ACCT 3203 Final

A very high degree of operating leverage indicates a firm a. has high fixed costs. b. has a high net income. c. has high variable costs. d. is operating close to its break-even point.

a. has high fixed costs.

The Richard Company had operating leverage of 2.0. Sales for last year are $100,000 with contribution margin of $50,000. Next year, sales are expected to be $150,000. What is next year's expected operating income? a. $25,000 b. 200% c. $50,000 d. 40%

c. $50,000 % increase in profit = 2.0 x 50% = 100% Last year's profit = CM/DOL = $50,000/2 = $25,000 Last year's profit = $100,000 - $50,000 - $25,000* = $25,000 Increased profit is 100% x $50,000 *Fixed cost = $50,000 - $25,000 = $25,000

The following information pertains to Mayberry Corporation: Beginning inventory, units 1,000 Ending inventory, units 6,000 Direct materials per unit $20 Direct labor per unit 40 Variable overhead per unit 10 Fixed overhead per unit 30 Variable selling cost per unit 6 Fixed selling & administrative costs per unit 14 What is the value of the ending inventory using absorption costing? a. $240,000 b. $360,000 c. $600,000 d. $420,000

c. $600,000 ($20 + $40 + $10 + $30) x 6,000 = $600,000

Meco Company produces a product that has a regular selling price of $360 per unit. At a typical monthly production volume of 2,000 units, the product's average unit cost of goods sold amounts to $270. Included in this average is $120,000 of fixed overhead cost. All selling and administrative costs are fixed and amount to $30,000 per month. Meco Company has just received a special order for 1,000 units at $240 per unit. The buyer will pay transportation, and the regular selling price of other customers will not be affected if Meco accepts the order. Assuming Meco Company is operating at capacity and accepting the order would require an offsetting reduction in regular sales, the effect on profits of accepting the order would be a a. $240,000 decrease b. $120,000 decrease c. $30,000 increase d. $150,000 decrease

1,000 x ($360 - $240) = $120,000 decrease

Which item is NOT an example of a sunk cost? a. materials needed for production b. purchase cost of machinery c. depreciation d. all are sunk costs

a. material needed for production

Foster Company manufactures 20,000 units of a component a year. The manufacturing cost of the components was determined to be as follows: Direct materials $150,000 Direct labor 240,000 Variable overhead 90,000 Fixed overhead 120,000 Total cost $600,000 An outside supplier offered to sell the component to Foster for $25.50 each. Foster can rent its unused manufacturing facilities for $45,000 if it purchases the component from the outside supplier. What is the effect on income if Foster purchases the component from the outside supplier? a. $45,000 increase b. $15,000 increase c. $75,000 decrease d. $105,000 increase

b. $15,000 increase Relevant cost to make: Direct materials $150,000 Direct labor 240,000 Variable overhead 90,000 Total relevant cost $480,000 Relevant cost to buy Cost to purchase ($25.50 x 20,000) $510,000 Less: rental income (45,000) Total relevant cost to buy $465,000 Income will increase by $15,000 ($480,000 - $465,000) if the component is purchased outside.

Taylor Company's budgeted sales were 10,000 units at $200 per unit. Actual sales were 9,200 units at $210 per unit. Taylor's price volume variance is a. $68,000 U b. $160,000 U c. $8,000 U d. $168,000 U

b. $160,000 U $200(9,200 - 10,000) = $160,000 U

Elwood Company provided the following information: Budgeted Actual Total sales in units 6,000 6,000 Total contribution margin $65,000 $75,600 Budgeted average unit CM $10.83 Market size in units 120,000 125,000 Calculate the market share variance. a. $2,708 F b. $2,708 U c. $3,459 U d. $3,459 F

b. $2,708 U Actual market share % = 6,000/125,000 = 0.0480 Budgeted market share % = 6,000/120,000 = 0.0500 Market share variance = (0.048-0.050) x 125,000 x $10.83 = $2,707.50 U, rounded to $2,708 U

Sarah Smith, a sole proprietor, has the following projected figures for next year: Price per unit $150.00 Contribution margin per unit $45.00 Total fixed costs $630,000 What selling price per unit is needed to obtain a before-tax profit of $270,000 at a volume of 4,000 units? a. $150.00 b. $330.00 c. $225.00 d. $105.00

b. $330.00 Total CM = $630,000 + $270,000 = $900,000 CM/unit = $900,000/4,000 = $225 Price = $225 +($150 - $45) = $330

