Accounting Ch.20

True or false: In practice, the underlying assumptions of cost-volume-profit analysis may sometimes be difficult to satisfy.

True

The dollar amount by which actual sales volume exceeds the break-even point is referred to as the ____________ __________ _________.

margin of safety

A company's margin of safety multiplied by its contribution margin ratio equals its ___________ __________.

operating income

After the break-even point has been reached, each dollar of contribution margin contributes directly to a company's __________.

operating income

Complete the following formula: Revenue - Variable Costs - Fixed Costs = ___________ ___________

operating income

As activity base volume increases, the average fixed cost per unit of activity

decreases.

For manufacturing companies, one assumption of cost-volume-profit analysis is that the number of units produced is assumed to be

equal to the number of units sold each period.

As input units of a particular activity base increase, the difference between the average total cost per unit of that activity base and the average fixed cost per unit of that activity base

equals the variable cost per unit of the activity base. stays the same.

Which of the following would most likely exhibit semivariable behaviors?

factory overhead costs selling, general, and administrative costs

Changes in the average total cost per unit of an activity base result solely from changes in the average _________ cost per unit associated with a activity base.

fixed

Costs that do not change significantly in response to changes in an activity base are referred to as ___________ costs.

fixed

Prior to reaching the break-even point, each dollar of contribution margin contributes to the coverage of a company's _______ costs.

fixed

The fixed cost line of a cost-volume-profit graph

has a slope of 0. is horizontal throughout a company's relevant range of activity.

The ________ ________ method is an easy way to determine the fixed and variable elements of semivariable costs.

high-low

As activity base volume increases, total variable costs

increase.

A company's marketing manager is considering a plan to increase her annual advertising budget by $75,000. By doing so, she estimates that the company's annual revenue would increase by $300,000 over its current level. The company's contribution margin ratio is 30%. If the marketing manager's plan is implemented, the company's operating income is expected to increase by $__________.

15,000

Wilson sells industrial benders. Wilson's sales price per bender is $500, and its variable cost per bender is $300. The company's fixed costs currently total $900,000. Wilson expects to generate revenue of $4 million in the upcoming period. The company must reduce its current level of fixed costs (FC) by $_________ in order to achieve a target operating income of $850,000.

150,000

Wilson sells industrial benders. Wilson's sales price per bender is $500, and its variable cost per bender is $300. The company's fixed costs total $900,000. The company's break-even point in sales dollars is $__________.

2,250,000

A company's marketing manager is considering a plan to increase his annual advertising budget by $180,000. By doing so, he estimates that the company's annual revenue would increase by $400,000 over its current level. The company's contribution margin ratio is 40%. If the marketing manager's plan is implemented, the company's operating income is expected to decrease by $___________.

20,000

Medford sells muffler bearings. Medford's sales price per unit is $150, and its variable cost per unit is $50. The company's fixed costs currently total $800,000. The company anticipates that it will sell 25,000 units in the upcoming period. The company must reduce the current level of fixed costs (FC) by $____________ to achieve a target operating income of $1.9 million.

200,000

Medford sells muffler bearings. Medford's sales price per unit is $150, and its variable cost per unit is $50. The company's fixed costs total $800,000. The company must sell _________ units to achieve a target operating income of $1.5 million.

23,000

Demand for a company's product is expected to increase significantly in the upcoming year, resulting in additional direct labor overtime costs of $2 per unit. The production manager expects that the higher volume will increase annual maintenance costs on the company's manufacturing equipment by $20,000. Fixed costs currently average $500,000 per year, and the company's contribution margin per unit is currently $27. Based on this information, the production manager estimates that the company must produce and sell ____________ units to achieve a target operating income of $250,000 in the upcoming year.

30,800

A company plans to automate its manufacturing activities in the upcoming year. The change in production methods is expected to reduce direct labor costs by $10 per unit. However, the production manager expects that annual fixed manufacturing overhead will increase by $400,000. Fixed costs currently average $800,000 per year, and the company's contribution margin per unit is currently $40. Based on this information, the production manager estimates the the company must produce and sell _________ units to earn a target operating income of $750,000 in the upcoming year.

