ACCT 225 - Chapter 5

Marshall Company had actual sales of $600,000 when break-even sales were $420,000. What is the margin of safety ratio? (a) 25%. (b) 30%. (c) 33 1/3% (d) 45%.

(b) 30%.

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.

(b) remain the same per unit at every activity level.

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.

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.

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.

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.

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.

A statement for internal use that classifies costs as fixed or variable and reports contribution margin in the body of the statement.

Cost-volume-profit (CVP) income statement

Moss, Inc. has total fixed costs of $56,000 and a contribution margin ratio of 40%. Moss wants to generate net income totaling $35,000. How much will sales revenue be at Moss' target net income? A. $140,000. B. $57,400. C. $127,400. D. $227,500.

D. $227,500. Sales revenues required to attain target net income of $35,000 = fixed costs of $56,000 + target net income of $35,000 ÷ contribution margin ratio of 40% = $227,500.

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.

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

(a) is revenue remaining after deducting variable costs.

What is contribution margin? A. The amount available to cover fixed costs and contribute to profits. B. The amount of revenue remaining after deducting fixed costs. C. The amount available to cover fixed and variable costs and contribute to profits. D. The percent of selling price pertaining to the cost of goods sold.

A. The amount available to cover fixed costs and contribute to profits.

What type of cost remains the same per unit at every level of activity? A. Variable cost. B. Semivariable cost. C. Fixed cost. D. Mixed cost.

A. Variable cost.

The activity that causes changes in the behavior of costs.

Activity Index

Werth Company produces tie racks. Its estimated fixed costs for the year are $288,000, and the estimated variable costs per unit are $14. Werth expects to produce and sell 60,000 racks at a price of $20 per unit. How many units will be sold at breakeven? A. 20,571. B. 48,000. C. 3,600. D. 14,400.

B. 48,000. The breakeven point in units is determined as follows: 20X − 14X − 288,000 = 0 X= 48,000 units

The level of activity at which total revenues equal total costs.

Break-Even Point

The amount of revenue remaining after deducting variable costs.

Contribution Margin (CM)

The percentage of each dollar of sales that is available to apply to fixed costs and contribute to net income; calculated as contribution margin per unit divided by unit selling price.

Contribution Margin Ratio

The amount of revenue remaining per unit after deducting variable costs; calculated as unit selling price minus unit variable cost.

Contribution Margin per unit

The study of how specific costs respond to changes in the level of business activity.

Cost Behavior Analysis

The study of the effects of changes in costs and volume on a company's profits.

Cost-volume-profit (CVP) analysis

A graph showing the relationship between costs, volume, and profits.

Cost-volume-profit (CVP) graph

The difference between actual or expected sales and sales at the break-even point.

Margin of Safety

Costs that contain both a variable- and a fixed-cost element and change in total but not proportionately with changes in the activity level.

Mixed Costs

Explain the concept of mixed costs.

Mixed costs increase in total but not proportionately with changes in the activity level. For purposes of CVP analysis, mixed costs must be classified into their fixed and variable elements. One method that management may use to classify these costs is the high-low method.

The range of the activity index over which the company expects to operate during the year.

Relevant Range

The income objective set by management.

Target Net Income

Identify the three ways to determine the break-even point.

The break-even point can be (a) computed from a mathematical equation, (b) computed by using a contribution margin technique, and (c) derived from a CVP graph.

List the five components of cost-volume-profit analysis.

The five components of CVP analysis are (a) volume or level of activity, (b) unit selling prices, (c) variable costs per unit, (d) total fixed costs, and (e) sales mix.

Costs that vary in total directly and proportionately with changes in the activity level.

Variable Costs

Distinguish between variable and fixed costs.

Variable costs are costs that vary in total directly and proportionately with changes in the activity index. Fixed costs are costs that remain the same in total regardless of changes in the activity index.

Indicate what contribution margin is and how it can be expressed.

Contribution margin is the amount of revenue remaining after deducting variable costs. It is identified in a CVP income statement, which classifies costs as variable or fixed. It can be expressed as a total amount, as a per unit amount, or as a ratio.

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.

Your 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.

Which of the following is likely to contain a linear relationship between costs and activities? A. Full capacity. B. Relevant range. C. Small-scale operations. D. The entire range of possible activity.

B. Relevant range.

Mixed costs change proportionately with changes in the activity level. True or False

False

When companies prepare a detailed CVP income statement, they provide more detail about specific variable costs but not fixed cost items. True or False

False

Costs that remain the same in total regardless of changes in the activity level.

Fixed Costs

A mathematical method that uses the total costs incurred at the high and low levels of activity to classify mixed costs into fixed and variable components.

High-Low Method

Explain the significance of the relevant range.

The relevant range is the range of activity in which a company expects to operate during a year. It is important in CVP analysis because the behavior of costs is assumed to be linear throughout the relevant range.