Using Costs in Decision Making Test Bank Answers Chapter 2

Chapter 2

Using Costs in Decision Making

Learning Objectives―Coverage by question type

LO1 – Understand and be able to explain the important cost-related concepts in management accounting.

True / False Multiple Choice Exercises, Problems & Short Answer

1-12 1-10 1

LO2 – Understand how cost information supports important management activities, such as product pricing, product planning, budgeting, and performance evaluation.

True / False Multiple Choice Exercises, Problems & Short Answer

13 11 2, 3

LO3 – Be able to model, interpret, and evaluate the effect of volume changes on costs and profit in simple organizations.

True / False Multiple Choice Exercises, Problems & Short Answer

14-19 12-40 4-11

Chapter 2: Using Costs in Decision Making

True / False

LO1

Terms: Target costing

Difficulty: 2

1. In markets where the organization faces a market-determined price, the organization can set its price using cost plus pricing.

Difficulty: 1

2. The most widespread use of cost information is in budgeting.

Difficulty: 1

3. Governments are frequent users of cost reimbursement contracts.

Difficulty: 1

4. The salary of the company president is a fixed manufacturing cost.

Difficulty: 1

5. For external reporting, generally accepted accounting principles require that costs be classified as either variable or fixed costs.

Difficulty: 1

6. Variable costs vary with the level of production or sales volume.

Difficulty: 1

7. Currently, most personnel costs are classified as fixed costs.

Difficulty: 2

8. Fixed costs depend on the resources acquired, not the resources used.

Difficulty: 1

9. The time over which a decision maker can adjust capacity is referred to as the short run.

Difficulty: 2

10. Fixed cost behavior over the long run likely looks like a step variable cost

Difficulty: 2

11. For general customers, the price charged for a product must cover its long-run cost to the organization.

Difficulty: 1

12. In recent years, fixed costs have decreased as a proportion of total manufacturing costs.

Difficulty: 1

13. An important role for cost information is to help managers develop a price for a product or service, or even decide whether to produce a product or service.

Difficulty: 1

14. Break-even point is not an important concept since the goal of business is to make a profit.

Difficulty: 1

15. To perform cost-volume-profit analysis, a company must be able to separate costs into fixed and variable components.

Difficulty: 1

16. Cost-volume-profit analysis may be used for single-product and multiproduct analysis but not in a service environment.

Difficulty: 2

17. Selling price per unit is $60, variable cost per unit is $30, and fixed cost per unit is $20. When this company operates above the break-even point, the sale of one more unit will increase net income by $10.

Difficulty: 3

18. A company with sales of $100,000, variable costs of $70,000, and fixed costs of $50,000 will reach its break-even point if sales are increased by $20,000.

Difficulty: 2

19. In multiproduct situations when the sales mix shifts toward the product with the lowest contribution margin per unit, the break-even quantity will decrease.

Difficulty: 1

1. Which of the following could be considered a cost object?
2. A product
3. A product line
4. A department
5. All the above

Difficulty: 1

1. Which of the following is an example of a direct cost?
2. Labor
3. Depreciation of general-purpose production equipment
4. Supervisor salaries
5. Factory rent

Difficulty: 1

1. A total cost that increases at a constant rate as production is increased is called:
2. Fixed cost
3. Variable cost
4. Step variable cost
5. None of the above

Difficulty: 1

1. Which of the following is most likely an example of a fixed cost?
2. The cost of materials.
3. The cost of electricity used in a factory.
4. The cost of taxes paid on income.
5. The cost of rent paid to rent a warehouse.

Difficulty: 2

1. Which of the following is likely to be an example of a mixed cost?
2. The cost of steel used to make automobiles.
3. The total cost, including transportation, admission, and food of going to a movie.
4. The cost of paying workers based on what they produce.
5. None of the above.

Difficulty: 2

1. Which of the following is likely an example of a step variable cost?
2. The cost of diesel fuel consumed by a truck travelling from Toronto to Vancouver.
3. The cost of supervisory labour in a factory.
4. The salary paid to a company’s chief executive.
5. None of the above

Difficulty: 2

1. Fixed costs:

A) may be either direct or indirect costs.

B) vary with production or sales volume.

C) include parts and materials used to manufacture a product.

D) can be adjusted in the short run to meet actual demands.

Difficulty: 2

1. Fixed costs depend on:

A) the amount of resources used.

B) the amount of resources acquired.

C) the volume of production.

D) the volume of sales.

Difficulty: 2

1. Currently, most companies consider annual salary costs as:

A) a fixed cost.

B) a variable cost.

C) an opportunity cost.

D) a period cost.

Difficulty: 2

1. Which of the following describes a variable cost?

A) Variable cost are always indirect costs.

B) Variable costs increase in total when the actual level of activity increases.

C) Variable costs include most personnel costs and depreciation on machinery.

D) Variable costs can always be traced directly to the cost object.

