Financial And Managerial Accounting Ch 5

Question 1

The relevant range is:

a. The range of activity in which variable costs will be curvilinear
b. The range of activity in which fixed costs will be curvilinear
c. The range over which the company expects to operate during a year
d. Usually from zero to 100% of operating capacity

Answer 1

The relevant range is:

c. The range over which the company expects to operate during a year

Question 2

Kendra NV’s total utility cost during the past year were 1200 EUR during its highest month and 600 EUR during its lowest month. These costs corresponded with 10 000 units of production during the high month and 2000 units during the low month. What are the fixed and variable components of its utility costs using the high-low method?

a. 0,075 variable and 450 fixed
b. 0,120 variable and 0 fixed
c. 0,300 variable and 0 fixed
d. 0,060 variable and 600 fixed

Answer 2

Kendra NV’s total utility cost during the past year were 1200 EUR during its highest month and 600 EUR during its lowest month. These costs corresponded with 10 000 units of production during the high month and 2000 units during the low month. What are the fixed and variable components of its utility costs using the high-low method?

a. 0,075 variable and 450 fixed

Step 1: determine variable costs per unit change in:

change in total costs / high - low activity level = variable cost per unit

(1200 - 600) / (10000 - 2000) = 0,075

Step 2: determine fix costs. Substract the total variable cost at either the high or the low activity level from the total cost at that activity level:

1200 - (0,075 x 10000) = 450

Question 3

Lanza SA had actual sales of 600 000 USD when break-even sales were 420 000 USD. What is the margin of safety ratio?

a. 25%
b. 30%
c. 33 ⅓%
d. 45%

Answer 3

Lanza SA had actual sales of 600 000 USD when break-even sales were 420 000 USD. What is the margin of safety ratio?

b. 30%

margin of safety in EUR = actual (expected) sales - break-even sales

margin of safety in EUR = 600 000 - 420 000 = 180 000

margin of safety ratio = margin of safety in EUR / actual (expected) sales

margin of safety ratio = 180 000 / 600 000 = 30%

Question 4

Lucy expects to produce and sell 9,000 units at £20 each. Each unit will cost her £8 a unit to produce and fixed costs will be £50,000 per annum. What is the break-even point in units?

Answer 4

Lucy expects to produce and sell 9,000 units at £20 each. Each unit will cost her £8 a unit to produce and fixed costs will be £50,000 per annum. What is the break-even point in units?

Answer: 4167

break-even point in units = fixed costs / contribution margin per unit

break-even point in units = 50 000 / (20 - 8) = 4167

Question 5

Toby is arranging for a rock concert to be held in the students union. The use of the hall will be free but security costs of £100 will have to be met. The cost of the main band will be £2,500 and the supporting band will cost £150. Tickets will be priced at £11 each. How many tickets is the break-even point for this event?

Answer 5

Toby is arranging for a rock concert to be held in the students union. The use of the hall will be free but security costs of £100 will have to be met. The cost of the main band will be £2,500 and the supporting band will cost £150. Tickets will be priced at £11 each. How many tickets is the break-even point for this event?

Answer: 250

Question 6

Contribution margin:

a. Is revenue remaining after deducting variable costs
b. May be expressed as contribution margin per unit
c. Is selling price less cost of goods sold
d. Both (a) and (b) above

Answer 6

Contribution margin:

d. Both (a) and (b) above
a. Is revenue remaining after deducting variable costs
b. May be expressed as contribution margin per unit

Question 7

Which of the following is the most secure margin of safety for a business to have?

a. A margin of safety of 3,000 units and a percentage margin of safety of 30%
b. A margin of safety of 3,000 units and a percentage margin of safety of 25%.
c. A margin of safety of 300 units and a percentage margin of safety of 35%
d. A margin of safety of 300 units and a percentage margin of safety of 20%

Answer 7

Which of the following is the most secure margin of safety for a business to have?

c. A margin of safety of 300 units and a percentage margin of safety of 35% The most secure margin of safety is the one with the highest percentage margin of safety.

