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Test 2

A fixed cost remains constant in total and on a per unit basis at various levels of activity


For CVP analysis, both variable and fixed costs are assumed to have a linear relationship within the relevant range of activity


A mixed cost has both selling and administrative cost elements


In CVP analysis, the term cost includes manufacturing costs, and selling and administrative expenses


Both variable and fixed costs are included in calculating the contribution margin


The margin of safety is the difference between contribution margin and fixed costs


A variable cost is a cost hat

varies in total in proportion to changes in the level of activity

A fixed cost is a cost which

remains constant in total with changes in the level of activity

Cost behavior analysis is a study of how a firm's costs

respond to changes int he level of business activity

The CVP income statement classifies costs as variable or fixed and computes a contribution margin


Net income can be increased or decreased by changing the sales mix


When a company has limited resources, management must decide which products to make and sell in order to maximize net income


The degree of operating leverage provides a measure of a company's earnings volatility


The CVP income statement classifies costs

as variable or fixed and computes contribution margin

Decisions made using incremental analysis focus on the amounts which differ among the alternatives.


Max company has excess capacity. A customer proposes to buy 400 widgets at a special unit price even though the price is less than the unit variable cost to manufacture the widget. Max should accept the special order if demand for other products is unaffected.


Direct materials, direct labor, and allocated fixed and variable manufacturing overhead area ll relevant in a make-or-buy decision.


What is an always relevant cost?

Opportunity cost

A revenue that differs between alternatives and makes a difference in decision making is called

Incremental revenue

Describe one aspect of incremental analysis

Both cost and revenues that differ between alternate courses of action will be analyzed

Qualitative factors to be considered in a make-or-buy decision

Possible lost jobs from buying outside, supplier's ability to satisfy quality standards, incremental benefit from buying outside

Opportunity costs should be

added to the "Make" costs

In a competitive market, a company is forced to act as a price taker and must emphasize minimizing controlling costs


The difference between the target price and the desired profit is the target cost of the product


In time-and-material pricing, the material charge is based on the cost of direct materials used and a material loading charge for related overhead costs


Prices are set by the competitive market when

a product is not easily distinguished from competing products

The calculation to determine target cost is

sales price-desired profit

Why does the unit selling price increase when expected volume is lower than budgeted volume?

Fixed costs and desired ROI have to be spread over fewer units

Operating leverage refers to the extent to which a companies net income to a given change in a fixed cost


Most cases prices are set by the

Competitive Market

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