Chapter 5: Practice Multiple-Choice Questions

Kendra Corporation's total utility costs during the past year were $1,200 during its highest month and $600 during its lowest month. These costs corresponded with 10,000 units of production during the high month and 2,000 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.

(a)$0.075 variable and $450 fixed. Variable is (.075)(1,200 - 600 / 10,000 - 2,000) and fixed is (450)(1,200 - .075 x 10,000). Therefore, choices (b) $0.120 variable and $0 fixed, (c) $0.300 variable and $0 fixed, and (d) $0.060 variable and $600 fixed are incorrect.

Cournot Company sells 100,000 wrenches for $12 a unit. Fixed costs are $300,000, and net income is $200,000. What should be reported as variable expenses in the CVP income statement? (a)$700,000. (b)$900,000. (c)$500,000. (d)$1,000,000.

(a)$700,000. Contribution margin is equal to fixed costs plus net income (300,000 + 200,000 = 500,000) . Since variable expenses are the difference between total sales ($1,200,000) and contribution margin ($500,000), $700,000 must be the amount of variable expenses in the CVP income statement. Therefore, choices (b) $900,000, (c) $500,000, and (d) $1,000,000 are incorrect.

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.

(a)variable-cost element and a fixed-cost element. Mixed costs consist of a variable-cost element and a fixed-cost element, not (b) a controllable-cost element, (c) a relevant-cost element or a controllable-cost element, or (d) a relevant-cost element.

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.

(b) Variable Costs + Fixed Costs + Target Net Income. The correct equation is Required Sales = Variable Costs + Fixed Costs + Target Net Income. The other choices are incorrect because (a) needs fixed costs added, (b) needs variable costs added, and (d) there is a correct answer given (b).

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.

(c)$200,000. Unit contribution margin is (1) (4 x .25) (Fixed Costs / Unit Contribution margin = Break even point). Solving for fixed costs, 200,000 units × $1 per unit = $200,000, not (a) $100,000, (b) $160,000, or (d) $300,000.

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.

(c)Fixed costs per unit. Total fixed costs, not fixed costs per unit, are involved in CVP analysis. Choices (a) sales mix, (b) unit selling prices, and (d) volume or level of activity are all involved in CVP analysis.

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 be greater or less depending on the sales volume.

(c)net income will always be identical on both. Net income will always be identical on both a traditional income statement and a CVP income statement. Therefore, choices (a), (b), and (d) are incorrect statements.

Brownstone Company's contribution margin ratio is 30%. If Brownstone's sales revenue is $100 greater than its break-even sales in dollars, its net income: (a)will be $100. (b)will be $70. (c)will be $30. (d)cannot be determined without knowing fixed costs.

(c)will be $30. If Brownstone's sales revenue is $100 greater than its break-even sales in dollars, its net income will be $30 or (100 x .3), not (a) $100 or (b) $70. Choice (d) is incorrect because net income can be determined without knowing fixed costs.

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

(d)Both (a) and (b) above. Contribution margin is revenue remaining after deducting variable costs and it may be expressed on a per unit basis. Choices (a) and (b) are accurate, but (d) is a better answer. Choice (c) is incorrect because it defines gross margin, not contribution margin.

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.

(d)Both (a) and (b) above. Variable costs vary in total directly and proportionately with changes in the activity level and remain the same per unit at every activity level. Choices (a) and (b) are correct, but (d) is the better and more complete answer. Since (a) and (b) are both true statements, choice (c) is incorrect.

Your cell phone service provider offers a plan that is classified as a mixed cost. The cost per month for 1,000 minutes is $50. If you use 2,000 minutes this month, your cost will be: (a)$50. (b)$100. (c)more than $100. (d)between $50 and $100.

(d)between $50 and $100. Your cost will include the fixed-cost component (flat service fee) which does not increase plus the variable cost (usage charge) for the additional 1,000 minutes which will increase your cost to between $50 and $100. Therefore, choices (a) $50, (b) $100, and (c) more than $100 are incorrect.

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.

c)the range over which the company expects to operate during a year. The relevant range is the range over which the company expects to operate during a year. The other choices are incorrect because the relevant range is the range over which (a) variable costs are expected to be linear, not curvilinear, and (b) the company expects fixed costs to remain the same. Choice (d) is incorrect because this answer does not specifically define relevant range.