CHAPTER 1: INTRODUCTION d. By the function incurring the expenditure.

Multiple Choice a 11. Which classification of costs is most relevant for

income statements to be used internally?
a 1. The controller of a company or other organization is a. Behavior.
a. a staff manager. b. Function.
b. an operating manager. c. Method of payment.
c. an accountant, not a manager. d. Object.
d. a natural manager.
d 12. The set of processes that transform raw materials
c 2. Which item is NOT an IMA Standard for Ethical into finished products is known as a
Conduct? a. differentiation strategy.
a. Integrity. b. flexible manufacturing system.
b. Competence. c. lowest cost strategy.
c. Loyalty. d. value chain.
d. Objectivity.
a 13. Income statements classifying costs by object show
d 3. Which statement about the degree of detail in a such items as
report is true? a. tax expense, wages expense, depreciation
a. It depends on the level of the manager receiving expense.
the report. b. cost of goods sold, selling expenses, administrative
b. It may depend on the frequency of the report. expenses.
c. It depends on the type of manager receiving the c. assets, liabilities, owners' equity.
report. d. all of the above.
d. All of the above.
a 14. The period that begins with the arrival of materials
b 4. Managerial accounting is similar to financial and ends with the shipment of a completed good is the
accounting in that a. cycle time.
a. both are governed by generally accepted b. manufacturing cell.
accounting principles. c. computer-integrated manufacturing.
b. both deal with economic events. d. performance period.
c. both concentrate on historical costs.
d. both classify reported information in the same way. a 15. Which function is most directly related to
management by objectives?
d 5. Managerial accounting differs from financial a. Planning.
accounting in that it is b. Control.
a. more concerned with the future. c. Decision making.
b. more concerned with segments of a company. d. Reporting.
c. less constrained by rules and regulations.
d. all of the above. d 16. Which consideration influences the frequency of an
internal report?
b 6. One of the ways managerial accounting differs from a. The wishes of the managers receiving the report.
financial accounting is that managerial accounting b. The frequency with which decisions are made that
a. is bound by generally accepted accounting require the information in the report.
principles. c. The cost of preparing the report.
b. classifies information in different ways. d. All of the above.
c. does not use financial statements.
d. deals only with economic events. a 17. A just-in-time manufacturer is more likely than a
conventional manufacturer to
d 7. Which activity is NOT normally performed by a. receive more frequent deliveries of materials.
managerial accountants? b. spend less money on advertising.
a. Assisting managers to interpret data in managerial c. need workers with fewer skills.
accounting reports. d. all of the above.
b. Designing systems to provide information for
internal and external reports. c 18. A conventional manufacturer is more likely than a
c. Gathering data from sources other than the just-in-time manufacturer to
accounting system. a. have a short production cycle.
d. Deciding the best level of inventory to be b. produce goods in small batches.
maintained. c. hold large inventories to serve as buffers.
d. none of the above.
c 8. Conventional and just-in-time manufacturers both
a. Maintain large inventories of their products. a 19. The professional certification most relevant for
b. Sell only to other manufacturing companies. managerial accountants is the
c. Desire to meet customers' deadlines. a. CMA.
d. Require about the same amount of space to b. CPA.
operate. c. CSA.
d. MAS.
d 9. Classifying costs by behavior is
a. associated primarily with financial accounting. d 20. A firm that is competing using a
b. not relevant to a company that has only selling _______________________ strategy is attempting to
expenses. create a perception of uniqueness that will permit a
c. common in reports prepared for external readers. higher selling price.
d. none of the above. a. value chain
b. lowest cost
a 10. Which is NOT a common accounting classification c. lead time
of costs? d. differentiation
a. By the method of payment for the expenditure.
b. By the objective of expenditure.
c. By behavior.

1
b 21. Planning and control are Problems
a. different names for the same thing.
b. the basic functions of management. 1. Based on the following, compute total owners' equity.
c. described equally well by the terms "decision
making" and "performance evaluation." Cash $ 8,000 Total noncurrent liabilities
d. exemplified by, respectively, financial statements $ 0
and budgeting. Total assets $64,000 Retained earnings
$16,000
a 22. In contrast to a balance sheet, an income statement Total contributed
a. is for a period of time, a balance sheet is at a point capital $12,000 Current liabilities
in time. $36,000
b. gives information about cash and a balance sheet
does not.
c. is prepared after the statement of retained SOLUTION:
earnings.
d. has two columns, while a balance sheet has more
than two. $28,000 ($16,000 RE + $12,000 contributed capital)

c 23. One characteristic of the conventional 2. Based on the following, compute total noncurrent
manufacturing environment is assets.
a. flexible manufacturing systems.
b. manufacturing cells. Total current assets $600,000
c. a just-in-case philosophy. Total current liabilities $240,000
d. a high degree of quality control. Retained earnings $162,000
Total noncurrent liabilities $710,000
d 24. A characteristic of the just-in-time manufacturing Total contributed capital $360,000
environment is
a. frequent deliveries of materials.
b. manufacturing cells. SOLUTION:
c. little or no inventory of finished product.
d. all of the above. $872,000 ($240,000 + $710,000 + $360,000 + $162,000
- $600,000)
d 25. Conventional and just-in-time manufacturers differ
in that the conventional manufacturer is likely to
a. be a new entrant into its industry. 3. Based on the information provided, compute accrued
b. need less storage space than its JIT competitors. wages payable at the end of 20X4.
c. give less credibility to management accounting
reports. Accrued wages payable, beginning of 20X4
d. have a longer production cycle than its JIT $ 14,000
competitors. Wages expense for 20X4 $
45,000
Cash paid in 20X4 for wages $
True-False 42,500

F 1. Published financial statements show costs classified

by behavior. SOLUTION:

T 2. Generally accepted accounting principles govern 16,500 ($14,000 + $45,000 - $42,500)

financial accounting but not managerial accounting.
4. Using the following data, find the missing items.
T 3. Economic events are the raw data for both financial
and managerial accounting. Total assets, beginning of year . . . . . . . $160
Total assets, end of year . . . . . . . . . . $240
F 4. Internal financial statements must be prepared using Total liabilities, beginning of year . . . . $120
generally accepted accounting principles. Total owners' equity, end of year . . . . . . $ 60
Net income for year . . . . . . . . . . . . $ 24
T 5. The form and content of reports can influence Additional investment during year . . . . . . $ 16
decisions made by managers. Contributed capital, beginning of the year . $ 30

F 6. Management-by-objectives and management-by- a. Total owners' equity at the beginning of the year.
exception are two names for the same general
management principle. b. Total liabilities at the end of the year.

