Ch. 7 Cost Allocation: Departments, Joint Products, and By-Products

Given a sales price of $300 per unit, variable cost of $180 per unit, and fixed costs of $150,000, the breakeven point in units is BLANK

1,250 Reason: Break-even in units = fixed cost / contribution margin per unit = 150,000/(300-180)

Given a sales price of $250 per unit, variable cost of $100 per unit, and fixed costs of $60,000, the breakeven in dollars is $BLANK

100,000 Reason: Breakeven in dollars = Breakeven in units x Selling price = ((60000/(250-100)) x 250

Which of the following is NOT one of the five strategic decision making steps for CVP analysis?

Choose the option that has the lowest variable costs.

True or false: CVP analysis can be used to determine the most cost-effective trade off between different types of costs.

True

The degree of operating leverage (DOL) is ______.

defined at each output (volume) level, Q

The break-even point in terms of number of units (i.e., sales volume) equals fixed costs ______.

divided by the contribution margin per unit

The break-even point in dollars can be found by ______.

dividing fixed costs for period by the contribution margin ratio

Margin of safety (MOS) is ______.

equal to sales above the break-even point

The end product (information) obtained from a decision table/decision tree is a set of ______.

expected values for each decision option

CVP can be used to determine the required change in BLANK or BLANK cost, given a known change in the other cost component. (Enter only one word per blank.)

fixed, variable

If the degree of operating leverage (DOL) at a given output level (Q) is 10, this means that ______.

from that output level (Q), each % change in sales leads to a 10% change in operating income

Given the choice of two options, one with high fixed cost and low unit variable cost (high-fixed-cost option) and the other with low fixed cost and high unit variable cost (low-fixed-cost option), the best choice for sales levels ABOVE the indifference point is the ______ fixed cost option.

high Reason: As sales volume increases, the high-fixed cost option becomes more attractive because it brings about a reduction in total variable cost

CVP analysis ______.

provides a means to predict the effect of sales growth on operating profit

By definition, a firm with high operating leverage has ______.

relatively high fixed costs Reason: Operating leverage refers to the extent to which there are fixed costs in an organization's cost structure.

A key assumption of conventional CVP (cost-volume-profit) analysis is that ______.

revenue and cost functions are linear

For a multi-product firm, the total (i.e., overall) break-even point expressed in terms of sales dollars can be determined by dividing total fixed costs, F, by the ______.

weighted-average contribution margin ratio

The contribution margin per unit for Products A, B, and C, respectively, are as follows: $24; $60; $180. A standard sales mix consists of 1 unit of A, 2 units of B, and 3 units of C. The weighted-average contribution margin per unit for this firm is ______.

$114 Reason: ((1÷6) × $24) + ((2÷6) × $60) + ((3÷6) × $180) = $113.999964

The required sales volume in units, Q, needed to generate a given amount of pre-tax profit, πB, is ______.

(F + πB)÷(contribution margin per unit)

If fixed cost per week is $600, and selling price per unit is $7.50, with a variable cost per unit of $3.50, the number of units that must be sold to generate a pretax profit of $480 per week is ______.

270 Reason: ($600 + $480)÷($7.50 - $3.50) = $1,080÷$4.00 per unit = 270 units

The primary difference in a CVP model that incorporates ABC data, compared to a conventional CVP profit-planning model, is the inclusion of ______.

activity-based costs (e.g., batch-level costs) rather than solely volume-related costs

Semi-fixed costs ______.

are also called step costs

The overall break-even point for a firm with two products, A and B, is $800,000. In terms of physical units, Product A is 80% of the total. In terms of total sales dollars, Product A is 50% of the total. The relative contribution margins per unit are 60% and 40%. The contribution margin ratio is 30% for Product A and 20% for Product B. The overall break-even point associated with Product A is ______.

$400,000 Reason: 50% × $800,000 = $400,000

In a given period, sales = $100, total cost of good sold (CGS) = $30, selling and administrative expenses (i.e., operating expenses) = $20. Of the $50 total costs, $40 are classified as variable costs and the remaining costs ($10) as fixed. The total contribution margin for the period is ______.

$60 Reason: Total CM = Sales - Variable costs = $100 - $40 = $60

Product A has a contribution margin per unit of $12 and Product B has a contribution margin per unit of $6. Given a sales mix of 25:75, the weighted-average contribution margin per unit is ______.

$7.50 Reason: $12 × 25% + $6 × 75% = $7.50

The required sales volume in units, Q, to generate a targeted after-tax profit, πA, given an income tax rate, t, is Q = ______.

(fixed costs + [πA/(1 - t)])÷contribution margin per unit

The required sales volume in units, Q, needed to generate an after-tax income of $10,000, given a combined tax rate, t, of 20%, fixed costs, F, of $5,000, and a contribution margin per unit of $50 is ______ units.

350 Reason: Q = $5,000 + ($10,000÷(1 - 0.20))÷$50 per unit = 350 units

Given a sales price of $375 per unit, variable cost of $125 per unit, and fixed costs of $100,000, the breakeven point in units is BLANK

400 Reason: Break-even in units = fixed cost / contribution margin per unit = 100,000/(375-125)

The overall break-even point for XZY, which produces two products (A and B), is 150 units. The standard sales mix is 1 unit of A for every 2 units of B. At the overall break-even point for the firm, the number of units of Product A is ______.

50 Reason: (1÷(1 + 2)) × 150 units = 50 units

Product A has total sales of $600,000 (2,000 units) and Product B has total sales of $200,000 (1,000 units). The unit contribution margin is $150 for both products. Given this information, the weight for Product A in determining the weighted-average contribution margin ratio is ______.

