Cost Test 2

The full-cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the product's cost.

False

The total contribution margin is the unit contribution margin multiplied by the number of units minus the fixed component of the total costs (TC).

False

Microsoft Excel® is ideally suited for analyzing alternative CVP scenarios using its "What-If Analysis" function.

True

Price discrimination is the practice of selling identical goods or services to different customers at different prices.

True

Profit is the unit contribution margin multiplied by the number of units minus the fixed component of the total costs (TC).

True

Short-run decisions often have long-run implications.

True

A target cost is computed as: A) cost to manufacture plus a desired markup. B) cost to manufacture plus designated selling expenses. C) market willingness to pay - cost to manufacture. D) market willingness to pay - desired profit.

D.

Agreement among business competitors to set prices at a particular level is: A) predatory pricing. B) target pricing. C) peak-load pricing. D) price fixing.

D.

The relevance of a particular cost to a decision is determined by the: (CMA adapted) A) riskiness of the decision. B) number of decision variables. C) amount of the cost. D) potential effect on the decision.

D.

Which of the following costs are irrelevant for a special order that will allow an organization to utilize some of its present idle capacity? A) Direct materials. B) Indirect materials. C) Variable overhead. D) Unavoidable fixed overhead.

D.

An increase in an organization's tax rate will cause an increase in its break-even point.

False

Cost-volume-profit (CVP) analysis assumes that the production volume equals sales volume so that any changes in unit prices can be ignored.

False

Financial statements prepared in accordance with generally accepted accounting principles (GAAP) provide differential cost information.

False

Fixed costs are always classified as sunk costs in differential cost analysis.

False

If the average selling price is $0.60 per unit, the average variable cost is $0.36 per unit, and the total fixed costs are $1,500, then sales of 15,000 units will result in operating profits of $3,600.

False

If the fixed costs are $2,400, targeted before-tax operating profit is $1,200, tax rate is 25%, selling price per unit is $2, and contribution margin ratio is 40%, then the sales volume is 9,000 units.

False

If the fixed costs are $2,400, targeted operating profits is $1,200, selling price per unit is $2, and the contribution margin ratio is 40%, then the required sales volume is 9,000 units

False

In multi-product cost-volume-profit (CVP) analysis, the fixed product mix method and the weighted- average contribution margin method yield different break-even points.

False

Microsoft Excel® cannot be used to find break-even points.

False

Only variable costs can be differential costs.

False

Peak-load pricing is the practice of setting prices lowest when the quantity demanded for the product approaches the physical capacity to produce it.

False

The average selling price is $0.60 per unit, the average variable cost is $0.36 per unit, and the total fixed costs are $1,500. If operating profits of $900 are desired, a sales volume of 2,500 units is necessary.

False

The best course of action in sensitive decisions is that the manager should depend upon the cost analyst's CVP analysis without considering alternative assumptions.

False

The theory of constraints focuses on determining the optimal product mix when one or more resources restrict the attainment of a goal or objective.

True

When deciding whether or not to accept a special order, a decision-maker should focus on differential costs instead of full costs.

True

With constrained resources, the important measure of profitability is the contribution margin per unit of scarce resource.

True

Differential costs are: (CMA adapted) A) the difference in total costs that result from selecting one choice instead of another. B) the profit foregone by selecting one choice instead of another. C) a cost that continues to be incurred in the absence of activity. D) a cost common to all choices in questions and not clearly allocable to any of them.

A.

Exporting a product to another country at a price below the domestic price is: A) dumping. B) target pricing. C) peak-load pricing. D) price fixing.

A.

Which of the following statements regarding special orders is (are) true? (A) The primary decision for special orders is determining whether the differential revenue is greater than the differential costs associated with the order. (B) The differential analysis approach to pricing for special orders could lead to underpricing in the long-run because fixed costs are not included in the analysis. A) Only A. B) Only B. C) Neither A nor B is true. D) Both A and B are true.

D.

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.

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.

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.

All else equal, the break-even point for an organization with a low operating leverage will be relatively higher than the break-even point for an organization with a high operating leverage.

False

A decision must involve at least two alternative courses of action.

True

An increase in an organization's fixed costs will result in a lower margin of safety, assuming all other costs and sales remain unchanged.

True

An increase in the selling price per unit will decrease an organization's operating leverage, assuming sales unit volume doesn't change and there are no other changes in its cost structure.

True

An organization's operating leverage is high when it has a low proportion of variable costs in its total costs.

True

Before-tax operating profits are equal to the after-tax operating profits divided by (1 - tax rate).

True

Both total revenues (TR) and total costs (TC) are likely to be affected by changes in the output.

