1.

In a joint manufacturing process, joint costs incurred prior to a decision as to

whether to process the products after the split-off point should be viewed as:

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A Differential
. costs.
B Relevant
. costs.
C Standard
. costs.
D
Sunk costs.
.
Choice "D" is correct. A sunk cost is a past cost (cost already incurred) and cannot be changed
irrespective of the future actions taken

2. Profits that are lost by moving an input from one use to another are referred to as:

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A
Opportunity costs.
.
B Cannibalization
. charges.
C
Replacement costs.
.
D Out-of-pocket
. costs.

Choice "A" is correct. Opportunity costs are the benefits lost or foregone when
one alternative is chosen over the other.

Profits that are lost by moving an input from one use to another are referred to as
opportunity costs.

3. Johnson waits two hours in line to buy a ticket to an NCAA Final Four
Tournament. The opportunity cost of buying the $200 ticket is:

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A Johnson's best alternative use of both the $200 and the two
. hours spent in line.
B Johnson's best alternative use of the two hours it took to wait
. in line.
C
The value of the $200 to the ticket agent.
.
D
Johnson's best alternative use of the $200.
.

Choice "A" is correct. A cost analysis should incorporate all elements of cost,
including money and time. Time is an extremely valuable resource and, although
it may not have an associated dollar amount, it represents an allocation of
resources that could be used elsewhere.

The opportunity cost is Johnson's best alternative use of both the $200 and the
two hours in line. Opportunity cost is the contribution foregone by not using a
limited resource in its next best alternative use.

4. Relevant costs refer to

A.Anticipated future costs that will differ among various alternatives.

B.All fixed costs.
C.Past costs that are expected to be different in the future.
D.Costs that would be incurred within the relevant range of production.
5. Daily costs for Kelso Manufacturing include $1,000 of fixed costs and total variable
costs are shown below.
Unit Output 10 11 12 13 14 15

$25
Cost $125 $400 $525 $700 $825
0
The average total cost at an output level of 11 units is

A.$250.00.
B.$215.91.
C.$113.64.
D.$125.00.

6. For the year just ended, Silverstone Company's sales revenue was
$450,000. Silverstone's fixed costs were $120,000 and its variable costs
amounted to $270,000. For the current year, sales are forecasted at
$500,000. If the fixed costs do not change, Silverstone's profits this year will
be:

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A $200,0
. 00.
B $110,0
. 00.
C $60,00
. 0.
D $80,00
. 0.

Choice "D" is correct. Profit is calculated by taking sales revenue and subtracting
fixed costs and variable costs. Fixed costs in total are assumed to stay constant,
while variable costs will change as production and sales volumes change. A key
assumption is that variable costs per unit will remain the same, even as totals
may change.

If variable costs are $270,000 and sales revenue is $450,000, this implies that
variable costs are 60 percent of sales. If current year sales forecasts are
$500,000, variable costs (at 60 percent) will be $300,000. The total profit of
$80,000 will be equal to sales of $500,000 less variable costs of $300,000 and
fixed costs of $120,000.

7. Wilkinson Company sells its single product for $30 per unit. The contribution
margin ratio is 45 percent and Wilkinson has fixed costs of $10,000 per month.
If 3,000 units are sold in the current month, Wilkinson's income would be:

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A $90,00
. 0.
B $40,50
. 0.
C $30,50
. 0.
D $49,50
. 0.
Choice "C" is correct. On a company's income statement, bottom-line income is
derived by determining sales dollars and subtracting both variable and fixed
costs. The contribution margin can be used as a quick way to derive the amount
of sales dollars left over after variable costs have been covered.

Wilkinson's income would be $30,500, as shown below.

(Contribution margin ratio × Selling price per unit × Units) –

Income =
Fixed costs
= (0.45 × $30 × 3,000) – $10,000
$30,5
=
00

8. The breakeven point in units increases when unit costs:

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A
Increase and sales price increases.
.
B
Decrease and sales price increases.
.
C Increase and sales price remains
. unchanged.
D Remain unchanged and sales price
. increases.

Choice "C" is correct. The breakeven point represents the sales-volume (either
expressed in units or dollars) level at which revenues exactly equal total costs.
The contribution margin per unit is equal to sales less variable costs per unit.
Sales and breakeven have an inverse relationship; when the sales price per unit
increases, the breakeven point goes down. Costs and breakeven have a direct
relationship; when costs per unit increase, the breakeven point goes up.

