CHAPTER 19

COST-volume-profit analysis: Additional Issues

CHAPTER LEARNING OBJECTIVES

1. Apply basic CVP concepts. The CVP income statement classifies costs and expenses as variable or fixed and reports contribution margin in the body of the statement. Contribution margin is the amount of revenue remaining after deducting variable costs. It can be expressed as a per unit amount or as a ratio. The break-even point in sales units is fixed costs divided by unit contribution margin. The break-even point in sales dollars is fixed costs divided by the contribution margin ratio. These equations can also be used to determine sales units or sales dollars needed to achieve target net income, simply by adding target net income to fixed costs before dividing by the contribution margin. Margin of safety indicates how much sales can decline before the company is operating at a loss. It can be expressed in dollar terms or as a percentage.

2. Explain the term sales mix and its effects on break-even sales. Sales mix is the relative proportion in which each product is sold when a company sells more than one product. For a company with a small number of products, break-even sales in units is determined by using the weighted-average unit contribution margin of all the products. If the company sells many different products, then calculating the break-even point using unit information is not practical. Instead, in a company with many products, break-even point sales in dollars is calculated using the weighted-average contribution margin ratio.

3. Determine sales mix when a company has limited resources. When a company has limited resources, it is necessary to find the contribution margin per unit of limited resource. This amount is then multiplied by the units of limited resource to determine which product maximizes net income.

4. Indicate how operating leverage affects profitability. Operating leverage refers to the degree to which a company’s net income reacts to a change in sales. Operating leverage is determined by a company’s relative use of fixed versus variable costs. Companies with high fixed costs relative to variable costs have high operating leverage. A company with high operating leverage experiences a sharp increase (decrease) in net income with a given increase (decrease) in sales. The degree of operating leverage is measured by dividing contribution margin by net income.

^a5. Explain the differences between absorption costing and variable costing. Under absorption costing, fixed manufacturing costs are product costs. Under variable costing, fixed manufacturing costs are period costs. If production volume exceeds sales volume, net income under absorption costing will exceed net income under variable costing by the amount of fixed manufacturing costs included in ending inventory that results from units produced but not sold during the period. If production volume is less than sales volume, net income under absorption costing will be less than under variable costing by the amount of fixed manufacturing costs included in the units sold during the period that were not produced during the period. The use of variable costing is consistent with cost-volume-profit analysis. Net income under variable costing is unaffected by changes in production levels. Instead, it is closely tied to changes in sales. The presentation of fixed costs in the variable costing approach makes it easier to identify fixed costs and to evaluate their impact on the company’s profitability.

TRUE-FALSE STATEMENTS

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

2. In CVP analysis, cost includes manufacturing costs but not selling and administrative expenses.

3. When a company is in its early stages of operation, its primary goal is to generate a target net income.

4. The margin of safety tells a company how far sales can drop before it will be operating at a loss.

5. Sales mix is a measure of the percentage increase in sales from period to period.

6. Sales mix is not important to managers when different products have substantially different contribution margins.

7. The weighted-average contribution margin ratio of all the products is computed when determining the break-even point in sales dollars for a multi-product firm.

8. If Buttercup, Inc. sells two products with a sales mix of 75%:25% (as a percentage of units sold), and the respective unit contribution margins are $80 and $240, then the weighted-average unit contribution margin is $120.

9. If fixed costs are $100,000 and weighted-average unit contribution margin is $50 then the break-even point in sales units is 2,000 units.

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

11. The break-even point in sales dollars is variable costs divided by the weighted-average contribution margin ratio.

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

13. When a company has limited resources to manufacture products, it should manufacture those products that have the highest unit contribution margin.

14. If a company has limited machine hours available for production, it is generally more profitable to produce and sell the product with the highest contribution margin per machine hour.

15. According to the theory of constraints, a company must identify its constraints and find ways to reduce or eliminate them.

