Deck 3: Defining and Using Cost Estimates

Question 1

Costs set a limit on profit given a set price.

Answer 1

True

Question 2

Indirect costs can be tied to one specific outcome or set of products, while direct costs are shared among many different outcomes or products.

Answer 2

False

Question 3

The basic cost estimate is (variable cost per unit - fixed cost per unit) times volume sold plus price per unit times volume.

Answer 3

False

Question 4

A product cost is incurred every period (normally a month) regardless of whether or not the company is open for business.

Question 5

A period cost is incurred every period (normally a month) regardless of whether or not the company is open for business.

Question 6

A manufacturing cost is a cost incurred in manufacturing companies that can be directly tied to making the product it sells.

Question 7

A nonmanufacturing cost is a cost incurred in service companies that cannot be directly tied to providing the service.

Question 8

Material cost is the significant costs (raw materials and direct labor) used in making a product.

Question 9

Overhead cost is the sum of the overall direct and indirect costs of making a product or providing a service.

Question 10

An example of an "unavoidable" cost is depreciation on a machine that is no longer used.

Question 11

Telephone bills that charge a monthly fee and then a cost per minute of long distance are examples of mixed costs.

Question 12

An example of a variable cost at a college would be the registration department.

Question 13

A firm's cost structure is its mix of fixed, variable, and mixed costs, but not stepped costs.

Question 14

Cost-volume-profit analysis is an analytic tool used to get a first-pass estimate of how changes in a business will ultimately affect profits and sustainability.

Question 15

The basic profit equation is: Profit = Sales less Total Costs, or (Price) x (Volume Sold) minus (Variable cost) x (volume sold) minus total fixed costs, or IB = PVS - [(VCUVS) + TFC].

Question 16

A business case is used to determine whether a major action was successful.

Question 17

What is the relationship between a cost and a price, if any?

A) Price sets a limit on cost at a given set price.
B) Costs do not determine price; they simply are taken out of selling price to yield a profit.
C) Cost is set by the market based on the match between a product's or service's attributes (value proposition) and the preferences of the customer; price is then based on cost.
D) Price is determined by how a business is run, which is not tied to the cost.
E) There is no relationship between a cost and a price.

Question 18

BusyBee Cleaning Co. is evaluating its costs to clean a standard office. The controller has done a linear regression of the hours spent cleaning various offices and the total costs (labor, supplies, transportation) for each office cleaned. The regression analysis yielded the following information.
Y = $25x + $75
Y = the total cost to clean an office
X = the hours spent cleaning an office
What is the best description of the costs of cleaning an office based on this regression analysis?

A) The cost is $100 per hour to clean an office.
B) There is $25 of fixed costs and $75 of variable costs per hour to clean an office.
C) There is $25 of variable costs per hour and $75 of fixed costs to clean an office.
D) The cost is $25 per hour to clean an office.

Question 19

Manchester Airlines is in the process of preparing a contribution margin income statement that will allow a detailed look at its variable costs and profitability of operations. Which of the following cost combinations should be used to evaluate the variable cost per flight of the company's Boston-Las Vegas flights?

A) Flight crew salary, fuel, and engine maintenance.
B) Fuel, food service, and airport landing fees.
C) Airplane depreciation, baggage handling, and airline marketing.
D) Communication system operation, food service, and ramp personnel.

Question 20

Taylor Corporation is determining the cost behavior of several items in order to budget for the upcoming year. Past trends have indicated the following dollars were spent at three different levels of output.
In establishing a budget for 14,000 units, Taylor should treat Costs A, B, and C, respectively, as:

A) Semivariable, fixed, and variable.
B) Variable, fixed, and variable.
C) Semivariable, semivariable, and semivariable.
D) Variable, semivariable, and semivariable.

Question 21

Which one of the following refers to a cost that remains the same as the volume of activity decreases within the relevant range?

A) Average cost per unit.
B) Variable cost per unit.
C) Unit fixed cost.
D) Total variable cost.

Question 22

Fowler Co. provides the following summary of its total budgeted production costs at three production levels.
The cost behavior of each of the costs, respectively, is:

A) semivariable, variable, fixed, and variable.
B) variable, semivariable, fixed, and semivariable.
C) variable, fixed, fixed, and variable.
D) variable, semivariable, fixed, and variable.

