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GARRISON NOREEN - MANAGERIAL ACCOUNTING TESTBANK (COST VOLUME PROFIT ANALYSIS)

 Chapter 6 Cost-Volume-Profit Relationships

258 Garrison, Managerial Accounting, 12th Edition

True/False Questions

1. To estimate what the profit will be at various levels of activity, a manager can simply

take the number of units to be sold over the break-even point and multiply that number

by the unit contribution margin.

Answer: True Level: Medium LO: 1

2. Incremental analysis is generally the simplest and most direct approach to decision

making.

Answer: True Level: Easy LO: 1

3. To facilitate decision-making, fixed expenses should be expressed on a per-unit basis.

Answer: False Level: Medium LO: 1

4. One assumption in CVP analysis is that inventories do not change.

Answer: True Level: Easy LO: 1

5. On a CVP graph for a profitable company, the total expense line will be steeper than

the total revenue line.

Answer: False Level: Medium LO: 2

6. If sales volume increases, and all other factors remain unchanged, the contribution

margin ratio will decrease.

Answer: False Level: Medium LO: 3

7. The break-even point for a capital intensive, automated company will tend to be

higher than for a less capital intensive company while the margin of safety will tend to

be lower.

Answer: True Level: Medium LO: 5,7

8. An increase in the number of units sold will decrease a company's break-even point.

Answer: False Level: Medium LO: 5

Chapter 6 Cost-Volume-Profit Relationships

Garrison, Managerial Accounting, 12th Edition 259

9. Assuming that the unit contribution margin is positive, a 10% decrease in selling price

will increase the break-even point in terms of unit sales more than will a 10% increase

in the variable expense.

Answer: True Level: Hard LO: 5

10. The break-even point is the point where total contribution margin equals total variable

expenses.

Answer: False Level: Medium LO: 5

11. The break-even point can usually be determined by simply adding together all of the

expenses from the income statement.

Answer: False Level: Medium LO: 5

12. Two companies with the same margin of safety in dollars will also have the same total

contribution margin.

Answer: False Level: Medium LO: 7

13. If a company has high operating leverage, then profits will be very sensitive to

changes in sales.

Answer: True Level: Easy LO: 8

14. Operating leverage will decrease as the company's margin of safety increases.

Answer: True Level: Hard LO: 7,8

15. The overall contribution margin ratio for a company producing three products may be

obtained by adding the contribution margin ratios for the three products and dividing

the total by three.

Answer: False Level: Hard LO: 9

Chapter 6 Cost-Volume-Profit Relationships

260 Garrison, Managerial Accounting, 12th Edition

Multiple Choice Questions

16. Which of the following is correct? The break-even point occurs on the CVP graph

where:

A) total profit equals total expenses.

B) total profit equals total fixed expenses.

C) total contribution margin equals total fixed expenses.

D) total variable expenses equal total contribution margin.

Answer: C Level: Medium LO: 1,2

17. If a company decreases its total fixed expenses while increasing the variable expense

per unit, the total expense line relative to its previous position on a cost-volume-profit

graph will:

A) shift upward and have a steeper slope.

B) shift upward and have a flatter slope.

C) shift downward and have a steeper slope.

D) shift downward and have a flatter slope.

Answer: C Level: Medium LO: 2

18. East Company manufactures and sells a single product with a positive contribution

margin. If the selling price and the variable expense per unit both increase 5% and

fixed expenses do not change, what is the effect on the contribution margin per unit

and the contribution margin ratio?

Contribution Contribution

margin per unit margin ratio

A) No change No change

B) Increase Increase

C) Increase No change

D) Increase Decrease

Answer: C Level: Medium LO: 3,4 Source: CMA, adapted

Chapter 6 Cost-Volume-Profit Relationships

Garrison, Managerial Accounting, 12th Edition 261

19. Mossfeet Shoe Company is a single product firm. Mossfeet is predicting that a price

increase next year will not cause unit sales to decrease. What effect would this price

increase have on the following items for next year?

Contribution Break-even

Margin Ratio Point

A) Increase Decrease

B) Decrease Decrease

C) Increase No effect

D) Decrease No effect

Answer: A Level: Medium LO: 3,5

20. The contribution margin ratio is equal to:

A) Total manufacturing expenses/Sales.

B) (Sales - Variable expenses)/Sales.

C) 1 - (Gross Margin/Sales).

D) 1 - (Contribution Margin/Sales).

Answer: B Level: Medium LO: 3

21. The contribution margin ratio always increases when the:

A) break-even point increases.

B) break-even point decreases.

C) variable expenses as a percentage of net sales decrease.

D) variable expenses as a percentage of net sales increase.

Answer: C Level: Hard LO: 3 Source: CPA, adapted

22. In the middle of the year, the price of Lake Corporation's major raw material increased

by 8%. How would this increase affect the company's break-even point and margin of

safety?

Break-even point Margin of safety

A) Increase Increase

B) Increase Decrease

C) Decrease Decrease

D) Decrease Increase

Answer: B Level: Easy LO: 5,7

Chapter 6 Cost-Volume-Profit Relationships

262 Garrison, Managerial Accounting, 12th Edition

23. A $2.00 increase in a product's variable expense per unit accompanied by a $2.00

increase in its selling price per unit will:

A) decrease the degree of operating leverage.

B) decrease the contribution margin.

C) have no effect on the break-even volume.

D) have no effect on the contribution margin ratio.

Answer: C Level: Hard LO: 5,8

24. The break-even point in unit sales is found by dividing total fixed expenses by:

A) the contribution margin ratio.

B) the variable expenses per unit.

C) the sales price per unit.

D) the contribution margin per unit.

Answer: D Level: Easy LO: 5

25. Which of the following would not affect the break-even point?

A) number of units sold

B) variable expense per unit

C) total fixed expenses

D) selling price per unit

Answer: A Level: Medium LO: 5 Source: CMA, adapted

26. If a company increases its selling price by $2 per unit due to an increase in its variable

labor cost of $2 per unit, the break-even point in units will:

A) decrease.

B) increase.

C) not change.

D) change but direction cannot be determined.

Answer: C Level: Medium LO: 5

27. To obtain the dollar sales volume necessary to attain a given target profit, which of the

following formulas should be used?

A) (Fixed expenses + Target net profit)/Total contribution margin

B) (Fixed expenses + Target net profit)/Contribution margin ratio

C) Fixed expenses/Contribution margin per unit

D) Target net profit/Contribution margin ratio

Answer: B Level: Easy LO: 6

Chapter 6 Cost-Volume-Profit Relationships

Garrison, Managerial Accounting, 12th Edition 263

28. Salinas Corporation has a degree of operating leverage of 8. This means that a 1%

change in sales dollars at Salinas will generate an 8% change in:

A) variable expenses.

B) fixed expenses.

C) contribution margin.

D) net operating income.

Answer: D Level: Medium LO: 8

29. In calculating the break-even point for a multi-product company, which of the

following assumptions are commonly made?

I. Selling prices are constant.

II. Variable expenses are constant per unit.

III. The sales mix is constant.

A) I and II

B) I and III

C) II and III

D) I, II, and III

Answer: D Level: Easy LO: 9

30. The following information relates to the break-even point at Pezzo Corporation:

Sales dollars ...................... $120,000

Total fixed expenses ......... $30,000

If Pezzo wants to generate net operating income of $12,000, what will its sales dollars

have to be?

A) $132,000

B) $136,000

C) $168,000

D) $176,000

Answer: C Level: Hard LO: 1,3,5,6

Chapter 6 Cost-Volume-Profit Relationships

264 Garrison, Managerial Accounting, 12th Edition

31. The following information relates to Snowbird Corporation:

Sales at the break-even point ......... $312,500

Total fixed expenses ...................... $250,000

Net operating income .................... $150,000

What is Snowbird's margin of safety?

A) $62,500

B) $187,500

C) $100,000

D) $212,500

Answer: B Level: Hard LO: 1,3,5,7

32. The “Dog Hut” hot dog stand expects the following operating results for next year:

Sales ............................................... $280,000

Net operating income .................... $21,000

Contribution margin ratio .............. 70%

What is Dog Hut's break-even point next year in sales dollars?

A) $120,000

B) $181,300

C) $196,000

D) $250,000

Answer: D Level: Hard LO: 1,3,5

33. The following information relates to Zinc Corporation for last year:

Sales ........................................................... $500,000

Net operating income ................................ $25,000

Degree of operating leverage .................... 5

Sales at Zinc are expected to be $600,000 next year. Assuming no change in cost

structure, this means that net operating income for next year should be:

A) $30,000

B) $45,000

C) $50,000

D) $125,000

Answer: C Level: Hard LO: 1,3,8

Chapter 6 Cost-Volume-Profit Relationships

Garrison, Managerial Accounting, 12th Edition 265

34. The following information pertains to Nova Co.'s cost-volume-profit relationships:

Breakeven point in units sold ...................... 1,000

Variable expenses per unit .......................... $500

Total fixed expenses .................................... $150,000

How much will be contributed to net operating income by the 1,001st unit sold?

A) $650

B) $500

C) $150

D) $0

Answer: C Level: Medium LO: 1,5

35. Barnes Corporation expected to sell 150,000 games during the month of November.

The following budgeted data are based on that level of sales:

Revenue (150,000 games) ..................................... $2,400,000

Variable expenses .................................................. 1,425,000

Fixed manufacturing overhead expenses .............. 250,000

Fixed selling & administrative expenses ............... 500,000

Net operating income ............................................ 225,000

Barnes' actual sales during November were 180,000 games. What should the actual net

operating income during November have been?

A) $450,000

B) $270,000

C) $420,000

D) $510,000

Answer: C Level: Medium LO: 1 Source: CMA, adapted

36. Carver Company produces a product which sells for $40. Variable manufacturing

costs are $18 per unit. Fixed manufacturing costs are $5 per unit based on the current

level of activity, and fixed selling and administrative costs are $4 per unit. A selling

commission of 15% of the selling price is paid on each unit sold. The contribution

margin per unit is:

A) $7

B) $17

C) $22

D) $16

Answer: D Level: Easy LO: 1

Chapter 6 Cost-Volume-Profit Relationships

266 Garrison, Managerial Accounting, 12th Edition

37. Tice Company is a medium-sized manufacturer of lamps. During the year a new line

called “Horolin” was made available to Tice's customers. The break-even point for

sales of Horolin is $200,000 with a contribution margin of 40%. Assuming that the

profit for the Horolin line during the year amounted to $100,000, total sales during the

year would have amounted to:

A) $300,000

B) $420,000

C) $450,000

D) $475,000

Answer: C Level: Hard LO: 3,5,6 Source: CPA, adapted

38. Black Company's sales are $600,000, its fixed expenses are $150,000, and its variable

expenses are 60% of sales. Based on this information, the margin of safety is:

A) $90,000

B) $190,000

C) $225,000

D) $240,000

Answer: C Level: Medium LO: 3,5,7

39. Variable expenses for Alpha Company are 40% of sales. What are sales at the breakeven

point, assuming that fixed expenses total $150,000 per year:

A) $250,000

B) $375,000

C) $600,000

D) $150,000

Answer: A Level: Easy LO: 3,5

40. Minist Company sells a single product at a selling price of $15.00 per unit. Last year,

the company's sales revenue was $225,000 and its net operating income was $18,000.

If fixed expenses totaled $72,000 for the year, the break-even point in unit sales was

A) 15,000

B) 9,900

C) 14,100

D) 12,000

Answer: D Level: Hard LO: 3,5

Chapter 6 Cost-Volume-Profit Relationships

Garrison, Managerial Accounting, 12th Edition 267

41. Winger Corp. sells a product for $5 per unit. The fixed expenses are $210,000 and the

unit variable expenses are 60% of the selling price. What sales would be necessary in

order for Winger Corp. to realize a profit of 10% of sales?

A) $700,000

B) $525,000

C) $472,500

D) $420,000

Answer: A Level: Hard LO: 3,6 Source: CPA, adapted

42. Sales in East Company declined from $100,000 per year to $80,000 per year, while net

operating income declined by 300 percent. Given these data, the company must have

had an operating leverage of:

A) 15

B) 2.7

C) 30

D) 12

Answer: A Level: Hard LO: 3,8

43. Darth Company sells three products. Sales and contribution margin ratios for the three

products follow:

Product

X Y Z

Sales in dollars ............................... $20,000 $40,000 $100,000

contribution margin ratio ............... 45% 40% 15%

Given these data, the contribution margin ratio for the company as a whole would be:

A) 25%

B) 75%

C) 33.3%

D) it is impossible to determine from the given data

Answer: A Level: Medium LO: 3,9

Chapter 6 Cost-Volume-Profit Relationships

268 Garrison, Managerial Accounting, 12th Edition

44. Sunnripe Company manufactures and sells two types of beach towels, standard and

deluxe. Sunnripe expects the following operating results next year for each type of

towel:

Standard Deluxe

Sales ............................................... $450,000 $50,000

Variable expenses (total) ............... $360,000 $20,000

Sunnripe expects to have a total of $57,600 in fixed expenses next year. What is

Sunnripe's break-even point next year in sales dollars?

A) $72,000

B) $144,000

C) $192,000

D) $240,000

Answer: D Level: Hard LO: 3,9

45. Cindy, Inc. sells a product for $10 per unit. The variable expenses are $6 per unit, and

the fixed expenses total $35,000 per period. By how much will net operating income

change if sales are expected to increase by $40,000?