F 7. "Pro forma" is the name given to an income c. Retained earnings at the beginning of the year.
statement that classifies costs by function.
d. End-of-the-year retained earnings.
T 8. Some managerial accounting reports contain costs
not incorporated in the basic accounting system. e. Dividends declared during the year.

F 9. A professional examination exists to test the

competence of financial accountants, but not of
managerial accountants.

F 10. Managerial accountants should, but have no

obligation to, maintain their professional skills.

2
SOLUTION: Total owners' equity, end of year . . . . . . $ 480
Net income for year . . . . . . . . . . . . $ 164
a. Total OE, $40 ($160 - $120) Additional capital invested during year . . . $ 50
Contributed capital, beginning of the year . $
b. Total liabilities, $180 ($240 - $60 ) 200

c. Beginning RE, $10 ($40 beginning owners' equity - $30 a. Total owners' equity at the beginning of the year.
)
b. Total liabilities at the end of the year.
d. Ending RE, $14 [$60 - ($30 + $16)]
c. Retained earnings at the beginning of the year.
e. Dividends declared, $20 ($10 of beg RE + $24 - $14
ending RE) d. End-of-the-year retained earnings.

e. Dividends declared during the year.

5. Based on the following, compute total owners' equity.

Cash $ 30,000 Total noncurrent SOLUTION:

liabilities $18,000
Total assets $126,000 Retained earnings a. Total OE, $420 ($1,050 - $630)
$24,000
Current liabilities $56,000 b. Total liabilities, $720 ($1,200 - $480)

c. Beginning RE, $220 ($420 beginning owners' equity -

SOLUTION: $200)

$52,000 (126,000 Total assets - $56,000 current d. Ending RE, $230 [$480 - ($200 + $50)]
liabilities - $18,000 total noncurrent liabilities)
e. Dividends declared, $154 ($220 of beg RE + $164 -
$230 ending RE)
6. Based on the following, compute total noncurrent
assets. 10. Using the following data, find the missing items.

Total current assets $135,000 Total liabilities, beginning of year . . . . . $440

Total current liabilities $ 70,000 Total liabilities, end of year . . . . . . . . $490
Retained earnings $ 47,500 Total owners' equity, beginning of year . . . .
Total noncurrent liabilities $182,500 $340
Total owners' equity $125,000 Total assets, end of year . . . . . . . . . . . $950
Dividends declared during the year. . . . . . . $ 74
Additional capital invested during year . . . . $ 90
SOLUTION: Contributed capital, beginning of the year . .
$240
$242,500 ($70,000 + $182,500 + $125,000 - $135,000)
a. Total assets at the beginning of the year.
7. Based on the information provided, compute accrued
taxes payable at the end of 20X3. b. Total owners' equity at the end of the year.

Accrued taxes, beginning of 20X3 c. Retained earnings at the beginning of the year.
$244,000
Taxes expense for 20X3 $760,000 d. End-of-the-year retained earnings.
Cash paid in 20X3 for taxes $750,000
e. Net income for year.

SOLUTION:
SOLUTION:
$254,000 ($244,000 + $760,000 - $750,000)
a. Total assets, $780 ($440 + $340)

8. Based on the information provided, compute prepaid b. Total owners' equity, $460 ($950 - $490)
supplies at the end of 20X5.

Prepaid supplies, beginning of 20X5 $ c. Beginning RE, $100 ($340 beginning owners' equity -
10,000 $240)
Supplies expense for 20X5
$210,000 d. Ending RE, $130 [$460 - ($240 + $90)]
Cash paid in 20X5 for supplies
$216,000 e. Net income, $104 ($130 of ending RE + $74 - $100
beginning RE)

SOLUTION:

$16,000 ($10,000 + $216,000 - $210,000)

9. Using the following data, find the missing items.

Total assets, beginning of year . . . . . . . $1,050

Total assets, end of year . . . . . . . . . . $1,200
Total liabilities, beginning of year . . . . $ 630

3
CHAPTER 2: PROFIT PLANNING c. A 10% increase in fixed costs.
d. A 10% increase in fixed cost per unit.

Multiple Choice c 11. If variable cost as a percentage of sales increases,

the
c 1. Which formula gives unit sales required to earn a a. contribution margin percentage increases.
target profit? (P = selling price, V = variable cost per unit, b. selling price increases.
F = total fixed costs, T = target profit) c. break-even point in dollars increases.
a. F/(P - V) d. fixed costs decrease.
b. (F + T)/P
c. (F + T)/(P - V) b 12. Which cost is most likely to be variable for a
d. (F + T)/V retailer?
a. Advertising.
c 2. Which formula gives the sales dollars required to b. Cost of goods sold.
earn a target profit? (P = selling price, V = variable cost c. Sales salaries.
per unit, F = total fixed costs, T = target profit) d. Rent.
a. F/[(P - V)/P]
b. (F + T)/(P) a 13. A cost-volume-profit graph reflects relationships
c. (F + T)/[(P - V)/P] a. expected to hold over the relevant range.
d. F + T/V b. of results over the past few years.
c. that the company's managers would like to have
d 3. Over the relevant range, total revenues and total happen.
costs d. likely to prevail for the industry.
a. increase, but at a decreasing rate.
b. decrease. d 14. A multiproduct company
c. remain constant. a. cannot use CVP analysis.
d. can be graphed as straight lines. b. must use a separate CVP graph for each of its
products.
b 4. At the break-even point, total contribution margin is c. can use CVP analysis only if the contribution
a. zero. margin percentages on each product are the same.
b. equal to total fixed costs. d. could earn a higher-than-expected profit even
c. equal to total costs. though the total number of units sold was less than
d. equal to total variable costs. expected.