Reggie Corporation manufactures a single product with the following unit costs for 1,000 units: Direct materials $2,400 Direct labor 960 Factory overhead (30% variable) 1,800 Selling expenses (50% variable) 900 Administrative expenses (10% variable) 840 Total per unit $6,900 Recently, a company approached Reggie about buying 100 units for $5,100 each. Currently, the models are sold to dealers for $7,800. Reggie Corporation's capacity is sufficient to produce the extra 100 units. No selling expenses would be incurred on the special order. If Reggie wants to increase its profit by $18,000 on the special order, what is the minimum price it could charge per unit? a. $4,014. b. $4,164. c. $5,100. d. $6,900.

b. $4,164. $2,400 + $960 + ($1,800 x 0.3) + ($840 x 0.1) + ($18,000/100) = $4,164

Lewis Company had the following budgeted information for the coming year: Price per unit $150 Variable cost per unit $90 Total fixed costs #300,000 What is the profit if one unit more than the break-even point is sold? a. $150 b. $60 c. $300,060 d. $600,060

b. $60 At breakeven, all fixed costs are covered, so additional units add the contribution margin to profit. If one more unit is sold, profit will be $60 ($150 - $90).

Halbert Company projected the following information for next year: Price per unit $60 Contribution margin per unit $30 Total fixed cost $100,000 Tax rate 20% How many units must be sold to earn an after-tax profit of $40,000? a. 3,750 b. 5,000 c. 5,625 d. 5,167

b. 5,000 Before-tax income = $40,000/(1 - 0.20) = $50,000 Units = ($100,000 + $50,000)/$30 = 5,000

Caskill Company provided the following information: Budgeted Actual Standard Deluxe Standard Deluxe Price $12 $25 $11 $26 Unit variable cost 4 12 5 12 Contribution margin $8 $13 $6 $14 Units 15,000 4,000 15,300 5,000 Calculate the sales mix variance. a. $4,265 U b. $3,635 U c. $3,635 F d. $4,265 F

c. $3,635 F Budgeted average CM per unit = $172,000/(15,000 + 4,000) = $9.05 Sales mix variance = [(15,300 - 15,000) x ($8-$9.05)] [(5,000 - 4,000) x ($13-$9.05)] = $3,635 F

Kringel Company provided the following information: Sales (200,000 units) $500,000 Manufacturing costs: Variable 170,000 Fixed 30,000 Selling & Admin costs: Variable 80,000 Fixed 20,000 What is the variable product cost per unit for Kringel? a. $0.85 b. $1.25 c. $1.00 d. $2.50

a. $0.85 ($170,000)/200,000 = $0.85

For the year, Angel's Bath and Body Shop had variable costs of $27,000, fixed costs of $18,000, and an operating loss of $4,500. The annual sales volume required for Angel's to have before-tax income of $24,000 is a. $126,000 b. $84,000 c. $73,500 d. $42,000

a. $126,000 Sales = $27,000 + $18,000 - $4,500 = $40,500 CMR = ($40,500 - $27,000)/$40,500 = 0.333333 ($18,000 + $24,000)/0.3333 = $126,000

The following information pertains to Mayberry Corporation: Beginning inventory, units 1,000 Ending inventory, units 6,000 Direct materials per unit $20 Direct labor per unit 40 Variable overhead per unit 10 Fixed overhead per unit 30 Variable selling cost per unit 6 Fixed selling & administrative costs per unit 14 Absorption costing income would be ______________ variable costing income. a. $150,000 greater than b. $150,000 less than c. $240,000 less than d. $240,000 greater than

a. $150,000 greater than Fixed overhead in beg. inventory $ 30,000 Fixed overhead in ending inventory 180,000 Difference $150,000 Inventory has gone up, so absorption costing income is greater than variable costing income. OR $30 x (6,000 - 1,000) = $150,000

Foster Company manufactures 20,000 units of a component a year. The manufacturing cost of the components was determined to be as follows: Direct materials $150,000 Direct labor 240,000 Variable overhead 90,000 Fixed overhead 120,000 Total cost $600,000 An outside supplier offered to sell the component to Foster for $25.50 each. What is the effect on income if Foster purchases the component from the outside supplier? a. $30,000 decrease b. $30,000 increase c. $90,000 decrease d. $90,000 increase

a. $30,000 decrease Relevant cost to make: Direct materials $150,000 Direct labor 240,000 Variable overhead 90,000 Total relevant cost $480,000 Relevant cost to buy = $25.50 x 20,000 = $510,000 Income will decrease by $30,000 ($510,000 - $480,000) if the component is purchased outside.