A) $16,000 increase

B) $5,000 increase

C) $24,000 increase

D) $11,000 decrease

Answer: A Level: Medium LO: 3

46. Birney Company has prepared the following budget data:

Sales .............................................................. 150,000 units

Selling price .................................................. $25 per unit

Variable expenses ......................................... $15 per unit

Fixed manufacturing expenses ..................... $800,000

Fixed selling and admin. expenses ............... $700,000

An advertising agency claims that an aggressive advertising campaign would enable

the company to increase its unit sales by 20%. What is the maximum amount that the

company can pay for advertising and obtain a net operating income of $200,000?

A) $100,000

B) $200,000

C) $300,000

D) $550,000

Answer: A Level: Hard LO: 4,6 Source: CPA, adapted

Chapter 6 Cost-Volume-Profit Relationships

Garrison, Managerial Accounting, 12th Edition 269

47. During last year, Thor Lab supplied hospitals with a comprehensive diagnostic kit for

$120. At a volume of 80,000 kits, Thor had fixed expenses of $1,000,000 and net

operating income of $200,000. Because of an adverse legal decision, Thor's liability

insurance expenses this year will be $1,200,000 more than they were last year.

Assuming that the volume and other costs are unchanged, what should be the sales

price this year if Thor is to make the same $200,000 net operating income?

A) $120

B) $135

C) $150

D) $240

Answer: B Level: Medium LO: 4,6 Source: CPA, adapted

48. How much will a company's net operating income change if it undertakes an

advertising campaign given the following data:

Cost of advertising campaign ...................................... $25,000

Variable expense as a percentage of sales ................... 42%

Increase in sales ........................................................... $60,000

A) $200 increase

B) $25,200 increase

C) $15,000 increase

D) $9,800 increase

Answer: D Level: Hard LO: 4

Chapter 6 Cost-Volume-Profit Relationships

270 Garrison, Managerial Accounting, 12th Edition

49. Sun Company's tentative budget for next year is as follows:

Sales ........................................................... $600,000

Variable expenses ...................................... 360,000

Fixed expenses:

Manufacturing ........................................ 90,000

Selling and administrative ...................... 110,000

Net operating income ............................. $40,000

Mr. Johnston, the marketing manager, has proposed an aggressive advertising

campaign costing an additional $50,000 that he predicts will result in a 30% unit sales

increase. Assuming that Johnston's proposal is incorporated into the budget, what

should be the increase in the budgeted net operating income for next year?

A) $12,000

B) $22,000

C) $72,000

D) $130,000

Answer: B Level: Hard LO: 4 Source: CPA, adapted

50. Last year, variable expenses were 60% of total sales and fixed expenses were 10% of

total sales. If the company increases its selling prices by 10%, but if fixed expenses,

variable costs per unit, and unit sales remain unchanged, the effect of the increase in

selling price on the company's total contribution margin would be:

A) a decrease of 2%

B) an increase of 5%

C) an increase of 10%

D) an increase of 25%

Answer: D Level: Hard LO: 4 Source: CIMA, adapted

Chapter 6 Cost-Volume-Profit Relationships

Garrison, Managerial Accounting, 12th Edition 271

51. Moruzzi Corporation is a single-product company that expects the following operating

results for next year:

Sales ........................................................... $320,000

Contribution margin per unit ..................... $0.20

Contribution margin ratio .......................... 25%

Degree of operating leverage .................... 8

How many units would Moruzzi have to sell next year to break-even?

A) 50,000

B) 200,000

C) 280,000

D) 350,000

Answer: D Level: Hard LO: 5

52. Mason Company's selling price was $20.00 per unit. Fixed expenses totaled $54,000,

variable expenses were $14.00 per unit, and the company reported a profit of $9,000

for the year. The break-even point for Mason Company is:

A) 10,500 units

B) 4,500 units

C) 8,500 units

D) 9,000 units

Answer: D Level: Medium LO: 5

53. Given the following data:

Selling price per unit ................................. $2.00

Variable production cost per unit .............. $0.30

Fixed production cost ................................ $3,000

Sales commission per unit ......................... $0.20

Fixed selling expenses ............................... $1,500

The break-even point in dollars is:

A) $6,000

B) $4,500

C) $2,647

D) $4,000

Answer: A Level: Easy LO: 5

Chapter 6 Cost-Volume-Profit Relationships

272 Garrison, Managerial Accounting, 12th Edition

54. Hollis Company sells a single product for $20 per unit. The company's fixed expenses

total $240,000 per year, and variable expenses are $12 per unit of product. The

company's break-even point is:

A) $400,000

B) $600,000

C) 20,000 units

D) 12,000 units

Answer: B Level: Easy LO: 5

55. Darwin, Inc., sells a particular textbook for $20. Variable expenses are $14 per book.

At the current volume of 50,000 books sold per year the company is just breaking

even. Given these data, the annual fixed expenses associated with the textbook total:

A) $300,000

B) $1,000,000

C) $1,300,000

D) $700,000

Answer: A Level: Medium LO: 5

56. Singapore Candy Cane Company is a single product firm with the following cost

structure for next year:

Selling price per unit ................................. $1.20

Variable expenses per unit ........................ $0.72

Total fixed expenses for the year .............. $64,800

What is the company's break-even point next year in sales dollars?

A) $90,000

B) $108,000

C) $135,000

D) $162,000

Answer: D Level: Medium LO: 5

Chapter 6 Cost-Volume-Profit Relationships

Garrison, Managerial Accounting, 12th Edition 273

57. Garcia Veterinary Clinic expects the following operating results next year:

Sales (total) .................................... $600,000

Variable expenses (total) ............... $120,000

Fixed expenses (total) .................... $300,000

What is Garcia's break-even point next year in sales dollars?

A) $240,000

B) $375,000

C) $400,000

D) $420,000

Answer: B Level: Medium LO: 5

58. Frank Company manufacturers a single product that has a selling price of $20.00 per

unit. Fixed expenses total $45,000 per year, and the company must sell 5,000 units to

break even. If the company has a target profit of $13,500, sales in units must be:

A) 6,000

B) 5,750

C) 6,500

D) 7,925

Answer: C Level: Hard LO: 6

59. Spencer Company expects to sell 60,000 units next year. Variable production costs are

$4 per unit, and variable selling costs are 10% of the selling price. Fixed expenses are

$115,000 per year, and the company has set a target profit of $50,000. Based on this

information, the unit selling price should be:

A) $7.00

B) $10.75

C) $7.50

D) $6.75

Answer: C Level: Hard LO: 6

Chapter 6 Cost-Volume-Profit Relationships

274 Garrison, Managerial Accounting, 12th Edition

60. Company X sold 25,000 units of product last year. The contribution margin per unit

was $2, and fixed expenses totaled $40,000 for the year. This year fixed expenses are

expected to increase to $45,000, but the contribution margin per unit will remain

unchanged at $2. How many units must be sold this year to earn the same net

operating income as was earned last year:

A) 22,500

B) 27,500

C) 35,000

D) 2,500

Answer: B Level: Medium LO: 6

61. A product sells for $10 per unit and has variable expenses of $6 per unit. Fixed

expenses total $45,000 per month. How many units of the product must be sold each

month to yield a monthly profit of $15,000?

A) 6,000 units

B) 3,750 units

C) 15,000 units

D) 10,000 units

Answer: C Level: Easy LO: 6

62. The Breiden Company sells rodaks for $6.00 per unit. Fixed expenses total $37,500

per month and variable expenses are $2.00 per unit. How many rodaks must be sold

each month to realize a profit before income taxes of 15% of sales (to the nearest

whole unit):

A) 9,375 units

B) 11,029 units

C) 12,097 units

D) 9,740 units

Answer: C Level: Hard LO: 6 Source: CMA, adapted

Chapter 6 Cost-Volume-Profit Relationships

Garrison, Managerial Accounting, 12th Edition 275

63. Chibu Corporation is a single product firm with the following cost formula for all of

its costs for next year:

Y = $225,000 + $30X

Chibu sells its product for $120 per unit. What would Chibu's total sales dollars have

to be next year in order to generate $270,000 of net operating income?

A) $618,750

B) $660,000

C) $1,080,000

D) $1,980,000

Answer: B Level: Hard LO: 6

64. Gamma Company has sales of $120,000, a contribution margin of $48,000, and a net

operating income of $12,000. The company's degree of operating leverage is:

A) 2.5

B) 4.0

C) 10.0

D) 4.8

Answer: B Level: Easy LO: 8

65. Alpha Company reported the following data for its most recent year: sales, $500,000;

variable expenses, $300,000; and fixed expenses, $150,000. The company's degree of

operating leverage is:

A) 10

B) 2

C) 4

D) 2.5

Answer: C Level: Medium LO: 8

Chapter 6 Cost-Volume-Profit Relationships

276 Garrison, Managerial Accounting, 12th Edition

66. Mason Enterprises has prepared the following budget for the month of July:

Selling Variable Unit

price per unit cost per unit sales

Product A ............... $10.00 $4.00 15,000

Product B ............... $15.00 $8.00 20,000

Product C ............... $18.00 $9.00 5,000

Assuming that total fixed expenses will be $150,000 and the sales mix remains

constant, the break-even point would be closest to:

A) $276,008

B) $235,292

C) $294,545

D) $141,278

Answer: C Level: Hard LO: 9 Source: CMA, adapted

67. The unit contribution margins of Product X and Product Y are $10 and $9,

respectively. Total fixed expenses will be the same regardless of which product is

produced and sold. Which of the following statements will always be true:

A) Product X has a higher contribution margin ratio than Product Y.

B) if total sales are $300,000 no matter which product is sold, it is more profitable to

sell Product X than Product Y.

C) less units would be required to break even if only Product X is sold than if only

Product Y is sold.

D) responses A, B, and C are all correct.

Answer: C Level: Hard LO: 9

68. A company sells two products--J and K. The sales mix is expected to be $3.00 of sales

of Product K for every $1.00 of sales of Product J. Product J has a contribution margin

ratio of 40% whereas Product K has a contribution margin ratio of 50%. Annual fixed

expenses are expected to be $120,000. The overall break-even point for the company

in dollar sales is expected to be closest to:

A) $196,000

B) $200,000

C) $253,000

D) $255,000

Answer: C Level: Hard LO: 9 Source: CIMA, adapted

Chapter 6 Cost-Volume-Profit Relationships

Garrison, Managerial Accounting, 12th Edition 277

Use the following to answer questions 69-71:

A cement manufacturer has supplied the following data:

Tons of cement produced and sold 220,000

Sales revenue $924,000

Variable manufacturing expense $297,000

Fixed manufacturing expense $280,000

Variable selling and administrative expense $165,000

Fixed selling and administrative expense $82,000

Net operating income $100,000

69. What is the company's unit contribution margin?

A) $4.20

B) $0.45

C) $1.90

D) $2.10

Answer: D Level: Easy LO: 1

70. The company's contribution margin ratio is closest to:

A) 40.0%

B) 50.0%

C) 60.0%

D) 10.7%

Answer: B Level: Easy LO: 3

71. If the company increases its unit sales volume by 5% without increasing its fixed

expenses, then total net operating income should be closest to:

A) $5,000

B) $123,100

C) $105,000

D) $102,500

Answer: B Level: Medium LO: 1

Chapter 6 Cost-Volume-Profit Relationships

278 Garrison, Managerial Accounting, 12th Edition

Use the following to answer questions 72-74:

A tile manufacturer has supplied the following data:

Boxes of tiles produced and sold ............................. 580,000

Sales revenue ............................................................ $2,842,000

Variable manufacturing expense .............................. 1,653,000

Fixed manufacturing expense .................................. 784,000

Variable selling and administrative expense ............ 145,000

Fixed selling and administrative expense ................ 128,000

Net operating income ............................................... $132,000

72. What is the company's unit contribution margin?

A) $0.23

B) $4.90

C) $3.10

D) $1.80

Answer: D Level: Easy LO: 1

73. The company's contribution margin ratio is closest to:

A) 29.4%

B) 4.7%

C) 63.3%

D) 36.7%

Answer: D Level: Easy LO: 3

74. If the company increases its unit sales volume by 5% without increasing its fixed

expenses, then total net operating income should be closest to:

A) $6,600

B) $184,200

C) $134,422

D) $138,600

Answer: B Level: Medium LO: 1

Chapter 6 Cost-Volume-Profit Relationships

Garrison, Managerial Accounting, 12th Edition 279

Use the following to answer questions 75-78:

Drake Company's income statement for the most recent year appears below:

Sales (26,000 units) ................................... $650,000

Less: Variable expenses ............................ 442,000

Contribution margin .................................. 208,000

Less: Fixed expenses ................................. 234,000

Net operating loss ...................................... $ (26,000)

75. The unit contribution margin is:

A) $17.00

B) $8.00

C) $1.00

D) $9.00

Answer: B Level: Easy LO: 1

76. The break-even point in sales dollars is:

A) $731,250

B) $676,000

C) $675,000

D) $720,000

Answer: A Level: Medium LO: 5

77. If the company desires a net operating income of $20,000, the number of units needed

to be sold is:

A) 28,500

B) 31,000

C) 31,750

D) 26,500

Answer: C Level: Medium LO: 6

78. The sales manager is convinced that a $60,000 expenditure on advertising will

increase unit sales by fifty percent without any other increase in fixed expenses. If the

sales manager is correct, the company's net operating income would increase by:

A) $44,000

B) $34,000

C) $30,000

D) $49,000

Answer: A Level: Medium LO: 4

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Use the following to answer questions 79-81:

Roberts Company bases its budget on the following data:

Sales .................................. 3,600 units

Selling price ...................... $50 per unit

Variable expense ............... $15 per unit

Fixed expenses .................. $40,530

79. If the company wants to increase its total contribution margin by 40%, it will need to

increase its sales by about:

