 $4,000
6 1,650 $5,100
7 1,900 $5,400
Assume that the relevant range includes all of the activity levels mentioned in this
problem.

5. Using the high-low method of analysis, the variable cost per meal served in the
cafeteria would be estimated to be:
A) $1.50.
B) $2.00.
C) $2.80.
D) $1.00.

The answer is B. The high point is 1900 meals, and the low point is 1200 meals.
The activity level is used to determine the high and low points. Using these
points, calculate the slope of the line that runs through these two points. This is
the variable cost per unit:

V = (5400 – 4000)/(1900 – 1200) = $1400/700 = $2 per meal

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6. Assume that the cafeteria expects to serve 1,850 meals during Week 8. Using
the high-low method, the expected total cost of the cafeteria would be:
A) $5,340.
B) $5,180.
C) $5,300.
D) $4,375.

The answer is C. You know the variable cost per unit. Now, calculate the total
fixed cost:

TC = Vx + F
TC = 2x + F
$4,000 = $2 (1200) + F
$4,000 = $2400 + F
$1,600 = F

So, the cost function is TC = 2x + $1,600. Plug 1850 into the formula and solve
for total costs:

TC = (2 x 1850) + $1600.
TC = $3700 + $1600
TC = $5,300

7. A disadvantage of the high-low method of cost analysis is that:

A) it cannot be used when there are a very large number of observations.
B) it is too time consuming to apply.
C) it uses two extreme data points, which may not be representative of normal
conditions.
D) it relies totally on the judgment of the person performing the cost analysis.

A is not true. It can applied no matter how many observations that you have.
B is not true. It is easy to calculate.
C is true.
D is not true. There is no judgment.

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