68 terms

a cost changes as the related activity changes.

Cost behavior refers to the manner in which

variable costs.

Costs that remain constant on a per-unit level as the level of activity changes are called

Graph 1

Which of the following graphs illustrates the behavior of a total fixed cost?

Salary of a factory supervisor

Which of the following costs is an example of a cost that remains the same in total as the number of units produced changes?

Remains constant with changes in production

Which of the following describes the behavior of the variable cost per unit?

Number of patients who stay in the hospital

Which of the following activity bases would be the most appropriate for food costs of a hospital?

Number of miles driven

Which of the following activity bases would be the most appropriate for gasoline costs of a delivery service such as UPS?

variable costs.

Costs that vary in total in direct proportion to changes in an activity level are called

Direct materials cost

Which of the following is an example of a cost that varies in total as the number of units produced changes?

Electricity per KWH to operate factory equipment

Which of the following is an example of a cost that varies in total as the number of units produced changes?

Decrease

As production increases, what would you expect to happen to fixed costs per unit?

Fixed costs are fixed in total, and variable costs are fixed per unit.

Which of the following statements is TRUE regarding fixed and variable costs?

Graph 3

Which of the following graphs illustrates the behavior of a total variable cost?

straight line.

The graph of a variable cost when plotted against its related activity base appears as a

Decreases with increasing production

Which of the following describes the behavior of the fixed cost per unit?

predicting customer demand.

Knowing how costs behave is useful to management for all the following reasons EXCEPT for

graph 2

Which of the following graphs illustrates the nature of a mixed cost?

$2,600

18. Given the following cost and activity observations for Merritt Company's utilities, use the high-low method to calculate Merritt's fixed costs per month.

Cost

Machine Hours

January

$52,600

20,000

February

75,100

29,000

March

57,000

22,000

April

64,000

24,500

Cost

Machine Hours

January

$52,600

20,000

February

75,100

29,000

March

57,000

22,000

April

64,000

24,500

Rental costs of $5,000 per month plus $0.30 per machine hour of use

Which of the following costs is a mixed cost?

0.40

Given the following cost and activity observations for Pike Company's utilities, use the high-low method to calculate Pike's variable utilities costs per machine hour.

Cost

Machine Hours

May

$8,300

15,000

June

10,400

20,000

July

7,200

12,000

August

9,500

18,000

Cost

Machine Hours

May

$8,300

15,000

June

10,400

20,000

July

7,200

12,000

August

9,500

18,000

Stay the same

As production increases, what should happen to the variable costs per unit?

28,400.

Winston Co. manufactures office furniture. During the most productive month of the year, 3,500 desks were manufactured at a total cost of $84,400. In its slowest month, the company made 1,100 desks at a cost of $46,000. Using the high-low method of cost estimation, total fixed costs are

separated into their variable and fixed cost components.

For purposes of analysis, mixed costs are generally

$0.10

Given the following cost and activity observations for Pike Company's utilities, use the high-low method to calculate Pike Company's variable utilities costs per machine hour.

Cost

Machine Hours

March

$3,100

15,000

April

2,700

10,000

May

2,900

12,000

June

3,500

18,000

Cost

Machine Hours

March

$3,100

15,000

April

2,700

10,000

May

2,900

12,000

June

3,500

18,000

$12,000

Tucker Co. manufactures office furniture. During the most productive month of the year, 3,600 desks were manufactured at a total cost of $192,000. In its slowest month, the company made 1,200 desks at a cost of $72,000. Using the high-low method of cost estimation, total fixed costs per month are

cost-volume-profit analysis.

The systematic examination of the relationships among selling prices, volume of sales and production, costs, expenses, and profits is termed

variable costs and fixed costs.

In cost-volume-profit analysis, all costs are classified into the following two categories:

the same as the profit-volume ratio.

The contribution margin ratio is

Contribution margin ratio

Which ratio indicates the percentage of each sales dollar that is available to cover fixed costs and to provide a profit?

$12,500 increase

Variable costs as a percentage of sales for Leamon Inc. are 75%, current sales are $600,000, and fixed costs are $110,000. How much will operating income change if sales increase by $50,000?

32%

If sales are $820,000, variable costs are 68% of sales, and operating income is $260,000, what is the contribution margin ratio?

$160,000.

A firm operated at 90% of capacity for the past year during which fixed costs were $320,000, variable costs were 60% of sales, and sales were $1,200,000. Operating profit was

44%

If sales are $200,000, variable costs are 56% of sales, and operating income is $30,000, what is the contribution margin ratio?

$50,000 increase

Wiles Inc.'s unit selling price is $40, the unit variable costs are $30, fixed costs are $135,000, and current sales are 10,000 units. How much will operating income change if sales increase by 5,000 units?

$2,833,333

If fixed costs are $850,000 and variable costs are 70% of sales, what is the break-even point (in dollars)?

6,250 units

If fixed costs are $250,000, the unit selling price is $105, and the unit variable costs are $65, what is the break-even sales (in units)?

$1,666,667

If fixed costs are $750,000 and variable costs are 55% of sales, what is the break-even point (in dollars)?

increase by 640 units.