Difficulty: 2

1. Which of the following statements is true?
2. Depreciation on production equipment is always an indirect cost
3. Depreciation on production equipment is always a direct cost
4. Depreciation on production equipment is usually an indirect cost but can sometimes be a direct cost
5. Depreciation on production equipment is usually a direct cost but can sometimes be an indirect cost

Difficulty: 2

1. Cost-volume-profit analysis is used PRIMARILY by management:

A) as a planning tool.

B) for control purposes.

C) to establish a target net income for next year.

D) to attain extremely accurate financial results.

Difficulty: 1

1. Contribution margin equals revenues minus:

A) product costs.

B) period costs.

C) variable costs.

D) fixed costs.

Difficulty: 2

1. The break-even point is the level at which revenues:

A) equal fixed costs.

B) equal variable costs.

C) equal fixed costs minus flexible costs.

D) equal variable costs plus capacity-related costs.

Difficulty: 2

1. The break-even point in units is:

A) total costs divided by variable costs per unit.

B) contribution margin per unit divided by revenue per unit.

C) fixed costs divided by contribution margin per unit.

D) (fixed costs plus variable costs) divided by contribution margin per unit.

Difficulty: 2

1. Cost-volume-profit analysis assumes all of the following except:

A) all costs are purely variable or fixed.

B) units manufactured equal units sold.

C) total variable costs remain the same over the relevant range.

D) total fixed costs remain the same over the relevant range.

Difficulty: 2

1. All the following are assumed in a cost-volume-profit analysis EXCEPT:

A) a constant product mix.

B) fixed costs increase when activity increases.

C) revenue per unit does not change as volume changes.

D) all costs can be classified as either fixed or variable.

Difficulty: 2

1. In multiproduct situations, when the sales mix shifts toward the product with the highest contribution margin per unit, then:

A) total revenues will decrease.

B) breakeven quantity will increase.

C) total contribution margin will decrease.

D) operating income will increase.

Difficulty: 1

1. Which of the following is not an assumption underlying single product cost volume profit analysis as described in the course text?
2. All costs can be classified as either fixed or variable.
3. There are no inventories.
4. The sales of any other products the company produces remains constant.
5. Total variable costs must be constant.

Difficulty: 1

1. If a product’s variable cost increases, the number of units needed to be sold to earn a target profit will:
2. Increase
3. Decrease
4. Not change
5. Cannot be determined since predicting the effect requires more information.

Difficulty: 1

1. Ajax Company produces a single product with a selling price of $15. The product has a contribution margin ratio of 0.4. Ajax Company has fixed costs of $900,000. The breakeven number of unit sales is:
2. 150,000
3. 225,000
4. 360,000
5. Cannot be determined from the information provided.

Difficulty: 2

1. Event Company produces a single product with the following characteristics: price per unit $24.00, variable materials cost per unit $8.60, variable labour cost per unit $3.60, variable overhead cost per unit $1.80, and fixed overhead cost per unit $2.00. Event Company’s manufacturing fixed costs are $5,000,000 and selling, general and administration fixed costs are $2,500,000.

Which of the following numbers is the dollar sales required for Event Company to earn a target profit of $500,000?

1. $12,500,000
2. $18,000,000
3. $19,200,000
4. $24,000,000

Difficulty: 2

1. Constant Company produces a single product with the following characteristics: Price per unit $14.00, variable materials cost per unit $2.00, variable labour cost per unit, $1.50, variable overhead cost per unit, $0.50, variable selling cost per unit $1.00. Total fixed costs at Constant Company are $2,250,000 per year.

Which of the following is the required unit sales for Constant Company to break even?

1. 214,286
2. 225,000
3. 250,000
4. 275,000

Difficulty: 2

1. Rattle Company produces a single product. The product is sold for $12.00 per unit and has total variable costs of $4.00 per unit. Total fixed costs are $4,800,000 and the company faces a tax rate of 25%.

What unit sales are required for Rattle Company to earn an after tax profit of $900,000?

1. 500,000
2. 600,000
3. 750,000
4. None of the above

Difficulty: 2

1. Which of the following is an assumption of multiproduct cost volume profit analysis?
2. That variable cost per unit remains constant for all products.
3. If the sales of one product increases by 10%, sales of all the other products must increase by 10%
4. Total fixed costs remain constant in the relevant range
5. All of the above

Difficulty: 2

1. In multiple product cost volume profit analysis if the variable cost of one product increases then:
2. The production of that product will increase.
3. The total units required to breakeven will increase.
4. Fixed costs will fall to accommodate the increase in the product’s increased variable cost.
5. All of the above are true.