Question 8

The mathematical equation for computing required sales to obtain target net income can be expressed as Required sales =

a. Variable costs + target net income
b. Variable costs + fixed costs + target net income
c. Fixed costs + target net income
d. No correct answer is given

Answer 8

The mathematical equation for computing required sales to obtain target net income can be expressed as Required sales =

b. Variable costs + fixed costs + target net income

Question 9

Variable costs are costs that:

a. Vary in total directly and proportionately with changes in the activity level
b. Remain the same per unit at every activity level
c. Neither of the above
d. Both (a) and (b) above

Answer 9

Variable costs are costs that:

d. Both (a) and (b) above
a. Vary in total directly and proportionately with changes in the activity level
b. Remain the same per unit at every activity level

Question 10

Toby is arranging for a rock concert to be held in the students union. The use of the hall will be free but security costs of £100 will have to be met. The cost of the main band will be £2,500 and the supporting band will cost £150. Tickets will be priced at £11 each. If Toby sells 500 tickets as he anticipates, what profit will this event make?

Answer 10

Toby is arranging for a rock concert to be held in the students union. The use of the hall will be free but security costs of £100 will have to be met. The cost of the main band will be £2,500 and the supporting band will cost £150. Tickets will be priced at £11 each. If Toby sells 500 tickets as he anticipates, what profit will this event make?

Answer: 2750

Question 11

Which of the following definitions of break-even point is correct?

a. The break-even point is where total revenue equals total fixed costs plus variable costs.
b. The break-even point is where total fixed costs equals total variable costs.
c. The break-even point is where total sales revenue equals total contribution.
d. The break-even point is where total revenue equals total fixed costs less variable costs.

Answer 11

Which of the following definitions of break-even point is correct?

a. The break-even point is where total revenue equals total fixed costs plus variable costs.

Question 12

Your cell phone service provider offers a plan that is classified as a mixed cost. The cost per month for 1000 minutes is 50 EUR. If you use 2000 minutes this month, your cost will be:

a. 50 EUR
b. 100 EUR
c. More than 100 EUR
d. Between 50 and 100 EUR

Answer 12

Your cell phone service provider offers a plan that is classified as a mixed cost. The cost per month for 1000 minutes is 50 EUR. If you use 2000 minutes this month, your cost will be:

d. Between 50 and 100 EUR

Your costs will include the fixed-cost component (flat-service fee) which does not increase plus the variable cost (usage charge) for the additional 1000 minutes which will increase your cost to between 50 and 100 EUR. Therefore the other choices are incorrect.

Question 13

Gaby is planning to produce and sell baseball hats for Toby’s concert. She expects to produce and sell 300 at a selling price of £8 each. Her break-even point is 213 hats. What is her margin of safety, as a percentage?

Answer 13

Gaby is planning to produce and sell baseball hats for Toby’s concert. She expects to produce and sell 300 at a selling price of £8 each. Her break-even point is 213 hats. What is her margin of safety, as a percentage?

Answer: 29%

Question 14

If the contribution per unit is £15 and the breakeven point is 60,000 units. Which of the following statements could NOT be true?

a. To make a profit of £300,000, then 80,000 units would have to be sold.
b. To make a profit of £500,000, then 100,000 units would have to be sold.
c. The selling price per unit is £55 and the variable cost per unit is £40
d. The fixed costs are £900 000

Answer 14

If the contribution per unit is £15 and the breakeven point is 60,000 units. Which of the following statements could NOT be true?

b. To make a profit of £500,000, then 100,000 units would have to be sold. Profit at 100,000 units is (£15 x 100,000) - 900,000 = £600,000.