Question 23

Roberta Johnson is the manager of SleepWell Inn, one of a chain of motels located throughout the United States. An example of an operating cost at SleepWell that is mixed is:

A) The security guard's salary.
B) Electricity.
C) Postage for reservation confirmations.
D) Local yellow pages advertising.

Question 24

The marketing manager of Ames Company has learned the following about a new product that is being introduced by Ames. Sales of this product are planned at $100,000 for the first year. Sales commission expense is budgeted at 8% of sales plus the marketing manager's incentive budgeted at an additional half of a percent. The preparation of a product brochure will require 20 hours of marketing salaried staff time at an average rate of $100 per hour, and 10 hours, at $150 per hour, for an outside illustrator's effort. The variable marketing cost for this new product will be:

A) $8,000.
B) $8,500.
C) $10,000.
D) $10,500.

Question 25

The relevant range refers to the activity levels over which:

A) Cost relationships hold constant.
B) Costs fluctuate.
C) Production varies.
D) Relevant costs are incurred.

Question 26

Cell Company has discovered that the cost of processing customer invoices is strictly variable within the relevant range. Which of the following statements concerning the cost of processing customer invoices is incorrect?

A) The total cost of processing customer invoices will increase as the volume of customer invoices increases.
B) The cost per unit for processing customer invoices will decline as the volume of customer invoices increases.
C) The cost of processing the 100th customer invoice will be the same as the cost of processing the first customer invoice.
D) The average cost per unit for processing a customer invoice will equal the incremental cost of processing one more customer invoice.

Question 27

When identifying fixed and variable costs, which one of the following is a typical assumption concerning cost behavior?

A) General and administrative costs are assumed to be variable costs.
B) Cost behavior is assumed to be realistic for all levels of activity from zero to maximum capacity.
C) Total costs are assumed to be linear when plotted on a graph.
D) The relevant time period is assumed to be five years.

Question 28

Lar Company has found that its total electricity cost has both a fixed component and a variable component within the relevant range. The variable component seems to vary directly with the number of units produced. Which one of the following statements concerning Lar's electricity cost is incorrect?

A) The total electricity cost will increase as production volume increases.
B) The total electricity cost per unit of production will increase as production volume increases.
C) The variable electricity cost per unit of production will remain constant as production volume increases.
D) The fixed electricity cost per unit of production will decline as production volume increases.

Question 29

A company uses cost-volume-profit analysis to evaluate a new product. The total fixed costs of production per year are $160,000. The unit variable cost is $50. Which one of the following combinations of unit selling price and breakeven number of units sold per year is correct?

A) $50 selling price and 3,200 breakeven number of units.
B) $100 selling price and 1,600 breakeven number of units.
C) $25 selling price and 6,400 breakeven number of units.
D) $70 selling price and 8,000 breakeven number of units.

Question 30

A company sells two products: Sparta and Volta. Volta is manufactured by a third-party supplier, which charges the company a contractual price for each unit of Volta manufactured. A summary of revenue and costs assumptions for each product is as follows.
The company has the opportunity to spend an additional $10,000 in promotional expenditures on either Sparta or Volta, anticipating a 10% increase in unit sales volume as a result. Both product lines have idle capacity and can support the increase in unit volume. The company should spend the additional promotional expenditure on:

A) Sparta, because it would generate an additional $10,000 in operating profit.
B) Sparta, because it would generate an additional $60,000 in operating profit.
C) Volta, because it would generate an additional $20,000 in operating profit.
D) Volta, because it would generate an additional $10,000 in operating profit.

Question 31

Bolger and Co. manufactures large gaskets for the turbine industry. Bolger's per-unit sales price and variable costs for the current year are as follows.
Sales price per unit $300
Variable costs per unit 210
Bolger's total fixed costs aggregate $360,000. As Bolger's labor agreement is expiring at the end of the year, management is concerned about the effect a new agreement will have on its unit breakeven point. The controller performed a sensitivity analysis to ascertain the estimated effect of a $10 per unit direct labor increase and a $10,000 reduction in fixed costs. Based on this data, it was determined that the breakeven point would:

A) Decrease by 1,000 units.
B) Decrease by 125 units.
C) Increase by 375 units.
D) Increase by 500 units.