Difficulty: 2

1. Which of the following is the required total unit sales of the three products for Wren Company to break even?
2. 25,000
3. 30,000
4. 34,000
5. 31,000

Difficulty: 3

1. If Wren Company faces a tax rate of 20% and has a target after tax income of $281,000 which of the following is the required unit sales?
2. Regular – 12,250; Custom – 9,000; Deluxe – 6,500
3. Regular – 13,500; Custom – 9,000; Deluxe – 7,500
4. Regular – 22,500; Custom – 15,000; Deluxe – 12,500
5. Regular – 24,750; Custom – 16,500; Deluxe – 13,750

Difficulty: 2

1. The contribution margin per unit is:

A) $6.50.

B) $3.50.

C) $3.00.

D) $1.75.

Difficulty: 2

1. The break-even point in units for a year is:

A) 2,000 units.

B) 3,000 units.

C) 5,000 units.

D) 10,000 units.

Difficulty: 2

1. The number of units that must be sold annually to achieve $52,500 of profits is:

A) 20,000 units.

B) 15,000 units.

C) 10,000 units.

D) 5,000 units.

Difficulty: 3

1. If sales increase by $19,500 in a year, profits will increase by:

A) $10,500.

B) $17,500.

C) $19,500.

D) $35,000.

Difficulty: 2

1. The contribution margin per unit is:

A) $ 7.50.

B) $ 10.50.

C) $ 12.00.

D) $ 14.00.

Difficulty: 2

1. The number of units that ST must sell each year to break even is:

A) 4,853 units.

B) 7,857 units.

C) 11,000 units.

D) 13,000 units.

Difficulty: 2

1. The number of units that ST must sell annually to make a profit of $75,000 is:

A) 7,500 units.

B) 18,000 units.

C) 21,000 units.

D) 30,000 units.

Difficulty: 3

1. If the sales mix consists of two units of Product X and one unit of Product Y, what is the weighted revenue per unit of composite product?

A) $10.00

B) $11.66

C) $13.33

D) $15.00

Difficulty: 3

1. If the sales mix consists of two units of Product X and one unit of Product Y, what is the break-even point in units for a year?

A) 2,000 units of Y and 4,000 units of X

B) 2,025 units of Y and 4,050 units of X

C) 4,025 units of Y and 8,050 units of X

D) 4,000 units of Y and 8,000 units of X

Difficulty: 3

1. What is the operating income for a year, assuming actual sales total 150,000 units, and the sales mix is two units of Product X and one unit of Product Y?

A) $1,150,000

B) $1,250,000

C) $1,750,000

D) None of the above are correct.

Difficulty: 3

1. If the sales mix shifts to one unit of Product X and two units of Product Y, then the contribution margin per unit of composite product will:

A) increase per unit.

B) stay the same.

C) decrease per unit.

D) be undeterminable.

Difficulty: 3

1. If the sales mix shifts to one unit of Product X and two units of Product Y, then the break-even point in units for a year will:

A) increase.

B) stay the same.

C) decrease.

D) be undeterminable.

Difficulty: 2

1. Describe a variable cost. Describe a fixed cost. Explain why the distinction between variable and fixed costs is important in management accounting.

Difficulty: 2

2. Describe how cost information informs the budgeting process.

Difficulty: 3

3. Give some examples of cost information playing an important part in contract situations.

Difficulty: 2

4. George’s Variety reported the following for last year.

Required:

a. Compute the contribution margin.

b. Compute the gross margin.

c. Compute the operating income.

Difficulty: 2

5. In 2020, Maria Company has sales of 8,000 units at $10 each, variable costs totaling $20,000, and fixed costs of $30,000. In 2021, the company expects annual insurance costs to increase by $4,000 to $9,000.

Required:

a. Calculate operating income and the breakeven point in units for 2020.

b. Calculate the breakeven point in units for 2021.

Difficulty: 2

6. Designs by Susan (DS) sells a single product. The company's most recent income statement is given below.

Required:

Difficulty: 2

7. Karla’s Inc., sells a single product. The company's most recent income statement is given below.

Required:

Difficulty: 2

8. What is meant by the term break-even point? Why should a manager be concerned about the break-even point?

Difficulty: 2

9. Explain when a manager would use cost-volume-profit analysis.

Difficulty: 3

10. Outwest Manufacturing produces two products, X and Y. The following information is presented for both products:

Total fixed costs $234,000

Required:

Assume the sales mix is 3 units of X for every unit of Y:

a. What is the weighted revenue per unit of composite average product, the weighted average variable cost, and the weighted contribution margin per unit of composite average product?

b. What is the break-even point in units of both X and Y?

Difficulty: 2

11. East Textile Company sells shirts for men and boys. The average selling price and variable cost for each product are as follows:

Total fixed costs: $38,400

Required:

Assume the sales mix is 2 men's shirts for each boy's shirt:

a. What is the weighted revenue per unit of composite average product, the weighted average variable cost, and the weighted contribution margin per unit of average product?

b. What is the break-even point in units for each type of shirt?

c. What is the operating income, assuming sales total 9,000 shirts?