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ACCT 2810 Ch. 11

Cost behavior refers to the manner in which
a cost changes as the related activity changes.
Costs that remain constant on a per-unit level as the level of activity changes are called
variable costs.
Which of the following graphs illustrates the behavior of a total fixed cost?
Graph 1
Which of the following costs is an example of a cost that remains the same in total as the number of units produced changes?
Salary of a factory supervisor
Which of the following describes the behavior of the variable cost per unit?
Remains constant with changes in production
Which of the following activity bases would be the most appropriate for food costs of a hospital?
Number of patients who stay in the hospital
Which of the following activity bases would be the most appropriate for gasoline costs of a delivery service such as UPS?
Number of miles driven
Costs that vary in total in direct proportion to changes in an activity level are called
variable costs.
Which of the following is an example of a cost that varies in total as the number of units produced changes?
Direct materials cost
Which of the following is an example of a cost that varies in total as the number of units produced changes?
Electricity per KWH to operate factory equipment
As production increases, what would you expect to happen to fixed costs per unit?
Decrease
Which of the following statements is TRUE regarding fixed and variable costs?
Fixed costs are fixed in total, and variable costs are fixed per unit.
Which of the following graphs illustrates the behavior of a total variable cost?
Graph 3
The graph of a variable cost when plotted against its related activity base appears as a
straight line.
Which of the following describes the behavior of the fixed cost per unit?
Decreases with increasing production
Knowing how costs behave is useful to management for all the following reasons EXCEPT for
predicting customer demand
Knowing how costs behave is useful to management for all the following reasons EXCEPT for
predicting customer demand.
Which of the following graphs illustrates the nature of a mixed cost?
Graph 2
Given the following cost and activity observations for Merritt Company’s utilities, use the high-low method to calculate Merritt’s fixed costs per month.

Cost
Machine Hours
January
$52,600

20,000

February
75,100

29,000

March
57,000

22,000

April
64,000

24,500

$2,600
Which of the following costs is a mixed cost?
Rental costs of $5,000 per month plus $0.30 per machine hour of use
Given the following cost and activity observations for Pike Company’s utilities, use the high-low method to calculate Pike’s variable utilities costs per machine hour.

Cost
Machine Hours
May
$8,300

15,000

June
10,400

20,000

July
7,200

12,000

August
9,500

18,000

$0.40
As production increases, what should happen to the variable costs per unit?
Stay the same
Winston Co. manufactures office furniture. During the most productive month of the year, 3,500 desks were manufactured at a total cost of $84,400. In its slowest month, the company made 1,100 desks at a cost of $46,000. Using the high-low method of cost estimation, total fixed costs are
$28,400.
For purposes of analysis, mixed costs are generally
separated into their variable and fixed cost components.
Given the following cost and activity observations for Pike Company’s utilities, use the high-low method to calculate Pike Company’s variable utilities costs per machine hour.

Cost
Machine Hours
March
$3,100

15,000

April
2,700

10,000

May
2,900

12,000

June
3,500

18,000

$0.10
Tucker Co. manufactures office furniture. During the most productive month of the year, 3,600 desks were manufactured at a total cost of $192,000. In its slowest month, the company made 1,200 desks at a cost of $72,000. Using the high-low method of cost estimation, total fixed costs per month are
$12,000.
The systematic examination of the relationships among selling prices, volume of sales and production, costs, expenses, and profits is termed
cost-volume-profit analysis.
In cost-volume-profit analysis, all costs are classified into the following two categories:
variable costs and fixed costs.
The contribution margin ratio is
the same as the profit-volume ratio.
Which ratio indicates the percentage of each sales dollar that is available to cover fixed costs and to provide a profit?
Contribution margin ratio
Variable costs as a percentage of sales for Leamon Inc. are 75%, current sales are $600,000, and fixed costs are $110,000. How much will operating income change if sales increase by $50,000?
$12,500 increase
If sales are $820,000, variable costs are 68% of sales, and operating income is $260,000, what is the contribution margin ratio?
32%
A firm operated at 90% of capacity for the past year during which fixed costs were $320,000, variable costs were 60% of sales, and sales were $1,200,000. Operating profit was
$160,000.
If sales are $200,000, variable costs are 56% of sales, and operating income is $30,000, what is the contribution margin ratio?
44%
Wiles Inc.’s unit selling price is $40, the unit variable costs are $30, fixed costs are $135,000, and current sales are 10,000 units. How much will operating income change if sales increase by 5,000 units?
$50,000 increase
If fixed costs are $850,000 and variable costs are 70% of sales, what is the break-even point (in dollars)?
$2,833,333
If fixed costs are $250,000, the unit selling price is $105, and the unit variable costs are $65, what is the break-even sales (in units)?
6,250 units
If fixed costs are $750,000 and variable costs are 55% of sales, what is the break-even point (in dollars)?
$1,666,667
Foggy Co. has the following operating data for its manufacturing operations:

