Chapter 3 - Cost Accounting

At a break-even point of 700 units, variable costs were $980 and fixed costs were $595. What will the 701st unit sold contribute to operating profits before income taxes? A. $0.85 B. $1.40 C. $2.25 D. $3.10

A. $0.85 Explanation: $980 variable costs + $595 fixed costs at break-even makes sales $1,575/700 units = $2.25 unit - $1.40 variable costs per unit = $0.85 profit per unit.

Which of the following changes to a company's contribution income statement will always lower the break-even point (either in units or in dollars)? A. Sales price increases by 10%. B. Sales price decreases by 5%. C. Variable costs increase by 10% and fixed costs decrease by 5%. D. Variable costs decrease by 5% and fixed costs increase by 10%.

A. Sales price increases by 10%.

The contribution margin ratio is 20% for Crowne Company and the break-even point in sales is $300,000. If Crowne Company's target operating profit is $70,000, sales would have to be: A. $370,000. B. $650,000. C. $400,000. D. $350,000.

B. $650,000. Explanation: Revised sales = (Target operating profit ÷ Contribution margin ratio) + Break-even sales= ($70,000 ÷ 20%) + $300,000= $350,000 + $300,000 = $650,000 total sales

If Q equals the level of output, P is the selling price per unit, V is the variable cost per unit, and F is the fixed cost, then the break-even point in units is: A. Q ÷ (P − V). B. F ÷ (P − V). C. V ÷ (P − V). D. F ÷ [Q(P − V)].

B. F ÷ (P − V).

Which of the following would not cause the break-even point to change? A. Sales price increases. B. Sales volume increases. C. Fixed cost increases. D. Variable costs per unit decreases.

B. Sales volume increases.

A company's break-even point will not be changed by: A. a change in total fixed costs. B. a change in the number of units produced and sold. C. a change in the variable cost ratio. D. a change in the contribution margin ratio.

B. a change in the number of units produced and sold. Explanation: This change would affect the break-even point.

The Skyways Company is currently selling its single product for $15. Variable costs are estimated to remain at 70% of the current selling price and fixed costs are estimated to be $4,800 per month. If Skyways increases its selling price by 10%, its variable cost ratio will: A. not change. B. decrease. C. increase. D. Cannot determine with the information given.

B. decrease. Explanation: $15(.70) = $10.50 is variable cost; $15(1.10) = $16.50 is the increased selling price; $10.50/$16.50 = 63.6% (vs. 70%) is the new variable cost ratio (vs. the current variable cost ratio).

The following information pertains to Tiller Co.: Sales$800,000 Variable Costs 160,000 Fixed Costs 40,000 What is Tiller's break-even point in sales dollars? (CPA adapted) A. $200,000 B. $160,000 C. $50,000 D. $40,000

C. $50,000 Explanation: ($800,000 − $160,000)/$800,000 = 80%; $40,000/0.80 = $50,000.

The following information pertains to Tiller Co.: Sales$870,000 Variable Costs 174,000 Fixed Costs 45,600 What is Tiller's break-even point in sales dollars? (CPA adapted) A. $219,600. B. $174,000. C. $57,000. D. $45,600.

C. $57,000. Explanation: ($870,000 - $174,000)/$870,000 = 80%; $45,600/0.80 = $57,000.

Which of the following formulas is used to calculate the contribution margin ratio? A. (Sales − Fixed costs) ÷ Sales. B. (Sales − Cost of goods sold) ÷ Sales. C. (Sales − Variable costs) ÷ Sales. D. (Sales − Total costs) ÷ Sales.

C. (Sales − Variable costs) ÷ Sales.

Cost-volume-profit (CVP) analysis is a simple but powerful tool to assist management in making operating decisions. Which of the following does not represent a potential use of CVP analysis? A. Ability to compute the break-even point. B. Ability to determine optimal sales volumes. C. Aids in evaluating tax planning alternatives. D. Aids in determining optimal pricing policies.

C. Aids in evaluating tax planning alternatives. Explanation: CVP analysis addresses pricing and volume, but it does not address tax planning.

Which of the following would not cause the break-even point to change? A. Sales price increases. B. Fixed cost decreases. C. Sales volume decreases. D. Variable costs per unit increases.

C. Sales volume decreases. Explanation: This would cause the break-even point to change.

If both the variable cost per unit and the selling price per unit increase, the new contribution margin ratio in relation to the old contribution margin ratio will be: A. Lower. B. Higher. C. Unchanged. D. Cannot determine with the information given.

D. Cannot determine with the information given. Explanation: Need to know size of increase of each.

If both the variable cost per unit and the selling price per unit decrease, the new contribution margin ratio in relation to the old contribution margin ratio will be: A. Lower. B. Higher. C. Unchanged. D. Cannot determine with the information given.

D. Cannot determine with the information given. Explanation: In order to make a decision, we need to know the amount or percentage of change.

At the break-even point, the total contribution margin equals total: (CPA adapted) A. Variable costs. B. Sales. C. Selling and administrative costs. D. Fixed costs.

D. Fixed costs.

Which of the following would not cause the break-even point to change? A. Variable costs per unit increases. B. Fixed costs increases. C. Product mix shifts towards the more expensive products. D. Sales volume decreases.

D. Sales volume decreases.

A company's break-even point will not be increased by: A. an increase in total fixed costs. B. a decrease in the selling price per unit. C. an increase in the variable cost per unit. D. an increase in the number of units produced and sold.

D. an increase in the number of units produced and sold. Explanation: Units sold do not affect the break-even point; instead, they indicate where we are on the revenue curve and the margin of safety.

Cost A is a fixed cost, while B is a variable cost. During the current year, the volume of output has decreased. In terms of cost per unit of output, we would expect that: A. cost A has remained unchanged. B. cost B has decreased. C. cost A has decreased. D. cost B has remained unchanged.

D. cost B has remained unchanged Explanation: Variable cost per unit has remained constant, while fixed cost in total remains unchanged but has increased on a per unit basis.

The difference between total sales in dollars and total variable costs is called: A. operating profit. B. net profit. C. the gross margin. D. the contribution margin.

D. the contribution margin. Explanation: Contribution margin = Total sales − Total variable costs.

Flower Company manufactures and sells a single product that has a positive contribution margin. If the selling price and variable costs both decrease by 5% and fixed costs do notchange, then what would be the effect on the contribution margin per unit and the contribution margin ratio? Contribution margin per unit Contribution margin ratio A. Decrease Decrease B. Decrease No change C. No change Decrease D. No change No change Option A Option B Option C Option D

Option B

If the fixed costs for a product decrease and the variable costs (as a percentage of sales dollars) decrease, what will be the effect on the contribution margin ratio and the break-even point, respectively? Contribution Margin RatioBreak-even Point A. Decrease Increase B. Increase Decrease C. Decrease Decrease D. Increase Increase Option A Option B Option C Option D

Option B Explanation: If VC decreases, CM% increases; if FC decreases, the break-even will also decrease.