A) $48,840

B) $72,000

C) $50,400

D) $34,188

Answer: B Level: Hard LO: 1

80. If the company wants its margin of safety to equal $40,000, it will need to sell about:

A) 1,158 units

B) 1,958 units

C) 2,300 units

D) 800 units

Answer: B Level: Hard LO: 7

81. If the company's fixed expenses decrease by 20%, the break-even point will change

from its previous level by about a:

A) 232 unit increase

B) 510 unit decrease

C) 232 unit decrease

D) 510 unit increase

Answer: C Level: Hard LO: 4,5

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Use the following to answer questions 82-83:

The following data were supplied by Reader Corporation:

Sales .................................. $600,000

Variable expenses .............. $420,000

Fixed expenses .................. $141,000

82. The contribution margin is:

A) $420,000

B) $54,000

C) $474,000

D) $180,000

Answer: D Level: Easy LO: 1

83. The break-even point in sales dollars is:

A) $470,000

B) $180,000

C) $420,000

D) $561,000

Answer: A Level: Easy LO: 5

Use the following to answer questions 84-86:

A manufacturer of premium wire strippers has supplied the following data:

Units produced and sold .................................................. 560,000

Sales revenue ................................................................... $4,704,000

Variable manufacturing expense ..................................... 2,436,000

Fixed manufacturing expense ......................................... 1,200,000

Variable selling and administrative expense ................... 616,000

Fixed selling and administrative expense ....................... 272,000

Net operating income ...................................................... $180,000

84. The company's margin of safety in units is closest to:

A) 384,762

B) 263,704

C) 61,017

D) 522,740

Answer: C Level: Medium LO: 7

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85. The company's unit contribution margin is closest to:

A) $2.95

B) $5.45

C) $7.30

D) $4.05

Answer: A Level: Easy LO: 1

86. The company's degree of operating leverage is closest to:

A) 9.18

B) 3.11

C) 2.07

D) 26.13

Answer: A Level: Medium LO: 8

Use the following to answer questions 87-89:

A company that makes organic fertilizer has supplied the following data:

Bags produced and sold .............................................. 240,000

Sales revenue ............................................................... $1,896,000

Variable manufacturing expense ................................. $804,000

Fixed manufacturing expense ..................................... $520,000

Variable selling and administrative expense ............... $180,000

Fixed selling and administrative expense ................... $270,000

Net operating income .................................................. $122,000

87. The company's margin of safety in units is closest to:

A) 140,000

B) 202,238

C) 125,714

D) 32,105

Answer: D Level: Medium LO: 7

88. The company's unit contribution margin is closest to:

A) $4.10

B) $3.80

C) $4.55

D) $7.15

Answer: B Level: Easy LO: 1

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89. The company's degree of operating leverage is closest to:

A) 1.97

B) 15.54

C) 1.25

D) 7.48

Answer: D Level: Medium LO: 8

Use the following to answer questions 90-92:

The following data was provided by Truxton Corporation:

Sales .......................................................... 10,000 units

Selling price .............................................. $30 per unit

Contribution margin ratio .......................... 30%

Margin of safety percentage ...................... 40%

90. The variable expense per unit is:

A) $21

B) $9

C) $12

D) $18

Answer: A Level: Hard LO: 3

91. The break-even level in sales dollars is:

A) $180,000

B) $90,000

C) $210,000

D) $54,000

Answer: A Level: Hard LO: 5

92. Net operating income at sales of 10,000 units is:

A) $0

B) $36,000

C) $90,000

D) $300,000

Answer: B Level: Hard LO: 4

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Use the following to answer questions 93-95:

A manufacturer of cedar shingles has supplied the following data:

Bundles of cedar shakes produced and sold .................... 280,000

Sales revenue ................................................................... $2,072,000

Variable manufacturing expense ..................................... $1,134,000

Fixed manufacturing expense ......................................... $436,000

Variable selling and administrative expense ................... $238,000

Fixed selling and administrative expense ....................... $164,000

Net operating income ...................................................... $100,000

93. The company's break-even in unit sales is closest to:

A) 130,149

B) 81,081

C) 25,038

D) 240,000

Answer: D Level: Medium LO: 5

94. The company's contribution margin ratio is closest to:

A) 66.2%

B) 73.0%

C) 27.0%

D) 33.8%

Answer: D Level: Easy LO: 3

95. The company's degree of operating leverage is closest to:

A) 2.80

B) 7.00

C) 2.29

D) 20.72

Answer: B Level: Medium LO: 8

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Use the following to answer questions 96-98:

A manufacturer of tiling grout has supplied the following data:

Kilograms produced and sold .......................................... 300,000

Sales revenue ................................................................... $1,950,000

Variable manufacturing expense ..................................... $960,000

Fixed manufacturing expense ......................................... $266,000

Variable selling and administrative expense ................... $360,000

Fixed selling and administrative expense ....................... $232,000

Net operating income ...................................................... $132,000

96. The company's break-even in unit sales is closest to:

A) 43,774

B) 237,143

C) 76,615

D) 80,606

Answer: B Level: Medium LO: 5

97. The company's contribution margin ratio is closest to:

A) 67.7%

B) 74.2%

C) 32.3%

D) 25.8%

Answer: C Level: Easy LO: 3

98. The company's degree of operating leverage is closest to:

A) 14.77

B) 2.65

C) 4.77

D) 2.27

Answer: C Level: Medium LO: 8

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Use the following to answer questions 99-100:

Clarkson Industries produces an electronic calculator that sells for $75 per unit. Variable

expenses are $45 per unit and fixed expenses are $150,000.

99. The break-even point for Clarkson Industries is:

A) 2,000 units

B) 3,333 units

C) 10,000 units

D) 5,000 units

Answer: D Level: Easy LO: 5

100. The contribution margin ratio is:

A) 20%

B) 66.6%

C) 60%

D) 40%

Answer: D Level: Easy LO: 3

Use the following to answer questions 101-103:

Kerensky Corporation, a wholesale company, has provided the following data:

Sales per period ......................................... 1,000 units

Selling price .............................................. $35 per unit

Variable production cost ........................... $15 per unit

Selling expenses ........................................ $5,000 plus 5% of selling price

Administrative expenses ........................... $3,000 plus 10% of selling price

101. The contribution margin ratio is closest to:

A) 57%

B) 58%

C) 42%

D) 62%

Answer: C Level: Medium LO: 3

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102. The margin of safety percentage is closest to:

A) 46%

B) 60%

C) 42%

D) 62%

Answer: A Level: Medium LO: 7

103. The number of units needed to achieve a target net operating income of $20,000 is

closest to:

A) 1,404 units

B) 542 units

C) 1,898 units

D) 1,361 units

Answer: C Level: Medium LO: 4

Use the following to answer questions 104-105:

Mark Corporation produces two models of calculators. The Business model sells for $60, and

the Math model sells for $40. The variable expenses are given below:

Business Math

Model Model

Variable production costs per unit .................................. $15 $16

Variable selling and administrative expenses per unit .... $9 $6

The fixed expenses are $75,000 per month. The expected monthly sales of each model are:

Business, 1,000 units; Math, 500 units.

104. The contribution margin ratio for the Business model is:

A) 40 percent

B) 75 percent

C) 85 percent

D) 60 percent

Answer: D Level: Medium LO: 3

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105. The break-even point for the expected sales mix is (round to nearest whole unit):

A) 833 of each

B) 1,667 Business and 833 Math

C) 1,667 of each

D) 833 Business and 1,667 Math

Answer: B Level: Hard LO: 5

Use the following to answer questions 106-108:

Next year, Coma Paint Company expects to sell 18,000 gallons of paint. Coma is budgeting

the following operating results for next year:

Sales .............................................. $270,000

Variable expenses .......................... 108,000

Contribution margin ...................... 162,000

Fixed expenses .............................. 90,000

Net operating income .................... $ 72,000

106. What is Coma's break-even point next year in sales dollars?

A) $49,500

B) $90,000

C) $108,000

D) $150,000

Answer: D Level: Medium LO: 5

107. How many gallons of paint would Coma have to sell next year in order to double its

projected net operating income of $72,000?

A) 22,800 gallons

B) 25,200 gallons

C) 26,000 gallons

D) 36,000 gallons

Answer: C Level: Medium LO: 6

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108. Assume that Coma wants to sell 20,000 gallons next year. What minimum selling

price would Coma have to charge for each gallon in order to still obtain its projected

net operating income of $72,000?

A) $11.00

B) $13.50

C) $14.00

D) $14.10

Answer: D Level: Hard LO: 5,6

Use the following to answer questions 109-111:

The following budgeted income statement was prepared by Fullton Corporation:

Sales (100 units at $100 a unit) ....................... $10,000

Cost of goods sold:

Direct labor (variable) .................................. $1,500

Direct materials ............................................ 1,400

Variable factory overhead ............................ 1,000

Fixed factory overhead ................................. 500 4,400

Gross margin ................................................... 5,600

Selling expenses:

Variable ........................................................ 600

Fixed ............................................................. 1,000

Administrative expenses:

Variable ........................................................ 500

Fixed ............................................................. 1,000 3,100

Net operating income ...................................... $ 2,500

109. How many units would have to be sold to break even?

A) 50

B) 58

C) 68

D) 75

Answer: A Level: Medium LO: 5 Source: CPA, adapted

110. What would the net operating income be if sales increase by 25%?

A) $3,125

B) $3,750

C) $4,000

D) $5,000

Answer: B Level: Medium Source: CPA, adapted

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111. What would be the sales at the break-even point if fixed factory overhead increases by

$1,700?

A) $6,700

B) $8,400

C) $8,666

D) $9,200

Answer: B Level: Medium LO: 4,5 Source: CPA, adapted

Use the following to answer questions 112-113:

Barnes Corporation's income statement for last year appears below:

Sales ...................................................... $1,500,000

Cost of sales:

Direct materials .................................. $250,000

Direct labor (variable) ........................ 150,000

Variable overhead .............................. 75,000

Fixed overhead ................................... 100,000 575,000

Gross margin ......................................... 925,000

Selling, general, and administrative:

Variable .............................................. 200,000

Fixed ................................................... 250,000 450,000

Net operating income ............................ $ 475,000

112. The break-even point last year was:

A) $146,341

B) $636,364

C) $729,730

D) $181,818

Answer: B Level: Medium LO: 5 Source: CMA, adapted

113. The management of Barnes Corporation anticipates a 10 percent increase in total sales,

a 12 percent increase in total variable expenses, and a $45,000 increase in total fixed

expenses next year. The break-even point for next year is:

A) $729,027

B) $862,103

C) $214,018

D) $474,000

Answer: A Level: Medium LO: 4,5 Source: CMA, adapted

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Use the following to answer questions 114-117:

Holger Incorporated, which produces and sells a single product, has provided the following

data:

Sales .................................. 2,000 units

Selling price ...................... $60 per unit

Variable expense ............... $40 per unit

Fixed expense .................... $20,000

Consider each of the following questions independently.

114. If the dollar contribution margin per unit is increased by 10% and if total fixed

expense is decreased by 20%, net operating income is expected to:

A) increase by $2,000

B) increase by $12,000

C) increase by $8,000

D) increase by $16,000

Answer: C Level: Hard LO: 4

115. If the sales volume decreases by 25% and the variable expense per unit increases by

15%, net operating income is expected to:

A) decrease by $19,000

B) decrease by $1,000

C) increase by $1,750

D) decrease by $15,000

Answer: A Level: Hard LO: 4

116. If the company's fixed expenses increased by $8,000, how many units must be sold to

reach a target net operating income of $36,000:

A) 1,400 units

B) 2,200 units

C) 2,400 units

D) 3,200 units

Answer: D Level: Hard LO: 6

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117. If the company's sales volume in units decreases by 30%, and if it desires a targeted

net operating income of $29,000, then the selling price should be:

A) $58.85

B) $60.75

C) $64.50

D) $75.00

Answer: D Level: Hard LO: 4,6

Use the following to answer questions 118-119:

Given the following data:

Total Per Unit

Sales ................................................ $30,000 $10

Less variable expenses .................... 18,000 6

Contribution margin ........................ 12,000 $ 4

Less fixed expenses ......................... 9,000

Net operating income ...................... $ 3,000

118. If sales decrease by 500 units, by how much would fixed expenses have to be reduced

to maintain current net operating income?

A) $5,000

B) $3,000

C) $1,500

D) $2,000

Answer: D Level: Easy LO: 4

119. The company has an opportunity to secure a special order of 800 units if it is willing to

drop the selling price on these units to $9. In addition to the usual variable expenses,

the costs of securing the special order would be $1,000. The company's regular sales

would not be affected by the special order. If the special order is accepted, the

company's overall net operating income will:

A) increase $2,400

B) increase $1,400

C) increase $2,200

D) decrease $2,200

Answer: B Level: Easy LO: 4

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Use the following to answer questions 120-122:

Junior Bodway, Inc., has provided the following budgeted data:

Sales .................................. 10,000 units

Selling price ...................... $50 per unit

Variable expense ............... $30 per unit

Fixed expense .................... $180,000

120. What is the company's break-even point in sales dollars?

A) $450,000

B) $180,000

C) $300,000

D) $500,000

Answer: A Level: Easy LO: 5

121. How many units would the company have to sell in order to have a net operating

income of $40,000?

A) 20,000 units

B) 9,000 units

C) 11,000 units

D) 7,333 units

Answer: C Level: Easy LO: 6

122. At the budgeted sales level of 10,000 units, what is the company's degree of operating

leverage?

