Test bank managerial accounting by kieso weygandt 5e ch06

The even point in units is fixed costs divided by contribution margin per unit.. These formulas can also break-be used to determine units or sales dollars needed to achieve target net in

CHAPTER 6 COST-VOLUME-PROFIT ANALYSIS: ADDITIONAL ISSUES SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY

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SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

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The chapter also contains four Short-Answer Essay questions

CHAPTER STUDY OBJECTIVES

1 Describe the essential features of a cost-volume-profit income statement The CVP

income statement classifies costs and expenses as variable or fixed and reports contributionmargin in the body of the statement

2 Apply basic CVP concepts Contribution margin is the amount of revenue remaining after

deducting variable costs It can be expressed as a per unit amount or as a ratio The even point in units is fixed costs divided by contribution margin per unit The break-evenpoint in dollars is fixed cost divided by the contribution margin ratio These formulas can also

break-be used to determine units or sales dollars needed to achieve target net income, simply byadding target net income to fixed costs before dividing by the contribution margin Margin ofsafety indicates how much sales can decline before the company is operating at a loss Itcan be expressed in dollar terms or as a percentage

3 Explain the term sales mix and its effects on break-even sales Sales mix is the relative

proportion in which each product is sold when a company sells more than one product For acompany with a small number of products, break-even sales in units is determined by usingthe weighted-average unit contribution margin of all the products If the company sells manydifferent products, then calculating the break-even point using unit information is notpractical Instead, in a company with many products, break-even sales in dollars iscalculated using the weighted-average contribution margin ratio

4 Determine sales mix when a company has limited resources When a company has

limited resources, it is necessary to find the contribution margin per unit of limited resource.This amount is then multiplied by the units of limited resource to determine which productmaximizes net income

5 Understand how operating leverage affects profitability Operating leverage refers to the

degree to which a company’s net income reacts to a change in sales Operating leverage isdetermined by a company’s relative use of fixed versus variable costs Companies with highfixed costs relative to variable costs have high operating leverage A company with highoperating leverage will experience a sharp increase (decrease) in net income with a givenincrease (decrease) in sales The degree of operating leverage can be measured by dividingcontribution margin by net income

a6 Explain the difference between absorption costing and variable costing Under

absorption costing, fixed manufacturing costs are product costs Under variable costing, fixedmanufacturing costs are period costs

a7 Discuss net income effects under absorption costing versus variable costing If

production volume exceeds sales volume, net income under absorption costing will exceednet income under variable costing by the amount of fixed manufacturing costs included inending inventory that results from units produced but not sold during the period If productionvolume is less than sales volume, net income under absorption costing will be less thanunder variable costing by the amount of fixed manufacturing costs included in the units soldduring the period that were not produced during the period

a8 Discuss the merits of absorption versus variable costing for management decision

making The use of variable costing is consistent with cost-volume-profit analysis Net

income under variable costing is unaffected by changes in production levels Instead, it isclosely tied to changes in sales The presentation of fixed costs in the variable costingapproach makes it easier to identify fixed costs and to evaluate their impact on thecompany’s profitability

5 Sales mix is a measure of the percentage increase in sales from period to period.

6 Sales mix is not important to managers when different products have substantiallydifferent contribution margins

7 The weighted-average contribution margin of all the products is computed whendetermining the break-even sales for a multi-product firm

8 If Conan Corporation sells two products with a sales mix of 75% : 25%, and the respectivecontribution margins are $100 and $300, then weighted-average unit contribution margin

is $150

9 If fixed costs are $100,000 and weighted-average unit contribution margin is $50, then thebreak-even point in units is 2,000 units

10 Net income can be increased or decreased by changing the sales mix

11 The break-even point in dollars is variable costs divided by the weighted-averagecontribution margin ratio

12 When a company has limited resources, management must decide which products tomake and sell in order to maximize net income

13 When a company has limited resources to manufacture products, it should manufacturethose products which have the highest contribution margin per unit

14 If a company has limited machine hours available for production, it is generally moreprofitable to produce and sell the product with the highest contribution margin per machinehour

15 According to the theory of constraints, a company must identify its constraints and findways to reduce or eliminate them

16 Cost structure refers to the relative proportion of fixed versus variable costs that acompany incurs

17 Operating leverage refers to the extent to which a company’s net income reacts to a givenchange in fixed costs

18 The degree of operating leverage provides a measure of a company’s earnings volatility.

19 If O’Brien Company has a margin of safety ratio of 60, it could sustain a 60 percentdecline in sales before it would be operating at a loss