Question 15

Gossen Company is planning to sell 200,000 pliers for $4 per unit. The contribution margin ratio is 25%. If Gossen will break even at this level of sales, what are the fixed costs?

a. $100,000
b. $160,000
c. $200,000
d. $300,000

Answer 15

Gossen Company is planning to sell 200,000 pliers for $4 per unit. The contribution margin ratio is 25%. If Gossen will break even at this level of sales, what are the fixed costs?

c. $200,000

fixed costs / contribution margin ratio = break-even point in EUR

fixed costs / 25% = ($4 x 200,000)

fixed costs = 800 000 x 25%

fixed costs = 200 000

Question 16

Mixed costs consist of a:

a. Variable cost element and a fixed cost element
b. Fixed cost element and a controllable cost element
c. Relevant cost element and a controllable cost element
d. Variable cost element and a relevant cost element

Answer 16

Mixed costs consist of a:

a. Variable cost element and a fixed cost element

Question 17

Gaby is planning to produce and sell baseball hats for Toby’s concert. She expects to produce and sell 300 at a selling price of £8 each. Her breakeven point is 213 hats. To produce the hat, the following costs will be incurred: Fabric: £3 per hat Labour costs/hour: £8 per hour Rent of premises: £460 per annum Insurance: £180 per annum Each hat will take a carpenter 15 minutes to make. Which of the following statements is true?

a. The variable cost per unit will be £11 and fixed costs will be £640.
b. The variable cost per unit will be £5 and fixed costs will be £640.
c. The variable cost per unit will be £5 and fixed costs will be £460.
d. The variable cost per unit will be £11 and fixed costs will be £460.

Answer 17

Gaby is planning to produce and sell baseball hats for Toby’s concert. She expects to produce and sell 300 at a selling price of £8 each. Her breakeven point is 213 hats. To produce the hat, the following costs will be incurred: Fabric: £3 per hat Labour costs/hour: £8 per hour Rent of premises: £460 per annum Insurance: £180 per annum Each hat will take a carpenter 15 minutes to make. Which of the following statements is true?

b. Variable cost: £3 plus £8/4 = £5; fixed cost: £460 plus £180 = £640.

Question 18

Cournot AG sells 100 000 wrenches CHF12 a unit. Fixed costs are CHF300 000 and net income is CHF200 000. What should be reported as variable expenses in the CVP income statement?

a. CHF700 000
b. CHF900 000
c. CHF500 000
d. CHF1 000 000

Answer 18

Cournot AG sells 100 000 wrenches CHF12 a unit. Fixed costs are CHF300 000 and net income is CHF200 000. What should be reported as variable expenses in the CVP income statement?

a. CHF700 000

Question 19

Which of the following costs would be a fixed cost for Shaun, a knitwear manufacturer?

a. Labels and packaging
b. Labour cost: knitting machine operators
c. Factory rent
d. Purchasing wool

Answer 19

Which of the following costs would be a fixed cost for Shaun, a knitwear manufacturer?

c. Factory rent

Question 20

The mathematical equation for computing required sales to obtain target net income is: Required sales =

a. Variable costs + Target net income
b. Variable costs + Fixed costs + Target net income
c. Fixed costs + Target net income
d. No correct answer is given

Answer 20

The mathematical equation for computing required sales to obtain target net income is: Required sales =

b. Variable costs + Fixed costs + Target net income = required sales

Question 21

Margin of safety can be computed as:

a. Actual sales - break-even sales
b. Contribution margin - fixed costs
c. Break-even sales - variable costs
d. Actual sales - contribution margin

Answer 21

Margin of safety can be computed as:

a. Actual sales - break-even sales

Question 22

Which of the following most accurately describes a fixed cost?

a. A fixed cost is not affected by inflation.
b. A fixed cost involves the purchase of non-current assets.
c. A fixed cost remains the same, regardless of the level of output.
d. A fixed cost remains the same from year to year.

Answer 22

Which of the following most accurately describes a fixed cost?

c. A fixed cost remains the same, regardless of the level of output.

Question 23

Which of the following is not involved in CVP analysis?

a. Sales mix.
b. Unit selling prices.
c. Fixed costs per unit.
d. Volume or level of activity.