The breakeven point in units will increase when unit costs increase and sales price
remains unchanged. Higher unit costs, without a change in sales price, will decrease
the contribution margin and increase the number of units required to break even.

9. Products A and B are jointly produced as a single unit, but they are sold separately.
Product A sells for $10 and has a variable cost of $7, while product B sells for $8 and
has a variable cost of $2. If the firm’s fixed costs are $1,375,000, how many units are
required to be produced to break even?

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 A 166,667
. units.
B 152,778
. units.
C 117,250
. units.
D 138,334
. units.

Choice "B" is correct.

10. The contribution margin for a particular product is $40. If variable costs are $10, and
breakeven sales in dollars are $150,000, fixed costs must be:

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A $120,0
. 00
B $112,5
. 00
C $30,00
. 0
D $37,50
. 0
Choice "A" is correct. Fixed costs can be derived by taking the contribution margin ratio and
multiplying it by breakeven sales in dollars. If the contribution margin is $40, and variable costs
are $10, the sales price per unit must be $50. The contribution margin ratio will therefore be
$40/$50, or 80 percent. Breakeven sales of $150,000 × 80 percent is equal to fixed costs of
$120,000.

11. A detergent company sells large containers of industrial cleaner at a selling price of
$12 per container. Each container of cleaner requires $4.50 of direct materials, $2.50
direct labor, and $1 of variable overhead. The company has total fixed costs of
$2,000,000 and an income tax rate of 40 percent. Management has set a goal to
achieve a targeted after-tax net income of $2,400,000. What amount of dollar sales
must the company achieve in order to meet its goal?
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A $24,000,0
. 00
B $22,000,0
. 00
C $14,4000,
. 000
D $18,000,0
. 00
Choice "D" is correct. Cost/Volume/Profit analysis may be used to determine how many
sales dollars are needed to earn a profit before or after taxes. This is calculated using
the following formula:

Fixed costs + Target

income
Contribution margin
ratio
Target income is a before-tax amount. If an after-tax amount is desired, then the after-
tax amount is divided by the reciprocal of the tax rate. For example, if the tax rate is 30
percent, then the reciprocal of the tax rate is 70% (1 – 30%). The contribution margin
ratio is determined by dividing the contribution margin per unit (sales price per unit
minus variable costs per unit) by the sales price per unit.

$18,000,000 sales dollars are needed to earn a profit after taxes of $2,400,000. The
after-tax net income of $2,400,000 needs to be converted to a before-tax amount of
$4,000,000 by using the formula: ($2,400,000 ÷ [1 – 40%]). The $4,000,000 result is
added to fixed costs of $2,000,000 to equal $6,000,000 in the numerator, above. The
contribution margin ratio is used in the denominator and is equal to one-third: ([$12 unit
sales price – $4.50 direct materials cost per unit – $2.50 direct labor cost per unit – $1
variable overhead cost per unit] ÷ $12 unit sales price) = One-third. $6,000,000 divided
by one-third is $18,000,000.

12. A firm uses simple linear regression to forecast the costs for its main product line. If
fixed costs are equal to $235,000, and variable costs are $10 per unit, how many units
does it need to sell at $15 per unit to make a $300,000 profit?

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A 107,0
. 00
B 60,00
. 0
C 21,40
. 0
D 47,00
. 0
Choice "A" is correct. The regression equation set up will be: y (total costs) = $235,000 + $10x,
with x representing volume. In order to make a $300,000 profit, sales ($15x) − costs must equal
$300,000. So the full set up will be: $15x − ($235,000 + $10x) = $300,000. Solving for x, $5x =
$535,000, or 107,000 units. At 107,000 units, sales will total $1,605,000 and costs will total
$1,305,000 for a profit of $300,000.

13. A company produces three products, X, Y, and Z, with a contribution margin of $6,
$4, and $3, respectively. Management estimates sales of 300,000 units next year:
100,000 units of X; 150,000 units of Y; and 50,000 units of Z. How many units of Y must
be sold to break even if the sales mix is maintained and if fixed costs for the year are
$112,500?

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A 4,167
. units
B 8,334
. units
C 25,000
. units
D 12,500
. units

Choice "D" is correct. The number of units to be sold to achieve breakeven (0 operating
income) depends on the sales mix (also called revenue mix) because each product may
have a different contribution margin per unit. The calculation of the weighted average
contribution margin per unit is needed to determine the breakeven point of all products.
Then, a product's share is determined using relative weight based on that product's
units sold as a proportion of all units sold.

