Accounting Exam 2

Question 1

Cost Behavior is:

Answer 1

the way in which costs change when the activity level changes

Question 2

A cost driver is:

Answer 2

is an activity that causes total costs to change

Question 3

A company’s normal operating activity is to produce 500 units per month. During its first two months of operations, it produced 100 units per month. Following a great article about the product, product sales spiked to 1,000 units per month, but the spike only lasted for one month. Which of the following best approximates the company’s relevant range?

Answer 3

450-510 units

Question 4

When Carter Inc. sells 48,000 units, its total variable cost is $115,200. What is its total variable cost when it sells 54,000 units?

Answer 4

$129,600

Question 5

What is a variable cost?

Answer 5

A cost that is $26,000 when production is 65,000, and $36,400 when production is 91,000.

Question 6

Fixed costs are _____

Answer 6

constant in total dollars

Question 7

All else being equal, if sales revenue doubles, fixed costs will:

Answer 7

decrease on a per unit basis

Question 8

Mohave, Inc. produces approximately 4,000 units per month, and it places a quality assurance logo on each of its units. To use this logo, it must pay the quality assurance firm $5,000 per month plus $1 per unit. The cost to Mohave of using the quality assurance logo would be a:

Answer 8

mixed cost

Question 9

Total contribution margin is defined as:

Answer 9

total sales revenue less total variable costs

Question 10

Jasmine Corp. has a selling price of $15, variable costs of $10 per unit, and fixed costs of $25,000. Contribution margin is $85,000. How many units did Jasmine sell?

Answer 10

17,000 (Contribution margin = Sales revenue − Variable costs = $15X − $10X = $85,000. X = $85,000/$5 =)

Question 11

Rose Corp. has contribution margin of $65,000, variable costs of $10 per unit, and fixed costs of $25,000. If Rose sells 13,000 units, what was the selling price per unit?

Answer 11

$15.00 (Contribution margin = Sales revenue − Variable costs = (SR × 13,000) − ($10 × 13,000) = $65,000. SR = $195,000/13,000 = $15)

Question 12

Maple Corp. has a selling price of $20, variable costs of $15 per unit, and fixed costs of $25,000. Maple expects profit of $300,000 at its anticipated level of production. What is Maple’s unit contribution margin?

Answer 12

$5.00

Question 13

The contribution margin ratio is

Answer 13

the contribution margin stated as a percentage of sales.

Question 14

Booble, Inc. has a contribution margin ratio of 45%. This month, sales revenue was $200,000, and profit was $40,000. How much are Booble’s fixed costs?

Answer 14

$50,000 (Contribution margin is $90,000. ($200,000 × 45% = $90,000) Fixed costs are $50,000. ($90,000 − $40,000 = $50,000)

Question 15

What is true about Cost Volume Profit

Answer 15

A decision making tool for managers, focusing on the relationship among volume and mix units sold, prices, variable costs, fixed costs, and profit

Question 16

Profit is indicated on a cost-volume-profit graph by:

Answer 16

the vertical difference between the revenue line and the cost line.

Question 17

The formula for break-even point in terms of units is:

Answer 17

total fixed costs/Unit Contribution Margin

Question 18

Quail, Inc., has a contribution margin of 40% and fixed costs of $130,000. What is the break-even point in sales dollars?

Answer 18

$325,000

Question 19

Mira Corp. has a selling price of $50 per unit, variable costs of $40 per unit, and fixed costs of $90,000. How many units must be sold to break-even?

Answer 19

9,000 units

Question 20

Jasper Corp. has a selling price of $30, and variable costs of $20 per unit. When 12,000 units are sold, profits equaled $70,000. How many units must be sold to break-even?

Answer 20

5,000 units (Fixed costs are [($30 − $20) × 12,000] − $70,000 = $50,000. Break-even point is $50,000/($30 − $20)

Question 21

Belle Corp. has a selling price of $50 per unit, variable costs of $40 per unit, and fixed costs of $100,000. What sales revenue is needed to break-even?