16. Cost structure refers to the relative proportion of fixed versus variable costs that a company incurs.

17. Operating leverage refers to the extent to which a company’s net income reacts to a given change in fixed costs.

18. The degree of operating leverage provides a measure of a company’s earnings volatility.

19. If Sprinkle Industries has a margin of safety ratio of .60, it could sustain a 60 percent decline in sales before it would be operating at a loss.

20. A company with low operating leverage will experience a sharp increase in net income with a given increase in sales.

^a21. Variable costing is the approach used for external reporting under generally accepted accounting principles.

^a22. The difference between absorption costing and variable costing is the treatment of fixed manufacturing overhead.

^a23. Selling and administrative costs are period costs under both absorption and variable costing.

^a24. Manufacturing cost per unit will be higher under variable costing than under absorption costing.

^a25. Some fixed manufacturing costs of the current period are deferred to future periods through ending inventory under variable costing.

^a26. When units produced exceed units sold, net income under absorption costing is higher than net income under variable costing.

^a27. When units sold exceed units produced, net income under absorption costing is higher than net income under variable costing.

^a28. When absorption costing is used for external reporting, variable costing can still be used for internal reporting purposes.

^a29. When absorption costing is used, management may be tempted to overproduce in a given period in order to increase net income.

^a30. The use of absorption costing facilitates cost-volume-profit analysis.

MULTIPLE CHOICE QUESTIONS

31. Cost-volume-profit analysis is the study of the effects of

a. changes in costs and volume on a company’s profit.

b. cost, volume, and profit on the cash budget.

c. cost, volume, and profit on various ratios.

d. changes in costs and volume on a company’s profitability ratios.

32. The CVP income statement classifies costs

a. as variable or fixed and computes contribution margin.

b. by function and computes a contribution margin.

c. as variable or fixed and computes gross profit.

d. by function and computes a gross profit.

33. Contribution margin is the amount of revenue remaining after deducting

a. cost of goods sold.

b. fixed costs.

c. variable costs.

d. contra-revenue.

34. Moonwalker’s CVP income statement included sales of 5,000 units, unit selling price of $100, unit variable cost of $60, and fixed expenses of $110,000. Contribution margin is

a. $500,000.

b. $300,000.

c. $200,000.

d. $90,000.

35. Moonwalker’s CVP income statement included sales of 5,000 units, a unit selling price of $100, unit variable cost of $60, and fixed expenses of $110,000. Net income is

a. $500,000.

b. $200,000.

c. $190,000.

d. $90,000.

36. For Buffalo Co., at a sales volume of 4,000 units, sales revenue is $75,000, variable costs total $50,000, and fixed expenses are $21,000. What is the unit contribution margin?

a. $5.25

b. $6.25

c. $12.50

d. $13.50

37. If contribution margin is $140,000, sales revenue is $300,000, and net income is $40,000, then variable and fixed expenses are

Variable Fixed

a. $40,000 $260,000

b. $160,000 $100,000

c. $100,000 $160,000

d. $130,000 $130,000

38. In a CVP income statement, cost of goods sold is generally

a. completely a variable cost.

b. completely a fixed cost.

c. neither a variable cost nor a fixed cost.

d. broken down into its variable and fixed cost components.

39. In a CVP income statement, selling expenses are generally

a. completely a variable cost.

b. completely a fixed cost.

c. neither a variable cost nor a fixed cost.

d. broken down into its variable and fixed cost components.

40. Hinge Manufacturing’s cost of goods sold is $420,000 variable and $240,000 fixed. The company’s selling and administrative expenses are $300,000 variable and $360,000 fixed. If the company’s sales revenue is $1,580,000, what is its contribution margin?

a. $260,000

b. $860,000

c. $920,000

d. $980,000

41. Hinge Manufacturing’s cost of goods sold is $420,000 variable and $240,000 fixed. The company’s selling and administrative expenses are $300,000 variable and $360,000 fixed. If the company’s sales revenue is $1,580,000, what is its net income?

a. $260,000

b. $860,000

c. $920,000

d. $980,000

42. Woolford’s CVP income statement included sales of 5,000 units, a unit selling price of $50, unit variable cost of $30, and net income of $25,000. Fixed expenses are

a. $75,000.

b. $100,000.

c. $150,000.

d. $250,000.