The number of units to be sold of Item Y for breakeven is 12,500 units. The calculation
is as follows:

X Y Z
Sales in units 100,000 150,000 50,000
CM per unit $6 $4 $3
150,0
100,0 00 = 50,00
Product mix ratio in units 00 = 300,0 1/2 0 =
300,0 1/3 00 300,0 1/6
00 00
Weighted average CM per unit: $2 + $2 $6 × $4 × $3 × 1/6 =
+ $0.5 = $4.50 1/3 = $2 1/2 = $2 $0.50
Breakeven point units = $112,500 total fixed costs / $4.50 weighted average CM per
unit = 25,000

⇒ X = 1/3 × 25,000 units = 8,334 units (rounded up)

⇒ Y = 1/2 × 25,000 units = 12,500 units

⇒ Z = 1/6 × 25,000 units = 4,167 units

14. Lazar Industries produces two products, Crates and Trunks. Per-unit selling prices,
costs, and resource utilization for these products are as follows.

Crate Trunk
s s
Selling price $20 $30
Direct material costs $5 $5
Direct labor costs 8 10
Variable overhead
3 5
costs
Variable selling costs 1 2
Machine hours per
2 4
unit
Production of Crates and Trunks involves joint processes and use of the same facilities.
The total fixed factory overhead cost is $2,000,000 and total fixed selling and
administrative costs are $840,000. Production and sales are scheduled for 500,000
Crates and 700,000 Trunks. Lazar has a normal capacity to produce a total of
2,000,000 units in any combination of Crates and Trunks, and maintains no direct
materials, work-in-process, or finished goods inventory.

Because of plant renovations, Lazar Industries will be limited to 1,000,000 machine

hours. What is the maximum amount of contribution margin Lazar can generate during
the renovation period?

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A $7,000,0
. 00
B $3,000,0
. 00
C $1,500,0
. 00
D $2,000,0
. 00

Choice "D" is correct. For maximum contribution margin questions, the first step is to
calculate the contribution margin for each product per the constraining resource. For
Crates, the contribution margin is $1.50 per machine hour [($20 – $5 – $8 – $3 – $1) / 2
hours per unit] and for Trunks, the contribution margin is $2 per machine hour [($30 –
$5 – $10 – $5 – $2) / 4 hours per unit]. The second step is to allocate resources to the
product that generates the highest contribution margin per constraint resource (Trunks,
in this question).

For Crates, the contribution margin is $3 per unit ($20 – $5 – $8 – $3 – $1). For Trunks,
the contribution margin is $8 per unit ($30 – $5 – $10 – $5 – $2). The maximum
contribution that Lazar can generate is $2,000,000 by producing 250,000 Trunks (each
requiring 4 machine hours, thereby reaching the capacity constraint of 1,000,000
hours).

15. Climen Co. produces and sells widgets. In Year 1, the company produced and sold
50,000 units of its single product and reported the following revenues and costs:

$600,0
Sales 00
300,00
Cost of goods sold 0
$300,0
Gross profit 00
Selling expenses (all $170,0
fixed) 00
Sales commission (10% of
sales) 60,000
Depreciation and
amortization 20,000
Rent ($4,500 per month) 54,000
349,00
Other operating expenses 45,000 0
$(49,00
Operating income 0)
An analysis of the financial results reveals that fixed overhead was applied at a rate of
$1 per unit and that one third of the other operating expenses is fixed and does not vary
with changes in volume. What is the total contribution margin for Year 1?

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A $320,0
. 00
B $260,0
. 00
C $156,0
. 00
D $210,0
. 00
Choice "B" is correct. Contribution margin is the excess of sales revenue over all of the
variable costs incurred during the period. Variable costs include cost of goods sold
(excluding the fixed overhead portion); sales commissions; variable selling, general, and
administrative costs; and the portion of other operating expenses that are variable.

The contribution margin of $260,000 is calculated as follows:

$600,
Sales 000
Variable cost of goods sold [excluding the fixed manufacturing costs 250,0
of $50,000 (50,000 units × $1)] 00
60,00
Sales commission (10% of sales) 0
30,00
Others (2/3 × $45,000) 0
Contribution margin
$260,000

16. A car rental company uses a significant number of vehicles in its operations. The management has to
decide if it would be more advantageous to acquire new vehicles utilizing a financial lease as opposed to
ownership.

Which one of the following factors would not be relevant to the decision?

