Chapters 3 & 4

Charleston Inc. manufactures 40,000 components per year. The manufacturing cost of the components total $190,000 and are comprised of direct materials, $90,000; direct labor, $50,000; variable manufacturing overhead, $20,000; and fixed manufacturing overhead, $30,000. If Charleston purchases the component from an outside supplier for $4.25 per unit, how will the company's operating profit be impacted?

$10,000 decrease

Jordan Inc. manufactures water polo balls, which sell for $50. The company expects to incur the following costs during the coming year: variable manufacturing cost, $15 per unit; variable selling and administrative cost, $5 per unit; fixed manufacturing cost, $35,000; and fixed selling and administrative cost, $25,000. What is the break-even volume in sales dollars?

$100,000

Given the following information, calculate the sales dollars needed to achieve the target profit. Target profit after tax: $4,500 Fixed costs: $2,000 Contribution margin ratio: 40% Tax rate: 25%

$16,250 Reason: $2,000 + $4,500/(1 -.25) = $8,000/.40 or $20,000

Given the following information, calculate profit: Selling price per unit: $150.00 Variable cost per unit: $120.00 Fixed costs: $1,000 Number of units: 100

$2,000 Reason: Profit = (P-V)X - F = ($150 - 120)x100 -$1,000 = $2,000

Given the following information, calculate the margin of safety: Sales: $100,000 Fixed costs: $30,000 Variable costs: $60,000

$25,000 Reason: Contribution Margin Ratio = ($100,000 - $60,000)÷$100,000 =0.40 Margin of safety = $100,000 - ($30,000 ÷ 0.40)

Carrie Corporation makes three products: a standard model, a deluxe model, and a luxury model. The financial statements of the products are as follows: Sales revenue Standard Model: $90,000 Deluxe Model: $70,000 Luxury Model: $50,000 Total: $210,000 Variable costs Standard Model: 30,000 Deluxe Model: 35,000 Luxury Model: 25,000 Total: 90,000 Contribution margin Standard Model: 60,000 Deluxe Model: 35,000 Luxury Model: 25,000 Total: 120,000 Less fixed costs: Salaries Standard Model: 12,000 Deluxe Model: 20,000 Luxury Model: 4,000 Total: 36,000 Rent Standard Model: 10,000 Deluxe Model: 10,000 Luxury Model: 10,000 Total: 30,000 Administrative Standard Model: 20,000 Deluxe Model: 10,000 Luxury Model: 8,000 Total: 38,000 Operating profit (loss) Standard Model: $18,000 Deluxe Model: $(5,000) Luxury Model: $3,000 Total: $16,000 If the deluxe model product line was discontinued, all variable costs for that line could be avoided and $10,000 of the salaries associated with that model could be avoided. The other fixed costs are unavoidable. If the deluxe model product line is dropped, how will the company's operating profit be impacted?

$25,000 decrease

A telephone company sells two models of phones; standard and deluxe. History shows that 80% of sales are standard phones and 20% are deluxe phones. Given the following information, calculate the weighted average contribution margin per unit: Standard's contribution margin per unit: $20 Deluxe's contribution margin per unit: $60

$28 Reason: ($20 x 80%) + ($60 x 20%) = $28

Bob's Bakery has a nearly unlimited demand for his cakes and pies. Each cake requires 2 direct labor hours and provides a contribution margin of $90. Each pie requires 1/4 labor hour and provides a contribution margin of $15. Bob has a total of 100 labor hours available each month and his fixed costs are $1,500. Calculate the maximum operating profit Bob can earn each month.

$4,500 Reason: Bob needs to focus on contribution margin per direct labor hour which is $45 for cakes ($90/2) and $60 for pies ($15 x 4). If Bob allocates all 100 hours to pies, his contribution margin will equal $6,000 and his net profit will be $4,500 ($6,000 - $1,500).

Perennial Company, a manufacturer of decorative pots, expects sales of 500,000 pots at $10 each during the coming year. Variable manufacturing costs are $4 per unit and fixed manufacturing costs are $2.50 per unit. The company received a special order from an overseas customer to purchase 50,000 pots at $6 each. The company has sufficient plant capacity to manufacture this order. However, additional overtime labor costs of $1.00 per pot would be required to produce the pots. No other costs would be incurred as a result of accepting the order. If the special order is accepted, how will operating profit be impacted?