A) 10.0

B) 6.0

C) 22.5

D) 5.0

Answer: A Level: Easy LO: 8

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Use the following to answer questions 123-125:

Pricher Corporation's income statement for last year appears below:

Sales .......................................................... $2,000,000

Cost of goods sold:

Direct materials ...................................... $500,000

Direct labor (variable) ............................ 150,000

Variable manufacturing overhead .......... 50,000

Fixed manufacturing overhead ............... 600,000 1,300,000

Gross margin ............................................. 700,000

Selling and administrative expenses:

Variable .................................................. 100,000

Fixed ....................................................... 300,000 400,000

Net operating income ................................ $ 300,000

123. The break-even point last year was:

A) $1,500,000

B) $2,571,429

C) $1,250,000

D) $900,000

Answer: A Level: Medium LO: 5

124. The degree of operating leverage last year was:

A) 0.33

B) 2.33

C) 4.00

D) 3.33

Answer: C Level: Easy LO: 8

125. If fixed selling and administrative expenses increase by $60,000 and sales remain at

the $2,000,000 level, what is the margin of safety in sales dollars:

A) $300,000

B) $200,000

C) $500,000

D) $400,000

Answer: D Level: Medium LO: 7

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Use the following to answer questions 126-127:

Highjinks Inc. has provided the following budgeted data:

Sales .................................. 20,000 units

Selling price ...................... $100 per unit

Variable expense ............... $70 per unit

Fixed expense .................... $450,000

126. What is the company's margin of safety as a percentage of sales?

A) 50%

B) 25%

C) 75%

D) 100%

Answer: B Level: Medium LO: 7

127. How many units would the company have to sell in order to have a net operating

income equal to 5% of total sales dollars?

A) 18,000 units

B) 20,000 units

C) 15,333 units

D) 14,286 units

Answer: A Level: Hard LO: 7

Use the following to answer questions 128-129:

Douglas Corporation produces and sells two models of vacuum cleaners, Standard and

Deluxe. Company records show the following data relating to these two products:

Standard Deluxe

Selling price per unit ....................................................... $140 $155

Variable production costs per unit .................................. $110 $116

Variable selling and admin. expense per unit ................. $15 $12

Expected monthly sales in units ...................................... 600 1,200

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The company's total monthly fixed expense is $15,000.

128. The break-even in sales dollars for the expected sales mix is closest to:

A) $140,000

B) $85,000

C) $107,000

D) $98,000

Answer: D Level: Medium LO: 9

129. If the expected monthly sales in units were divided equally between the two models

(900 Standard and 900 Deluxe), the break-even level of sales would be:

A) the same as with the expected sales mix.

B) higher than with the expected sales mix.

C) lower than with the expected sales mix.

D) cannot be determined with the available data.

Answer: B Level: Medium LO: 9

Essay Questions

130. Baker Company has a product that sells for $20 per unit. The variable expenses are

$12 per unit, and fixed expenses total $30,000 per year.

Required:

a. What is the total contribution margin at the break-even point?

b. What is the contribution margin ratio for the product?

c. If total sales increase by $20,000 and fixed expenses remain unchanged, by how

much would net operating income be expected to increase?

d. The marketing manager wants to increase advertising by $6,000 per year. How

many additional units would have to be sold to increase overall net operating

income by $2,000?

Level: Medium LO: 1,3,4

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Answer:

a. At the break-even, the total contribution margin equals total fixed expenses.

Therefore, the total contribution margin would be $30,000.

b. Contribution margin ratio =Unit contribution margin ÷ Selling price

= ($20 - $12) ÷ $20 = 40%

c. Increase in sales ....................................... $20,000

CM ratio .................................................. 40%

Increase in net operating income ............. $8,000

d. Increase in advertising expenses ................... $6,000

Desired increase in net operating income ..... 2,000

Total required contribution margin ............... $8,000

÷ Contribution margin per unit ...................... $8

Required unit sales ........................................ 1,000

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131. Candice Corporation has decided to introduce a new product. The product can be

manufactured using either a capital-intensive or labor-intensive method. The

manufacturing method will not affect the quality or sales of the product. The estimated

manufacturing costs of the two methods are as follows:

Capital Labor

-intensive -intensive

Variable manufacturing cost per unit ..................... $14.00 $17.60

Fixed manufacturing cost per year ......................... $2,440,000 $1,320,000

The company's market research department has recommended an introductory selling

price of $30 per unit for the new product. The annual fixed selling and administrative

expenses of the new product are $500,000. The variable selling and administrative

expenses are $2 per unit regardless of how the new product is manufactured.

Required:

a. Calculate the break-even point in units if Candice Corporation uses the:

1. capital-intensive manufacturing method.

2. labor-intensive manufacturing method.

b. Determine the unit sales volume at which the net operating income is the same for

the two manufacturing methods.

c. Assuming sales of 250,000 units, what is the degree of operating leverage if the

company uses the:

1. capital-intensive manufacturing method.

2. labor-intensive manufacturing method.

d. What is your recommendation to management concerning which manufacturing

method should be used?

Level: Hard LO: 1,4,5,8

Answer:

a.

1. Capital-intensive:

Break-even in units = Fixed expenses ÷ Unit contribution margin

= ($2,440,000 + $500,000) ÷ ($30 - $14 – $2)

= $2,940,000 ÷ $14 per unit

= 210,000 units

2. Labor-intensive:

Break-even in units = Fixed expenses ÷ Unit contribution margin

= ($1,320,000 + $500,000) ÷ ($30 – $17.60 – $2)

= $1,820,000 ÷ $10.40 per unit

= 175,000 units

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b. Profit = Sales - Variable expenses - Fixed expenses

Capital-intensive:

Profit = $30Q – $16Q – $2,940,000

= $14Q – $2,940,000

Labor-intensive:

Profit = $30Q – $19.60Q – $1,820,000

= $10.40Q – $1,820,000

The profits are equal when:

$14Q – $2,940,000 = $10.40Q – $1,820,000

$3.60Q = $1,120,000

Q = $1,120,000 ÷ $3.60

Q = 311,111

c.

1. Capital-intensive:

Sales (250,000 × $30) ................................ $7,500,000

Variable expenses (250,000 × $16) ........... 4,000,000

Contribution margin ................................... 3,500,000

Fixed expenses ........................................... 2,940,000

Net operating income ................................. $ 560,000

Degree of operating leverage = Contribution margin ÷ Net operating income

= $3,500,000 ÷ $560,000 = 6.25

2. Labor-intensive:

Sales (250,000 × $30) ................................ $7,500,000

Variable expenses (250,000 × $19.60) ...... 4,900,000

Contribution margin ................................... 2,600,000

Fixed expenses ........................................... 1,820,000

Net operating income ................................. $ 780,000

Degree of operating leverage = Contribution margin ÷ Net operating income

= $2,600,000 ÷ $780,000 = 3.33

d. The decision hinges upon the expected sales of the new product. If management is

confident that sales will be in excess of 311,111 units, then the capital-intensive

method should be used. If sales are likely to fall below this number, then the laborintensive

method should be used. Management should also be aware that net

operating income will be more volatile with the capital-intensive method since it

has higher operating leverage.

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132. Delphi Company has developed a new product that will be marketed for the first time

during the next fiscal year. Although the Marketing Department estimates that 35,000

units could be sold at $36 per unit, Delphi's management has allocated only enough

manufacturing capacity to produce a maximum of 25,000 units of the new product

annually. The fixed expenses associated with the new product are budgeted at

$450,000 for the year. The variable expenses of the new product are $16 per unit.

Required:

a. How many units of the new product must Delphi sell during the next fiscal year in

order to break even on the product?

b. What is the profit Delphi would earn on the new product if all of the

manufacturing capacity allocated by management is used and the product is sold

for $36 per unit?

c. What is the degree of operating leverage for the new product if 25,000 units are

sold for $36 per unit?

d. The Marketing Department would like more manufacturing capacity to be devoted

to the new product. What would be the percentage increase in net operating

income for the new product if its unit sales could be expanded by 10% without any

increase in fixed expenses and without any change in the unit selling price and unit

variable expense?

e. Delphi's management has stipulated that the new product must earn a profit of at

least $125,000 in the next fiscal year. What unit selling price would achieve this

target profit if all of the manufacturing capacity allocated by management is used

and all of the output can be sold at that selling price?

Level: Hard LO: 4,5,6,8 Source: CMA, adapted

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Answer:

a. Break-even in units = Fixed expenses ÷ Unit contribution margin

= $450,000 ÷ $20 = 22,500

b.

Sales (25,000 × $36) .................................. $900,000

Variable expenses (25,000 × $16) ............. 400,000

Contribution margin ................................... 500,000

Fixed expenses ........................................... 450,000

Net operating income ................................. $ 50,000

c. Degree of operating leverage = Contribution margin ÷ Net operating income

= $500,000 ÷ $50,000 = 10

d. Percentage increase in net operating income

= Degree of operating leverage × Percentage change in sales

= 10 × 10% =100%

Or,

Sales (25,000 × 1.1 × $36) ......................... $990,000

Variable expenses (25,000 × 1.1 × $16) .... 440,000

Contribution margin ................................... 550,000

Fixed expenses ........................................... 450,000

Net operating income ................................. $100,000

Percentage increase in net operating income

= ($100,000 – $50,000) ÷ $50,000= 100%

e. Sales = Variable expenses + Fixed expenses + Target profit

25,000P = ($16 × 25,000) + $450,0000 + $125,000

where P is the selling price

25,000P = $400,000 + $450,000 + $125,000

P = $975,000 ÷ 25,000 = $39

Chapter 6 Cost-Volume-Profit Relationships

302 Garrison, Managerial Accounting, 12th Edition

133. Parkins Company produces and sells a single product. The company's income

statement for the most recent month is given below:

Sales (6,000 units at $40 per unit) ............. $240,000

Less manufacturing costs:

Direct materials ...................................... $48,000

Direct labor (variable) ............................ 60,000

Variable factory overhead ...................... 12,000

Fixed factory overhead ........................... 30,000 150,000

Gross margin ............................................. 90,000

Less selling and other expenses:

Variable selling and other expenses ....... 24,000

Fixed selling and other expenses ............ 42,000 66,000

Net operating income ................................ $ 24,000

There are no beginning or ending inventories.

Required:

a. Compute the company's monthly break-even point in units of product.

b. What would the company's monthly net operating income be if sales increased by

25% and there is no change in total fixed expenses?

c. What dollar sales must the company achieve in order to earn a net operating

income of $50,000 per month?

d. The company has decided to automate a portion of its operations. The change will

reduce direct labor costs per unit by 40 percent, but it will double the costs for

fixed factory overhead. Compute the new break-even point in units.

Level: Medium LO: 4,5,6

Chapter 6 Cost-Volume-Profit Relationships

Garrison, Managerial Accounting, 12th Edition 303

Answer:

a. The company's income statement in contribution format would be:

Sales ........................................................... $240,000 $40 100%

Less variable expenses:

Direct materials ...................................... $48,000

Direct labor ............................................. 60,000

Variable factory overhead ...................... 12,000

Variable selling and other expenses ....... 24,000 144,000 24 60%

Contribution margin .................................. 96,000 $16 40%

Less fixed expenses:

Fixed factory overhead ........................... 30,000

Fixed selling and other expense ............. 42,000 72,000

Net operating income ................................ $ 24,000

The break-even point in units would be:

$72,000 ÷ $16 = 4,500 units.

b. 6,000 × 125% = 7,500 units

Sales (7,500 units at $40) ................................................ $300,000

Less variable expenses (7,500 units at $24) .................... 180,000

Contribution margin ........................................................ 120,000

Less fixed expenses ......................................................... 72,000

Net operating income ...................................................... $ 48,000

c. ($72,000 + $50,000) ÷ 0.40 = $305,000

d. Direct labor costs are presently $10 per unit ($60,000 ÷ 6,000 units) and will

decrease by $4 per unit ($10 × 40%). Therefore, the company’s new cost structure

will be:

Selling price ..................................................... $40 100%

Less variable expenses ($24 – $4) ................... 20 50%

Contribution margin ........................................ $20 50%

(2 × $30,000 + $42,000) ÷ $20 per unit = 5,100 units

Chapter 6 Cost-Volume-Profit Relationships

304 Garrison, Managerial Accounting, 12th Edition

134. Zoran Corporation manufactures and sells a single product; cordless telephones. Zoran

is considering upgrading its current manufacturing facilities with more modern

equipment. Relevant cost data under the current facility and the upgraded facility is

provided below:

Current Upgraded

Manufacturing costs:

Direct materials cost per unit ................. $20.00 $20.00

Direct labor cost per unit ........................ $18.00 $10.00

Variable overhead cost per unit .............. $34.00 $24.00

Fixed overhead cost in total ................... $43,000 $160,000

Selling and administrative expenses:

Variable expense per unit ....................... $5.00 $5.00

Fixed expense in total ............................. $12,000 $12,000

Under either system, Zoran will sell the cordless phones for $125 per phone.

Required:

a. What is the break-even point (in number of phones) of each option?

b. At what level of sales (in number of phones) will it start being more profitable for

Zoran to have the upgraded facilities?

Level: Hard LO: 4,5

Answer:

a.