c 5. If a company is operating at a loss, a 15. If selling price, per-unit variable cost, and total fixed
a. fixed costs are greater than sales. costs are constant,
b. selling price is lower than variable cost per unit. a. the break-even point in units remains constant.
c. selling price is less than average total cost per unit. b. profit per unit remains constant for all levels of
d. fixed cost per unit is greater than variable cost per volume within the relevant range.
unit. c. total variable costs equal total fixed costs.
d. total contribution margin equals total fixed costs.
b 6. As volume increases, average cost per unit
a. increases. b 16. XYZ Company desires a profit of $120,000 and
b. decreases. expects to sell 20,000 units. Variable cost per unit is $15
c. remains constant. and total fixed costs are $160,000. The selling price must
d. increases in proportion to the change in volume. be
a. $40.
d 7. All else constant, if the selling price falls, b. $30.
a. total variable costs will be lower than expected. c. $26.
b. contribution margin percentage will be higher than d. $20.
expected.
c. total contribution margin will be higher than a 17. Contribution margin percentage is 30% and
expected. contribution margin per unit is $12. Which of the
d. per-unit contribution margin will be lower than following is true?
expected. a. Variable cost per unit is $28.
b. Return on sales is 12%.
c 8. If all goes according to plan except that unit variable c. Selling price is $48.
cost falls, d. Variable cost percentage is 12%.
a. total contribution margin will be lower than
expected. b 18. Contribution margin is 30% of sales. Profit is
b. the contribution margin percentage will be lower $80,000. Sales are $600,000. Fixed costs are
than expected. a. $ 90,000.
c. profit will be higher than expected. b. $100,000.
d. per-unit contribution margin will be lower than c. $160,000.
expected. d. $180,000.

a 9. If all goes according to plan except that total fixed a 19. TRS Company changed production methods,
costs rise, increasing fixed costs and decreasing its per-unit variable
a. income will be lower than expected. costs. The change
b. total contribution margin will be lower than a. increases risk and increases potential profit.
expected. b. increases risk and decreases potential profit.
c. total sales will be lower than expected. c. decreases risk and decreases potential profit.
d. income will be higher than expected. d. decreases risk and increases potential profit.

a 10. Which of the following decreases per-unit

contribution margin the most for a company currently
earning a profit?
a. A 10% decrease in selling price.
b. A 10% increase in variable cost per unit.

4
c 20. Introducing income taxes into cost-volume-profit a 30. A fixed cost is the same percentage of sales in three
analysis different months. Which of the following is true?
a. raises the break-even point. a. The company had the same sales in each of those
b. lowers the break-even point. months.
c. increases unit sales needed to earn a particular b. The cost is both fixed and variable.
target profit. c. The company is operating at its break-even point.
d. decreases the contribution margin percentage. d. The company is achieving its target level of profit.

d 21. Selling price is $100, unit variable cost is $68, and c 31. If a company raises its target dollar profit, its
fixed costs are $400,000. Unit sales required to earn a a. break-even point rises.
$120,000 profit are b. fixed costs increase.
a. 5,200 c. required total contribution margin increases.
b. 7,647 d. selling price rises.
c. 13,700
d. 16,250 a 32. If the sales mix shifts toward higher contribution
margin products, the break-even point
c 22. The tax rate is 40%. A company that wants a profit a. decreases.
of $120,000 after taxes must earn how much before b. increases.
taxes? c. remains constant.
a. $ 48,000. d. it is impossible to tell without more information.
b. $ 72,000.
c. $200,000. a 33. In the following graph, revenue is represented by
d. $300,000. A
| * D
a 23. Genco Company has a 30% contribution margin | * *
percentage and fixed costs of $30,000. To earn a 10% | * *
return on sales, Genco must have sales of | * *
a. $150,000. | * *
b. $100,000. | *
c. $40,000. | * *
d. an amount that cannot be determined without more | * *
information. | * *
B|
a 24. If a company is earning a profit, its fixed costs *__________*__________________________________
a. are less than total contribution margin. _ C
b. are equal to total contribution margin. | *
c. are greater than total variable costs. | *
d. can be greater than or less than total contribution | *
margin. | *
|
a 25. Per-unit variable cost *_____________________________________________
a. remains constant within the relevant range. _
b. increases as volume increases within the relevant O E
range.
c. decreases as volume increases within the relevant a. the line OA.
range. b. the line BD.
d. decreases if volume increases beyond the relevant c. the vertical distance between the lines OA and BD.
range. d. the vertical axis.

d 26. An increase in the income tax rate c 34. In the following graph, the vertical distance between
a. raises the break-even point. the lines OA and BD represents
b. lowers the break-even point.
c. decreases sales required to earn a particular after- | A D
tax profit. | * *
d. increases sales required to earn a particular after- | * *
tax profit. | * *
| * *
b 27. Contribution margin is | *
a. the same as gross margin. | * *
b. revenue minus variable costs. | * *
c. revenue minus variable costs and fixed costs. | * *
d. the ratio of income to sales. B|*__________*
__________________________________ C
c 28. Classifying a cost as fixed or variable depends on | *
how it behaves | *
a. per unit, as the volume of activity changes. | *
b. in total, as the volume of activity changes. | *
c. both a and b are correct. |
d. none of the above. *_____________________________________________
_
d 29. Critical to CVP analysis in a multiproduct company O E
is that
a. the products be complementary. a. revenue.
b. the products be sold to the same kinds of b. total variable cost.
customers. c. profit or loss.
c. all products have about the same contribution d. total contribution margin.
margin percentage.
d. the sales mix is relatively constant.