75% Reason: $600,000÷($600,000 + $200,000) = 0.75

Which of the following is true regarding not-for-profit (NFP) organizations?

CVP analysis can typically be used in the organization. Reason: The exclusion of "profit" from the CVP model does not preclude its use in an NFP context. CVP analysis can be used to support planning & decision-making for NFP enterprises.

True or false: Batch-costs are treated as fixed in both conventional and ABC-based CVP analysis.

False

True or false: Facility-level costs are treated differently under CVP analysis using an activity-based costing (ABC) approach than they are under the conventional approach to CVP.

False

The level of short-term profitability of an organization is a function of: sales volume, selling price per unit, variable cost per unit, total fixed costs, and ______.

Sales mix (output level)

True or false: An important component of strategic decision making for CVP analysis is an ongoing evaluation of the effectiveness of implementation of the desired alternative.

True

A structured approach to uncertainty/risk analysis that incorporates managerial actions, events, and outcomes (for example, the amount of profit generated during a period), is referred to as ______.

a decision tree (or decision table)

Separate CVP models can be developed for individual products/services as long as there are no significant demand dependencies across products/services and ______.

all fixed costs are traceable to, or can reasonably be allocated to, individual products/services Reason: In this case, profit planning can proceed by developing a CVP model for each product or service.

When a company has step (or semifixed) costs ______.

an approximation of the relevant range may be impossible breakeven points must be computed for each range

When doing CVP analysis using the ABC method ______.

batch-level costs may increase or decrease (i.e., are considered variable costs)

Break-even point in units multiplied by the selling price per unit equals ______.

break-even in sales dollars

Not -for-profit (NFP) organizations ______ use CVP analysis.

can

CVP analysis ______.

can help a firm execute its strategy identifies risks in increasing fixed costs if volume falls

The amount by which operating profit changes for each unit change in sales is the ______.

contribution margin per unit

If selling price per unit is $10, variable cost per unit is $4, and fixed cost per unit is $1, the ______.

contribution margin per unit is $6 Reason: Contribution margin per unit = selling price per unit - variable cost per unit = $10 - $4.

The term that refers to the proportion of each sales dollar available for the recovery of fixed costs is ______.

contribution margin ratio

A model representing how costs and revenues change in response to changes in volume (output) is referred to as ______.

cost-volume-profit (CVP) analysis

The ______ the operating leverage, the greater the sensitivity of operating income to changes in sales volume.

higher

Given the choice of two options, one with high fixed cost and low unit variable cost (high-fixed-cost option) and the other with low fixed cost and high unit variable cost (low-fixed-cost option), the sales level where managers would be equally satisfied with either option is called the BLANK BLANK

indifference point

The construction of a profit-planning (i.e., CVP) model in conjunction with value-stream accounting ______.

is simplified because the analysis is performed at the product-group level

In a conventional CVP model of profit behavior, total revenues are depicted as a ______.

linear function of sales volume, Q

When comparing two products, the product with a relatively ______ margin of safety (MOS) ratio is the riskier of the two.

low Reason: A lower MOS ratio means the organization is closer to the breakeven point.

The margin of safety ratio is calculated as ______.

margin of safety in units or in dollars ÷ breakeven sales in units or in dollars

The planned or actual sales above the break-even point, measured in dollars or units is referred to as the BLANK of BLANK. (Enter only one word per blank.)

margin, safety

If a multiproduct company cannot reasonably allocate fixed costs to each product, then a constant BLANK BLANK must be assumed in order to build a single CVP model for profit-planning purposes. (Enter only one word per blank.)

sales mix

The weighted-average contribution margin for a multi-product organization is calculated by weighting the contribution margin of each individual product by that product's ______.

sales mix % based on physical units

Total contribution margin for a given accounting period equals ______.

sales volume (in units) × contribution margin per unit

On a CVP graph, the slope of the total revenue line equals ______ per unit.

selling price

The name for a variety of methods that examine how an amount changes in response to changes in one or more factors used to predict that amount is BLANK BLANK (Enter only one word per blank.)

sensitivity analysis

The name given to a variety of approaches that examine how a given variable of interest (e.g., profit) changes in response to changes in one or more factors used to predict that variable is ______.

sensitivity analysis

A CVP graph ______.

shows how costs, revenues, and profits change in response to changes in volume (output)

If the fixed cost per month is $500, the selling price per unit is $10, and the variable cost per unit is $8, then ______.

the break-even point in dollars is $500÷($2÷$10) Reason: The break-even point in dollars = Fixed costs (F) divided by the contribution margin ratio, where contribution margin ratio = cm per unit divided by selling price per unit.

The break-even point in dollars equals ______.

the break-even point in units x the selling price per unit

If selling price per unit is $10 and variable cost per unit is $7, then ______.

the contribution margin ratio = 30% Reason: Contribution margin ratio = contribution margin per unit ($3) divided by selling price per unit ($10).

At the break-even point ______.

total contribution margin (CM) equals total fixed costs, F

When families of products are grouped into BLANK BLANK in lean accounting, there is an opportunity to use CVP for the product group rather than for a single product or multiple products. (Enter only one word per blank.)

value streams

The calculation of an amount given different levels of a fact that influences that amount is called BLANK-BLANK analysis. (Enter only one word per blank.)

what if

The calculation of an amount given different levels of a fact that influences that amount is ______ analysis.

what-if