Question 32

Phillips & Company produces educational software. Its unit cost structure, based upon an anticipated production volume of 150,000 units, is as follows.
Sales price $160
Variable costs 60
Fixed costs 55
The marketing department has estimated sales for the coming year at 175,000 units, which is within the relevant range of Phillips' cost structure. Phillips' breakeven volume (in units) and anticipated operating income for the coming year would amount to:

A) 82,500 units and $7,875,000 of operating income.
B) 82,500 units and $9,250,000 of operating income.
C) 96,250 units and $3,543,750 of operating income.
D) 96,250 units and $7,875,000 of operating income.

Question 33

All of the following are assumptions of cost-volume-profit analysis except:

A) Total fixed costs do not change with a change in volume.
B) Revenues change proportionately with volume.
C) Variable costs per unit change proportionately with volume.
D) Sales mix for multiproduct situations do not vary with volume changes.

Question 34

Ace Manufacturing plans to produce two products, Product C and Product F, during the next year, with the following characteristics.
Total projected fixed costs for the company are $30,000. Assume that the product mix would be the same at the breakeven point as at the expected level of sales of both products. What is the projected number of units (rounded) of Product C to be sold at the breakeven point?

A) 2,308 units.
B) 9,231 units.
C) 11,538 units.
D) 15,000 units.

Question 35

Carson Inc. manufactures only one product and is preparing its budget for next year based on the following information.

If Carson wants to achieve a net income of $1.3 million next year, its sales must be:

A) 62,000 units.
B) 70,200 units.
C) 80,000 units.
D) 90,000 units.

Question 36

MetalCraft produces three inexpensive socket wrench sets that are popular with do-it-yourselfers. Budgeted information for the upcoming year is as follows.
Total fixed costs for the socket wrench product line is $961,000. If the company's actual experience remains consistent with the estimated sales volume percentage distribution, and the firm desires to generate total operating income of $161,200, how many Model No. 153 socket sets will MetalCraft have to sell?

A) 26,000
B) 54,300
C) 155,000
D) 181,000

Question 37

Starlight Theater stages a number of summer musicals at its theater in northern Ohio. Preliminary planning has just begun for the upcoming season, and Starlight has developed the following estimated data.
¹ Represent payments to production companies and are based on tickets sold.
² Costs directly associated with the entire run of each production for costumes, sets, and artist fees.
Starlight will also incur $565,000 of common fixed operating charges (administrative overhead, facility costs, and advertising) for the entire season, and is subject to a 30% income tax rate. If management desires Mr. Wonderful to produce an after-tax contribution of $210,000 toward the firm's overall operating income for the year, total attendance for the production would have to be:

A) 20,800.
B) 25,000.
C) 25,833.
D) 31,000.

Question 38

Bargain Press is considering publishing a new textbook. The publisher has developed the following cost data related to a production run of 6,000, the minimum possible production run. Bargain Press will sell the textbook for $45 per copy.

How many textbooks must Bargain Press sell in order to generate operating earnings (earnings before interest and taxes) of 20% on sales? (Round your answer up to the nearest whole textbook.)

A) 2,076 copies.
B) 5,207 copies.
C) 5,412 copies.
D) 6,199 copies.

Question 39

Breakeven quantity is defined as the volume of output at which revenues are equal to:

A) Marginal costs.
B) Total costs.
C) Variable costs.
D) Fixed costs.

Question 40

For the year just ended, Silverstone Company's sales revenue was $450,000. Silverstone's fixed costs were $120,000 and its variable costs amounted to $270,000. For the current year, sales are forecasted at $500,000. If the fixed costs do not change, Silverstone's profits this year will be:

A) $60,000.
B) $80,000.
C) $110,000.
D) $200,000.

Question 41

Breeze Company has a contribution margin of $4,000 and fixed costs of $1,000. If the total contribution margin increases by $1,000, operating profit would:

A) Decrease by $1,000.
B) Increase by more than $1,000.
C) Increase by $1,000.
D) Remain unchanged.