43. The contribution margin ratio is

a. sales dollars divided by contribution margin.

b. sales dollars divided by fixed expenses.

c. sales dollars divided by variable expenses.

d. contribution margin divided by sales dollars.

44. For Pierce Company, sales revenue is $500,000, variable expenses are $340,000, and fixed expenses are $140,000. Pierce’s contribution margin ratio is

a. 72%.

b. 28%.

c. 32%.

d. 68%.

45. For Sanborn Co., sales revenue is $1,000,000, fixed expenses are $300,000, and the unit contribution margin is $60. What is the company’s break-even point?

a. $1,666,667 sales dollars

b. $500,000 sales dollars

c. 16,667 units

d. 5,000 units

46. For Franklin, Inc., sales revenue is $2,000,000, fixed expenses are $600,000, and the contribution margin ratio is 36%. What is the company’s net income?

a. $120,000

b. $216,000

c. $504,000

d. $720,000

47. For Franklin, Inc., sales revenue is $2,000,000, fixed expenses are $600,000, and the contribution margin ratio is 36%. What are the total variable expenses?

a. $384,000

b. $720,000

c. $1,280,000

d. $2,000,000

48. In 2022, Teller Company sold 3,000 units at $600 each. Unit variable costs were $420 and total fixed expenses were $240,000. What was Teller’s 2022 net income?

a. $300,000

b. $540,000

c. $1,260,000

d. $1,800,000

49. In 2022, Teller Company sold 3,000 units at $600 each. Unit variable costs were $420 and fixed expenses were $270,000. The same unit selling price, unit variable expenses, and fixed expenses are expected for 2023. What is Teller’s break-even point in sales dollars for 2023?

a. $900,000

b. $2,700,000

c. $1,800,000

d. $2,571,429

50. In 2022, Teller Company sold 3,000 units at $600 each. Unit variable cost was $420 and fixed expenses were $270,000. The same unit selling price, unit variable expenses, and fixed expenses are expected for 2023. What is Teller’s break-even point in sales units for 2023?

a. 1,500

b. 643

c. 450

d. 750

51. The required sales in units to achieve a target net income is

a. (sales + target net income) divided by unit contribution margin.

b. (sales + target net income) divided by contribution margin ratio.

c. (fixed cost + target net income) divided by unit contribution margin.

d. (fixed cost + target net income) divided by contribution margin ratio.

52. For Wickham Co., sales is $3,000,000, fixed expenses are $900,000, and the contribution margin ratio is 36%. What is required sales in dollars to earn a target net income of $600,000?

a. $1,666,667

b. $2,500,000

c. $4,166,667

d. $3,100,000

53. Warner Manufacturing reported sales of $2,000,000 last year (100,000 units at $20 each) when the break-even point was 80,000 units. Warner’s margin of safety ratio is

a. 20%.

b. 25%.

c. 80%.

d. 120%.

54. For Wilder Corporation, sales revenue is $1,600,000 (8,000 units), fixed expenses are $480,000, and the unit contribution margin is $80. What is the margin of safety in dollars?

a. $80,000

b. $400,000

c. $720,000

d. $1,120,000

55. Margin of safety in dollars is

a. expected sales dollars divided by break-even point in sales dollars.

b. expected sales dollars less break-even point in sales dollars.

c. actual sales dollars less expected sales dollars.

d. expected sale dollars less actual sales dollars.

56. The margin of safety ratio is

a. expected sales divided by break-even point in sales dollars.

b. expected sales less break-even point in sales dollars.

c. margin of safety in dollars divided by expected sales.

d. margin of safety in dollars divided by break-even point in sales dollars.

