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AUDITING THEORY - SECRET NOTES AND TESTBANK
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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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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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
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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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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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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
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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
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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
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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
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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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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
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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.
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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
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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.
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