Current:

($43,000 + $12,000) ÷ ($125 – $20 – $18 – $34 – $5) = 1,146 phones (rounded)

Upgraded:

($160,000 + $12,000) ÷ ($125 – $20 – $10 – $24 – $5) = 2,606 phones (rounded)

b. CM per phone on current system: $125 – $20 – $18 – $34 – $5 = $48

CM per phone on upgraded system: $125 – $20 – $10 – $24 – $5 = $66

$48Q – $55,000 = $66Q – $172,000

$117,000 = $18Q

Q = 6,500 phones

Chapter 6 Cost-Volume-Profit Relationships

Garrison, Managerial Accounting, 12th Edition 305

135. Penury Company offers two products. At present, the following represents the usual

results of a month's operations:

Product K Product L

Per Per Combined

Amount Unit Amount Unit Amount

Sales revenue ..................... $120,000 $1.20 $80,000 $0.80 $200,000

Variable expenses .............. 60,000 0.60 60,000 0.60 120,000

Contribution margin .......... $ 60,000 $0.60 $20,000 $0.20 80,000

Fixed expenses .................. 50,000

Net operating income ........ $ 30,000

Required:

a. Find the break-even point in terms of dollars.

b. Find the margin of safety in terms of dollars.

c. The company is considering decreasing product K's unit sales to 80,000 and

increasing product L's unit sales to 180,000, leaving unchanged the selling price

per unit, variable expense per unit, and total fixed expenses. Would you advise

adopting this plan?

d. Refer to (c) above. Under the new plan, find the break-even point in terms of

dollars.

e. Under the new plan in (c) above, find the margin of safety in terms of dollars.

Level: Medium LO: 5,7,9

Chapter 6 Cost-Volume-Profit Relationships

306 Garrison, Managerial Accounting, 12th Edition

Answer:

a. CM ratio = Contribution margin ÷ Sales revenue

= $80,000 ÷ $200,000 = 40%

Break-even in dollars = Fixed expenses ÷ CM ratio

= $50,000 ÷ 0.40 = $125,000

b. Margin of safety = Sales revenue - Sales at break-even

= $200,000 – $125,000 = $75,000

c. Product K Product L

Units ................................ 80,000 180,000

Amount

Per

Unit Amount

Per

Unit

Combined

Amount

Sales revenue ................... $96,000 $1.20 $144,000 $0.80 $240,000

Variable expense ............. 48,000 0.60 108,000 0.60 156,000

Contribution margin ........ $48,000 $0.60 $ 36,000 $0.20 84,000

Fixed expense .................. 50,000

Net operating income ...... $ 38,000

Yes, the new arrangement is more profitable.

d. CM ratio = Contribution margin ales revenue

= $84,000 ÷ $240,000 = 35%

Break-even point dollars = Fixed expense ÷ CM ratio

= $50,000 ÷ 0.35 = $142,857

e. Margin of safety = Sales revenue – Sales at break-even

= $240,000 – $142,857 = $97,143

Chapter 6 Cost-Volume-Profit Relationships

Garrison, Managerial Accounting, 12th Edition 307

136. Lobo, International has two divisions, Manufacturing and Retail which had the

following operating results over the last two years:

Manufacturing Division Retail Division

Year 1 Year 2 Year 1 Year 2

Sales (in units) ......................... 5,000 6,500 2,000 2,400

Sales (in dollars) ...................... $400,000 $520,000 $250,000 $300,000

Less cost of goods sold ............ 290,000 353,000 160,000 192,000

Gross margin ............................ 110,000 167,000 90,000 108,000

Less selling and administrative

expenses ............................... 50,000 59,000 52,000 56,000

Net operating income ............... $ 60,000 $108,000 $ 38,000 $ 52,000

Assume that the cost structure in each division above did not change over the two

years. Use the high-low method as needed to estimate variable and fixed expenses.

Required:

a. Calculate the break-even point in sales dollars for each division.

b. Calculate the degree of operating leverage for the Manufacturing Division for each

year.

Level: Hard LO: 5,8

Answer:

a. Total expenses, Year 1, Manuf. = $290,000 + $50,000 = $340,000

Total expenses, Year 2, Manuf. = $353,000 + $59,000 = $412,000

Total expenses, Year 1, Retail = $160,000 + $52,000 = $212,000

Total expenses, Year 2, Retail = $192,000 + $56,000 = $248,000

Manufacturing:

Variable expenses per unit using the high-low method:

($412,000 – $340,000) ÷ (6,500 – 5,000) = $48 per unit

Variable expenses = $48 × 5,000 = $240,000

Fixed expenses = $340,000 – $240,000 = $100,000

CM ratio = ($400,000 – $240,000) ÷ $400,000 = 40%

Break-even sales = $100,000 ÷ 0.40 = $250,000

Chapter 6 Cost-Volume-Profit Relationships

308 Garrison, Managerial Accounting, 12th Edition

Retail:

Variable expenses per unit using the high-low method:

($248,000 – $212,000) ÷ (2,400 – 2,000) = $90 per unit;

Variable expenses = $90 × 2,000 = $180,000

Fixed expenses = $212,000 – $180,000 = $32,000

CM ratio = ($250,000 – $180,000) ÷ $250,000 = 28%

Break-even sales = $32,000 ÷ 0.28 = $114,286

b. Year 1: ($400,000 – ($48 × 5,000)) ÷ $60,000 = 2.67 (rounded)

Year 2: ($520,000 – ($48 × 6,500)) ÷ $108,000 = 1.93 (rounded)

GARRISON NOREEN - MANAGERIAL ACCOUNTING TESTBANK (COST BEHAVIOR)

 Chapter 5 Cost Behavior: Analysis and Use

Garrison, Managerial Accounting, 12th Edition 213

True/False Questions

1. A variable cost is a cost that remains constant in total throughout wide ranges of

activity.

Answer: False Level: Easy LO: 1

2. If the activity level increases, then one would expect the variable cost per unit to

increase as well.

Answer: False Level: Medium LO: 1

3. Fixed costs expressed on a per unit basis vary inversely with changes in activity.

Answer: True Level: Medium LO: 1

4. Calculation of fixed costs on a per unit basis is critical for internal reporting to

managers.

Answer: False Level: Medium LO: 1

5. Management's strategy will determine to a large degree the classification of a fixed

cost as discretionary or committed.

Answer: True Level: Easy LO: 1

6. Committed fixed costs cannot be reduced to zero without seriously impairing the

company's long term goals.

Answer: True Level: Easy LO: 1

7. Unless the behavior pattern of each cost of a company is understood, the impact of a

company's activities on its costs will not be known until after the activity has occurred.

Answer: True Level: Medium LO: 1

8. When using the high-low method, if the high and low activity levels do not coincide

with the high and low levels of cost, then the analyst should use the points with the

high and low levels of cost.

Answer: False Level: Medium LO: 3

Chapter 5 Cost Behavior: Analysis and Use

214 Garrison, Managerial Accounting, 12th Edition

9. A traditional functional income statement organizes costs on the basis of behavior.

Answer: False Level: Easy LO: 4

10. The contribution income statement organizes costs according to behavior.

Answer: True Level: Easy LO: 4

11. The contribution margin represents the amount available to contribute toward covering

fixed expenses and toward profits for the period.

Answer: True Level: Easy LO: 4

12. Most companies use the contribution approach in preparing financial statements for

external reporting purposes.

Answer: False Level: Medium LO: 4

13. In the least-squares regression method, total cost is considered to be “Y”, the

dependent variable.

Answer: True Level: Easy LO: 5

14. The least-squares regression method computes the regression line that minimizes the

sum of the squared deviations from the plotted points to the line.

Answer: True Level: Medium LO: 5

15. Account analysis is a special form of least-squares regression in which more than one

account is analysed at the same time.

Answer: False Level: Easy LO: 6

Chapter 5 Cost Behavior: Analysis and Use

Garrison, Managerial Accounting, 12th Edition 215

Multiple Choice Questions

16. As the level of activity increases, how will a mixed cost in total and per unit behave?

In Total Per Unit

A) Increase Decrease

B) Increase Increase

C) Increase No effect

D) Decrease Increase

E) Decrease No effect

Answer: A Level: Hard LO: 1

17. Since Anytime Pizza is open 24 hours a day, its pizza oven is constantly on and is,

therefore, always using natural gas. However, when there is no pizza in the oven, the

oven automatically lowers its flame and reduces its natural gas usage by 70%. The

cost of natural gas would best be described as a:

A) fixed cost.

B) mixed cost.

C) step-variable cost.

D) true variable cost.

Answer: B Level: Easy LO: 1

18. When the activity level is expected to decline within the relevant range, what effects

would be anticipated with respect to each of the following?

Fixed costs

per unit

Variable

costs per unit

A) Increase Increase

B) Increase No change

C) No change No change

D) No change Increase

Answer: B Level: Medium LO: 1 Source: CPA, adapted

19. Within the relevant range, variable costs can be expected to:

A) vary in total in direct proportion to changes in the activity level.

B) remain constant in total as the activity level changes.

C) increase on a per unit basis as the activity level increases.

D) increase on a per unit basis as the activity level decreases.

E) none of these.

Answer: A Level: Easy LO: 1

Chapter 5 Cost Behavior: Analysis and Use

216 Garrison, Managerial Accounting, 12th Edition

20. Which of the following is not correct when referring to fixed costs?

A) Whether a cost is committed or discretionary will depend in large part on

management's strategy.

B) Discretionary fixed costs arise from annual decisions by management.

C) Fixed costs remain constant in total throughout the relevant range.

D) Committed fixed costs can often be reduced to zero for short periods of time

without seriously impairing the long-run goals of the company.

E) The trend in companies today is toward greater fixed costs relative to variable

costs.

Answer: D Level: Easy LO: 1

21. Which of the following statements is true when referring to fixed costs?

A) Committed fixed costs arise from the annual decisions by management.

B) As volume increases, unit fixed cost and total fixed cost will change.

C) Fixed costs increase in total throughout the relevant range.

D) Discretionary fixed costs can often be reduced to zero for short periods of time

without seriously impairing the long-run goals of the company.

Answer: D Level: Easy LO: 1

22. For the past 8 months, Jinan Corporation has experienced a steady increase in its cost

per unit even though total costs have remained stable This cost per unit increase may

be due to _____________ costs because the level of activity at Jinan is

_______________.

A) fixed, decreasing

B) fixed, increasing

C) variable, decreasing

D) variable, increasing

Answer: A Level: Medium LO: 1

23. Discretionary fixed costs:

A) cannot be changed since they are fixed.

B) have a long-term planning horizon, generally encompassing many years.

C) are made up of facilities, equipment, and basic organization.

D) responses b and c are both correct.

E) none of these.

Answer: E Level: Easy LO: 1

Chapter 5 Cost Behavior: Analysis and Use

Garrison, Managerial Accounting, 12th Edition 217

24. An example of a committed fixed cost is:

A) management training seminars.

B) a long-term equipment lease.

C) research and development.

D) advertising.

Answer: B Level: Easy LO: 1

25. Which of the following would usually be considered a committed fixed cost for a

retail sales corporation?

A) lease payments made on its store buildings

B) the cost of the Caribbean trip given to the employee of the year

C) the cost of running an annual leadership seminar for managers

D) both a and c above

Answer: A Level: Medium LO: 1

26. Which of the following would usually be considered a discretionary fixed cost for a

financial planning company?

A) the cost of the annual employee picnic

B) property taxes on its corporate office building

C) the cost of internships for selected college seniors

D) both a and c above

Answer: D Level: Medium LO: 1

27. Which of the following is unlikely to be classified as a fixed cost with respect to the

number of units produced and sold?

A) Property taxes on a headquarters building.

B) Legal department salaries.

C) Cost of leasing the company's mainframe computer.

D) Production supplies.

Answer: D Level: Easy LO: 1

Chapter 5 Cost Behavior: Analysis and Use

218 Garrison, Managerial Accounting, 12th Edition

28. The following data have been collected for four different cost items.

Cost Item

Cost at 100

units

Cost at 140

units

W $8,000 $10,560

X $5,000 $5,000

Y $6,500 $9,100

Z $6,700 $8,580

Which of the following classifications of these cost items by cost behavior is correct?

Cost W Cost X Cost Y Cost Z

A) variable fixed mixed variable

B) mixed fixed variable mixed

C) variable fixed variable variable

D) mixed fixed mixed mixed

Answer: B Level: Hard LO: 1 Source: CIMA, adapted

29. Which of the following methods of analyzing mixed costs can be used to estimate an

equation for the mixed cost?

Least-

High-Low Squares

A) Yes Yes

B) Yes No

C) No Yes

D) No No

Answer: A Level: Easy LO: 2,5

30. A multiple regression equation has:

A) more than one dependent variable.

B) more than one independent variable.

C) more than one amount for total fixed cost.

D) both A and B above.

Answer: B Level: Medium LO: 2,5

Chapter 5 Cost Behavior: Analysis and Use

Garrison, Managerial Accounting, 12th Edition 219

31. In describing the cost formula equation, Y = a + bX, which of the following is correct:

A) “Y” is the independent variable.

B) “a” is the variable cost per unit.

C) “a” and “b” are valid for all levels of activity.

D) in the high-low method, “b” equals the change in cost divided by the change in

activity.

Answer: D Level: Medium LO: 3

32. The high-low method is used with which of the following types of costs?

A) Variable.

B) Mixed.

C) Fixed.

D) Step-variable.

Answer: B Level: Medium LO: 3

33. The contribution approach income statement:

A) organizes costs on a functional basis.

B) provides owners with more cash flows.

C) is particularly helpful to the manager in planning and decision making.

D) provides a gross margin figure from which selling and administrative expenses are

deducted.

E) none of these.

Answer: C Level: Medium LO: 4

34. Contribution margin is:

A) Sales less cost of goods sold.

B) Sales less variable production, variable selling, and variable administrative

expenses.

C) Sales less variable production expense.

D) Sales less all variable and fixed expenses.

E) none of the above.