Foggy Co. has the following operating data for its manufacturing operations:

Unit selling price

$ 250

Unit variable cost

$ 100

Total fixed costs

$840,000

The company has decided to increase the wages of hourly workers, which will increase the unit variable cost by 10%. Increases in the salaries of factory supervisors and property taxes for the factory will increase fixed costs by 4%. If sales prices are held constant, the break-even point for Flynn Co. will

Unit selling price

$ 250

Unit variable cost

$ 100

Total fixed costs

$840,000

The company has decided to increase the wages of hourly workers, which will increase the unit variable cost by 10%. Increases in the salaries of factory supervisors and property taxes for the factory will increase fixed costs by 4%. If sales prices are held constant, the break-even point for Flynn Co. will

7,778 units

If fixed costs are $350,000, the unit selling price is $75, and the unit variable costs are $30, what is the break-even sales (in units)?

81,000 units

If fixed costs are $810,000, the unit selling price is $60, and the unit variable costs are $48, what is the break-even sales (in units) if the variable costs are increased by $2?

63,333 units

If fixed costs are $810,000, the unit selling price is $60, and the unit variable costs are $48, what is the break-even sales (in units) if fixed costs are reduced by $50,000?

18,000 units and 15,000 units

If fixed costs are $450,000, the unit selling price is $75, and the unit variable costs are $50, what are the old and new break-even sales (in units) if the unit selling price increases by $5?

$2,577,778

Snower Corporation sells product G for $150 per unit, the variable cost per unit is $105, the fixed costs are $720,000, and Snower is in the 25% corporate tax bracket. What are the sales (in dollars) required to earn a net income (after tax) of $40,000?

9,445

If fixed costs are $850,000 and the unit contribution margin is $90, what amount of units must be sold in order to have a zero profit?

58,334

If fixed costs are $600,000 and the unit contribution margin is $12, what amount of units must be sold in order to realize an operating income of $100,000?

10,500

If fixed costs are $500,000 and the unit contribution margin is $40, what is the break-even point in units if fixed costs are reduced by $80,000?

53,429

If fixed costs are $561,000 and the unit contribution margin is $10, what is the break-even point in units if variable costs are decreased by $0.50 per unit?

increase.

If variable costs per unit increased because of an increase in hourly wage rates, the break-even point would

decrease.

If variable costs per unit decreased because of a decrease in utility rates, the break-even point would

Unit variable cost decreases

Which of the following conditions would cause the break-even point to decrease?

Unit variable cost increase

Which of the following conditions would cause the break-even point to increase?

Total fixed costs increase

Which of the following conditions would cause the break-even point to increase?

increase by 10%.

Rouney Co. has budgeted salary increases to factory supervisors totaling 10%. If selling prices and all other cost relationships are held constant, next year's break-even point will

$125,217.

Vest Food Co. has the following operating data:

Unit selling price

$ 10.00

Unit variable costs

6.00

Fixed costs

$960,000

The company is contemplating moving to another state where direct labor costs can be reduced, thereby reducing the unit variable cost by 10%. The state where the company currently operates has offered to reduce property taxes to encourage Vest to stay. The minimum amount of property tax savings necessary to keep the company, assuming no other changes, would be

Unit selling price

$ 10.00

Unit variable costs

6.00

Fixed costs

$960,000

The company is contemplating moving to another state where direct labor costs can be reduced, thereby reducing the unit variable cost by 10%. The state where the company currently operates has offered to reduce property taxes to encourage Vest to stay. The minimum amount of property tax savings necessary to keep the company, assuming no other changes, would be

$61,500

If the contribution margin ratio for Harrison Company is 38%, sales were $425,000 and fixed costs were $100,000, what was the income from operations?

the break-even point.

The point where the sales line and the total costs line intersect on the cost-volume-profit chart represents

the break-even point.

The point where the profit line intersects the horizontal axis on the profit-volume chart represents

"what if" or sensitivity analysis.

With the aid of computer software, managers can vary assumptions regarding selling prices, costs, and volume and can immediately see the effects of each change on the break-even point and profit. Such an analysis is called

the maximum possible operating loss.

The point where the profit line intersects the left vertical axis on the profit-volume chart represents

expected to increase by 32%.

Clinton Co. has an operating leverage of 4. Sales are expected to increase by 8% next year. Operating income is

sales mix.

The relative distribution of sales among the various products sold by a business is termed the

There is no limit.

When a business sells more than one product at varying selling prices, the business's break-even point can be determined as long as the number of products does not exceed

$3,000,000

If a business had sales of $4,000,000, fixed costs of $1,200,000, a margin of safety of 25%, and a contribution margin ratio of 40%, what was the break-even point?

$3,000,000

If a business had sales of $4,000,000 and a margin of safety of 25%, what was the break-even point?

25%

If a business had a capacity of $10,000,000 of sales, actual sales of $6,000,000, break-even sales of $4,500,000, fixed costs of $1,800,000, and variable costs of 60% of sales, what is the margin of safety expressed as a percentage of sales?

3.000

If sales are $300,000, variable costs are 60% of sales, and operating income is $40,000, what is the operating leverage?

margin of safety.

The difference between the current sales revenue and the sales at the break-even point is called the

Costs cannot be properly classified into fixed and variable costs

Cost-volume-profit analysis CANNOT be used if which of the following occurs?