39,000

Hartford Manufacturing uses the high-low method to estimate the fixed and variable cost elements of its total manufacturing overhead. The company uses machine-hours (MH) as its activity base. In the current year, its highest month of activity was 4,500 MH, with a corresponding total manufacturing overhead cost of $800,000. Its lowest month of activity was 2,000 MH, with a corresponding total manufacturing overhead cost of $360,000. The company anticipates that it will use 3,000 MH in January of the upcoming year. Use the high-low method to determine the following: 1. The variable manufacturing overhead cost per MH is $____________. 2. The monthly fixed manufacturing overhead cost is $__________. 3. The estimated total manufacturing overhead cost in January of the upcoming year is $__________.

Blank 1: 176 Blank 2: 8,000 Blank 3: 536,000

Donaldson Trucking uses cargo miles driven (CMD) as an activity base. The company reports the following breakdown of cost behaviors: Fixed Costs per Year License fees = $12,000 Insurance = $28,000 Depreciation = $160,000 Office & Clerical = $190,000 Variable Costs per CMD Driver wages = $0.40/CMD Fuel = $1.25/CMD Semivariable Costs/CMD Maintenance & Service Costs = $10,000 + $0.35/CMD 1. The intercept of the company's total cost graph is $_________. 2. The slope of the company's total cost line is $___________. 3. The company's estimated total cost at 1 million CMD is $_________.

Blank 1: 400,000 or 400000 Blank 2: 2 Blank 3: 2,400,000 or 2400000

Rommel Trucking uses cargo miles driven (CMD) as an activity base. The company reports the following breakdown of cost behaviors: Purely fixed costs = $900,000/year Purely variable costs = $2.50/CMD Semivariable (mixed) costs = $100,000/year + $0.50/CMD Compute the company's estimated total cost per CMD if the following miles are logged by drivers during the year: 1. The estimated total cost per CMD at 400,000 miles logged is $_____________. 2. The estimated total cost per CMD at 800,000 miles logged is $__________. 3. The estimated total cost per CMD at 1 million miles logged is $____________.

Blank 1: 5.50 Blank 2: 4.25 Blank 3: 4

Dingo manufactures boosters. Dingo's selling price per booster is $50, and its variable cost per booster is $15. The company's fixed costs total $350,000, and its current sales level is $700,000. 1. The company's break-even point in sales dollars is $____________. 2. The company's margin of safety is $___________. 3. The company's current operating income is $___________.

Blank 1: 500,000 Blank 2: 200,000 Blank 3: 140,000

Jensen Corporation uses the high-low method to estimate the fixed and variable cost elements of its total manufacturing overhead. The company uses machine-hours (MH) as its activity base. In the current year, its highest month of activity was 1,400 MH, with a corresponding total manufacturing overhead cost of $90,000. Its lowest month of activity was 900 MH, with a corresponding total manufacturing overhead cost of $60,000. Use the high-low method to determine the following: 1. The variable manufacturing overhead cost per MH is $_____________. 2. The monthly fixed manufacturing overhead cost is $____________.

Blank 1: 60 Blank 2: 6,000

Henderson Corporation uses the high-low method to estimate the fixed and variable cost elements of its total manufacturing overhead. The company uses direct labor hours (DLH) as its activity base. In the current year, its highest month of activity was 2,500 DLH, with a corresponding total manufacturing overhead cost of $200,000. Its lowest month of activity was 1,300 DLH, with a corresponding total manufacturing overhead cost of $116,000. Use the high-low method to determine the following: 1. The variable manufacturing overhead cost per DLH is $. 2. The monthly fixed manufacturing overhead cost is $.

Blank 1: 70 Blank 2: 25,000

Wilkinson Corporation uses the high-low method to estimate the fixed and variable cost elements of its total manufacturing overhead. The company uses direct labor hours (DLH) as its activity base. In the current year, its highest month of activity was 3,200 DLH, with a corresponding total manufacturing overhead cost of $300,000. Its lowest month of activity was 1,700 DLH, with a corresponding total manufacturing overhead cost of $180,000. The company anticipates that it will use 2,500 DLH in January of the upcoming year. Use the high-low method to determine the following: 1. The variable manufacturing overhead cost per DLH is $_________. 2. The monthly fixed manufacturing overhead cost is $__________. 3. The estimated total manufacturing overhead cost in January of the upcoming year is $_________.

Blank 1: 80 Blank 2: 44,000 Blank 3: 244,000

Calculated on a per-unit basis, a company's contribution margin ratio equals its __________ ___________ per unit divided by its average unit __________ __________.

Blank 1: contribution Blank 2: margin Blank 3: sales Blank 4: price

Determining how costs and profits behave in response to changes in levels of business activity is commonly referred to as ___________-__________- ___________ analysis.