$50,000 increase

A retailer called Little Big Brother sells video games. The games sell for $40 each. The variable costs consist of the purchase price of $20 per video game. The store's annual fixed costs are $250,000 and the company's income tax rate is 40%. What is the volume of sales dollars required to earn an after-tax target profit of $120,000?

$900,000

Target volume (units) =

(Fixed costs + Target profit)/Unit contribution margin

Which of the following statements are true about the theory of constraints? - Cost minimization is an important aspect of the theory of constraints. - The objective of the theory of constraints is to maximize net operating income. - The theory of constraints assumes few variable costs. - The theory of constraints focuses on bottlenecks.

- Cost minimization is an important aspect of the theory of constraints. - The theory of constraints assumes few variable costs. - The theory of constraints focuses on bottlenecks.

Which of the following statements are true? - Opportunity costs are typically reported with other accounting cost data. - If opportunity costs are difficult to estimate, they should be ignored when preparing an analysis. - Determining opportunity costs involves subjectivity. - Some opportunity costs are not readily quantified.

- Determining opportunity costs involves subjectivity. - Some opportunity costs are not readily quantified.

Which of the following statements is true? - Informal or unspoken agreements to fix prices may be considered illegal. - Price fixing is illegal in almost all developing countries. - The idea behind price fixing is to set prices at a level lower than equilibrium prices in competitive markets. - OPEC is a prime example of an organization that uses price fixing. - Companies can only be charged with price fixing for domestic sales.

- Informal or unspoken agreements to fix prices may be considered illegal. - OPEC is a prime example of an organization that uses price fixing.

Select the choices that correctly express the Profit Equation. - Operating profit = Total revenues - Total costs - Operating profit = Total revenues + Total costs - Total costs = Total revenues - Operating profit - Total revenues = Operating profit - Total costs

- Operating profit = Total revenues - Total costs - Total costs = Total revenues - Operating profit

Which of the following statements are true? - Determining opportunity costs is typically very easy. - Because opportunity costs do not represent a substantial part of a cost alternative, they can be ignored. - Opportunity costs are typically not reported with other accounting cost data. - When a benefit is forgone, it is not always possible to determine if an opportunity cost estimate is realistic.

- Opportunity costs are typically not reported with other accounting cost data. - When a benefit is forgone, it is not always possible to determine if an opportunity cost estimate is realistic.

Which of the following statements are correct? - Product choices are generally thought of as long-run decisions. - Product decisions may be limited by capacity in the short-run. - The choice of which products and services to offer has little or no effect on costs. - Determining what products or services to offer is a common managerial decision.

- Product decisions may be limited by capacity in the short-run. - Determining what products or services to offer is a common managerial decision.

On a CVP graph, ______. - volume is plotted on the vertical axis - TR = TC at breakeven - profit = TR - TC - as volume (X) increases, fixed costs increases

- TR = TC at breakeven - profit = TR - TC

When considering the differential costs versus total costs approach, the ______. - differential format is always preferred for short run decision - differential format can be derived from the total format - total cost approach provides information regarding total resources required

- differential format can be derived from the total format - total cost approach provides information regarding total resources required

Using full costs for pricing decisions can be justified when a firm ______. - enters into a long-term contractual relationship to supply a product - accepts a one-time special order to supply a product that will not impact other sales - enters into a contract with a governmental agency to supply a product

- enters into a long-term contractual relationship to supply a product - enters into a contract with a governmental agency to supply a product

The theory of constraints focuses on ______. - eliminating all other operating costs - minimizing investments - throughput contribution

- minimizing investments - throughput contribution

Assumptions that may be considered important limitations of CVP analysis include constant ______. - total fixed costs - selling price - unit variable costs

- selling price - unit variable costs

Summit Company manufactures and sells three products; X, Y, and Z. Last year sales of these products were 20,000 units of X, 30,000 units of Y and 50,000 units of Z. The unit contribution margins are $5 for X, $4 for Y, and $3 for Z. Assuming the product mix remains the same and that fixed costs are $222,000, how many units of X must Summit sell to break even?