Question 42

Wilkinson Company sells its single product for $30 per unit. The contribution margin ratio is 45% and Wilkinson has fixed costs of $10,000 per month. If 3,000 units are sold in the current month, Wilkinson's income would be:

A) $30,500.
B) $49,500.
C) $40,500.
D) $90,000.

Question 43

Specialty Cakes Inc. produces two types of cakes, a 2-pound round cake and a 3-pound heart-shaped cake. Total fixed costs for the firm are $94,000. Variable costs and sales data for the two types of cakes are presented below.
If the product sales mix were to change to three heart-shaped cakes for each round cake, the breakeven volume for each of these products would be:

A) 8,174 round cakes, 12,261 heart-shaped cakes.
B) 12,261 round cakes, 8,174 heart-shaped cakes.
C) 4,947 round cakes, 14,842 heart-shaped cakes.
D) 15,326 round cakes, 8,109 heart-shaped cakes.

Question 44

Ticker Company sells two products. Product A provides a contribution margin of $3 per unit, and Product B provides a contribution margin of $4 per unit. If Ticker's sales mix shifts toward Product A, which one of the following statements is correct?

A) The total number of units necessary to break even will decrease.
B) The overall contribution margin ratio will increase.
C) Operating income will decrease if the total number of units sold remains constant.
D) The contribution margin ratios for Products A and B will change.

Question 45

The contribution margin ratio is computed as:

A) (sales minus fixed expenses) / sales
B) sales / variable expenses
C) (sales minus variable expenses) / sales
D) (fixed expenses plus variable expenses) / sales

Question 46

Nadal Company currently produces and sells 20,000 cans of tennis balls at a selling price of $10 each. The product has variable costs of $4 per unit and fixed costs of $50,000. The company currently earns a total contribution margin of:

A) $50,000.
B) $70,000.
C) $120,000.
D) $200,000.

Question 47

What does the term "breakeven point" mean?

A) The level of sales in which total contribution margin equals total fixed costs.
B) The point in which total variable costs equal total fixed costs.
C) The level of sales in which total contribution margin is zero.
D) The point in which total sales equal total contribution margin.
E) The point in which total sales equal total fixed costs.

Question 48

What is meant by a product's contribution margin (CM) ratio?

A) The ratio of contribution margin to total sales revenue.
B) The ratio of sales to breakeven sales.
C) The ratio of contribution margin to net operating income.
D) The ratio of price minus variable cost per units.
E) The ratio that can be multiplied by percentage change in sales revenue to get percentage change in profit.

Question 49

How is the degree of operating leverage useful?

A) It measures the cushion between sales and breakeven sales.
B) It measures the sales revenue needed to reach a target profit.
C) It measures the amount by which a company's sales can decline before losses are incurred.
D) It measures the impact on net operating income of a given percentage change in sales.
E) It measures the impact on net operating income of a given dollar change in sales.

Question 50

Company A's cost structure includes costs that are mostly variable, whereas Company B's cost structure includes costs that are mostly fixed. In a time of increasing sales, which company will tend to realize the most rapid increase in profits? Explain. (Tip: Use operating leverage.)

A) Company A, because it has a higher CM ratio due to lower variable costs.
B) Company B, because it has a higher CM ratio due to lower variable costs.
C) Company B, because it has a lower CM ratio due to higher variable costs.
D) Company A, because it has a lower CM ratio due to higher variable costs.
E) Company A, because it has a higher margin of safety.

Question 51

Holloway Company's contribution ratio is 24%. Total fixed costs are $84,000. Variable costs are $18 per unit. How many units must Holloway Company sell to break even?

A) 14,778 units.
B) 350,000 units.
C) 14,778 units
D) 4,667 units.
E) The correct answer cannot be determined from the information given.

Question 52

Siche Company manufactures cell phone covers that sell for $10 each. Fixed costs are $48,000 and variable costs are $7.20 per unit. Siche can buy a newer molding press that will increase fixed costs by $16,000 per year, but variable costs will be decreased by $.80 per unit. What effect will the purchase of the new press have on the breakeven point in units of Siche Company?

A) 635-unit increase.
B) 1,000-unit increase.
C) 1,681-unit decrease.
D) The purchase of the machine will not change the breakeven point.

Question 53

Spandex, Inc., has fixed costs of $36,000 and a contribution ratio of 20%. If sales are $200,000, what is the margin of safety percentage?

