Deck 5: Cost Behavior and Cost-Volume-Profit Analysis

Question 1

Total variable costs change in proportion to changes in volume of activity.

Answer 1

True

Question 2

Total fixed costs change in proportion to changes in volume of activity.

Answer 2

False

Question 3

Cost-volume-profit analysis is a predictive tool for identifying the impact of future cost changes, price changes, and volume of activity changes.

Answer 3

True

Question 4

As production volume increases, fixed cost per unit of output remains constant.

Question 5

Dividing a mixed cost into its separate fixed and variable cost components cannot be done in cost-volume-profit analysis.

Question 6

A step-wise variable cost can be separated into a fixed component and a variable component.

Question 7

The relevant range of operations includes extremely high and low levels of production that are unlikely to occur.

Question 8

Cost-volume-profit analysis can be used to compute expected income from predicted sales and cost levels.

Question 9

While the total amount of fixed cost changes with the level of production, fixed cost per unit remains constant as volume changes.

Question 10

While the total amount of variable cost changes with the level of production, variable cost per unit remains constant as volume changes.

Question 11

Fixed costs per unit decrease proportionately with increases in volume of activity.

Question 12

The dollar amount of sales needed to achieve a target income is computed by dividing the sum of fixed costs plus the target pretax income by the contribution margin ratio.

Question 13

Cost-volume-profit analysis requires management to classify all costs as either fixed or variable with respect to production or sales volume within the relevant range of operations.

Question 14

Curvilinear costs increase as volume of activity increases, but at a nonconstant rate.

Question 15

Variable costs per unit increase proportionately with increases in volume of activity.

Question 16

While the total amount of fixed cost remains constant with the level of production, fixed cost per unit changes as volume changes.

Question 17

The relevant range of operations is a range of volume neither close to zero nor at maximum capacity.

Question 18

As production volume activity increases, variable cost per unit remains constant.

Question 19

The margin of safety is the amount that sales can drop before the company incurs a loss.

Question 20

Cost-volume-profit analysis is used to predict future costs to be incurred, volumes of activity, sales to be made, and profit to be earned.

Question 21

The method most likely to produce the most precise line of cost behavior and require the least amount of judgment is the scatter diagram.

Question 22

Scatter diagrams plot volume (units) on the horizontal axis and cost on the vertical axis.

Question 23

Degree of operating leverage (DOL) is defined as total contribution margin in dollars divided by pretax income.

Question 24

The high-low method of deriving an estimated cost line uses all the data points available.

Question 25

Scatter diagrams plot volume (units) on the vertical axis and cost on the horizontal axis.

Question 26

Cost-volume-profit analysis is used to determine the number of units that must be sold to break even..

Question 27

The extent, or relative size, of fixed costs in the total cost structure is known as operating leverage.

Question 28

A visual line fit to points in a scatter diagram may be used to identify the approximate relation between past cost and unit data.

Question 29

A scatter diagram is useful for identifying extreme data points or outliers.

Question 30

The margin of safety can be expressed in dollars or as a percent of sales.

Question 31

The contribution margin ratio is the percent of each sales dollar that remains after deducting the unit variable cost.

Question 32

Contribution margin per unit is the amount by which a product's unit selling price exceeds its variable cost per unit.

Question 33

The contribution margin per unit is the price at which a unit must be sold in order for the company to break even.

Question 34

To determine the slope of the variable cost from a scatter diagram, divide the change in units by the change in cost.

Question 35

A break-even point can be calculated either in units or in dollars of sales.

Question 36

The high-low method can be used to estimate the cost equation using just two points.

Question 37

The break-even point is the sales level at which a company neither earns a profit nor incurs a loss.

Question 38

There are only two methods to derive an estimated line of cost behavior; the high-low method and the scatter diagram.

Question 39

The high-low method is used to derive the variable cost per unit and total fixed costs using just the highest and lowest volume levels.

Question 40

Least-squares regression is a statistical method for identifying cost behavior.

Question 41

A cost that changes as volume changes, but at a nonconstant rate, is called a:

A) Variable cost.
B) Curvilinear cost.
C) Step-wise variable cost.
D) Fixed cost.
E) Differential cost.

Question 42

Cost-volume-profit analysis cannot be used when a firm produces and sells more than one product.

Question 43

A cost-volume-profit (CVP) chart is a graph that plots number of units produced on the horizontal axis and dollars of costs and sales on the vertical axis.

Question 44

The absorption costing method is required for external financial reporting.

Question 45

The contribution margin ratio is the percent by which the margin of safety exceeds the break-even point.

Question 46

A cost that remains unchanged in total despite variations in volume of activity within a relevant range is a:

A) Fixed cost.
B) Curvilinear cost.
C) Variable cost.
D) Step-wise variable cost.
E) Standard cost.

Question 47

An important assumption in multiproduct CVP analysis is a changing sales mix.

Question 48

Under variable costing, only costs that change in total with changes in production levels are included in product costs.

Question 49

The variable costing method is required for external financial reporting.

Question 50

Managers can use variable costing information for internal decision making, but they must use absorption costing for external reporting purposes.

Question 51

A graphic depiction of the break-even point is known as a cost-volume-profit (CVP) chart.

Question 52

An important assumption in multiproduct CVP analysis is a constant sales mix.

Question 53

A cost that changes in total in proportion to changes in volume of activity is a(n):

A) Differential cost.
B) Fixed cost.
C) Incremental cost.
D) Variable cost.
E) Product cost.

Question 54

A cost with a flat cost line within a relevant range that shifts to another level when volume significantly changes is a(n):

A) Step-wise cost.
B) Fixed cost.
C) Curvilinear cost.
D) Incremental cost.
E) Flat line cost.