Answer 23

Which of the following is not involved in CVP analysis?

c. Fixed costs per unit. Total fixed costs are taken into account

Question 24

Tanaya Company’s contribution margin ratio is 30%. It Tanaya’s sales revenue is Rp 10 000 greater than its break-even sales in rupiah, its net income:

a. Will be Rp 10 000
b. Will be Rp 7000
c. Will be Rp 3000
d. Cannot be determined without knowing fixed costs

Answer 24

Tanaya Company’s contribution margin ratio is 30%. It Tanaya’s sales revenue is Rp 10 000 greater than its break-even sales in rupiah, its net income:

c. Will be Rp 3000 (Rp 10 000 x 30%)

Question 25

Lombardi Company has a unit selling price of $400, variable costs per unit of $240, and fixed costs of $180,000. Compute the break-even point in units using (a) a mathematical equation and (b) contribution margin per unit.

Answer 25

Lombardi Company has a unit selling price of $400, variable costs per unit of $240, and fixed costs of $180,000. Compute the break-even point in units using (a) a mathematical equation and (b) contribution margin per unit.

Mathematical equation:
sales - variable costs - fixed costs = net income
400Q - 240Q - 180 000 = 0 (net income is 0, since it’s the break-even point)
160Q = 180 000
Q = 180 000 / 160 = 1125 units

Contribution margin per unit:
fixed costs / contribution margin per unit = break-even point in units
180 000 / 160 = 1125 units

Question 26

When comparing a traditional income statement to a CVP income statement:

a. Net income will always be greater on the traditional statement
b. Net income will always be less on the traditional statement
c. Net income will always be identical on both
d. Net income will always be greater or less depending on the sales volume

Answer 26

When comparing a traditional income statement to a CVP income statement:

c. Net income will always be identical on both

Question 27

Helena Company, reports the following total costs at two levels of production. Classify each cost as variable, fixed, or mixed.

Answer 27

Helena Company, reports the following total costs at two levels of production. Classify each cost as variable, fixed, or mixed.

Question 28

Zootsuit Inc. makes travel bags that sell for $56 each. For the coming year, management expects fixed costs to total $320,000 and variable costs to be $42 per unit. Compute the break-even point in dollars using the contribution margin (CM) ratio.

Answer 28

Zootsuit Inc. makes travel bags that sell for $56 each. For the coming year, management expects fixed costs to total $320,000 and variable costs to be $42 per unit. Compute the break-even point in dollars using the contribution margin (CM) ratio.

Contribution margin: 56 - 42 = 14.

Contribution margin ratio: 14 / 56 = 25%.

Break-even in dollars from CM: 320 000 / 25% = 1 280 000

Question 29

Zootsuit Inc. makes travel bags that sell for $56 each. For the coming year, management expects fixed costs to total $320,000 and variable costs to be $42 per unit. Compute the margin of safety and margin of safety ratio assuming actual sales are $1,382,400.

Answer 29

Zootsuit Inc. makes travel bags that sell for $56 each. For the coming year, management expects fixed costs to total $320,000 and variable costs to be $42 per unit. Compute the margin of safety and margin of safety ratio assuming actual sales are $1,382,400.

Margin of safety in dollars: 1 382 400 - 1 280 000 = 102 400

Margin of safety ratio: 102 400 / 1 382 400 = 7,4%

Question 30

Zootsuit Inc. makes travel bags that sell for $56 each. For the coming year, management expects fixed costs to total $320,000 and variable costs to be $42 per unit. Compute the sales in dollars required to earn net income of $410,000.

Answer 30

Zootsuit Inc. makes travel bags that sell for $56 each. For the coming year, management expects fixed costs to total $320,000 and variable costs to be $42 per unit. Compute the sales in dollars required to earn net income of $410,000.

Target net income: (320 000 + 410 000) / 25% = 2 920 000

Question 31

Cunningham, Inc. sells MP3 players for €60 each. Variable costs are €40 per unit, and fixed costs total €120,000. How many MP3 players must Cunningham sell to earn net income of €280,000?

a. 22000
b. 7000
c. 20000
d. 5000

Answer 31

Cunningham, Inc. sells MP3 players for €60 each. Variable costs are €40 per unit, and fixed costs total €120,000. How many MP3 players must Cunningham sell to earn net income of €280,000?

c. 20000