Answer: B Level: Easy LO: 4

Chapter 5 Cost Behavior: Analysis and Use

220 Garrison, Managerial Accounting, 12th Edition

35. The contribution approach to income statement preparation:

A) organizes costs according to the functions of production, administration, and sales.

B) is used for external reporting.

C) organizes costs according to their variable and fixed cost behavior.

D) both b and c are true.

E) both a and b are true

Answer: C Level: Easy LO: 4

36. Iaci Corporation is a wholesaler that sells a single product. Management has provided

the following cost data for two levels of monthly sales volume. The company sells the

product for $133.60 per unit.

Sales volume (units) .............................................. 4,000 5,000

Cost of sales .......................................................... $383,600 $479,500

Selling, general, and administrative costs ............. $124,400 $136,000

The best estimate of the total contribution margin when 4,300 units are sold is:

A) $112,230

B) $162,110

C) $28,380

D) $45,150

Answer: A Level: Medium LO: 1,3,4

37. Iacob Corporation is a wholesaler that sells a single product. Management has

provided the following cost data for two levels of monthly sales volume. The company

sells the product for $103.40 per unit.

Sales volume (units) ........................................................ 5,000 6,000

Cost of sales ..................................................................... $315,500 $378,600

Selling, general, and administrative costs ....................... $162,500 $177,600

The best estimate of the total contribution margin when 5,300 units are sold is:

A) $56,710

B) $133,560

C) $41,340

D) $213,590

Answer: B Level: Medium LO: 1,3,4

Chapter 5 Cost Behavior: Analysis and Use

Garrison, Managerial Accounting, 12th Edition 221

38. Shipping costs at Columbia Mining Company are a mixture of variable and fixed

components The company shipped 8,000 tons of coal for $400,000 in shipping costs in

February and 10,000 tons for $499,000 in March Assuming that this activity is within

the relevant range, expected shipping costs for 11,000 tons would be:

A) $544,500

B) $548,500

C) $422,222

D) $554,000

Answer: B Level: Easy LO: 1,3

39. Anderson Corporation has provided the following production and average cost data for

two levels of monthly production volume. The company produces a single product.

Production volume ......................... 4,000 units 5,000 units

Direct materials .............................. $99.20 per unit $99.20 per unit

Direct labor .................................... $45.50 per unit $45.50 per unit

Manufacturing overhead ................ $94.00 per unit $77.60 per unit

The best estimate of the total monthly fixed manufacturing cost is:

A) $388,000

B) $954,800

C) $376,000

D) $328,000

Answer: D Level: Hard LO: 1,3

40. Andom Corporation has provided the following production and average cost data for

two levels of monthly production volume. The company produces a single product.

Production volume ......................... 1,000 units 2,000 units

Direct materials .............................. $15.20 per unit $15.20 per unit

Direct labor .................................... $30.50 per unit $30.50 per unit

Manufacturing overhead ................ $54.10 per unit $37.40 per unit

The best estimate of the total monthly fixed manufacturing cost is:

A) $74,800

B) $54,100

C) $99,800

D) $33,400

Answer: D Level: Hard LO: 1,3

Chapter 5 Cost Behavior: Analysis and Use

222 Garrison, Managerial Accounting, 12th Edition

41. Baker Corporation has provided the following production and average cost data for

two levels of monthly production volume. The company produces a single product.

Production volume .......................... 1,000 units 3,000 units

Direct materials ............................... $30.90 per unit $30.90 per unit

Direct labor ..................................... $40.20 per unit $40.20 per unit

Manufacturing overhead ................. $64.60 per unit $33.80 per unit

The best estimate of the total variable manufacturing cost per unit is:

A) $89.50

B) $18.40

C) $71.10

D) $30.90

Answer: A Level: Hard LO: 1,3

42. Bakan Corporation has provided the following production and average cost data for

two levels of monthly production volume. The company produces a single product.

Production volume ........................... 3,000 units 4,000 units

Direct materials ................................ $86.30 per unit $86.30 per unit

Direct labor ....................................... $26.40 per unit $26.40 per unit

Manufacturing overhead ................... $75.90 per unit $60.40 per unit

The best estimate of the total variable manufacturing cost per unit is:

A) $126.60

B) $86.30

C) $13.90

D) $112.70

Answer: A Level: Hard LO: 1,3

Chapter 5 Cost Behavior: Analysis and Use

Garrison, Managerial Accounting, 12th Edition 223

43. Cardiv Corporation has provided the following production and average cost data for

two levels of monthly production volume. The company produces a single product.

Production volume ............................. 4,000 units 5,000 units

Direct materials .................................. $85.80 per unit $85.80 per unit

Direct labor ......................................... $56.10 per unit $56.10 per unit

Manufacturing overhead ..................... $73.60 per unit $62.10 per unit

The best estimate of the total cost to manufacture 4,300 units is closest to:

A) $877,200

B) $909,400

C) $901,925

D) $926,650

Answer: B Level: Hard LO: 1,3

44. Caraco Corporation has provided the following production and average cost data for

two levels of monthly production volume. The company produces a single product.

Production volume .............................. 7,000 units 8,000 units

Direct materials ................................... $87.40 per unit $87.40 per unit

Direct labor .......................................... $20.20 per unit $20.20 per unit

Manufacturing overhead ...................... $101.50 per unit $90.80 per unit

The best estimate of the total cost to manufacture 7,300 units is closest to:

A) $1,487,375

B) $1,448,320

C) $1,500,750

D) $1,526,430

Answer: C Level: Hard LO: 1,3

Chapter 5 Cost Behavior: Analysis and Use

224 Garrison, Managerial Accounting, 12th Edition

45. Davis Corporation has provided the following production and total cost data for two

levels of monthly production volume. The company produces a single product.

Production volume .............................. 1,000 units 2,000 units

Direct materials ................................... $44,200 $88,400

Direct labor .......................................... $37,300 $74,600

Manufacturing overhead ...................... $48,500 $62,200

The best estimate of the total monthly fixed manufacturing cost is:

A) $130,000

B) $177,600

C) $34,800

D) $225,200

Answer: C Level: Medium LO: 1,3

46. Dacosta Corporation has provided the following production and total cost data for two

levels of monthly production volume. The company produces a single product.

Production volume .............................. 6,000 units 7,000 units

Direct materials ................................... $369,600 $431,200

Direct labor .......................................... $309,600 $361,200

Manufacturing overhead ...................... $919,800 $937,300

The best estimate of the total monthly fixed manufacturing cost is:

A) $1,599,000

B) $1,664,350

C) $814,800

D) $1,729,700

Answer: C Level: Medium LO: 1,3

Chapter 5 Cost Behavior: Analysis and Use

Garrison, Managerial Accounting, 12th Edition 225

47. Eddy Corporation has provided the following production and total cost data for two

levels of monthly production volume. The company produces a single product.

Production volume ................................ 6,000 units 7,000 units

Direct materials ..................................... $582,600 $679,700

Direct labor ............................................ $136,200 $158,900

Manufacturing overhead ........................ $691,800 $714,700

The best estimate of the total variable manufacturing cost per unit is:

A) $22.90

B) $119.80

C) $142.70

D) $97.10

Answer: C Level: Medium LO: 1,3

48. Edal Corporation has provided the following production and total cost data for two

levels of monthly production volume. The company produces a single product.

Production volume ................................. 5,000 units 6,000 units

Direct materials ...................................... $266,500 $319,800

Direct labor ............................................. $52,000 $62,400

Manufacturing overhead ......................... $748,500 $769,200

The best estimate of the total variable manufacturing cost per unit is:

A) $63.70

B) $84.40

C) $53.30

D) $20.70

Answer: B Level: Medium LO: 1,3

Chapter 5 Cost Behavior: Analysis and Use

226 Garrison, Managerial Accounting, 12th Edition

49. Farmington Corporation has provided the following production and total cost data for

two levels of monthly production volume. The company produces a single product.

Production volume ................................... 6,000 units 7,000 units

Direct materials ........................................ $195,000 $227,500

Direct labor ............................................... $113,400 $132,300

Manufacturing overhead ........................... $913,200 $931,700

The best estimate of the total cost to manufacture 6,300 units is closest to:

A) $1,162,350

B) $1,242,570

C) $1,222,515

D) $1,282,680

Answer: B Level: Medium LO: 1,3

50. Farac Corporation has provided the following production and total cost data for two

levels of monthly production volume. The company produces a single product.

Production volume .................................... 4,000 units 5,000 units

Direct materials ......................................... $208,800 $261,000

Direct labor ................................................ $119,200 $149,000

Manufacturing overhead ............................ $319,200 $329,500

The best estimate of the total cost to manufacture 4,300 units is closest to:

A) $674,890

B) $665,855

C) $695,740

D) $635,970

Answer: A Level: Medium LO: 1,3

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51. Gambino Corporation is a wholesaler that sells a single product. Management has

provided the following cost data for two levels of monthly sales volume. The company

sells the product for $138.80 per unit.

Sales volume (units) ........................................ 6,000 7,000

Cost of sales ..................................................... $369,000 $430,500

Selling, general, and administrative costs ....... $407,400 $418,600

The best estimate of the total monthly fixed cost is:

A) $776,400

B) $340,200

C) $812,750

D) $849,100

Answer: B Level: Medium LO: 1,3

52. Gamach Corporation is a wholesaler that sells a single product. Management has

provided the following cost data for two levels of monthly sales volume. The company

sells the product for $104.50 per unit.

Sales volume (units) .............................................. 5,000 6,000

Cost of sales ........................................................... $295,000 $354,000

Selling, general, and administrative costs ............. $186,000 $202,800

The best estimate of the total monthly fixed cost is:

A) $102,000

B) $518,900

C) $556,800

D) $481,000

Answer: A Level: Medium LO: 1,3

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228 Garrison, Managerial Accounting, 12th Edition

53. Harris Corporation is a wholesaler that sells a single product. Management has

provided the following cost data for two levels of monthly sales volume. The company

sells the product for $84.40 per unit.

Sales volume (units) .............................................. 5,000 6,000

Cost of sales ........................................................... $285,000 $342,000

Selling, general, and administrative costs ............. $107,500 $120,000

The best estimate of the total variable cost per unit is:

A) $77.00

B) $57.00

C) $69.50

D) $78.50

Answer: C Level: Medium LO: 1,3

54. Hara Corporation is a wholesaler that sells a single product. Management has provided

the following cost data for two levels of monthly sales volume. The company sells the

product for $159.80 per unit.

Sales volume (units) .............................................. 6,000 7,000

Cost of sales ........................................................... $363,600 $424,200

Selling, general, and administrative costs ............. $531,000 $547,400

The best estimate of the total variable cost per unit is:

A) $77.00

B) $60.60

C) $149.10

D) $138.80

Answer: A Level: Medium LO: 1,3

55. Given the cost formula Y = $12,500 + $5.00X, total cost for an activity level of 4,000

units would be:

A) $20,000

B) $12,500

C) $16,000

D) $32,500

Answer: D Level: Easy LO: 1

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Garrison, Managerial Accounting, 12th Edition 229

56. Given the cost formula Y = $13,000 + $7.00X, the total cost for an activity level of

3,000 units would be:

A) $13,000

B) $21,000

C) $18,000

D) $34,000

Answer: D Level: Easy LO: 1

57. The following data pertains to activity and maintenance costs for two recent years:

Year 2 Year 1

Activity level in units .................... 11,125 6,000

Maintenance cost ........................... $6,250 $4,200

If the high-low method is used to separate fixed and variable components of the cost,

which of the following statements is correct?

A) The variable cost is $0.70 per unit of activity

B) The fixed cost is $2,050

C) The variable cost is $2.50 per unit of activity

D) The fixed cost is $1,800

Answer: D Level: Easy LO: 3

58. The following data relate to two levels of activity at an out-patient clinic in a hospital:

Number of patient-visits ............. 4,500 5,750

General overhead ........................ $269,750 $289,125

The best estimate of the variable general overhead cost per patient-visit is closest to:

A) $15.50

B) $44.44

C) $59.94

D) $50.28

Answer: A Level: Easy LO: 3 Source: CIMA, adapted

Chapter 5 Cost Behavior: Analysis and Use

230 Garrison, Managerial Accounting, 12th Edition

59. At a sales level of $365,000, Lewis Company's gross margin is $20,000 less than its

contribution margin, its net operating income is $70,000, and its selling and

administrative expenses total $130,000 At this sales level, its contribution margin

would be:

A) $295,000

B) $180,000

C) $220,000

D) $200,000

Answer: C Level: Hard LO: 4

60. Your boss would like you to estimate the fixed and variable components of a

particular cost Actual data for this cost over four recent periods appear below.

Activity Cost

Period 1 .................. 25 $363

Period 2 .................. 22 $345

Period 3 .................. 23 $348

Period 4 .................. 20 $322

Using the least-squares regression method, what is the cost formula for this cost?

A) Y = $164.50 + $8.00X

B) Y = $0.00 + $15.31X

C) Y = $160.36 + $8.18X

D) Y = $168.08 + $5.27X

Answer: A Level: Hard LO: 5 Appendix: 5

61. Your boss would like you to estimate the fixed and variable components of a

particular cost Actual data for this cost over four recent periods appear below.

Activity Cost

Period 1 .................... 22 235

Period 2 .................... 23 243

Period 3 .................... 25 255

Period 4 .................... 20 227

Using the least-squares regression method, what is the cost formula for this cost?