5
d 35. In the following graph, total variable costs are d 42. Selling price is $40, unit variable cost is $24, and
represented by fixed costs are $400,000. Unit sales required to break
A even are
| * D a. 10,000.
| * * b. 12,500.
| * * c. 16,667.
| * * d. 25,000.
| * *
| * d 43. ABC's variable costs are 60% of total revenue. If
| * * fixed costs are $300,000, what is the break-even sales
| * * volume?
| * * a. $120,000
B|*__________* b. $180,000
__________________________________ C c. $500,00
| * d. $750,000
| *
| * b 44. Acme has sales of $200,000, fixed costs of
| * $100,000, and a profit of $20,000. What is Acme's margin
| of safety?
*_____________________________________________ a. $ 20,000
_ b. $ 33,333
O E c. $100,000
d. An amount that cannot be determined without
a. the line BD. more information.
b. the line BC.
c. the vertical distance between the lines OA and BD. b 45. Machine A has fixed costs of $450,000 and a
d. the vertical distance between the lines BD and BC. variable cost of $20. Machine B has fixed costs of
$600,000 and a variable cost of $14. What is the
d 36. Target costing is indifference point, in units?
a. a substitute for CVP analysis. a. 22,500
b. used by companies that cannot classify their costs b. 25,000
by behavior. c. 42,858
c. inappropriate if a company has already established d. An amount that cannot be determined without
a target profit. more information.
d. used in decisions to offer a new product or enter a
new market. d 46. DJH Company has sales of $360,000, variable
costs of $216,000, and fixed costs of $150,000. To earn
c 37. The break-even point in units equals total fixed a 10% return on sales, DJH must have sales of
costs divided by a. $375,000.
a. selling price per unit. b. $440,000.
b. variable cost per unit. c. $470,000.
c. contribution margin per unit. d. $500,000.
d. contribution margin percentage.
b 47. DJH Company has sales of $400,000, variable
d 38. The break-even point in dollars equals total fixed costs of $240,000, and fixed costs of $150,000. What is
costs divided by the break-even sales volume?
a. selling price per unit. a. $150,000
b. variable cost as a percentage of selling price. b. $375,000
c. contribution margin per unit. c. $390,000
d. contribution margin percentage. d. $550,000

c 39. Company A has a lower variable cost per unit and a 48. Alvarez Inc. sells three products with the following
higher total fixed costs than Company B. The selling results:
prices of their products are the same. Sales fluctuate
considerably for both companies. Therefore, X Y Z
a. Company A has a lower break-even point than ------ ------ ------
Company B. Sales $10,000 $20,000 $30,000
b. Company A earns more profit than Company B. Variable costs 4,000 12,000 15,000
c. Company A is more risky than Company B.
d. Company A has a lower contribution margin What is the weighted average contribution
percentage than Company B. margin percentage?
a. 48.3%
b 40. The margin of safety is b. 50.0%
a. the profit currently earned in excess of the target c. 51.7%
profit. d. Cannot be determined with the information
b. the difference between current sales and sales at given.
break-even.
c. the ratio of contribution margin to variable cost. c 49. Scottso Enterprises has fixed costs of $120,000. At
d. the difference between contribution margin a sales volume of $400,000, return on sales is 10%; at a
currently earned and contribution margin at break even. $600,000 volume, return on sales is 20%. What is the
break-even volume?
a 41. The indifference point is the level of volume at a. $160,000
which a company b. $210,000
a. earns the same profit under different operating c. $300,000
schemes. d. An amount that cannot be determined without
b. earns no profit. more information.
c. earns its target profit.
d. any of the above.

6
d 50. Samson Inc. has a contribution margin percentage
of 35%. If fixed costs are $630,000, what is the break- b. Find the selling price that Dennis must charge to
even point? earn an $8,000 profit selling 1,600 units.
a. $ 220,500
b. $ 409,500 c. Dennis is considering new equipment that would
c. $ 969,231 increase fixed costs by $2,000 while reducing unit
d. $1,800,000 variable costs by $1.60 per unit. Find the sales level
where Dennis is indifferent between the two cost
structures.
True-False

F 1. Target costing is a technique for classifying costs SOLUTION:

according to their behavior.
a. 2,667 ($32,000/$12)
T 2. "Gross profit" and "contribution margin" refer to
different things. b. $33.00
Profit = Sales - Variable Costs - Fixed Costs
F 3. A company that has no variable costs can never $8,000 = 1,600X - $8 x 1,600 - $32,000
break even. 1,600X = $52,800
X = $33.00
T 4. A company with no fixed costs has a break-even
point of zero. c. 1,250 units
Current Costs = Proposed Costs
F 5. If a company's income statement shows a positive $32,000 + $8Q = $34,000 + $6.40Q
contribution margin but a net loss, its fixed costs are too Q = 1,250
high.