A. The operating cost of the vehicles.

B. The tax depreciation schedule related to the vehicles.

C. The residual value of the vehicles.

D. The availability of credit to the company.

17. In April, a company with idle capacity has been contacted by a new customer to supply 100,000 units
of its products for a special order at a price that is 25% below the company’s regular sales price. If
accepted, the order will be completed and delivered in April. The order is identical to a committed order
that will be produced in May. Which one of the following costs is relevant for the company’s decision
whether to accept the special order?

A. The insurance on the machinery that will be used to produce the units.

B. The direct materials that were purchased earlier for a production order that was

canceled.

C. The machine setup costs for the order.

D. The electricity to operate the machinery in April to produce the units.

18. A company has considerable excess manufacturing capacity. A special job order’s cost sheet includes
the following applied manufacturing overhead costs:

Fixed costs $21,000

Variable costs 33,000

The fixed costs include a normal $3,700 allocation for in-house design costs, although no in-house
design will be done. Instead, the job will require the use of external designers costing $7,750. What is
the total amount to be included in the calculation to determine the minimum acceptable price for the
job?

A. $58,050

B. $36,700

C. $40,750

D. $54,000

19. When only differential manufacturing costs are taken into account for special-order pricing, an
essential assumption is that

A. Selling and administrative fixed and variable costs are linear.

B. Manufacturing fixed and variable costs are linear.

C. Acceptance of the order will not affect regular sales.

D. Acceptance of the order will not cause unit selling and administrative variable costs

to increase.

20.Costs relevant to an insourcing vs. outsourcing decision include variable manufacturing costs as well
as

A. Factory depreciation.

B. Factory management costs.

C. Property taxes.

D. Avoidable fixed costs.

21. If the price of apples declines and total revenue received by the firm increases, the

A. Elasticity of demand for apples is less than 1.0.

B. Demand for apples is inelastic.

C. Demand for apples is elastic.

D. Elasticity of demand for apples is 1.0.

22. A company is analyzing demand at different price points for their premium writing pens. The
quantity demanded was 1,500,000 units when the price was $4.50. When the price was $3.25, the
quantity demanded was 2,250,000 units. Using the midpoint formula, the price elasticity of demand for
its premium writing pens is

A. 1.16

B. 0.63

C. 0.86

D. 1.24

23. Systematic evaluation of the trade-offs between product functionality and product cost while still
satisfying customer needs is the definition of

A. Value engineering.

B. Theory of constraints.

C. Activity-based management.

D. Total quality management.

24. A pharmaceutical company is preparing to release a new medication. The controller would like to
consider the product life cycle in pricing, costing, and budgeting decisions for the product. The
statement below that best represents the time span that the controller should consider is the time from
initial

A. Research and development on a product to the time that sales mature and begin to decline.

B. Sale of a product to the time that customer service and support is no longer offered on that product.

C. Sale of a new product to the time that sales mature and begin to decline.

D. Research and development on a product to the time that customer service and support is no longer
offered on that product.

25. Market-skimming pricing strategies could be appropriate when

A. Competitors can easily enter the market.

B. The product is of poor quality.

C. No buyers want the product at a high price.

D. The costs of producing a small volume are low.

26. An entity is planning to introduce a new product, DMA. It is expected that 10,000 units of DMA will
be sold. The full product cost per unit is $300. Invested capital for this product amounts to $20 million.
The entity’s target rate of return on investment is 20%. The markup percentage for this product, based
on operating income as a percentage of full product cost, will be

A. 133.3%

B. 233.3%

C. 42.9%

D. 57.1%

27.Suppose that Giorgio has a store in New York selling imported suits from Italy. He purchases
each suit for $800 and resells them for $1,100. What is his markup percentage?
A 27.3%
B 137.5%
C 72.7%
D 37.5%
28.All of the following statements about a product’s life cycle are correct except:
A Products have a limited life.
B Products pass through different phases during their lives.
C Firms should use different marketing strategies in different life-cycle phases.
D The opportunities and threats to sales are similar throughout a product’s life cycle.
29.Which of the following statements is correct?
Elastic demand means that the percent change in quantity demanded is smaller than the percent
A
change in price.
Inelastic demand means that the percent change in quantity demanded is larger than the percent
B
change in price.
Inelastic demand means that the percent change in quantity demanded is smaller than the
C
percent change in price.
Inelastic demand means that the percent change in quantity demanded is exactly the same as
D
the percent change in price.
30.A company determines that at a price of $18 it will sell 22,900 units and at a price of $16 it
will sell 26,500 units. Using the midpoint formula, what is the price elasticity of demand?
A 1.24
B 0.81
C 1.30
D 0.77