20 A company with low operating leverage will experience a sharp increase in net incomewith a given increase in sales

a21 Variable costing is the approach used for external reporting under generally accepted

a25 Some fixed manufacturing costs of the current period are deferred to future periods

through ending inventory under variable costing

a26 When units produced exceed units sold, income under absorption costing is higher than

income under variable costing

a27 When units sold exceed units produced, income under absorption costing is higher than

income under variable costing

a28 When absorption costing is used for external reporting, variable costing can still be used

for internal reporting purposes

a29 When absorption costing is used, management may be tempted to overproduce in a given

period in order to increase net income

a30 The use of absorption costing facilitates cost-volume-profit analysis

Answers to True-False Statements

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MULTIPLE CHOICE QUESTIONS

31 Cost-volume-profit analysis is the study of the effects of

a changes in costs and volume on a company’s profit

b cost, volume, and profit on the cash budget

c cost, volume, and profit on various ratios

d changes in costs and volume on a company’s profitability ratios

32 The CVP income statement classifies costs

a as variable or fixed and computes contribution margin

b by function and computes a contribution margin

c as variable or fixed and computes gross margin

d by function and computes a gross margin

33 Contribution margin is the amount of revenue remaining after deducting

a cost of goods sold

38 In a CVP income statement, cost of goods sold is generally

a completely a variable cost

b completely a fixed cost

c neither a variable cost nor a fixed cost

d partly a variable cost and partly a fixed cost

39 In a CVP income statement, a selling expense is generally

a completely a variable cost

b completely a fixed cost

c neither a variable cost nor a fixed cost

d partly a variable cost and partly a fixed cost

40 Vazquez Company’s cost of goods sold is $350,000 variable and $200,000 fixed Thecompany’s selling and administrative expenses are $250,000 variable and $300,000 fixed

If the company’s sales is $1,400,000, what is its contribution margin?

43 The contribution margin ratio is

a sales divided by contribution margin

b sales divided by fixed expenses

c sales divided by variable expenses

d contribution margin divided by sales

44 For Danks Company, sales is $500,000, variable expenses are $310,000, and fixedexpenses are $140,000 Danks’ contribution margin ratio is

a 10%

b 28%

c 38%

d 62%

45 For Contreras Company, sales is $1,000,000, fixed expenses are $300,000, and thecontribution margin per unit is $72 What is the break-even point?

a 1,333

b 3,000

c 4,285

d 6,667

51 The required sales in units to achieve a target net income is

a (sales + target net income) divided by contribution margin per unit

b (sales + target net income) divided by contribution margin ratio

c (fixed cost + target net income) divided by contribution margin per unit

d (fixed cost + target net income) divided by contribution margin ratio

52 For Jon Company, sales is $1,000,000, fixed expenses are $300,000, and the contributionmargin ratio is 36% What is required sales in dollars to earn a target net income of

55 Margin of safety in dollars is

a expected sales divided by break-even sales

b expected sales less break-even sales

c actual sales less expected sales

d expected sales less actual sales

56 The margin of safety ratio is

a expected sales divided by break-even sales

b expected sales less break-even sales

c margin of safety in dollars divided by expected sales

d margin of safety in dollars divided by break-even sales

57 In 2008, McDougal sold 3,000 units at $500 each Variable expenses were $350 per unit,and fixed expenses were $195,000 The same variable expenses per unit and fixedexpenses are expected for 2009 If McDougal cuts selling price by 4%, what isMcDougal’s break-even point in units for 2009?

a 600

b 720

c 750

d 900

59 In 2008, Logan sold 1,000 units at $500 each, and earned net income of $40,000.Variable expenses were $300 per unit, and fixed expenses were $160,000 The sameselling price is expected for 2009 Logan’s variable cost per unit will rise by 10% in 2009due to increasing material costs, so they are tentatively planning to cut fixed costs by

$10,000 How many units must Logan sell in 2009 to maintain the same income level as2008?

a the relative percentage in which a company sells its multiple products

b the trend of sales over recent periods

c the mix of variable and fixed expenses in relation to sales

d a measure of leverage used by the company

61 In a sales mix situation, at any level of units sold, net income will be higher if

a more higher contribution margin units are sold than lower contribution margin units

b more lower contribution margin units are sold than higher contribution margin units

c more fixed expenses are incurred

d weighted-average unit contribution margin decreases

62 Konerko Company sells two types of computer chips The sales mix is 30% (Q-Chip) and70% (Q-Chip Plus) Q-Chip has variable costs per unit of $30 and a selling price of $50.Q-Chip Plus has variable costs per unit of $35 and a selling price of $65 The weighted-average unit contribution margin for Konerko is

d cannot determine from information given

64 Konerko Company sells two types of computer chips The sales mix is 30% (Q-Chip) and70% (Q-Chip Plus) Q-Chip has variable costs per unit of $30 and a selling price of $50.Q-Chip Plus has variable costs per unit of $35 and a selling price of $65 Konerko’s fixedcosts are $540,000 How many units of Q-Chip would be sold at the break-even point?

a 6,000

b 7,043

c 10,000

d 14,000

Use the following information for questions 65 and 66.