12,000

Given the following information, calculate break-even volume (in units): Selling price per unit: $14 Variable cost per unit: $10 Fixed costs: $1000

250 units 1000/(14-0)

The contribution margin per unit is $10 for product X and $15 for product Y. It takes 2.5 hours to produce each unit of product X and 3 hours to produce each unit of product Y. Fargo has a maximum production capacity of 25,000 machine hours and the demand for products X and Y is a maximum of 5,000 units each. How many units of product X and units of product Y should be produced?

4,000 of product X and 5,000 of product Y

Hale & Hearty Inc. currently sells 10,000 treadmills for $520 each. Variable costs relating to this product are $320 per unit and fixed costs total $1,200,000. What is the company's margin of safety?

4,000 units

Given the following information, calculate target volume (in units): Sales price per unit: $25 Variable cost per unit: $15 Target profit: $5,000 Fixed costs: $1,000

600 units = (1000+5000)/(25-15)

Key West Inc. manufactures inflatable kayaks. Each kayak sells for $350. At a production level of 10,000 units, the total variable manufacturing cost is $1,200,000 and the fixed manufacturing cost in total is $420,000. At this level of activity, the company will incur variable selling and administrative costs of $900,000 and fixed selling and administrative costs of $770,000. How many units have to be sold to break even?

8,500

A company currently spends $52,500 per month on fixed costs and produces a product with a contribution margin per unit of $750. The production process involves an engraving machine that can only finish 50 units per month. The company owns one engraving machine. For each additional 50 units, another machine must be rented at a cost of $7,500 per month. The break-even point per month for this product is ______ units.

80 =(52,500+7500)/750

A company has a unit contribution margin of $50, fixed costs of $15,000 and a target profit of $20,000 after-tax. If the tax rate is 20% the company must sell ______ units in order to earn the target profit.

800 =(15000+(20000/(1-0.2)))/50

Which of the following statement(s) relating to CVP analysis with spreadsheets is (are) correct? - Once the data are entered, an analysis tool such as Goal Seek can be used to find the volume associated with a given desired profit level. - A Microsoft Excel worksheet is ideally suited to doing CVP. - An extremely simple Microsoft Excel spreadsheet can easily be edited to analyze alternative scenarios (also called "what-if" analyses). - Only the second and third statements above are correct. - All of these statements are correct.

All of these statements are correct.

The volume level at which profits equal zero is called the ______-______ point.

Break-even

Excel's Goal Seek may be used to perform ______ analysis.

CVP

Which of the following terms is used to describe a cost that changes in response to alternative courses of action? - Sunk cost - Relevant cost - Differential cost - Target cost - None of these.

Differential cost

Which of the following statements is not correct? - Dumping is the practice of setting the selling price of a product at a low price with the intent of driving competitors out of the market or creating a barrier to entry for new competitors. - Price fixing is a particular legal and ethical problem because it is not universally illegal. - Peak-load pricing is the practice of setting prices highest when the quantity demanded for the product approaches the physical capacity to produce it. - Throughput contribution equals sales dollars minus direct materials costs and other variable costs such as energy and piecework labor. - Price discrimination is the practice of selling identical goods or services to different customers at different prices.

Dumping is the practice of setting the selling price of a product at a low price with the intent of driving competitors out of the market or creating a barrier to entry for new competitors.

True or false: At the break-even point, profit = total expenses.

False

True or false: Differential costs are not impacted by the time period being analyzed.

False

True or false: Profit = (P - V)X + F

False

Break-even volume in sales dollars =

Fixed costs/Contribution margin ratio

Break-even volume in units =

Fixed costs/Unit contribution margin

CVP analysis can be performed using Excel's ______ ______.

Goal Seek

Which of the following statements regarding assumptions and limitations of CVP analysis is not correct? - CVP analysis relies on certain assumptions and these assumptions might limit the applicability of the results for decision making. - If unit prices change (for example, if the unit prices are lower for higher volumes), CVP analysis cannot be used. - CVP analysis is a tool that the manager can use to help with decisions. - The limitations are due to the assumptions that the cost analyst makes; that is, they are not inherent limitations to the method of CVP analysis itself. - The assumptions of constant unit variable cost and constant unit prices for all levels of volume as important limitations of CVP analysis.

If unit prices change (for example, if the unit prices are lower for higher volumes), CVP analysis cannot be used.