57. In 2022, Hagar Corp. sold 3,000 units at $500 each. Unit variable cost was $350 and fixed expenses totaled $780,000. The same unit variable cost and fixed expenses are expected for 2023. If Hagar cuts its unit selling price by 4%, what is Hagar’s break-even point in sales units for 2023?

a. 5,200

b. 5,416

c. 5,760

d. 6,000

58. In 2022, Carow sold 3,000 units at $500 each. Unit variable cost was $250 and fixed expenses totaled $500,000. The same unit selling price is expected for 2023. Carow is tentatively planning to invest in equipment that would increase fixed costs by 20% while decreasing unit variable cost by 20%. If Carow makes the investment, what will be the break-even point in sales units for 2023?

a. 2,000

b. 2,400

c. 2,500

d. 3,000

59. In 2022, Raleigh sold 1,000 units at $500 each and earned net income of $40,000. Unit variable cost was $300 and fixed expenses totaled $160,000. The same unit selling price is expected for 2023. Raleigh’s unit variable cost will rise by 10% in 2023 due to increasing material costs so they are tentatively planning to cut fixed costs by $10,000. If the company is successful in cutting fixed costs by $10,000, how many units must Raleigh sell in 2023 to maintain the same net income level as 2022?

a. 882

b. 1,000

c. 1,056

d. 1,118

60. Sales mix is

a. the relative percentage in which a company sells its multiple products.

b. the trend of sales over recent periods.

c. the mix of variable and fixed expenses in relation to sales.

d. a measure of leverage used by the company.

61. If a company sells multiple products, at any level of units sold, net income will be higher if

a. more higher contribution margin units are sold than lower contribution margin units.

b. more lower contribution margin units are sold than higher contribution margin units.

c. more fixed expenses are incurred.

d. weighted-average unit contribution margin decreases.

62. Ramirez Corporation sells two types of computer hard drives. The sales mix is 30% (Q-Drive) and 70% (Q-Drive Plus) based upon quantity of units sold. Q-Drive has a unit variable cost of $90 and a unit selling price of $150. Q-Drive Plus has a unit variable cost of $105 and a unit selling price of $195. The weighted-average unit contribution margin for Ramirez is

a. $69.00.

b. $75.00

c. $81.00.

d. $100.50.

63. Capitol Manufacturing sells 4,000 units of Product A and 6,000 units of Product B annually. The sales mix for Product A

a. 40%.

b. 60%.

c. 67%.

d. Cannot determine from information given.

64. Ramirez Corporation sells two types of computer hard drives. The sales mix is 30% (Q-Drive) and 70% (Q-Drive Plus) based upon quantity of units sold. Q-Drive has a unit variable cost of $90 and a unit selling price of $150. Q-Drive Plus has a unit variable cost of $105 and a unit selling price of $195. Ramirez’s fixed costs are $891,000. How many units of Q-Drive would be sold at the break-even point in sales units?

a. 3,300

b. 4,455

c. 11,000

d. 7,700

65. Roosevelt Corporation has a weighted-average unit contribution margin of $30 for its two products, Standard and Supreme. Expected sales for Roosevelt are 40,000 Standard and 60,000 Supreme. Fixed expenses are $1,800,000. How many Standards would Roosevelt sell at the break-even point in sales units?

a. 24,000

b. 36,000

c. 40,000

d. 60,000

66. Roosevelt Corporation has a weighted-average unit contribution margin of $30 for its two products, Standard and Supreme. Expected sales for Roosevelt are 40,000 Standard and 60,000 Supreme. Fixed expenses are $1,800,000. At the expected sales level, Roosevelt’s net income will be

a. $(300,000).

b. $ - 0 -.

c. $1,200,000.

d. $3,000,000.

67. Swanson Company has two divisions; Sporting Goods and Sports Gear. The sales mix is 65% for Sporting Goods and 35% for Sports Gear, as determined by total sales dollars. Swanson incurs $6,660,000 in fixed costs. The contribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is 50%. The weighted-average contribution margin ratio is

a. 37%.

b. 40%.

c. 43%.

d. 50%.