Portrait Company provided the following information: Sales price per unit $18.00 Variable cost per unit $13.50 Total fixed cost $22,500 Tax rate 40% What volume of sales dollars is required to earn an after-tax income of $40,500? a. $360,000 b. $90,000 c. $252,000 d. $495,000

a. $360,000 Before-tax income = $40,500/(1 - 0.4) = $67,500 CMR = ($18.00 - $13.50)/$18.00 = 0.25 Sales = ($67,500 + $22,500)/0.25 = $360,000

Barco, Inc., decided to institute an advertising campaign that will cost $75,000. Variable costs remain at $15 per unit. Barco is currently selling 100,000 units of its product at $25 per unit. The marketing department estimates that there will be a 10% increase in sales volume. With all else remaining the same, what will be the result of this decision? a. An increase in operating income of $25,000 b. A decrease in operating income of $75,000 c. An increase in sales of $25,000 d. none of the above

a. An increase in operating income of $25,000 Additional units = 100,000 x 0.10 = 10,000 Additional CM = ($25 - $15) x 10,000 = $100,000 Additional income = $100,000 - $75,000 = $25,000

Product 1 has a contribution margin of $6 per unit, and Product 2 has a contribution margin of $7.50 per unit. Total fixed costs are $300,000. Sales mix and total volume varies from one period to another. Which of the following is TRUE? a. At a sales volume in excess of 25,000 units of Product 1 and 25,000 units of Product 2, operations will be profitable. b. The ratio of net profit to total sales for Product 2 will be larger than the ratio of net profit to total sales for Product 1. c. The contribution margin per unit of direct materials is lower for 1 than for 2. d. The ratio of total contribution margin to total sales always will be larger for Product 1 than for Product 2.

a. At a sales volume in excess of 25,000 units of Product 1 and 25,000 units of Product 2 operations will be profitable.

___________ is the pricing of a new product at a low initial price to build market share quickly. a. Penetration pricing b. Predatory pricing c. Price skimming d. Target pricing

a. Penetration pricing

A company currently needs sales revenue of $350,000 to earn after-tax income of $68,000. If the income tax rate increases, what will happen to the sales revenue needed to earn after-tax income of $68,000? a. Revenue will increase. b. Revenue will decrease. c. Revenue will remain constant. d. Variable costs will increase.

a. Revenue will increase.

Information about the Harmon Company's two products includes: Product X Product Y Sales price $9.00 $9.00 Unit variable costs: Manufacturing $5.25 $6.75 Selling 0.75 0.75 Total variable cost per unit $6.00 $7.50 Monthly fixed manufacturing cost is $82,500 and fixed selling and afministrative cost is $45,000. What is the total monthly sales volume in units needed to break even when the sales mix is 70% Product X and 30% Product Y? a. 8,333 units b. 50,000 units c. 16,667 units d. 56,667 units

b. 50,000 units Average CM per unit = [0.7 x ($9.00 - $6.00)] + [0.3 x ($9.00 - $7.50)] = $2.55 BE units = $127,500/$2.55 = 50,000

Stars Company produces products A1, B2, C3, and D4 through a joint process. The joint costs amount to $200,000. Stars provided the following information: If Processed Further Product Units Sales Value @ Split off Added Costs Sales Value A1 3,000 $10,000 $2,500 $15,000 B2 5,000 30,000 3,000 35,000 C3 4,000 20,000 4,000 25,000 D4 6,000 40,000 6,000 45,000 Which product(s) should be sold at split-off to maximize profits? a. Product A1 b. Product D4 c. Product B2 d. Products A1 and D4

b. Product D4 Product Added Revenues Added Costs Difference Decision A1 $5,000 $2,500 $2,500 Process Further B2 $5,000 $3,000 $2,000 Process Further C3 $5,000 $4,000 $1,000 Process Further D4 $5,000 $6,000 $(1,000) Sell @ split-off

Which of the following is a TRUE statement about sales mix? a. Profits may decline with an increase in total dollars of sales if the sales mix shifts to sell more of the high contribution margin product. b. Profits may decline with an increase in total dollars of sales if the sales mix shifts to sell more of the low contribution margin product. c. Profits will remain constant with an increase in total dollars of sales if the total sales in units remains constant. d. Profits will remain constant with a decrease in total dollars of sales if the sales mix also remains constant.

b. Profits may decline with an increase in total dollars of sales is the sales mic shifts to see more of the low contribution margin product.

The following information pertains to Ewing's three products: Prod D Prod E Prod F Unit sales per month 900 1,400 800 Price per unit $6.00 $11.25 $7.50 Variable cost per unit 3.00 9.00 7.80 Unit contribution margin $3.00 $2.25 $(0.30) Assume that the selling price of Prod F is increased to $8.25 with a reduction in monthly sales to 400 units. Monthly profits will a. increase by $2,070 b. increase by $420 c. increase by $180 d. decrease by $60

b. increase by $420 [400 x ($8.25 - $7.80)] + (800 x $0.30)= $420 increase

When production is less than sales volume, operating under absorption costing will be ______________________ operating income using variable costing. a. greater than b. less than c. equal to d. ten percent more than

b. less than

Smith Corporation provided the following data: Price per unit $15 Variable cost per unit $9 Total fixed costs $45,000 Units sold 10,000 units What is the margin of safety in units? a. 4,000 b. 667 c. 2,500 d. 7,500

c. 2,500 BE units = $45,000/($15 - $9) = 7,500 Margin of safety = 10,000 - 7,500 = 2,500