Unit selling price
$ 250
Unit variable cost
$ 100
Total fixed costs
$840,000

The company has decided to increase the wages of hourly workers, which will increase the unit variable cost by 10%. Increases in the salaries of factory supervisors and property taxes for the factory will increase fixed costs by 4%. If sales prices are held constant, the break-even point for Flynn Co. will

increase by 640 units.
If fixed costs are $350,000, the unit selling price is $75, and the unit variable costs are $30, what is the break-even sales (in units)?
7,778 units
If fixed costs are $810,000, the unit selling price is $60, and the unit variable costs are $48, what is the break-even sales (in units) if the variable costs are increased by $2?
81,000 units
If fixed costs are $810,000, the unit selling price is $60, and the unit variable costs are $48, what is the break-even sales (in units) if fixed costs are reduced by $50,000?
63,333 units
If fixed costs are $450,000, the unit selling price is $75, and the unit variable costs are $50, what are the old and new break-even sales (in units) if the unit selling price increases by $5?
18,000 units and 15,000 units
Snower Corporation sells product G for $150 per unit, the variable cost per unit is $105, the fixed costs are $720,000, and Snower is in the 25% corporate tax bracket. What are the sales (in dollars) required to earn a net income (after tax) of $40,000?
$2,577,778
If fixed costs are $850,000 and the unit contribution margin is $90, what amount of units must be sold in order to have a zero profit?
9,445
If fixed costs are $600,000 and the unit contribution margin is $12, what amount of units must be sold in order to realize an operating income of $100,000?
58,334
If fixed costs are $500,000 and the unit contribution margin is $40, what is the break-even point in units if fixed costs are reduced by $80,000?
10,500
If fixed costs are $561,000 and the unit contribution margin is $10, what is the break-even point in units if variable costs are decreased by $0.50 per unit?
53,429
If variable costs per unit increased because of an increase in hourly wage rates, the break-even point would
increase
If variable costs per unit decreased because of a decrease in utility rates, the break-even point would
decrease
Which of the following conditions would cause the break-even point to decrease?
Unit variable cost decreases
Which of the following conditions would cause the break-even point to increase?
Unit variable cost increases
Which of the following conditions would cause the break-even point to increase?
Total fixed costs increase
Rouney Co. has budgeted salary increases to factory supervisors totaling 10%. If selling prices and all other cost relationships are held constant, next year’s break-even point will
increase by 10%.
Vest Food Co. has the following operating data:

Unit selling price
$ 10.00
Unit variable costs
6.00
Fixed costs
$960,000

The company is contemplating moving to another state where direct labor costs can be reduced, thereby reducing the unit variable cost by 10%. The state where the company currently operates has offered to reduce property taxes to encourage Vest to stay. The minimum amount of property tax savings necessary to keep the company, assuming no other changes, would be

$125,217.
If the contribution margin ratio for Harrison Company is 38%, sales were $425,000 and fixed costs were $100,000, what was the income from operations?
$61,500
The point where the sales line and the total costs line intersect on the cost-volume-profit chart represents
the break-even point.
The point where the profit line intersects the horizontal axis on the profit-volume chart represents
the break-even point.
With the aid of computer software, managers can vary assumptions regarding selling prices, costs, and volume and can immediately see the effects of each change on the break-even point and profit. Such an analysis is called
“what if” or sensitivity analysis.
The point where the profit line intersects the left vertical axis on the profit-volume chart represents
the maximum possible operating loss.
Clinton Co. has an operating leverage of 4. Sales are expected to increase by 8% next year. Operating income is
expected to increase by 32%.
Kennedy Co. sells two products, Arks and Bins. Last year, Kennedy sold 32,000 units of Arks and 18,000 units of Bins. Related data are:

Unit Selling
Unit Variable
Unit Contribution
Product
Price
Cost
Margin
Arks
$ 80

$20

$60

Bins
120

40

$80

What was Kennedy Co.’s sales mix last year?