T 6. As unit sales increase, both average total cost and 3. Stout Company sells three products. Planned results
fixed cost per unit decrease. for next year follow.
Product
T 7. An increase in contribution margin percentage A B C
reduces the break-even point. ---- ---- ----
Selling price $10 $8 $4
F 8. Return on sales is another name for contribution Variable cost 4 6 1
margin percentage. --- --- ---
Contribution margin $6 $2 $3
F 9. Contribution margin is total variable costs minus === === ===
fixed costs. Sales mix in dollars 25% 25% 50%

T 10. The weighted-average contribution margin Fixed costs are $500,000.

percentage changes with changes in sales mix.
a. Compute the weighted-average contribution margin
percentage.
Problems
b. Compute the sales (in $) required to earn a $100,000
1. Foris Company's product sells for $16 and has a profit.
variable cost per unit of $12. Fixed costs are $120,000.
c. Suppose now that the sales mix, in UNITS, is 25%,
a. Compute the break-even point in dollars. 25%, 50%. Determine the weighted-average
contribution-margin per unit.
b. Compute the number of units Foris must sell to earn
a $30,000 profit. d. Determine the total unit sales needed to earn
$100,000.
c. Foris has a target profit of $36,000 and expects to
sell 30,000 units. Compute the selling price Foris must
charge to earn the target profit. SOLUTION:

d. Foris wants to keep its selling price at $8 per unit and a. 58.75%
earn a 10% return on sales. Calculate the number of A B C Total
units Foris must sell to meet the target. --- --- --- -----
Contribution margin percentage 60% 25% 75%
Sales mix in dollars 25% 25% 50%
SOLUTION: --- --- ---
Weighted-average 15% + 6.25% + 37.5% =
a. $480,000, $120,000/25% or $120,000/[($16 - $12)/ 58.75%
$16]
b. $1,021,277 [($500,000 + $100,000)/.5875]
b. 37,500, ($120,000 + $30,000)/($16 - $12)
c. $3.50
c. $17.20, $12 + [($120,000 + $36,000)/30,000]
A B C Total
d. 50,000, $120,000/[$16 - $12 - (.10 x $16)] --- --- --- -----
or [$120,000/(25% - 10%)]/$16 Contribution margin per unit $6.00 $2.00 $3.00
Sales mix in units 25% 25% 50%
----- ----- -----
2. Dennis Company sells a product for $20, variable costs Weighted-average $1.50 + $0.50 + $1.50 =
are $8 per unit, and fixed costs are $32,000. $3.50

a. What is Dennis' break-even point in units? d. 171,429, ($500,000 + $100,000)/$3.50

7
4. Maple Company has sales of $550,000 and has $180,000 + $12Q = $200,000 + $10Q
variable costs of $330,000. Fixed costs are $180,000. Q = 10,000

a. Compute the break-even point.

7. Mound Company has a before-tax return on sales of
b. Compute Maple's sales to earn a $50,000 profit. 9% and a 25% margin of safety. Current sales are
$800,000.
c. Compute the sales Maple would need to earn a 10%
return on sales. a. Calculate break-even sales.

b. Find Mound's variable cost percentage.

SOLUTION:

a. $450,000 ($180,000/40% = $450,000) SOLUTION:

[CM% = ($550,000 - $330,000)/$550,000 = 40%]
a. $600,000 ($800,000 x 75%)
b. $575,000 [($180,000 + $50,000)/40% = $575,000]
b. 64%
c. $600,000 [$180,000/(40% - 10%) = $180,000/30% =
$600,000] Sales Total Cost
$800,000 $728,000 ($800,000 x 91%)
$600,000 $600,000 break-even
5. Acme Company's product sells for $80 and has a
variable cost per unit of $60. Fixed costs are $400,000. $728,000 - $600,000
-------------------- = 64%
a. Compute the break-even point in dollars. $800,000 - $600,000

b. Compute the number of units must Acme sell to earn

a $100,000 profit. 8. Cranmore Company sells three products. Planned
results are as follows.
c. Acme has a target profit of $152,000 and expects to Product
sell 30,000 units. Compute the selling price Acme must P Q R
charge to earn the target profit. --- --- ---
Selling price $20 $8 $6
d. Acme wants to keep its selling price at $40 per unit Variable cost 8 6 3
and earn a 10% return on sales. Calculate the number of --- --- ---
units Acme must sell to meet the target. Contribution margin $12 $2 $3
=== === ===
Units sold 10,000 20,000 70,000
SOLUTION:
Fixed costs are $200,000.
a. $1,600,000 {$400,000/25% or $400,000/[($80 - $60)/
$80]} a. Determine the weighted-average contribution-margin
per unit.
b. 25,000 [($400,000 + $100,000)/($80 - $60)]
b. Determine the break-even point in units sold.
c. $78.40 {$60 + [($400,000 + $152,000)/30,000]}
c. Compute the total unit sales required to earn a
d. 33,333 {$400,000/[$80 - $60 - (.10 x $80)]} $75,000 profit.
or [$400,000/(25% - 10%)]/$80

SOLUTION:
6. Craik Company sells a product for $25, variable costs
are 12 per unit, and fixed costs are $180,000. a. $3.70
A B C Total
a. What is Craik's break-even point? --- --- --- -----
Units sold 10,000 + 20,000 + 70,000 =
b. Find the selling price that Craik must charge to earn 100,000
a $40,000 profit selling 16,000 units. Mix in units 10% 20% 70%

c. Craik is considering new equipment that would Contribution margin per unit $12.00 $2.00 $3.00
increase fixed costs by $20,000 while reducing unit ------ ------ ------
variable costs by $2.00 per unit. Find the sales level Weighted-average $1.20 + $0.40 + $2.10 =
where Craik is indifferent between the two cost $3.70
structures.
b. 54,054 ($200,000/$3.70)

SOLUTION: c. 74,324 [($200,000 + $75,000)/$3.70]

a. 13,846 ($180,000/$13)

b. $25.75
Profit = Sales - Variable Costs - Fixed Costs
$40,000 = 16,000X - $12 x 16,000 - $180,000
16,000X = $412,000
X = $25.75

c. 10,000 units
Current Costs = Proposed Costs

8
9. Oak Grove Inc's product sells for $32 and has a
variable cost per unit of $20. Fixed costs are $120,000.
The effective tax rate is 40%.

a. Compute the break-even point.

b. Compute the number of units Oak Grove must sell to

earn a $30,000 after-tax profit.

c. Oak Grove has an after-tax target profit of $36,000

and expects to sell 20,000 units. Compute the selling
price Oak Grove must charge to earn the target profit.