Which of the following statements is true? - In some companies, dropping a product line is equivalent to closing a business unit. - When determining whether to keep or drop a product line, financial issues are always the most important consideration. - Fixed costs are never relevant in a product line decision. - A product line should always be kept if its contribution margin is positive.

In some companies, dropping a product line is equivalent to closing a business unit.

If a company decides to increase its selling price by $4 per unit because of an increase in its variable labor cost of $4 per unit, what impact will these two changes have on the break-even volume in units?

It will not be impacted.

A company currently has two product lines and is considering dropping Product XYZ. Sales revenue Product ABC: $90,000 Product XYZ: $60,000 Total: $150,000 Cost of goods sold (all variable) Product ABC: $35,000 Product XYZ: $40,000 Total: $75,000 Contribution margin Product ABC: $55,000 Product XYZ: $20,000 Total: $75,000 Fixed costs* Product ABC: $30,000 Product XYZ: $25,000 Total: $55,000 Operating Profit (Loss) Product ABC: $25,000 Product XYZ: ($5,000) Total: $20,000 * Of the $55,000 of total fixed costs, $30,000 is rent. Each product is allocated $15,000. The rent will continue even if the product is dropped. The rest of the fixed costs are related to each product and would be saved if the product was dropped. Should Product XYZ be dropped? Why or why not?

No, because the operating profit would be $10,000 less if Product XYZ was dropped. Reason: If XYZ is dropped, the company will lose $20,000 in contribution margin and save $10,000 in fixed costs ($25,000 - $15,000) so profits would decrease by $10,000.

Which of the following is NOT a short-run pricing decision? - Pricing a main product in a large market - Adjusting product mix and volume in a competitive environment - A one-time special order

Pricing a main product in a large market

Which of the following statements is true? - A company that is vertically integrated relies on outside suppliers for many critical components in the value chain. - A make-or-buy decision should be based on lowest cost alone. - Some factors in a make-or-buy decision are not easily quantified. - A make-or-buy decision is almost always a simple, one-time choice.

Some factors in a make-or-buy decision are not easily quantified.

Which of the following terms is used to describe a cost that has been incurred that cannot be changed by present or future decisions? - None of these. - Marginal cost - Opportunity cost - Sunk cost - Differential cost

Sunk cost

Which of the following statements regarding target costing and pricing is not correct? - Target costing is widely used by companies in the automobile, electronics, and the personal computer industries. - Target costing is the concept of "price-based costing" instead of "cost-based pricing." - All of these are correct statements. - The target price is the price based on customers' perceived value for the product and the price that competitors charge. - Target cost equals the target price plus the desired profit margin.

Target cost equals the target price plus the desired profit margin.

Which of the following describes an important qualitative factor to consider regarding a special order? - The unavoidable fixed costs associated with the special order. - The avoidable fixed costs associated with the special order. - The effect of the sale of special-order units will have on the sale of regularly priced units. - The incremental revenue that will be generated by the special order. - The variable costs associated with the special order.

The effect of the sale of special-order units will have on the sale of regularly priced units.

Which of the following statements regarding life-cycle product costing and pricing is not correct? - Life-cycle costing tracks costs attributable to each product from start to finish. - Life-cycle costing is becoming increasingly important in light of Take-Back Laws in Europe, which make the costs of recycling and disposal of products the responsibility of the manufacturer. - A product life-cycle budget highlights for managers the importance of setting prices that will cover costs in all value-chain categories. - The product life-cycle covers the time from initial research and development to the time at which the product is first sold to customers. - Life-cycle costs provide important information for pricing.

The product life-cycle covers the time from initial research and development to the time at which the product is first sold to customers.

True or false: Ultimately dumping can cause the same harm to consumers that is caused by predatory pricing.

True

When a company engages in predatory pricing, the ultimate goal is to ______.

act like a monopolist

Cost-volume-profit analysis includes all of the following except ______.

assets

CVP analysis relies on certain ______ that might limit the applicability of results for decision making.

assumptions

Given the following, a special order for 500 units @ $10 each should ______. Sales (10,000 units @ $14 each): $140,000 Variable costs (10,000 units @ $8 each): $80,000 Total contribution margin: $60,000 Allocated fixed costs: $20,000 Operating profit: $40,000

be accepted because the profit will be $2 per unit ($1,000 total).