Answer 21

$500,000 (Break-even point in units is $100,000/($50 − $40) = 10,000. Revenue = 10,000 × $50 = $500,000. Alternatively, break-even point in sales dollars is fixed costs divided by contribution margin ratio. ($100,000/($10/$50)

Question 22

Merlot, Inc. has fixed costs of $200,000, sales price of $50, and variable cost of $30 per unit. How many units must be sold to earn profit of $80,000?

Answer 22

14,000 units (Calculate target profit by adding fixed costs to target profit, and dividing the result by the per unit contribution margin. ($200,000 + $80,000)/($50 − $30)

Question 23

Elk Corp. has sales of $300,000, a contribution margin ratio of 40%, and a target profit of $30,000. If 20,000 units were sold, what is the variable cost per unit?

Answer 23

$9.00 (Contribution margin is $300,000 × 40% = $120,000. Total variable costs are $300,000 − $120,000 = $180,000. Variable cost per unit is $180,000/20,000 = $9.00. Alternatively, if contribution margin ratio is 40%, then variable cost ratio is 60%, so sales multiplied by the variable cost ratio divided by units is the variable cost per unit. ($300,000 × 60% = $180,000/20,000 = 9 per unit)

Question 24

Harvest Corp. has a contribution margin ratio of 30%, fixed costs of $45,000, and a profit of $60,000. What are total sales?

Answer 24

$350,000 (Contribution margin is $60,000 + $45,000 = $105,000 = Sales × 30%.)

Question 25

The margin of safety is the difference between:

Answer 25

actual sales and break-even sales

Question 26

Dragon, Inc. has actual sales of $400,000 and a margin of safety of $150,000. What is Dragon’s break-even point in sales?

Answer 26

$250,000 (Actual sales less margin of safety equals the break-even point. $400,000 - $150,00)

Question 27

Idaho Corp. has fixed costs of $20,000 and a contribution margin ratio of 50%. Currently, sales are $75,000. What is Idaho’s margin of safety?

Answer 27

$35,000 (Sales less fixed costs divided by contribution margin ratio equals margin of safety. $75,000 - ($20,000/0.50)

Question 28

Degree of operating leverage is used to:

Answer 28

calculate change in profit given change in sales

Question 29

Frontier Corp. has a contribution margin of $450,000 and profit of $150,000. What is its degree of operating leverage?

Answer 29

3.00

Question 30

Which of the following steps in the managerial decision-making process involves differential analysis?

Answer 30

Evaluate the costs and benefits of the alternatives

Question 31

The steps in the managerial decision making process

Answer 31

Identify problem, Brainstorm: find alternatives, Pros/Cons of alternatives, Make a decision, Review results

Question 32

Which of the following is true of a firm that has reached the limit on its resources?

Answer 32

Opportunity costs are now relevant

Question 33

Which of the following types of decisions involves deciding whether to accept or reject an order that is outside the scope of normal sales?

Answer 33

Special-Order

Question 34

Be cautious of __________ expressed on a per-unit basis when weighing make-or-buy decisions. The total value (instead of the per unit value) is relevant to the decision.

Answer 34

fixed costs

Question 35

The law firm of Regal and Porter is examining its client base to determine how profitable its regular clients are. Its analysis indicates that Hawthorne, Inc. paid $179,200 in fees last year, but cost the firm $208,600 ($168,000 in billable labor, supplies, and copying, and $40,600 in allocated common fixed costs). If Regal and Porter dropped Hawthorne, Inc. as a client, and all fixed costs are unavoidable, how would profit be affected?

Answer 35

Decrease 11,200 ($179,200 − $168,000 = $11,200 in lost profit. Included in the cost is $40,600 in allocated fixed costs, which are unavoidable, so these would be excluded from the analysis.)

Question 36

It costs Camp, Inc. $35 per unit to manufacture 1,000 units per month of a product that it can sell for $50 each. Alternatively, Camp could process the units further into a more complex product, which would cost an additional $30 per unit. Camp could sell the more complex product for $75 each. How would processing the product further affect Camp’s profit?

Answer 36

Profit would decrease by $5,000 (Incremental revenue $25,000 − Incremental cost $30,000 = ($5,000)