SOLUTION:

a. 10,000 ($120,000/12)

b. 14,167 [($120,000 + $30,000/60%)/12]

c. $29.00 {$20 + [($120,000 + $36,000/60%)/20,000]}

10. Eleva Company has sales of $350,000, variable costs

of $200,000, and fixed costs of $125,000. Eleva has an
effective tax rate of 40%.

a. Compute the break-even point.

b. Compute Eleva's sales needed to earn a $75,000

after-tax profit.

c. Compute the sales Eleva would need to earn a 15%

after-tax return on sales.

SOLUTION:

a. $291,647 ($125,000/42.86% = $291,647)

CM% = ($350,000 - $200,000)/$350,000 =
42.86%

b. $571,629 [($120,000 + $75,000/60%)/42.86%]

c. $699,888 [$125,000/(42.86% - 25%) = $699,888]

before-tax return on sales = 15%/60% = 25%

9
CHAPTER 3: COST ANALYSIS c. RST must have some fixed costs and some
variable costs.
d. RST's cost structure cannot be determined from
Multiple Choice this information.

b 1. The principal advantage of the scatter-diagram b 11. A mixed cost

method over the high-low method of cost estimation is a. increases in steps as volume increases.
that the scatter-diagram method b. contains a fixed component and a variable
a. includes costs outside the relevant range. component.
b. considers more than two points. c. varies with more than one measure of volume.
c. can be used with more types of costs than the high- d. cannot be accurately predicted.
low method.
d. gives a precise mathematical fit of the points to the b 12. A non-value-adding activity
line. a. cannot be a cost driver.
b. should be eliminated.
a 2. The major objective of preparing a scatter-diagram c. usually drives only variable costs.
is to d. cannot usually be observed by managers.
a. derive an equation to predict future costs.
b. perform regression analysis on the results. d 13. A cost-predicting equation determined through
c. determine the relevant range. regression analysis
d. find the high and low points to use for the high-low a. always gives close predictions.
method of estimating costs. b. will not work any better than one obtained using the
high-low method.
d 3. The cost estimation method that gives the most c. can be used only for costs that vary with sales or
mathematically precise cost prediction equation is production.
a. the high-low method. d. could be severely affected by outliers.
b. the scatter-diagram method.
c. the contribution margin method. b 14. Which of the following do JIT operations try to
d. regression analysis. eliminate?
a. Discretionary fixed costs.
c 4. Which cost is most likely to be mixed for a b. Non-value-adding costs.
manufacturer? c. Avoidable costs.
a. Raw materials. d. Direct costs.
b. Direct labor.
c. Manufacturing overhead. d 15. ABC Company breaks even at $600,000 sales and
d. Insurance. earns $60,000 at $700,000 sales. Which of the following
is true?
b 5. Which combinations of object of cost and a. Fixed costs are $40,000.
classification of cost is most reasonable? b. Profit at sales of $800,000 would be $160,000.
Object of Cost Classification of Cost c. The selling price per unit is $6.
--------------- ---------------------- d. Contribution margin is 60% of sales.
a. Materials used to make products Discretionary
fixed cost b 16. A seasonal business that sets selling prices at 20%
b. Advertising cost Discretionary fixed cost above average cost for the preceding month will
c. Straight-line depreciation Variable cost a. be better off if it closed down during the off-season.
d. President's salary Avoidable fixed cost b. charge higher prices in the off-season than in the
busy season.
c 6. A cost is variable if it varies with the c. always charge higher prices than its competitors.
a. number of units manufactured. d. make a consistent return on sales of 20%.
b. number of units sold.
c. level of some activity. b 17. The components of manufacturing cost are
d. selling price of the product. a. variable costs, fixed costs, and overhead costs.
b. materials, direct labor, and overhead.
d 7. A non-value-adding cost is c. purchases, wages, and manufacturing overhead.
a. usually direct to a product. d. wages and salaries, maintenance and repairs,
b. the same as a discretionary cost. utilities, and depreciation.
c. unavoidable.
d. not essential to manufacturing a product. b 18. Which statement is true for a manufacturer?
a. It cannot use the contribution-margin format of the
a 8. Fixed costs that cannot be reduced within a short income statement.
period of time are b. Many costs vary with production activities, not with
a. committed. sales.
b. variable. c. The concepts of fixed and variable costs do not
c. avoidable. apply.
d. unnecessary. d. Cost-volume-profit analysis is not appropriate.

b 9. Which cost is most likely to be committed? d 19. Fixed costs that managers can change on short
a. Repairs and maintenance. notice are
b. Sum-of-the-years'-digits depreciation on the factory a. value-adding costs.
building. b. variable costs.
c. Fee for a consultant on the company's long-range c. unavoidable costs.
planning. d. discretionary costs.
d. Advertising.
c 20. A(n) __________ relationship is one that appears to
a 10. RST's average cost per unit is the same at all levels exist even though there is no causal relationship.
of volume. Which of the following is true? a. Correlation.
a. RST must have only variable costs. b. Outlier.
b. RST must have only fixed costs. c. Spurious.
d. Value-added.