Blank 1: cost Blank 2: volume Blank 3: profit

Semivariable costs are sometimes called mixed costs because they contain both a __________ and a ____________ component.

Blank 1: fixed Blank 2: variable

The level of activity at which a company's __________ income equals _________ is referred to as its break-even point.

Blank 1: operating Blank 2: zero or 0

In a cost-volume-profit graph, a company's operating income (or operating loss) equals the distance between the total ________ line and the total _________ line.

Blank 1: revenue Blank 2: cost

A company's contribution margin per unit equals its average __________ per unit minus its _________ per unit.

Blank 1: selling or sales Blank 2: price Blank 3: variable Blank 4: cost

Which of the following statements is/are true about cost-volume-profit (CVP) analysis?

CVP analysis can be applied to a department within a company. CVP analysis can be applied to a particular product line of a company.

True or false: Cost-volume-profit analysis is not a useful planning tool if any or all of its underlying assumptions are violated.

False

A company has a contribution margin per unit of $60 and an average selling price of $100 per unit. Given this information, which of the following statements is/are true?

Operating income will increase by $60 for each unit sold. Variable costs equal $40 per unit.

Assume the following: FC = Fixed Costs Sales = Sales Volume in Dollars CM% = Contribution Margin Ratio TOI = Target Operating Income Which of the following is the formula to determine the sales volume required in dollars to earn a desired level of operating income?

Sales = (FC + TOI)/CM%

What happens as input units of a particular activity base increase?

The average total cost per unit of that activity base decreases. The average fixed cost per unit of that activity base decreases.

Which of the following is NOT an underlying assumption of cost-volume-profit analysis?

Total variable costs as a percentage of sales change as sales activity varies.

True or false: Changes in the average total cost per unit of an activity base result solely from changes in the average fixed costs associated with an activity base.

True

Assume the following: FC = Fixed Costs CM = Contribution Margin per Unit TOI = Target Operating Income Units = Sales Volume in Units Which of the following is the formula for determining the sales volume required in units to earn a desired level of operating income?

Units = (FC + TOI)/CM

Which of the following are reasons why straight-line assumptions about cost behavior are useful and reasonable?

Unusual cost patterns tend to occur at unusually high or unusually low levels of volume. Cost patterns that occur within a relevant range of volume tend to be linear. Unusual cost patterns tend to offset one another.

If a company has a contribution margin ratio of 75%, which of the following statements is/are true?

Up to the break-even point, each dollar of sales will contribute 75 cents to the coverage of fixed costs. After the break-even point, each dollar of sales will contribute 75 cents to operating income.

Which of the following questions is well suited for cost-volume-profit analysis?

What will happen to profitability if capacity is expanded? How many units must be sold to achieve a target level of operating income? What level of sale must be generated to break even?

Which of the following is an example of a variable cost?

annual cost of goods sold

Which of the following is an example of a fixed cost?

annual property tax

The level of activity at which a company's operating income equals 0 is referred to as its _________ _________ point.

break-even

The high-low method enables managers to determine a __________ ____________ used to project total semivariable costs at various levels of activity.

cost formula

Which of the following are examples of fixed costs?

quarterly property taxes monthly depreciation expense semiannual insurance premiums

Mixed costs composed of both fixed and variable elements are often referred to as _______ costs.

semivariable

As activity base volume increases, variable costs per unit of activity

stay the same.

For most companies, it is reasonable to assume that total costs tend to vary with volume in a __________-__________ pattern within a relevant range of output.

straight-line

The term profit in cost-volume-profit analysis refers to operating income because

taxes and nonoperating gains and losses do not possess the characteristics of variable or fixed costs.

The slope of the total revenue line of a cost-volume-profit graph equals

the average selling price per unit.

To find the unit variable cost element of a company's total semivariable costs, the high-low method is used to determine

the change in total semivariable costs that results from changes in a relevant activity base. the slope of the total semivariable cost line.

The cost-volume-profit graph reveals that for every additional unit of product that a company sells,

total costs will increase by the slope of the total cost line. total costs will increase by the variable cost per unit. the distance from the fixed cost line to the total cost line will increase by the variable cost per unit.

Costs that change in total in response to changes in an activity base are referred to as ____________ costs.

variable

Which of the following are examples of variable costs?

weekly fuel costs for delivery trucks sales commissions overtime wages paid to production workers