A constraining resource in which the work to be performed limits production is called a(n) ______

bottleneck

An operation where the work required limits production is a(n) ______.

bottleneck

Jacki's Jewels has a limited number of skilled direct labor hours to make necklaces and bracelets. Each necklace has a contribution margin of $175 and requires 1 hour of labor. Each bracelet has a contribution margin of $100 and requires 1/2 hour of labor. In order to maximize contribution margin, Jacki should first use labor hours to make ______.

bracelets

Given the following, determine if a buy price for 3,000 units @ $4.00 per unit should be accepted or if the company should continue to make the 3,000 units. Direct materials ($1.00 per unit): $3,000 Labor ($1.60 per unit): $4,800 Variable overhead ($1.10 per unit): $3,300 Fixed overhead: $1,500 Common costs: $2,000 If the company buys the component, all of the variable costs and fixed overhead costs are differential. None of the common costs will be eliminated if the component is purchased. Based on price, the company should (make/buy) ______ the component at a net total advantage of $______.

buy; $600

When a company has a limited number of machine hours available each month, the limitation is known as a(n) ______.

constraint

When a company is unable to produce as much as demanded due to limited resources they are facing a(n) ______. Multiple choice question. throughput limitation opportunity cost constraint

constraint

Sanders, Inc. makes two products. Due to a limited availability of skilled labor hours, demand for the products exceeds production capability. In deciding how to allocate resources, Sanders' measure of profitability should be ______.

contribution margin per direct labor hour

Larson, Inc. makes two products. Due to a limited number of available machine hours, demand for the products exceeds production capability. When allocating resources, Larson's measure of profitability should be ______.

contribution margin per machine hour

When compared to the Cost-Volume-Profit graph, the ______ lines are collapsed on the Profit-Volume graph.

cost and revenue

An organization's ______ ______ is the proportion of fixed and variable costs to total costs.

cost structure

A company currently has two product lines and is considering dropping Product 456. Sales revenue Product 123: $20,000 Product 456: $10,000 Total: $30,000 Cost of goods sold (all variable) Product 123: $5,000 Product 456: $4,000 Total: $9,000 Contribution margin Product 123: $15,000 Product 456: $6,000 Total: $21,000 Fixed costs* Product 123: $9,000 Product 456: $8,000 Total: $17,000 Operating Profit (Loss) Product 123: $6,000 Product 456: ($2,000) Total: $4,000 If Product 456 is dropped, $5,000 of its total fixed costs will be saved. The other $3,000 will continue. Based on this information, dropping Product 456 will (increase/decrease) ______ profits by $______.

decrease; $1,000

Comparing alternative actions with the status quo in order to make decisions is the focus of ______.

differential analysis

The process of estimating revenues and costs of alternative actions and comparing them to the status quo is called ______ ______.

differential analysis

When a company exports its product to consumers in another country at an export price below the domestic price, ______ has occurred.

dumping

A company that is capital intensive has a cost structure with a high proportion of ______ costs.

fixed

On a CVP graph, the intercept of the total cost line is the ______ cost for the period.

fixed

The intercept of the profit-volume line equals the loss at zero volume, which equals ______ ______.

fixed costs

When considering a special order, ______.

fixed costs may be irrelevant

Operating leverage refers to the extent to which an organization's cost structure is made up of:

fixed costs.

When setting prices, most firms rely on ______.

full cost information

The time value of money ______.

is immaterial for short-run decisions

Cradle to grave costing is another term for ______ costing.

life-cycle

Environmental regulations that require firms to "take back" and dispose of products have increased the importance of ______ costing.

life-cycle

Pricing a product in a market where there is considerable leeway in setting prices is an example of a(n) ______-______ pricing decision.

long-run

Given the following information, if the company is offered a buy price for 5,000 units @ $8.00 per unit, the company should ______. Direct materials ($3.00 per unit): $15,000 Labor ($2.40 per unit): $12,000 Variable overhead ($1.20 per unit): $6,000 Fixed overhead: $10,000 Common costs: $4,000 If the company buys the units, all of the variable costs are differential as is $1.00 per unit of fixed overhead. None of the common costs will be eliminated if the units are purchased.

make the component because they will save $2,000 Reason: Variable costs $33,000 ($15,000 + $12,000 + $6,000) + $5,000 fixed costs* = $38,000 differential cost vs. $40,000 to buy or a $2,000 savings to continue to make the product. *$5,000 of the fixed cost is not differential.