10
 c. Building maintenance.
c 21. Identifying cost drivers d. Insurance.
a. is not necessary with regression analysis.
b. is the same as identifying cost pools. a 32. Which cost is LEAST likely to be direct to a
c. is an important part of cost management. particular product?
d. is useful only with step-variable costs. a. Salaries of salespeople who sell all of the
company's products.
d 22. A cost pool is b. Advertising of the product.
a. all of the costs of a particular department. c. License fees paid to the designer of the product.
b. all costs in a group such as variable costs or d. Cost of materials used to make the product.
discretionary fixed costs.
c. all costs related to a product or product line. c 33. Which cost is most likely to be avoidable in deciding
d. all costs that have the same driver. whether to shut down one of the four assembly lines in a
factory?
b 23. As volume increases, a. Depreciation on the factory building.
a. total fixed costs remain constant and per-unit fixed b. Salaries of maintenance workers who service all
costs increase. assembly lines.
b. total fixed costs remain constant and per-unit fixed c. Power used to operate equipment on the assembly
costs decrease. line.
c. total fixed costs remain constant and per-unit fixed d. Heat and light for the building.
costs remain constant.
d. total fixed costs increase and per-unit fixed costs c 34. DSP Company earned $100,000 on sales of
increase. $1,000,000. It earned 130,000 on sales of $1,100,000.
Variable costs as a percentage of sales are
d 24. Which cost is NOT subtracted from selling price to a. 30%.
calculate contribution margin per unit? b. 40%.
a. Variable manufacturing overhead. c. 70%.
b. Variable selling expenses. d. 90%.
c. Direct labor.
d. Fixed manufacturing overhead. b 35. DSP Company earned $100,000 on sales of
$1,000,000. It earned $130,000 on sales of $1,100,000.
c 25. A committed fixed cost Total fixed costs are
a. can never be eliminated. a. $0.
b. can be eliminated in the short-term and in the long- b. $200,000.
term. c. $420,000.
c. can be eliminated in the long-term, but not in the d. $900,000.
short-term.
d. can be eliminated in the short-term, but not in the c 36. Predicting costs at activity levels that are outside
long-term. the relevant range is called
a. association.
c 26. Avoidable costs are usually b. correlation.
a. committed. c. extrapolation.
b. common. d. none of the above.
c. direct.
d. fixed. a 37. A non-value-adding cost
a. is driven by a non-value-adding activity.
a 27. Direct costs are b. is discretionary.
a. associated with a specific activity. c. is direct to a product.
b. always variable. d. allows the company to charge a higher price for the
c. usually committed. product.
d. usually discretionary.
b 38. Looking at the following scatter diagrams we can
c 28. Discretionary costs conclude that
a. are usually unavoidable. $ $
b. are not necessary for successful operations. | ** | **
c. can be either direct or indirect. | * ** | ** *
d. should be the first ones cut in a cost-reduction | *** * | * *
program. | * * | **
| |
a 29. Ogden Company had $300,000 overhead cost at | |
20,000 machine hours, $320,000 overhead cost at |__________________ |
25,000 hours. Variable overhead cost per machine hour __________________
is activity activity
a. $ 4.00. Cost A Cost B
b. $12.80.
c. $15.00. a. cost A will be easier to predict than cost B.
d. some other number. b. cost B will be easier to predict than cost A.
c. cost A is out-of-control.
b 30. Sacramento Company had $400,000 overhead cost d. cost B has no fixed component.
at 50,000 machine hours and $460,000 overhead cost at
60,000 hours. Total fixed overhead is b 39. MNO has a break-even point of 200,000 units and
a. $ 60,000 earns a $100,000 profit at sales of 250,000 units. Which
b. $100,000 of the following is true?
c. $120,000. a. Fixed costs are $100,000.
d. $320,000. b. Total contribution margin at 200,000 units is
$400,000.
d 31. Which cost is LEAST likely to be discretionary? c. Profit at sales of 300,000 units is $120,000.
a. Salaries of salespeople. d. Selling price per unit is $2.
b. Advertising.

11
a 40. The closeness of the relationship between the cost c. 60%.
and the activity is called d. 70%.
a. correlation.
b. spurious. c 50. Osceola Company earned $50,000 on sales of
c. regression analysis. $400,000. It earned $70,000 on sales of $450,000. Total
d. manufacturing overhead. fixed costs are
a. $ 0.
d 41. R-squared is a measure of b. $ 50,000.
a. the spurious relationship between cost and c. $110,000.
activity. d. $180,000.
b. the fixed cost component.
c. the variable cost per unit of activity.
d. how well the regression line accounts for the True-False
changes in the dependent variable.
F 1. The major variable cost in a manufacturing company
c 42. DJH has an average unit cost of $20 at 20,000 units is factory overhead.
and $13.75 at 40,000 units. What is the variable cost per
unit? T 2. In interpreting regression results, the higher the
a. $5.00 correlation, the better cost predictions are likely to be.
b. $6.25
c. $7.50 F 3. Discretionary costs are step-variable.
d. An amount that cannot be determined without
more information. F 4. Discretionary fixed costs are not necessary to
successful operation of the business.
b 43. DJH has an average unit cost of $20 at 20,000 units
and $13.75 at 40,000 units. What is the total fixed cost? T 5. High-low, scatter diagram, and regression analysis
a. $125,000 are methods of developing formulas to predict mixed
b. $250,000 costs.
c. $400,000
d. An amount that cannot be determined without F 6. As volume increases, the per-unit amount of a mixed
more information. cost increases.