A) 2%
B) 10%
C) 20%
D) 26%

Question 54

Nochance.com has not reported a profit in five years. This year, the company would like to narrow its loss to ($10,000). Assuming the selling price of its single product is $36.50 per unit and its variable costs per unit are $24, how many units must be sold to achieve its target given that total fixed costs are $60,000?

A) 5,600
B) 4,800
C) 4,000
D) 3,200

Question 55

Newport Company's breakeven point is 2,000 boats. Its boats have an average price of $5,000 and variable costs per boat are $2,800. What is Newport's total fixed cost amount?

A) $5,600,000
B) $10,000,000
C) $2,800,000
D) $4,400,000

Question 56

Which is better: a higher or lower degree of operating leverage?

A) Higher because it leads to higher profits.
B) Lower because it requires fewer units sold to break even.
C) Higher because the amount by which a company's sales can decline before losses are incurred is higher.
D) Lower because the impact on net operating income of a given dollar change in sales is higher.
E) It depends on the level of risk a company is comfortable with.

Question 57

All of the following is true of a business case except:

A) It is a comprehensive analysis of a proposed change in how a business is being operated.
B) It analyzes at a detailed level actual changes in resource demands when a company changes its basic business model.
C) We use it before we take any major action, unless CVP analysis suggests the change is a good idea.
D) It is a great way to capture stepped costs.

Question 58

Starlight Theater stages a number of summer musicals at its theater in northern Ohio. Preliminary planning has just begun for the upcoming season, and Starlight has developed the following estimated data.
¹ Represent payments to production companies and are based on tickets sold.
² Costs directly associated with the entire run of each production for costumes, sets, and artist fees.
Starlight will also incur $565,000 of common fixed operating charges (administrative overhead, facility costs, and advertising) for the entire season, and is subject to a 30% income tax rate. These common charges are allocated based on total attendance for each production.
Required:
a. What is Starlight's product mix?
b. What is Starlight's package contribution margin?
c. If Starlight's schedule of musicals is held, as planned, how many patrons would have to attend for Starlight to break even during the summer season? How many tickets for each type of musical does it need to sell in order to break even?
d. What is Starlight Theater's current profit for the business?
e. What is Starlight Theater's current margin of safety in terms of revenue dollars?
f. Starlight Theater wants to make a profit of $1,500,000 for the season before taxes. How many patrons would have to attend now? What is the required revenue dollars of sales?
g. Now Starlight Theater wants this profit in after-tax dollars. How many patrons would have to attend now? What are the required revenue dollars of sales?

Question 59

Rogers Company has the following data for 2018:


-What is breakeven in (a) units and (b) sales dollars?

Question 60

Rogers Company has the following data for 2018:


-If sales increase by 5%, by what percent will profits increase?

Question 61

Rogers Company has the following data for 2018:


-What is the margin of safety in dollars?

Question 62

Rogers Company has the following data for 2018:


-How many units must be sold to reach a target profit of $100,000, before tax?

Question 63

Rogers Company has the following data for 2018:


-How many units must be sold to reach a target profit of $100,000, after tax assuming a 30% tax rate?

Question 64

Rogers Company has the following data for 2018:


-What would breakeven be in units if fixed costs increased by 20%?

Question 65

Rogers Company has the following data for 2018:


-How much sales revenue must be earned if the company wants to earn an after-tax profit equal to 15%of sales? Assume the tax rate is 40%. (Round to the nearest dollar.)

Question 66

Rogers Company has the following data for 2018:


-Suppose the company can increase sales revenue by $50,000 if an advertising campaign is launched. If the advertising campaign will cost $27,000, is advertising a good idea? Support your answer with appropriate computations.

Question 67

Rogers Company has the following data for 2018:


-Assume the company can sell 18,000 units. What price must it charge per unit to earn a before-tax profit of $110,000? (Round to the nearest cent.)

Question 68

Compute the number of scientific calculators and the number of business calculators that must be sold to break even.

Question 69

Compute the sales revenue that must be generated for the company to break even.

Question 70

How many business calculators must be sold to reach a target net income of $800,000 for the company as a whole?

Question 71

Match the term on the right with the definition on the left.