A diner is deciding whether to use its own ingredients to prepare meals or purchase frozen prepared items from a supplier. This is an example of a (n) ______.

make-or-buy decision

The excess of the projected (or actual) sales over the break-even sales level is called the ______ ______ ______.

margin of safety

Differential costs ______.

may be approximated by full costs in the long run

In determining whether to drop a product line or close a business unit, nonfinancial considerations ______.

may outweigh the financial issues

After-tax target profit equals the before-tax operating profit:

multiplied by (1 - tax rate).

Contribution margin divided by operating profit = ______ ______.

operating leverage

The extent that an organization's cost structure is made up of fixed costs is called ______ ______.

operating leverage

The profit equation is ______.

operating profit = total revenues - total costs

A company is considering whether to continue to make a component or buy it from an outside supplier. Because the company has no alternative use of the manufacturing facilities that are currently used to make the product, the ______ cost associated with the decision is zero.

opportunity

Utility companies often engage in ______-______ pricing in providing services at high demand levels.

peak-load

Setting prices highest when the quantity demanded for the product approaches the physical capacity to produce it is ______.

peak-load pricing

Setting prices below cost with the intent of driving competitors out of business is ______.

predatory pricing

Market segmentation is required with ______.

price discrimination

Selling identical goods or services to different customers at different prices is ______.

price discrimination

The agreement among business competitors to set prices at a particular level is ______.

price fixing

Given the following, a special order for 100 units @ $5 each will result in a (profit/loss) ______ of $______ from the special order. Sales (2,000 units @ $9 each): $18,000 Variable costs (2,000 units @ $4 each): $8,000 Total contribution margin: $10,000 Allocated fixed costs: $4,000 Operating profit: $6,000

profit; $100

The contribution margin ______ is the contribution margin as a percentage of sales revenue.

ratio

Decision horizons over which capacity will be unchanged are referred to by the term ______ ______.

short run

Product choices are generally considered to be ______ decisions.

short-run

Given the following, if a company is offered a buy price for 2,000 units @ $5.00 per unit, the company ______. Direct materials ($1.25 per unit): $2,500 Labor ($2.00 per unit): $4,000 Variable overhead ($1.00 per unit): $2,000 Fixed overhead: $1,000 Common costs: $500 If the company buys the units, all of the variable costs are differential. None of the fixed overhead or common costs will be eliminated if the units are purchased. However, if the units are purchased the facilities that are no longer used will be used for another purpose which will provide a differential contribution of $2,500.

should buy the component because they will save $1,000 Reason: Variable costs ($2,500 + $4,000 + $2,000) = $8,500 + $2,500 opportunity cost = $11,000 vs. $10,000 to buy (2,000 units x $5.00).

If a company is not operating at full capacity, accepting a(n) ______ ______ from a customer will not affect other sales and is usually a short-run occurrence.

special order

Using "price-based costing" instead of "cost-based pricing" is the concept of ______ ______.

target costing

The estimated price that potential customers are willing to pay for a product or service is the ______.

target price

In a make-or-buy decision, if a company has an alternative use of the facilities currently used to make the product, the opportunity cost of using the facility to continue to make the product is ______.

the differential contribution from the alternative use

Sales dollars minus direct materials costs and other variable costs such as energy and piecework labor equals ______ contribution.

throughput

Sales dollars minus direct materials costs and other variable costs such as energy and piecework labor equals ______.

throughput contribution

An advantage of the ______ format is that, first, all the information is available so it is easy to derive the differential format if desired.

total

The slope of the profit-volume line represents ______.

unit contribution margin

A company that is labor intensive has a cost structure with a high proportion of ______ costs.

variable

The process where managers understand the relationships between revenues, costs, volume and profit is called cost ______-______-______.

volume-profit-analysis

When a company is doing multi-product break-even analysis and assumes a constant product mix, the contribution margin is the ______-______ contribution margin of all of its products.

weighted-average

A company is considering whether to continue to make a component or buy it from an outside supplier. If they buy the component the manufacturing facility currently being used will be idle. If the company has no alternative use of the facility, the opportunity cost associated with this decision is ______.

zero