Uribe Company has a weighted-average unit contribution margin of $30 for its two products,Standard and Supreme Expected sales for Uribe are 40,000 Standard and 60,000 Supreme.Fixed expenses are $1,800,000

65 How many Standards would Uribe sell at the break-even point?

Use the following information for questions 67–70

Fields Corporation has two divisions; Sporting Goods and Sports Gear The sales mix is 65% forSporting Goods and 35% for Sports Gear Fields incurs $2,220,000 in fixed costs Thecontribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is 50%

67 The weighted-average contribution margin ratio is

71 A shift from low-margin sales to high-margin sales

a may increase net income, even though there is a decline in total units sold

b will always increase net income

c will always decrease net income

d will always decrease units sold

72 A shift from high-margin sales to low-margin sales

a may decrease net income, even though there is an increase in total units sold

b will always decrease net income

c will always increase net income

d will always increase units sold

Use the following information for questions 73 and 74

Innova Discs has two divisions—Standard and Premium Each division has hundreds of differenttypes of golf discs and disc golf products The following information is available:

Standard Division Premium Division Total

73 What is the weighted-average contribution margin ratio?

a $2,000 more if Product A is made

b $2,000 less if Product B is made

c $2,000 less if Product A is made

d the same if either product is made

77 Dye Company can sell all the units it can produce of either Plain or Fancy but not both.Plain has a unit contribution margin of $96 and takes two machine hours to make andFancy has a unit contribution margin of $120 and takes three machine hours to make.There are 2,400 machine hours available to manufacture a product What should Dye do?

a Make Fancy which creates $24 more profit per unit than Plain does

b Make Plain which creates $8 more profit per machine hour than Fancy does

c Make Plain because more units can be made and sold than Fancy

d The same total profits exist regardless of which product is made

78 What is the key factor in determining sales mix if a company has limited resources?

a Contribution margin per unit of limited resource

b The amount of fixed costs per unit

c Total contribution margin

d The cost of limited resources

79 Jermaine’s Vittles can produce and sell only one of the following two products:

80 S-Pod’s contribution margin is $10 per unit for Product A and $12 for Product B Product

A requires 2 machine hours and Product B requires 4 machine hours How much is thecontribution margin per unit of limited resource for each product?

a refers to the relative proportion of fixed versus variable costs that a company incurs

b generally has little impact on profitability

c cannot be significantly changed by companies

d refers to the relative proportion of operating versus nonoperating costs that a companyincurs

82 Outsourcing production will

a reduce fixed costs and increase variable costs

b reduce variable costs and increase fixed costs

c have no effect on the relative proportion of fixed and variable costs

d make the company more susceptible to economic swings

83 Reducing reliance on human workers and instead investing heavily in computers andonline technology will

a reduce fixed costs and increase variable costs

b reduce variable costs and increase fixed costs

c have no effect on the relative proportion of fixed and variable costs

d make the company less susceptible to economic swings

84 Cost structure refers to the relative proportion of

a selling expenses versus administrative expenses

b selling and administrative expenses versus cost of goods sold

c contribution margin versus sales

d none of the above

Use the following information for questions 85 and 86

Small Fry Company has sales of $1,000,000, variable costs of $400,000, and fixed costs of

87 Which of the following statements is not true?

a Operating leverage refers to the extent to which a company’s net income reacts to agiven change in sales

b Companies that have higher fixed costs relative to variable costs have higheroperating leverage

c When a company’s sales revenue is increasing, high operating leverage is goodbecause it means that profits will increase rapidly

d When a company’s sales revenue is decreasing, high operating leverage is goodbecause it means that profits will decrease at a slower pace than revenues decrease