Quinn Corporation had the following information for last year: Sales $80,000 Variable expenses 56,000 Contribution margin $24,000 Fixed expenses 16,000 Operating income $ 8,000 What is the degree of operating leverage for Quinn Corporation for last year? a. 0.333 b. 2.000 c. 3.000 d. 2.333

c. 3.000 DOL = $24,000/$8,000 = 3.000

The majority of product cost is "locked in" during which of the following life-cycle stages? a. Introduction b. Growth c. Development d. Decline

c. Development

Which of the following is NOT a way that companies might reduce tariffs? a. Alter materials to increase the domestic content. b. Restrict the amount of imported materials. c. Increase the amount of imported materials. d. Utilize foreign trade zones.

c. Increase the amount of imported materials.

Which of the following assumptions does NOT pertain to cost-volume-profit analysis? a. Sales price per unit remains constant. b. The sales mix is constant. c. Inventories in a manufacturing entity may go up or down. d. Fixed expenses are constant at all volumes of activities within the relevant range.

c. Inventories in a manufacturing entity may go up or down.

An important qualitative factor to consider regarding a special order is the a. variable costs associated with the special order. b. avoidable fixed costs associated with the special order. c. effect the sale of special-order units will have on the sale of regularly priced units. d. incremental revenue from the special order.

c. effect the sale of special-order units will have on the sale of regularly priced units.

Which of the following would not be classified as committed resources? a. salaried employees b. depreciation on buildings c. fuel to generate electricity internally d. lease on machinery

c. fuel to generate electricity internally

Using cost-volume-profit analysis, we can conclude that a 20 percent reduction in variable costs will a. reduce the break-even sales volume by 20 percent. b. reduce total costs by 20 percent. c. reduce the slope of the total cost line by 20 percent. d. not affect the break-even sales volume if there is an offsetting 20 percent increase in fixed costs.

c. reduce the slope of the total cost line by 20 percent.

Steele Corporation has the following information for January, February, and March: January February March Units produced 10,000 10,000 10,000 Units Sold 7,000 8,500 10,500 Production costs per unit (based on 10,000 units) are as follows: Direct materials per unit $12 Direct labor per unit 8 Variable overhead per unit 6 Fixed overhead per unit 4 Variable selling cost per unit 10 Fixed selling & administrative costs per unit 4 There were no beginning inventories for January, and all units were sold for $50. Costs are stable over the three months. Absorption costing income for March was _____________ than variable costing income. a. $13,000 greater b. $13,000 less c. $2,000 greater d. $2,000 less

d. $2,000 less January February March Units beg. inventory 0 3,000 4,500 Units produced 10,000 10,000 10,000 Units sold -7,000 -8,500 -10,500 Units ending inventory 3,000 4,500 4,000 $4 x (4,500 - 4,000) = $2,000 Absorption costing income is less than variable costing income since inventory decreased.

Quinn Corporation had the following information for last year: Sales $80,000 Variable expenses 56,000 Contribution margin $24,000 Fixed expenses 16,000 Operating income $ 8,000 What is the margin of safety in sales dollars for Quinn Corporation for last year? a. $8,000 b. $32,000 c. $53,333 d. $26,667

d. $26,667 CMR = $24,000/$80,000 = 0.3 BE sales = $16,000/0.3 = $53,333 Margin of safety = $80,000 - $53,333 = $26,667

Portrait Company provided the following information: Sales price per unit $18.00 Variable cost per unit $13.50 Total fixed cost $22,500 Tax rate 30% What volume of sales dollars is required to earn an after-tax income of $40,500? a. $630,000 b. $90,000 c. $252,000 d. $321,428

d. $321,428 Before-tax income = $40,500/(1 - 0.7) = $57,857 CMR = ($18.00 - $13.50)/$18.00 = 0.25 Sales = ($57,857 + $22,500)/0.25 = $321,428

aylor Company's budgeted sales were 10,000 units at $200 per unit. Actual sales were 9,200 units at $210 per unit. Taylor's sales price variance is a. $68,000 U b. $100,000 U c. $8,000 U d. $92,000 F

d. $92,000 F ($210 - $200) 9,200 = $92,000 F

A decrease in the sales price in the basic cost-volume-profit model would a. require a recomputation of the gross profit per unit. b. be offset by an increase in unit costs. c. decrease the break-even volume. d. increase the break-even volume.

d. increase the break-even volume.