68. Swanson Company has two divisions; Sporting Goods and Sports Gear. The sales mix is 65% for Sporting Goods and 35% for Sports Gear, as determined by total sales dollars. Swanson incurs $6,660,000 in fixed costs. The contribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is 50%. The break-even point in sales dollars is

a. $18,464,200.

b. $15,488,373.

c. $16,650,000.

d. $18,000,000.

69. Swanson Company has two divisions; Sporting Goods and Sports Gear. The sales mix is 65% for Sporting Goods and 35% for Sports Gear, as determined by total sales dollars. Swanson incurs $6,660,000 in fixed costs. The contribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is 50%. What will sales revenue be for the Sporting Goods Division at the break-even point?

a. $5,400,000

b. $6,300,000

c. $10,067,442

d. $11,700,000

70. Swanson Company has two divisions; Sporting Goods and Sports Gear. The sales mix is 65% for Sporting Goods and 35% for Sports Gear, as determined by total sales dollars. Swanson incurs $6,660,000 in fixed costs. The contribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is 50%. What will be the total contribution margin at the break-even point?

a. $5,730,699

b. $6,660,000

c. $6,720,000

d. $7,740,000

71. A shift from low-margin sales to high-margin sales

a. may increase net income, even though there is a decline in total units sold.

b. will always increase net income.

c. will always decrease net income.

d. will always decrease units sold.

72. A shift from high-margin sales to low-margin sales

a. may decrease net income, even though there is an increase in total units sold.

b. will always decrease net income.

c. will always increase net income.

d. will always increase units sold.

73. MacCloud Industries has two divisions—Standard and Premium. Each division has hundreds of different types of tennis racquets and tennis products. The following information is available:

Standard Division Premium Division Total

Sales $400,000 $600,000 $1,000,000

Variable costs 280,000 360,000

Contribution margin $120,000 $240,000

Total fixed costs $300,000

What is the company’s weighted-average contribution margin ratio?

a. 34%

b. 35%

c. 36%

d. 50%

74. MacCloud Industries has two divisions—Standard and Premium. Each division has hundreds of different types of tennis racquets and tennis products. The following information is available:

Standard Division Premium Division Total

Sales $400,000 $600,000 $1,000,000

Variable costs 280,000 360,000

Contribution margin $120,000 $240,000

Total fixed costs $300,000

What is the company’s break-even point in sales dollars?

a. $808,000

b. $833,333

c. $857,143

d. $882,353

75. The sales mix percentages for Novotna’s Boston and Seattle Divisions are 70% and 30%, as determined by total sales dollars. The contribution margin ratios are: Boston (40%) and Seattle (30%). Fixed costs are $2,220,000. What is Novotna’s break-even point in sales dollars?

a. $2,777,000

b. $6,000,000

c. $6,342,856

d. $6,727,272

 76. A company can sell all the units it can produce of either Product A or Product B, but not both. Product A has a unit contribution margin of $16 and takes two machine hours to make and Product B has a unit contribution margin of $30 and takes three machine hours to make. If there are 5,000 machine hours available to manufacture a product, net income will be

a. $10,000 more if Product A is made.

b. indeterminable given the information provided.

c. $10,000 less if Product A is made.

d. the same if either product is made.

77. Brooks Corporation can sell all the units it can produce of either Plain or Fancy, but not both. Plain has a unit contribution margin of $72 and takes two machine hours to make and Fancy has a unit contribution margin of $90 and takes three machine hours to make. There are 2,400 machine hours available to manufacture a product. What should Brooks do?

a. Make Fancy which creates $18 more profit per unit than Plain does.

b. Make Plain which creates $6 more profit per machine hour than Fancy does.

d. The same total profits exist regardless of which product is made.