88 Scottie Company’s degree of operating leverage is 1.5 Erstadt Corporation’s degree ofoperating leverage is 4.5 Erstadt’s earnings would go up (or down) by as much

as Scottie’s with an equal increase (or decrease) in sales

a 1/3

b 2 times

c 3 times

d 6 times

89 The margin of safety ratio

a is computed as actual sales divided by break-even sales

b indicates what percent decline in sales could be sustained before the company wouldoperate at a loss

c measures the ratio of fixed costs to variable costs

d is used to determine the break-even point

90 A cost structure which relies more heavily on fixed costs makes the company

a more sensitive to changes in sales revenue

b less sensitive to changes in sales revenue

c either more or less sensitive to changes in sales revenue, depending on other factors

d have a lower break-even point

91 A company with a higher contribution margin ratio is

a more sensitive to changes in sales revenue

b less sensitive to changes in sales revenue

c either more or less sensitive to changes in sales revenue, depending on other factors

d likely to have a lower breakeven point

92 The degree of operating leverage

a does not provide a reliable measure of a company’s earnings volatility

b cannot be used to compare companies

c is computed by dividing total contribution margin by net income

d measures how much of each sales dollar is available to cover fixed expenses

a93 Only direct materials, direct labor, and variable manufacturing overhead costs are

considered product costs when using

a full costing

b absorption costing

c variable costing

d product costing

a94 When a company assigns the costs of direct materials, direct labor, and both variable and

fixed manufacturing overhead to products, that company is using

a operations costing

b absorption costing

c variable costing

d product costing

a95 Companies recognize fixed manufacturing overhead costs as period costs (expenses)

when incurred when using

a97 Under absorption costing and variable costing, how are variable manufacturing coststreated?

a98 Under absorption costing and variable costing, how are direct labor costs treated?

a99 Fixed selling expenses are period costs

a under both absorption and variable costing

b under neither absorption nor variable costing

c under absorption costing, but not under variable costing

d under variable costing, but not under absorption costing

a100 Which cost is not charged to the product under variable costing?

a Direct materials

b Direct labor

c Variable manufacturing overhead

d Fixed manufacturing overhead

a101 Which cost is charged to the product under variable costing?

a Variable manufacturing overhead

b Fixed manufacturing overhead

c Variable administrative expenses

d Fixed administrative expenses

a102 Variable costing

a is used for external reporting purposes

b is required under GAAP

c treats fixed manufacturing overhead as a period cost

d is also known as full costing

Use the following information for questions 103–107

Briscoe Company sells its product for $40 per unit During 2008, it produced 60,000 units andsold 50,000 units (there was no beginning inventory) Costs per unit are: direct materials $10,direct labor $6, and variable overhead $2 Fixed costs are: $480,000 manufacturing overhead,and $60,000 selling and administrative expenses

a103 The per unit manufacturing cost under absorption costing is

a $16

b $18

c $26

d $27

a104 The per unit manufacturing cost under variable costing is

a108 Net income under absorption costing is gross profit less

a cost of goods sold

b fixed manufacturing overhead and fixed selling and administrative expenses

c fixed manufacturing overhead and variable manufacturing overhead

d variable selling and administrative expenses and fixed selling and administrativeexpenses

a109 Net income under variable costing is contribution margin less

a cost of goods sold

b fixed manufacturing overhead and fixed selling and administrative expenses

c fixed manufacturing overhead and variable manufacturing overhead

d variable selling and administrative expenses and fixed selling and administrativeexpenses

a110 The manufacturing cost per unit for absorption costing is

a usually, but not always, higher than manufacturing cost per unit for variable costing

b usually, but not always, lower than manufacturing cost per unit for variable costing

c always higher than manufacturing cost per unit for variable costing

d always lower than manufacturing cost per unit for variable costing

a111 The one primary difference between variable and absorption costing is that under

a variable costing, companies charge the fixed manufacturing overhead as an expense

in the current period

b absorption costing, companies charge the fixed manufacturing overhead as anexpense in the current period

c variable costing, companies charge the variable manufacturing overhead as anexpense in the current period

d absorption costing, companies charge the variable manufacturing overhead as anexpense in the current period

a112 Net income under absorption costing is higher than net income under variable costing

a when units produced exceed units sold

b when units produced equal units sold

c when units produced are less than units sold

d regardless of the relationship between units produced and units sold

a113 Some fixed manufacturing overhead costs of the current period are deferred to future

periods under

a absorption costing

b variable costing

c both absorption and variable costing

d neither absorption nor variable costing

Use the following information for questions 114–118

Jack Company sells its product for $11,000 per unit Variable costs per unit are: manufacturing,

$6,000, and selling and administrative, $125 Fixed costs are: $30,000 manufacturing overhead,and $40,000 selling and administrative There was no beginning inventory at 1/1/07 Productionwas 20 units per year in 2007–2009 Sales was 20 units in 2007, 16 units in 2008, and 24 units in2009

a114 Income under absorption costing for 2008 is

a118 For the three years 2007–2009,

a absorption costing income exceeds variable costing income by $6,000

b absorption costing income equals variable costing income

c variable costing income exceeds absorption costing income by $6,000

d absorption costing income may be greater than, equal to, or less than variable costingincome, depending on the situation