A) Y = $107.45 + $5.89X

B) Y = $0.00 + $10.67X

C) Y = $111.92 + $5.69X

D) Y = $120.81 + $3.56X

Answer: C Level: Hard LO: 5 Appendix: 5

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Garrison, Managerial Accounting, 12th Edition 231

Use the following to answer questions 62-64:

Callis Corporation is a wholesaler that sells a single product. Management has provided the

following cost data for two levels of monthly sales volume. The company sells the product for

$141.60 per unit.

Sales volume (units) .............................................. 5,000 6,000

Cost of sales .......................................................... $265,500 $318,600

Selling, general, and administrative costs ............. $393,500 $406,800

62. The best estimate of the total monthly fixed cost is:

A) $692,200

B) $725,400

C) $659,000

D) $327,000

Answer: D Level: Medium LO: 1,3

63. The best estimate of the total variable cost per unit is:

A) $131.80

B) $53.10

C) $66.40

D) $120.90

Answer: C Level: Medium LO: 1,3

64. The best estimate of the total contribution margin when 5,300 units are sold is:

A) $51,940

B) $469,050

C) $109,710

D) $398,560

Answer: D Level: Medium LO: 1,3,4

Use the following to answer questions 65-67:

Call Corporation is a wholesaler that sells a single product. Management has provided the

following cost data for two levels of monthly sales volume. The company sells the product for

$140.50 per unit.

Sales volume (units) .............................................. 6,000 7,000

Cost of sales .......................................................... $497,400 $580,300

Selling, general, and administrative costs ............. $273,600 $294,700

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232 Garrison, Managerial Accounting, 12th Edition

65. The best estimate of the total monthly fixed cost is:

A) $875,000

B) $147,000

C) $771,000

D) $823,000

Answer: B Level: Medium LO: 1,3

66. The best estimate of the total variable cost per unit is:

A) $82.90

B) $128.50

C) $104.00

D) $125.00

Answer: C Level: Medium LO: 1,3

67. The best estimate of the total contribution margin when 6,300 units are sold is:

A) $75,600

B) $97,650

C) $362,880

D) $229,950

Answer: D Level: Medium LO: 1,3,4

Use the following to answer questions 68-71:

Comparative income statements for Tudor Retailing Company for the last two months are

presented below:

September October

Sales in units ................................... 5,000 7,000

Sales revenue ................................... $100,000 $140,000

Less cost of goods sold ................... 40,000 56,000

Gross margin ................................... 60,000 84,000

Less operating expenses ................. :

Shipping expense ......................... 7,500 10,500

Clerical expense ........................... 10,000 12,000

Maintenance expense ................... 17,000 17,000

Total operating expense .................. 34,500 39,500

Net operating income ...................... $ 25,500 $ 44,500

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Garrison, Managerial Accounting, 12th Edition 233

68. Which of the following classifications best describes the behavior of shipping

expense?

A) Mixed

B) Variable

C) Fixed

D) none of the above

Answer: B Level: Easy LO: 1

69. Which of the following classifications best describes the behavior of clerical expense?

A) Mixed

B) Variable

C) Fixed

D) none of the above

Answer: A Level: Easy LO: 1

70. Assuming that Tudor Retailing Company uses the high-low method of analysis, the

total monthly fixed cost for Tudor Retailing Company would be estimated to be:

A) $34,500

B) $17,000

C) $27,000

D) $22,000

Answer: D Level: Medium LO: 3

71. Assuming that Tudor Retailing Company uses the high-low method of analysis, the

total operating expense if Tudor Retailing Company sells 6,500 units during a month

would be estimated to be:

A) $37,000

B) $44,850

C) $38,250

D) $36,679

Answer: C Level: Medium LO: 3

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234 Garrison, Managerial Accounting, 12th Edition

Use the following to answer questions 72-73:

The management of Casablanca Manufacturing Corporation believes that machine-hours is an

appropriate measure of activity for overhead cost Shown below are machine-hours and total

overhead costs for the past six months:

Machine- Overhead

Hours Cost

Jan 150,000 $339,000

Feb 140,000 $328,000

Mar 160,000 $350,000

Apr 130,000 $319,500

May 170,000 $362,500

Jun 200,000 $400,000

Assume that the relevant range includes all of the activity levels mentioned in this problem.

72. If Casablanca expects to incur 185,000 machine hours next month, what will the

estimated total overhead cost be using the high-low method?

A) $212,750

B) $359,750

C) $382,750

D) $381,700

Answer: C Level: Medium LO: 3

73. What is Casablanca's independent variable?

A) the year

B) the machine hours

C) the total overhead cost

D) the relevant range

Answer: B Level: Easy LO: 1

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Garrison, Managerial Accounting, 12th Edition 235

Use the following to answer questions 74-75:

The management of the Medulla Fitness Club believes that the attendance by its members is

an appropriate activity measure for total operating cost Shown below are attendance figures

and total operating costs for the past six months:

Members Operating

Attendance Cost

Jan 150,000 $786,000

Feb 130,000 $735,000

Mar 160,000 $792,000

Apr 120,000 $706,000

May 170,000 $799,000

Jun 190,000 $874,000

Assume that the relevant range includes all of the activity levels mentioned in this problem.

74. If Medulla expects to have 180,000 members attend the club in July, what will the

estimated total operating cost be using the high-low method?

A) $836,500

B) $837,000

C) $850,000

D) $852,000

Answer: C Level: Medium LO: 3

75. What is Medulla's dependent variable?

A) the month

B) the members' attendance

C) the total operating cost

D) the relevant range

Answer: C Level: Easy LO: 1

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236 Garrison, Managerial Accounting, 12th Edition

Use the following to answer questions 76-77:

Cosco, Inc. has accumulated the following data for the cost of maintenance on its machinery

for the last four months:

Month Maintenance Cost Machine Hours

September $26,020 21,000

October $24,600 18,500

November $22,300 15,000

December $25,100 19,000

Assume that the relevant range includes all of the activity levels mentioned in this problem

76. Assuming Cosco Company uses the high-low method of analysis, the fixed cost of

maintenance would be estimated to be:

A) $14,500

B) $ 5,020

C) $13,000

D) $12,320

Answer: C Level: Medium LO: 1,3

77. Assuming Cosco Company uses the high-low method of analysis, if machine hours are

budgeted to be 20,000 hours then the budgeted total maintenance cost would be

expected to be:

A) $25,400

B) $25,560

C) $23,700

D) $24,720

Answer: A Level: Medium LO: 1,3

Use the following to answer questions 78-80:

The following production and average cost data for two levels of monthly production volume

have been supplied by a company that produces a single product:

Production volume .................................... 1,000 units 3,000 units

Direct materials ......................................... $13.20 per unit $13.20 per unit

Direct labor ................................................ $14.50 per unit $14.50 per unit

Manufacturing overhead ........................... $65.40 per unit $29.40 per unit

Chapter 5 Cost Behavior: Analysis and Use

Garrison, Managerial Accounting, 12th Edition 237

78. The best estimate of the total monthly fixed manufacturing cost is:

A) $65,400

B) $88,200

C) $93,100

D) $54,000

Answer: D Level: Hard LO: 1,3

79. The best estimate of the total variable manufacturing cost per unit is:

A) $39.10

B) $27.70

C) $11.40

D) $13.20

Answer: A Level: Hard LO: 1,3

80. The best estimate of the total cost to manufacture 1,200 units is closest to:

A) $68,520

B) $100,920

C) $111,720

D) $90,120

Answer: B Level: Hard LO: 1,3

Use the following to answer questions 81-83:

The following production and average cost data for two levels of monthly production volume

have been supplied by a company that produces a single product:

Production volume ........................ 2,000 units 4,000 units

Direct materials ............................. $88.40 per unit $88.40 per unit

Direct labor .................................... $20.60 per unit $20.60 per unit

Manufacturing overhead ............... $86.90 per unit $55.30 per unit

81. The best estimate of the total monthly fixed manufacturing cost is:

A) $221,200

B) $391,800

C) $173,800

D) $126,400

Answer: D Level: Hard LO: 1,3

Chapter 5 Cost Behavior: Analysis and Use

238 Garrison, Managerial Accounting, 12th Edition

82. The best estimate of the total variable manufacturing cost per unit is:

A) $132.70

B) $88.40

C) $23.70

D) $109.00

Answer: A Level: Hard LO: 1,3

83. The best estimate of the total cost to manufacture 2,200 units is closest to:

A) $396,220

B) $430,980

C) $361,460

D) $418,340

Answer: D Level: Hard LO: 1,3

Use the following to answer questions 84-86:

Baker Corporation has provided the following production and total cost data for two levels of

monthly production volume. The company produces a single product.

Production volume ........................ 6,000 units 7,000 units

Direct materials ............................. $194,400 $226,800

Direct labor .................................... $74,400 $86,800

Manufacturing overhead ............... $758,400 $779,800

84. The best estimate of the total monthly fixed manufacturing cost is:

A) $1,027,200

B) $1,060,300

C) $1,093,400

D) $630,000

Answer: D Level: Medium LO: 1,3

85. The best estimate of the total variable manufacturing cost per unit is:

A) $32.40

B) $44.80

C) $66.20

D) $21.40

Answer: C Level: Medium LO: 1,3

Chapter 5 Cost Behavior: Analysis and Use

Garrison, Managerial Accounting, 12th Edition 239

86. The best estimate of the total cost to manufacture 6,300 units is closest to:

A) $984,060

B) $1,031,310

C) $1,047,060

D) $1,078,560

Answer: C Level: Medium LO: 1,3

Use the following to answer questions 87-89:

Babson Corporation has provided the following production and total cost data for two levels

of monthly production volume. The company produces a single product.

Production volume ........................ 5,000 units 6,000 units

Direct materials ............................. $103,500 $124,200

Direct labor .................................... $282,500 $339,000

Manufacturing overhead ............... $667,000 $679,800

87. The best estimate of the total monthly fixed manufacturing cost is:

A) $1,098,000

B) $1,053,000

C) $1,143,000

D) $603,000

Answer: D Level: Medium LO: 1,3

88. The best estimate of the total variable manufacturing cost per unit is:

A) $90.00

B) $77.20

C) $12.80

D) $20.70

Answer: A Level: Medium LO: 1,3

89. The best estimate of the total cost to manufacture 5,300 units is closest to:

A) $1,116,180

B) $1,062,915

C) $1,080,000

D) $1,009,650

Answer: C Level: Medium LO: 1,3

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240 Garrison, Managerial Accounting, 12th Edition

Use the following to answer questions 90-93:

Solo Company is a small merchandising firm. During the next month, the company expects to

sell 500 units. The company has the following revenue and cost structure:

Selling price per unit ..................... $60

Cost per unit .................................. $15

Sales commission .......................... 10% of sales

Advertising expense ...................... $5,000 per month

Administrative expense ................. $3,000 per month plus 20% of sales

90. The expected gross margin next month is:

A) $ 5,500

B) $22,500

C) $13,500

D) $ 7,500

Answer: B Level: Medium LO: 4

91. The expected contribution margin next month is:

A) $13,500

B) $ 5,500

C) $ 7,300

D) $22,500

Answer: A Level: Medium LO: 4

92. The expected total administrative expense next month is:

A) $3,000

B) $4,000

C) $9,000

D) $6,000

Answer: C Level: Easy LO: 1

93. The expected net operating income is:

A) $22,500

B) $ 5,500

C) $ 7,500

D) $13,500

Answer: B Level: Medium LO: 1

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Garrison, Managerial Accounting, 12th Edition 241

Use the following to answer questions 94-97:

The University Store, Inc. is the major bookseller for four nearby colleges An income

statement for the first quarter of the year is presented below:

University Store, Inc.

Income Statement

For the Quarter Ended March 31

Sales ................................................ $800,000

Cost of goods sold ........................... 560,000

Gross margin ................................... 240,000

Less operating expenses ................. :

Selling ............................................. $100,000

Administrative ................................. 110,000 210,000

Net operating income ...................... $ 30,000

On average, a book sells for $40.00. Variable selling expenses are $3.00 per book; the

remaining selling expenses are fixed. The variable administrative expenses are 5% of sales;

the remainder of the administrative expenses are fixed.

94. The contribution margin for the University Store for the first quarter is:

A) $660,000

B) $700,000

C) $180,000

D) $140,000

Answer: D Level: Medium LO: 4

95. The net operating income computed using the contribution approach for the first

quarter is:

A) $ 30,000

B) $180,000

C) $140,000

D) $0

Answer: A Level: Easy LO: 4

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242 Garrison, Managerial Accounting, 12th Edition

96. The cost formula for operating expenses with “X” equal to the number of books sold

is:

A) Y = $105,000 + $3X

B) Y = $105,000 + $5X

C) Y = $110,000 + $5X

D) Y = $110,000 + $33X

Answer: C Level: Medium LO: 1

97. If 25,000 books are sold during the second quarter and this activity is within the

relevant range, the company's expected contribution margin would be:

A) $875,000

B) $300,000

C) $175,000

D) $ 65,000

Answer: C Level: Medium LO: 1,4

Use the following to answer questions 98-101:

Dizzy Amusement Park is open from 8:00 am till midnight every day of the year. Dizzy

charges its patrons a daily entrance fee of $30 per person which gives them unlimited access

to all of the park's 35 rides.