78. What is the key factor in determining sales mix if a company has limited resources?

a. Contribution margin per unit of limited resource

b. The amount of fixed costs per unit

c. Each product’s unit contribution margin

d. The cost of limited resources

79. Greg’s Breads can produce and sell only one of the following two products:

Oven Contribution

Hours Required Margin per Unit

Muffins 0.2 $3

Coffee Cakes 0.3 $4

The company has oven capacity of 1,500 hours. How much will contribution margin be if it produces only the most profitable product?

a. $15,000

b. $20,000

c. $22,500

d. $21,000

 80. Curtis Corporation’s contribution margin is $25 per unit for Product A and $30 for Product B. Product A requires 2 machine hours and Product B requires 4 machine hours. What is the contribution margin per unit of limited resource for each product?

A B

a. $12.50 $7.50

b. $12.50 $8.33

c. $10.00 $7.50

d. $10.00 $8.33

81. Cost structure

a. refers to the relative proportion of fixed versus variable costs that a company incurs.

b. generally has little impact on profitability.

c. cannot be significantly changed by companies.

d. refers to the relative proportion of operating versus nonoperating costs that a company incurs.

82. Outsourcing production will

a. reduce fixed costs and increase variable costs.

b. reduce variable costs and increase fixed costs.

c. have no effect on the relative proportion of fixed and variable costs.

d. make the company more susceptible to economic swings.

83. Reducing reliance on human workers and instead, investing heavily in technology will

a. reduce fixed costs and increase variable costs.

b. reduce variable costs and increase fixed costs.

c. have no effect on the relative proportion of fixed and variable costs.

d. make the company less susceptible to economic swings.

84. Cost structure refers to the relative proportion of

a. selling expenses versus administrative expenses.

b. selling and administrative expenses versus cost of goods sold.

c. contribution margin versus sales.

d. none of the above.

85. Mercantile Corporation has sales of $2,000,000, variable costs of $800,000, and fixed costs of $900,000. Mercantile’s degree of operating leverage is

a. 1.33.

b. 1.67.

c. 1.50.

d. 4.00.

86. Mercantile Corporation has sales of $2,000,000, variable costs of $800,000, and fixed costs of $900,000. Mercantile’s margin of safety ratio is

a. 15%.

b. 25%.

c. 33%.

d. 75%.

87. Which of the following statements is not true?

a. Operating leverage refers to the extent to which a company’s net income reacts to a given change in sales.

b. Companies that have higher fixed costs relative to variable costs have higher operating leverage.

c. When a company’s sales revenue is increasing, high operating leverage is good because it means that profits will increase rapidly.

d. When a company’s sales revenue is decreasing, high operating leverage is good because it means that profits will decrease at a slower pace than revenues decrease.

88. Miller Manufacturing’s degree of operating leverage is 1.5. Warren Corporation’s degree of operating leverage is 3. Warren’s net income would go up (or down) by ________ as much as Miller’s with an equal increase (or decrease) in sales.

a. 1/2

b. 1.5 times

c. 2 times

d. 4.5 times

89. The margin of safety ratio

a. is computed as actual sales divided by break-even point in sales dollars.

b. indicates what percent decline in sales could be sustained before the company would operate at a loss.

c. measures the ratio of fixed costs to variable costs.

d. is used to determine the break-even point.

90. A cost structure which relies more heavily on fixed costs relative to variable cost makes the company

a. more sensitive to changes in the volume of sales revenue.

b. less sensitive to changes in the volume of sales revenue.

c. either more or less sensitive to changes in the volume of sales revenue, depending on other factors.

d. have a lower break-even point.

91. A company with a higher contribution margin ratio is

a. more sensitive to changes in the volume of sales revenue.

b. less sensitive to changes in the volume of sales revenue.

c. either more or less sensitive to changes in the volume of sales revenue, depending on other factors.

d. likely to have a lower break-even point.

92. The degree of operating leverage

a. does not provide a reliable measure of a company’s net income volatility.

b. cannot be used to compare companies.

c. is computed by dividing total contribution margin by net income.

d. measures how much of each sales dollar is available to cover fixed expenses.