True

The Frances Manufacturing Company sells two products, FRN and CES. FRN has a higher contribution margin ratio than CES. If the product mix shifts towards CES, the company's break-even point in total units (i.e., FRN plus CES) will increase.

True

The alternative courses of action in a make-or-buy decision are (a) manufacture needed items internally or (b) purchase needed items externally.

True

The break-even point in sales dollars is fixed costs divided by the contribution margin ratio.

True

A decrease in the margin of safety would be caused by a(n): A) increase in the total fixed costs. B) increase in total revenue (sales). C) decrease in the break-even point. D) decrease in the variable cost per unit.

A.

At a break-even point of 400 units, variable costs were $400 and fixed costs were $200. What will the 401st unit sold contribute to operating profits before income taxes? A) $0.50 B) $1.00 C) $1.50 D) $2.00

A.

The practice of setting the selling price below cost with the intent to drive competitors out of business is: A) predatory pricing. B) target pricing. C) target costing. D) peak-load pricing.

A.

The time from initial research & development to the time support to the customer ends is the: A) product life cycle. B) short run. C) target time. D) predatory price.

A.

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.

Which of the following statements regarding differential costs is (are) false? (A) The full-cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the product's cost. (B) When deciding whether or not to accept a special order, a decision-maker should focus on differential costs instead of full costs. A) Only A. B) Only B. C) Neither A nor B is false. D) Both A and B are false.

A.

The Arthur Company manufactures kitchen utensils. The company is currently producing well below its full capacity. The Benton Company has approached Arthur with an offer to buy 20,000 utensils at $0.75 each. Arthur sells its utensils wholesale for $0.85 each; the average cost per unit is $0.83, of which $0.12 is fixed costs. If Arthur were to accept Benton's offer, what would be the increase in Arthur's operating profits? A) $400. B) $800. C) $1,600. D) $2,000.

B.

The price based on customers' perceived value for the product and the price that competitors charge is the: A) predatory price. B) target price. C) target cost. D) dumping price.

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 Ratio Break-even Point A. Decrease Increase B. Increase Decrease C. Decrease Decrease D. Increase Increase A) Option A B) Option B C) Option C D) Option D

B. Option B

The practice of setting prices highest when the quantity demanded for the product approaches capacity is: A) predatory pricing. B) target pricing. C) peak-load pricing. D) price fixing.

C.

A company's break-even point will not be changed by: A) a change in total fixed costs. B) a change in the selling price per unit. C) a change in the variable cost per unit. D) a change in the income tax rate.

D.

If there is excess capacity, the minimum acceptable price for a special order must cover: A) only variable costs associated with the special order. B) variable and fixed manufacturing costs associated with the special order. C) variable and incremental fixed costs associated with the special order. D) variable costs and incremental fixed costs associated with the special order, plus the contribution margin usually earned on regular units.

C.

In a decision analysis situation, which one of the following costs is not likely to contain a variable cost component? (CMA adapted) A) Labor. B) Overhead. C) Straight-line Depreciation. D) Selling.

C.

Operating leverage refers to the extent to which an organization's cost structure is made up of: A) differential costs. B) opportunity costs. C) fixed costs. D) relevant costs.

C.

The amount by which a company's sales can decline before losses are incurred is called the: A) contribution margin ratio. B) degree of operating leverage. C) margin of safety. D) profit loss.

C.

The period of time over which capacity will be unchanged is: A) long run. B) sunk cost. C) short run. D) product life cycle.

C.

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.

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.

Cost-volume-profit (CVP) analysis is more complicated for organizations with multiple products because typically each product has a different contribution margin ratio.

True

Differential analysis cannot be used for long-run decisions because it cannot incorporate the timing of revenues and costs (i.e., the time value of money).

True

Differential analysis involves the comparison of one or more alternative courses of action with the status quo.

True

Dumping occurs when a company exports its product to consumers in another country at an export price that is below the domestic price. Answer:

True

If an organization's fixed costs are $2,400, tax rate is 40%, and contribution margin is $5,200, then its after- tax operating profits are $1,680.

True

If there is only one alternative course of action and the status quo is unacceptable, then there really is no decision to make.

True

In the short-run, plant capacity is fixed and product choices have to be made that optimize the use of available capacity.

True

Target costs equal the difference between the target selling price and the desired profit margin.

True

The contribution margin ratio is the contribution margin per unit divided by the selling price per unit.

True

The differential analysis approach to pricing for special orders could lead to underpricing in the long-run because fixed costs are not included in the analysis.

True

The more important the decision, the more the manager will want to ensure that the assumptions made for CVP analysis are applicable.

True

The reason opportunity costs are not included in the accounting system is because they involve estimates.

True