64% Arks, 36% Bins
Kennedy Co. sells two products, Arks and Bins. Last year, Kennedy sold 32,000 units of Arks and 18,000 units of Bins. Related data are:

Unit Selling
Unit Variable
Unit Contribution
Product
Price
Cost
Margin
Arks
$ 80

$20

$60

Bins
120

40

$80

What was Kennedy Co.’s overall enterprise product’s unit selling price?

$94.40
Kennedy Co. sells two products, Arks and Bins. Last year, Kennedy sold 32,000 units of Arks and 18,000 units of Bins. Related data are:

Unit Selling
Unit Variable
Unit Contribution
Product
Price
Cost
Margin
Arks
$ 80

$20

$60

Bins
120

40

$80

What was Kennedy Co.’s overall enterprise product’s unit variable cost?

$27.20
Kennedy Co. sells two products, Arks and Bins. Last year, Kennedy sold 32,000 units of Arks and 18,000 units of Bins. Related data are:

Unit Selling
Unit Variable
Unit Contribution
Product
Price
Cost
Margin
Arks
$ 80

$20

$60

Bins
120

40

$80

What was Kennedy Co.’s overall enterprise product’s unit contribution margin?

$67.20
Kennedy Co. sells two products, Arks and Bins. Last year, Kennedy sold 32,000 units of Arks and 18,000 units of Bins. Related data are:

Unit Selling
Unit Variable
Unit Contribution
Product
Price
Cost
Margin
Arks
$ 80

$20

$60

Bins
120

40

$80

Assuming that last year’s fixed costs totaled $910,000, what was Kennedy Co.’s break-even point in units?

13,542 units
Assume that Crowson Co. sold 8,000 units of Product A and 2,000 units of Product B during the past year. The unit contribution margins for Products A and B are $20 and $45, respectively. Crowson has fixed costs of $350,000. The break-even point in units is
14,000 units.
The relative distribution of sales among the various products sold by a business is termed the
sales mix.
When a business sells more than one product at varying selling prices, the business’s break-even point can be determined as long as the number of products does not exceed
There is no limit.
If a business had sales of $4,000,000, fixed costs of $1,200,000, a margin of safety of 25%, and a contribution margin ratio of 40%, what was the break-even point?
$3,000,000
If a business had sales of $4,000,000 and a margin of safety of 25%, what was the break-even point?
$3,000,000
If a business had a capacity of $10,000,000 of sales, actual sales of $6,000,000, break-even sales of $4,500,000, fixed costs of $1,800,000, and variable costs of 60% of sales, what is the margin of safety expressed as a percentage of sales?
25%
If sales are $300,000, variable costs are 60% of sales, and operating income is $40,000, what is the operating leverage?
3.000
The difference between the current sales revenue and the sales at the break-even point is called the
margin of safety.
Cost-volume-profit analysis CANNOT be used if which of the following occurs?
Costs cannot be properly classified into fixed and variable costs
The following is a list of various costs of producing sweatshirts. Classify each cost as either a variable, fixed, or mixed cost for units produced and sold.
(a)Electricity costs of $0.025 per kilowatt-hour.

(b)Warehouse rent of $6,000 per month plus $0.50 per square foot of storage used.

(c)Thread.

(d)Lubricants used to oil machinery.

(e)Janitorial costs of $2,000 per month.

(f)Advertising costs of $10,000 per month.

(g)Sales salaries.

(h)Color dyes for producing different colors of sweatshirts.

(i)Salary of the production supervisor.

(j)Straight-line depreciation on sewing machines.

(k)Patterns for different designs. Patterns typically last many years before being replaced.

(l)Maintenance costs with sewing machine company. The cost is $2,000 per year plus $0.001 for each machine hour of use.

(m)Property taxes on factory, building, and equipment.

(n)Cotton and polyester cloth.

(o)Hourly wages of sewing machine operators.

(a)
variable
(b)
mixed
(c)
variable
(d)
variable
(e)
fixed
(f)
fixed
(g)
fixed
(h)
variable
(i)
fixed
(j)
fixed
(k)
fixed
(l)
mixed
(m)
fixed
(n)
variable
(o)
variable

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