^a93. Only direct materials, direct labor, and variable manufacturing overhead costs are considered product costs when using

a. full costing.

b. absorption costing.

c. variable costing.

d. product costing.

^a94. When a company assigns the costs of direct materials, direct labor, and both variable and fixed manufacturing overhead to products, that company is using

a. operations costing.

b. absorption costing.

c. variable costing.

d. product costing.

^a95. Companies recognize fixed manufacturing overhead costs as period costs (expenses) when incurred when using

a. full costing.

b. absorption costing.

c. product costing.

d. variable costing.

^a96. Under absorption costing and variable costing, how are fixed manufacturing costs treated?

Absorption Variable

a. Product Cost Product Cost

b. Product Cost Period Cost

c. Period Cost Product Cost

d. Period Cost Period Cost

^a97. Under absorption costing and variable costing, how are variable manufacturing costs treated?

Absorption Variable

a. Product Cost Product Cost

b. Product Cost Period Cost

c. Period Cost Product Cost

d. Period Cost Period Cost

^a98. Under absorption costing and variable costing, how are direct labor costs treated?

Absorption Variable

a. Product Cost Product Cost

b. Product Cost Period Cost

c. Period Cost Product Cost

d. Period Cost Period Cost

^a99. Fixed selling expenses are period costs

a. under both absorption and variable costing.

b. under neither absorption nor variable costing.

c. under absorption costing, but not under variable costing.

d. under variable costing, but not under absorption costing.

^a100. Which cost is not charged to the product under variable costing?

a. Direct materials

b. Direct labor

c. Variable manufacturing overhead

d. Fixed manufacturing overhead

^a101. Which cost is charged to the product under variable costing?

a. Variable manufacturing overhead

b. Fixed manufacturing overhead

c. Variable administrative expenses

d. Fixed administrative expenses

^a102. Variable costing

a. is used for external reporting purposes.

b. is required under GAAP.

c. treats fixed manufacturing overhead as a period cost.

d. is also known as full costing.

^a103. Sprinkle Co. sells its product for $60 per unit. During 2022, it produced 60,000 units and sold 50,000 units (there was no beginning inventory). Variable costs per unit are: direct materials $15, direct labor $9, and overhead $3. Fixed costs are: $720,000 manufacturing overhead, and $90,000 selling and administrative expenses. The per unit manufacturing cost under absorption costing is

a. $24.00.

b. $27.00.

c. $39.00.

d. $40.50.

154. The ______________ income statement classifies cost as variable or fixed and computes a contribution margin.

155. _________________ tells a company how far sales can drop before it will be operating at a loss.

156. ___________________ is the relative percentage in which a company sells its multiple products.

157. When more than one product is sold, the break-even point in sales units can be determined by dividing fixed expenses by _______________________.

158. When a company has ________________, management must decide which products to make and sell in order to maximize net income.

159. ___________________ refers to the relative proportion of fixed versus variable costs that a company incurs.

160. The _________________________ provides a measure of a company’s net income volatility and can be used to compare companies.

^a161. Under _____________________ all manufacturing costs are charged to, or absorbed by, the product.

^a162. Fixed manufacturing costs are treated as period costs under ______________________.

^a163. When production exceeds sales, a portion of the _____________________ is deferred to a future period as part of the cost of ending inventory under absorption costing, but not under variable costing.

^a164. When units produced exceed units sold, net income under absorption costing is ___________ than net income under variable costing.

^a 165. Management may be tempted to overproduce in a given period in order to increase net income if _______________ is used for internal decision making.

Answers to Completion Statements

154. CVP 160. degree of operating leverage

155. Margin of safety ^a161. absorption costing

156. Sales mix ^a162. variable costing

157. weighted-average unit contribution margin ^a163. fixed manufacturing overhead

158. limited resources ^a164. higher

159. Cost structure ^a165. absorption costing

S-A E 166

A CVP income statement is frequently prepared for internal use by management. Describe the features of the CVP income statement that make it more useful for management decision-making than the traditional income statement that is prepared for external users.