Question 55

The proportion of sales volumes for various products in a multiproduct company is known as the composite mix.

Question 56

The proportion of sales volumes for various products in a multiproduct company is known as the sales mix.

Question 57

Under absorption costing, fixed overhead costs are excluded from product costs.

Question 58

To calculate the break-even point in units, one must know unit fixed cost, unit variable cost, and sales price.

Question 59

Under variable costing, fixed overhead costs are excluded from product costs.

Question 60

On a typical cost-volume-profit chart, unit sales are shown on the horizontal axis and both dollars of sales and dollars of costs are represented on the vertical axis.

Question 61

Which of the following costs are most likely to be classified as variable?

A) Factory rent
B) Manager salaries
C) Insurance
D) Direct materials
E) Straight-line depreciation

Question 62

A term describing a firm's normal range of operating activities is:

A) Relevant range of operations.
B) Break-even level of operations.
C) Margin of safety of operations.
D) Relevant operating analysis.
E) High-low level of operations.

Question 63

An important tool in predicting the volume of activity, the costs to be incurred, the sales to be made, and the profit to be earned is:

A) Target income analysis.
B) Cost-volume-profit analysis.
C) Least-squares regression analysis.
D) Variance analysis.
E) Process costing.

Question 64

Target income refers to:

A) Income at the break-even point.
B) Income from the most recent period.
C) Income planned for a future period.
D) Income only in a multiproduct environment.
E) Income at the minimum contribution margin.

Question 65

The excess of expected sales over the sales level at the break-even point is known as the:

A) Sales turnover.
B) Profit margin.
C) Contribution margin.
D) Relevant range.
E) Margin of safety.

Question 66

Cost-volume-profit analysis is based on necessary assumptions. Which of the following is not one of these assumptions?

A) Costs can be classified as variable or fixed.
B) Relevant range includes all possible levels of activity that a company might experience.
C) Sales price and variable costs per unit of output remain constant as volume changes.
D) A constant sales mix in a multiproduct company.
E) Total fixed costs are held constant.

Question 67

Curvilinear costs always increase:

A) With decreases in volume.
B) In constant proportion to changes in production levels.
C) When management performs break-even analysis.
D) When volume increases, but at a nonconstant rate.
E) On a per unit basis when volume of activity goes down.

Question 68

Which one of the following statements is not true?

A) Total fixed costs remain the same regardless of volume within the relevant range.
B) Total variable costs change with volume.
C) Total variable costs decrease as the volume increases.
D) Fixed costs per unit increase as the volume decreases.
E) Variable costs per unit remain the same regardless of the volume.

Question 69

A firm expects to sell 25,000 units of its product at $11 per unit. Pretax income is predicted to be $60,000. If the variable costs per unit are $5, total fixed costs must be:

A) $65,000.
B) $90,000.
C) $125,000.
D) $215,000.
E) $275,000.

Question 70

A cost that includes both fixed and variable cost components is called a:

A) Mixed cost.
B) Step-variable cost.
C) Composite cost.
D) Curvilinear cost.
E) Differential cost.

Question 71

During March, a firm expects its total sales to be $160,000, its total variable costs to be $95,000, and its total fixed costs to be $25,000. The contribution margin for March is:

A) $65,000.
B) $90,000.
C) $120,000.
D) $40,000.
E) $25,000.

Question 72

Watson Company has monthly fixed costs of $83,000 and a 40% contribution margin ratio. If the company has set a target monthly income of $15,000, what dollar amount of sales must be made to produce the target income?

A) $245,000
B) $207,500
C) $37,300
D) $170,000
E) $39,200

Question 73

The margin of safety is the excess of:

A) Break-even sales over expected sales.
B) Expected sales over variable costs.
C) Expected sales over fixed costs.
D) Fixed costs over expected sales.
E) Expected sales over break-even sales.

Question 74

Which of the following costs are most likely to be classified as fixed?

A) Shipping costs
B) Sales commissions
C) Direct labor
D) Direct materials
E) Property taxes

Question 75

A firm expects to sell 25,000 units of its product at $11 per unit and to incur variable costs per unit of $6. Total fixed costs are $70,000. The total contribution margin is:

A) $55,000.
B) $90,000.
C) $125,000.
D) $150,000.
E) $380,000.

Question 76

Select cost information for Seacrest Enterprises is as follows: Based on this information:

A) Both direct materials and rent expense are variable costs.
B) Utilities expense is a mixed cost and rent expense is a variable cost.
C) Utilities expense is a mixed cost and rent expense is a fixed cost.
D) Direct materials is a fixed cost and utilities expense is a mixed cost.
E) Both direct materials and utilities expense are mixed costs.

Question 77

A firm expects to sell 25,000 units of its product at $11 per unit and to incur variable costs per unit of $6. Total fixed costs are $70,000. The pretax net income is:

A) $55,000.
B) $90,000.
C) $125,000.
D) $150,000.
E) $380,000.

Question 78

Select cost information for Klondike Corporation is as follows: Based on this information:

A) Both direct materials and rent expense are variable costs.
B) Direct materials is a fixed cost and rent expense is a variable cost.
C) Both direct materials and rent expense are fixed costs.
D) Direct materials is a variable cost and rent expense is a fixed cost.
E) Both direct materials and rent expense are mixed costs.

Question 79

A company's normal operating range, which excludes extremely high or low operating levels that are not likely to occur, is called the:

A) Margin of safety.
B) Contribution range.
C) Break-even point.
D) Relevant range.
E) High-low point.

Question 80

If a firm's forecasted sales are $250,000 and its break-even sales are $190,000, the margin of safety in dollars is:

A) $60,000.
B) $250,000.
C) $190,000.
D) $440,000.
E) $24,000.