a 44. GMH Company had $200,000 overhead cost at T 7. In developing a cost-prediction equation using
25,000 machine hours and $240,000 overhead cost at regression analysis, you might not select the one with the
60,000 hours. Variable overhead per machine hour is highest correlation.
a. $4.00.
b. $1.00. F 8. A company using activity-based costing need not do
c. $0.83. regression analysis or scatter diagrams.
d. some other number.
F 9. An r-squared of .91 with a regression equation
d 45. Elmwood Company had $300,000 overhead cost at means that predictions will be accurate 91% of the time.
40,000 machine hours, and $360,000 overhead cost at
60,000 hours. Total fixed overhead is T 10. A multiple regression equation uses more than one
a. $ 36,000 driver to predict costs.
b. $ 40,000
c. $ 60,000.
d. $180,000. Problems

b 46. Crookston Company breaks even at $300,000 sales 1. Carlson Company incurred $170,000 in overhead costs
and earns $40,000 at $400,000 sales. Which of the making 12,000 units in March. It made 15,000 units and
following is true? incurred $188,000 in overhead costs in April.
a. Fixed costs are $120,000.
b. Profit at sales of $500,000 would be $50,000. a. Compute the variable component of overhead cost.
c. The selling price per unit is $4.
d. Contribution margin is 10% of sales. b. Find the fixed factor of overhead cost.

a 47. Glenwood has an average unit cost of $45 at

20,000 units and $25 at 60,000 units. What is the variable SOLUTION:
cost per unit?
a. $15 a. $6 [($188,000 - $170,000)/(15,000 - 12,000)]
b. $20
c. $35 b. $98,000 [$170,000 - (12,000 x $6), or $188,000 -
d. An amount that cannot be determined without (15,000 x $6)]
more information.

b 48. Glenwood has an average unit cost of $45 at

20,000 units and $25 at 60,000 units. What is the total 2. The statistician of RST, Inc. has developed the
fixed cost? following cost-prediction equation, using observations
a. $400,000 from 12,000 to 30,000 machine hours.
b. $600,000
c. $900,000 Y = $236,837 + $3.7625X, r-squared = .81, standard
d. An amount that cannot be determined without error = $24,363
more information.
Y = total maintenance cost, X = machine hours
b 49. Osceola Company earned $50,000 on sales of
$400,000. It earned $70,000 on sales of $450,000.
Contribution margin as a percentage of sales is
a. 30%.
b. 40%.

12
 a. Find the predicted maintenance cost at 25,000 SOLUTION:
machine hours.
a. $14 [($374,000 - $325,000)/(11,000 - 7,500)]
b. Will maintenance cost at zero machine hours be
$236,837? yes no Circle the correct answer. b. $220,000 [$325,000 - (7,500 x $14), or $374,000 -
(11,000 x $14)]
c. About 68% of the time, maintenance cost should be
within what amount of the predicted value?
7. The statistician of Comstock, Inc. has developed the
following prediction equation for costs, using observations
SOLUTION: from 25,000 to 60,000 machine hours.

a. $330,900 ($236,837 + $3.7625 x 25,000) Y = $146,374 + $4.892X, r-squared = .86, standard

error = $28,638
b. No, zero is outside the relevant range.
Y = total repair cost, X = machine hours
c. $24,363, the standard error
a. Find the predicted repair cost at 50,000 machine
hours.
3. Genner Company earned $125,000 on sales of
$750,000. It earned $225,000 on sales of $1,000,000. b. Will repair cost at zero machine hours be $146,374?
yes no Circle the correct answer.
a. Find the variable costs as a percentage of sales.
c. About 68% of the time, repair cost should be within
b. Find the total fixed costs. what amount of the predicted value?

SOLUTION: SOLUTION:

a. 60% {1 - [($225,000 - $125,000)/($1,000,000 - a. $390,974 ($146,374 + $4.892 x 50,000)

$750,000)]}
b. No, zero is outside the relevant range.
b. $175,000 [$1,000,000 x (1 - 60%) - $225,000]
c. $28,638, the standard error

4. Danner has an average unit cost of $22.50 at a volume

of 400,000 units. At 500,000 units the average unit cost is 8. Scooter Company earned $150,000 on sales of
$20.50. $1,000,000. It earned $330,000 on sales of $1,400,000.

a. Compute the variable cost per unit. a. Find the contribution margin ratio.

b. Compute the total fixed cost. b. Find the total fixed costs.

SOLUTION: SOLUTION:

a. $12.50 {[($20.50 x 500,000) - ($22.50 x 400,000)]/ a. 45% ($330,000 - $150,000)/($1,400,000 -

(500,000 - 400,000)} $1,000,000)

b. $4,000,000 ($9,000,000 - $12.50 x 400,000) b. $300,000 [$1,000,000 x 45%) - $150,000]

5. Tri-County Company incurred $175,000 in overhead 9. Bennco has an average unit cost of $18.50 at a volume
costs making 40,000 units in April. It made 24,000 units of 100,000 units. At 200,000 units the average unit cost is
and incurred $147,000 in overhead costs in May. $14.25.

a. Compute the variable component of overhead cost. a. Compute the variable cost per unit.

b. Find the fixed factor of overhead cost. b. Compute the total fixed cost.

SOLUTION: SOLUTION:

a. $1.75 [($175,000 - $147,000)/(40,000 - 24,000)] a. $10.00 {[($14.25 x 200,000) - ($18.50 x 100,000)]/

(200,000 - 100,000)}
b. $105,000 [$147,000 - (24,000 x $1.75), or $175,000 -
(40,000 x $1.75)] b. $850,000 ($2,850,000 - $10 x 200,000)

6. Bilbo Company incurred $374,000 in overhead costs

making 11,000 units in November. It made 7,500 units
and incurred $325,000 in overhead costs in December.

a. Compute the variable component of overhead cost.

b. Find the fixed factor of overhead cost.

13
10. Parsons Company incurred $475,000 in overhead
costs making 40,000 units in August. It made 30,000 units
and incurred $447,000 in overhead costs in September.

a. Compute the variable component of overhead cost.

b. Find the fixed factor of overhead cost.

SOLUTION:

a. $2.80 [($475,000 - $447,000)/(40,000 - 30,000)]

b. $363,000 [$447,000 - (30,000 x $2.80), or $475,000 -

(40,000 x $2.80)]

14