98. Dizzy gives out a free T-shirt to every 100th customer entering the park. The cost of

this T-shirt would best be described as a:

A) fixed cost

B) mixed cost

C) step-variable cost

D) true variable cost

Answer: C Level: Medium LO: 1

99. For liability insurance, Dizzy pays a set monthly fee plus a small additional amount

for every patron entering the park. The cost of liability insurance would best be

described as a:

A) fixed cost

B) mixed cost

C) step-variable cost

D) true variable cost

Answer: B Level: Easy LO: 1

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Garrison, Managerial Accounting, 12th Edition 243

100. Dizzy employees a certified operator for each of its 35 rides. Each operator is paid $20

per hour. The cost of the certified operators would best be described as a:

A) fixed cost

B) mixed cost

C) step-variable cost

D) true variable cost

Answer: A Level: Easy LO: 1

101. Dizzy donates $2 of every entrance fee to a local homeless shelter. This charitable

contribution would best be described as a:

A) fixed cost

B) mixed cost

C) step-variable cost

D) true variable cost

Answer: D Level: Easy LO: 1

Use the following to answer questions 102-106:

Donner Company would like to estimate the variable and fixed components of its

maintenance costs and has compiled the following data for the last five months of operations.

Labor Maintenance

Hours Cost

January 160 $617

February 130 $553

March 180 $596

April 190 $623

May 110 $532

102. Using the high-low method of analysis, the estimated variable cost per labor hour for

maintenance is closest to:

A) $0.83

B) $1.84

C) $1.30

D) $1.14

Answer: D Level: Medium LO: 3

Chapter 5 Cost Behavior: Analysis and Use

244 Garrison, Managerial Accounting, 12th Edition

103. Using the high-low method of analysis, the estimated total fixed cost per month for

maintenance is closest to:

A) $440

B) $407

C) $470

D) $0

Answer: B Level: Medium LO: 3

104. Using the least-squares regression method, the estimated variable cost per labor hour

for maintenance is closest to:

A) $1.88

B) $1.52

C) $1.09

D) $1.96

Answer: C Level: Hard LO: 5 Appendix: 5

105. Using the least-squares regression method, the estimated total fixed cost per month for

maintenance is closest to:

A) $470

B) $416

C) $400

D) $378

Answer: B Level: Hard LO: 5 Appendix: 5

106. Using the least-squares regression equation, the total maintenance cost for March is:

A) above the regression line

B) on the regression line

C) below the regression line

D) outside the relevant range

Answer: C Level: Hard LO: 5 Appendix: 5

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Garrison, Managerial Accounting, 12th Edition 245

Use the following to answer questions 107-108:

Golden Dragon Restaurant would like to estimate the variable and fixed components of its

utilities costs and has compiled the following data for the last five months of operations.

Month Meals served Utilities costs

December 550 $401.00

January 300 $360.00

February 250 $347.50

March 400 $385.50

April 600 $414.00

107. Using the high-low method of analysis, the estimated variable utilities cost per meal

served is:

A) $0.22

B) $0.73

C) $0.69

D) $0.19

Answer: D Level: Medium LO: 3

108. Using the high-low method of analysis, the estimated monthly fixed component of

utility cost is:

A) $ 66.50

B) $300.00

C) $303.00

D) $331.00

Answer: B Level: Medium LO: 3

Chapter 5 Cost Behavior: Analysis and Use

246 Garrison, Managerial Accounting, 12th Edition

Essay Questions

109. The owner of the Diamondhead restaurant in Honolulu would like to determine the

fixed and variable components of the restaurant's utility expenses. The owner believes

that the variable component of the utilities cost is driven by the number of meals

served.

Meals Utilities

served cost

January 3,000 $450

February 4,000 $480

March 3,500 $490

April 4,500 $530

May 5,000 $570

June 6,000 $620

July 5,500 $560

Required:

a. Plot the data on the graph below.

Chapter 5 Cost Behavior: Analysis and Use

Garrison, Managerial Accounting, 12th Edition 247

b. Using the quick-and-dirty scattergraph method, derive a cost formula for utilities

cost.

c. c Use your cost formula to predict the utilities cost if 5,200 meals are served.

Level: Medium LO: 1,2

Answer:

There is not a single correct answer to these questions. Students' answers to these

questions will vary and must be carefully graded. We recommend that you evaluate

the students' techniques rather than the numerical accuracy of their answers.

a. Check that students followed the steps for plotting data.

b. Answers will differ based upon how the line is fitted to the data. The answer

should be something like Y = $300 + $0.05X. (The least-squares regression line is

Y = $291 + $.053X.)

c. Answers will differ based upon the cost formula that the student derived in (2)

above. With our cost formula, the predicted cost is $560 = $300 + $0.05 × 5,200.

(Using least-squares regression, the cost estimate would be $567.)

110. Arlo's T-shirt Shop only has three costs: T-shirt cost, rent cost on the shop, and

utilities cost. Arlo's sells the T-shirt for $14.50 each. Management has prepared the

following estimated cost information for next month:

At 8,000 At 10,000

T-shirts T-shirts

T-shirt cost ......................... $48,000 $60,000

Rent cost ............................ $3,600 $3,600

Utilities cost ....................... $6,800 $8,300

Assume that all of the activity levels mentioned in this problem are within the relevant

range.

Required:

a. Calculate what Arlo's should expect for total variable cost if 9,000 T-shirts are sold

next month.

b. Prepare Arlo's contribution approach income statement for a monthly sales volume

level of 10,000 T-shirts.

Level: Hard LO: 1,3,4

Chapter 5 Cost Behavior: Analysis and Use

248 Garrison, Managerial Accounting, 12th Edition

Answer:

a.

T-shirt {[($60,000 - $48,000)/2,000] × 9,000} .................... $54,000

Utilities cost {[($8,300 - $6,800)/2,000] × 9,000} ............... $6,750

Total variable cost ................................................................ $60,750

b.

Arlo’s T-Shirt Shop

Contribution Approach Income Statement

Monthly Sales Volume of 10,000 T-Shirts

Sales ($14.50 × 10,000) .................................... $145,000

Less variable expenses:

T-shirt cost ..................................................... $60,000

Utilities cost ($0.75 × 10,000) ....................... 7,500 67,500

Contribution margin ......................................... 77,500

Less fixed expenses ..........................................

Rent cost ........................................................ 3,600

Utilities cost ($8,300 - $7,500)...................... 800 4,400

Net operating income ....................................... $ 73,100

111.Rapid Delivery, Inc., operates a parcel delivery service across the nation. The company

keeps detailed records relating to operating costs of trucks, and has found that if a truck

is driven 150,000 miles per year the average operating cost is 10 cents per mile. This cost

increases to 11 cents per mile if a truck is driven only 100,000 miles per year.

Assume that all of the activity levels mentioned in this problem are within the relevant

range.

Required:

a. Using the high-low method, derive the cost formula for truck operating costs.

b. Using the cost formula you derived above, what total cost would you expect the

company to incur in connection with the truck if it is driven 130,000 miles in a

year?

Level: Easy LO: 1,3

Chapter 5 Cost Behavior: Analysis and Use

Garrison, Managerial Accounting, 12th Edition 249

Answer:

a.

Miles Cost

High level 150,000 (150,000 miles × $.10 =) $15,000

Low level 100,000 (100,000 miles × $.11 =) 11,000

Change 50,000 $ 4,000

$4,000 ÷ 50,000 miles = $0.08 per mile variable cost

Total cost at high level .................................................... $15,000

Less variable element: 150,000 miles × $0.08 ................ 12,000

Fixed element .................................................................. $ 3,000

Cost formula: $3,000 plus $0.08 per mile or

Y = $3,000 + $0.08X

b.

Variable cost: 130,000 miles × $0.08 per mile................ $10,400

Fixed cost ........................................................................ 3,000

Total cost ......................................................................... $13,400

112. Butler Sales Company is a distributor that has an exclusive franchise to sell a

particular product made by another company. Butler Sales Company's income

statements for the last two years are given below:

This Year Last Year

Units sold ................................................... 200,000 160,000

Sales revenue ............................................. $1,000,000 $800,000

Less cost of goods sold .............................. 700,000 560,000

Gross margin ............................................. 300,000 240,000

Less operating expenses ............................ 210,000 198,000

Net operating income ................................ $ 90,000 $ 42,000

Operating expenses are a mixture of fixed costs and variable and mixed costs that vary

with respect to the number of units sold.

Required:

a. Estimate the company's variable operating expenses per unit, and its total fixed

operating expenses per year.

b. Compute the company's contribution margin for this year.

Level: Medium LO: 3,4

Chapter 5 Cost Behavior: Analysis and Use

250 Garrison, Managerial Accounting, 12th Edition

Answer:

a.

Cost Activity

High level of activity ............... $210,000 200,000

Low level of activity ................ 198,000 160,000

Change observed ..................... $ 12,000 40,000

$12,000 ÷ 40,000 units = $0.30 per unit variable cost

Total cost at the high level ............................................. $210,000

Less variable element (200,000 units × $0.30 per unit) . 60,000

Fixed element ................................................................. $150,000

b.

Sales revenue ....................................... $1,000,000

Less variable expenses:

Cost of goods sold ............................ $700,000

Operating expenses (above) ............. 60,000 760,000

Contribution margin ............................ $ 240,000

113. SomethingNew is a small one-person company that provides elaborate and

imaginative wedding cakes to order for very large wedding receptions. The owner of

the company would like to understand the cost structure of the company and has

compiled the following records of activity and costs incurred. The owner believes that

the number of weddings catered is the best measure of activity.

Month Weddings Costs Incurred

January 3 $3,800

February 2 $3,600

March 6 $4,000

April 9 $4,300

May 12 $4,500

June 20 $5,200

Required:

a. Using the high-low method, estimate the variable cost per wedding and the total

fixed cost per month. (Round off the variable cost per wedding to the nearest cent

and the total fixed cost to the nearest dollar.)

b. Using the least-squares regression method, estimate the variable cost per wedding

and the total fixed cost per month. (Round off the variable cost per wedding to the

nearest cent and the total fixed cost to the nearest dollar.)

Level: Hard LO: 3,5 Appendix: 5

Chapter 5 Cost Behavior: Analysis and Use

Garrison, Managerial Accounting, 12th Edition 251

Answer:

a. High-Low Method

Activity Costs

June (high activity level) 20 $5,200

February (low activity level) 2 3,600

Change observed 18 $1,600

Variable cost = Change in cost ÷ Change in activity

= $1,600 ÷ 18 weddings

= $88.89 per wedding

Fixed cost element = Total cost - Variable cost element

= $5,200 - ($88.89 per wedding × 20 weddings)

= $3,422

Cost formula: $3,422 fixed cost per month plus $88.89 per wedding, or

Y = $3,422 + $88.89X.

b. Least-Squares Regression Method

Using statistical software or hand calculation, the cost formula is approximately

$3,490 per month, plus $85.82 per wedding, or

Y = $3,490 + $85.82X

114. The management of Buff Sports Stadium believes that the number of sporting events

each month is a measure of activity for total clean up cost. Shown below are event

figures and total clean up costs for the past four months:

Number of Total

Sporting Clean-up

Events Cost

July 28 $30,900

August 34 $34,200

September 16 $20,700

October 22 $28,200

Required:

a. Estimate Buff's cost formula for monthly clean up cost using the high-low method.

b. Estimate Buff's cost formula for monthly clean up cost using the least-squares

regression method.

Level: Hard LO: 3,5 Appendix: 5

Chapter 5 Cost Behavior: Analysis and Use

252 Garrison, Managerial Accounting, 12th Edition

Answer:

a. High-Low: Y = $8,700 + $750X

($34,200 - $20,700)/(34 - 16) = $750 per event; $750 × 34 = $25,500;

$34,200 - $25,500 = $8,700

b. Least Squares: Y = $10,500 + $720X

115. CapeAir flies a medium-sized passenger jet on a route between Washington, D.C., and

Cape Cod. The manager of the airline would like to estimate the relationship between

the plane's payload (i.e., total weight of passengers and cargo) and total fuel costs. On

five recent flights, the payload varied between 22 tons and 35 tons.

Payload Fuel

(tons) Cost

Flight 1 35 $780

Flight 2 26 $720

Flight 3 33 $765

Flight 4 28 $735

Flight 5 22 $700

Required:

Using the least-squares regression method, estimate the variable cost per ton and the

fixed cost per flight. (Round off the variable cost per ton to the nearest cent and the

fixed cost per flight to the nearest dollar.)

Level: Hard LO: 5 Appendix: 5

Answer:

Using statistical software or hand calculation, the cost formula is about $562 per flight

plus $6.18 per ton.

Chapter 5 Cost Behavior: Analysis and Use

Garrison, Managerial Accounting, 12th Edition 253

116. Below are cost and activity data for a particular cost over the last four periods. Your

boss has asked you to analyze this cost so that management will have a better

understanding of how this cost changes in response to changes in activity.

Activity Cost

Period 1 47 $474

Period 2 44 $460

Period 3 42 $450

Period 4 40 $440

Required:

Using the least-squares regression method, estimate the cost formula for this cost.

Level: Medium LO: 5 Appendix: 5

Answer:

Using statistical software or hand calculation, the cost formula is approximately Y =

$246 + $4.86X.

117. Below are cost and activity data for a particular cost over the last four periods. Your

boss has asked you to analyze this cost so that management will have a better

understanding of how this cost changes in response to changes in activity.

Activity Cost

Period 1 46 $483

Period 2 42 $465

Period 3 45 $477

Period 4 49 $500

Required:

Using the least-squares regression method, estimate the cost formula for this cost.

Level: Medium LO: 5 Appendix: 5

Answer:

Using statistical software or hand calculation, the cost formula is approximately Y =

$253 + $5.02X.

CPALE OCTOBER 2019 - QUESTIONS

CPALE OCTOBER 2019 - QUESTIONS CLICK THE LINK BELOW: https://drive.google.com/drive/folders/1DgxM6gFp3n64dtRY4AIcgC1f5Hi-ztUh?usp=sharing