Test bank managerial accounting by kieso weygandt 5e ch06

CHAPTER 6
COST-VOLUME-PROFIT ANALYSIS: ADDITIONAL ISSUES
SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY
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True-False Statements
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Multiple Choice Questions
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K
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50.
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69.
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a

Brief Exercises
126.
127.

3
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128.
129.

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a

130.
131.

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132.
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134.

Exercises
135.
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Completion Statements
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155.
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5
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6

This topic is dealt with in an Appendix to the chapter.

K
K
K

a

158.
159.
a
160.
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147.
148.

a


6-2

Test Bank for ISV Managerial Accounting, Fourth Edition

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE
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Type

1.
2.
31.

TF
TF
MC

32.
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10.
11.
60.
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12.
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14.
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20.
81.
82.
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TF
MC
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TF
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93.
94.
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103.

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104.
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28.
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TF
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30.
121.

TF
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Study Objective 1
35. MC
38. MC
41.
36. MC
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42.
37. MC
40. MC
149.
Study Objective 2
47. MC
50. MC
53.

48. MC
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55.
Study Objective 3
63. MC
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126.
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127.
Study Objective 4
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128.
Study Objective 5

84. MC
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130.
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141.
Study Objective 6a
96. MC
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98. MC
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132.
Study Objective 7a
109. MC
114. MC
119.
110. MC
115. MC
120.
111. MC

116. MC
133.
112. MC
117. MC
134.
113. MC
118. MC
144.
Study Objective 8a
122. MC 124. MC
147.
123. MC 125. MC
148.

Note: TF = True-False
MC = Multiple Choice

C = Completion
BE = Brief Exercise

The chapter also contains four Short-Answer Essay questions.

Type

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Type

59.
150.

MC
C

139.
153.

Ex
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157.

C

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145.

146.
158.
159.

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C
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160.

C

Ex = Exercise


Cost-Volume-Profit Analysis: Additional Issues

6-3

CHAPTER STUDY OBJECTIVES
1. Describe the essential features of a cost-volume-profit income statement. The CVP
income statement classifies costs and expenses as variable or fixed and reports contribution
margin in the body of the statement.
2. Apply basic CVP concepts. Contribution margin is the amount of revenue remaining after
deducting variable costs. It can be expressed as a per unit amount or as a ratio. The breakeven point in units is fixed costs divided by contribution margin per unit. The break-even
point in dollars is fixed cost divided by the contribution margin ratio. These formulas can also

be used to determine units or sales dollars needed to achieve target net income, simply by
adding target net income to fixed costs before dividing by the contribution margin. Margin of
safety indicates how much sales can decline before the company is operating at a loss. It
can be expressed in dollar terms or as a percentage.
3. Explain the term sales mix and its effects on break-even sales. Sales mix is the relative
proportion in which each product is sold when a company sells more than one product. For a
company with a small number of products, break-even sales in units is determined by using
the weighted-average unit contribution margin of all the products. If the company sells many
different products, then calculating the break-even point using unit information is not
practical. Instead, in a company with many products, break-even sales in dollars is
calculated using the weighted-average contribution margin ratio.
4 Determine sales mix when a company has limited resources. When a company has
limited resources, it is necessary to find the contribution margin per unit of limited resource.
This amount is then multiplied by the units of limited resource to determine which product
maximizes net income.
5. Understand how operating leverage affects profitability. Operating leverage refers to the
degree to which a company’s net income reacts to a change in sales. Operating leverage is
determined by a company’s relative use of fixed versus variable costs. Companies with high
fixed costs relative to variable costs have high operating leverage. A company with high
operating leverage will experience a sharp increase (decrease) in net income with a given
increase (decrease) in sales. The degree of operating leverage can be measured by dividing
contribution margin by net income.
a

6. Explain the difference between absorption costing and variable costing. Under
absorption costing, fixed manufacturing costs are product costs. Under variable costing, fixed
manufacturing costs are period costs.

a

7. Discuss net income effects under absorption costing versus variable costing. If
production volume exceeds sales volume, net income under absorption costing will exceed
net income under variable costing by the amount of fixed manufacturing costs included in
ending inventory that results from units produced but not sold during the period. If production
volume is less than sales volume, net income under absorption costing will be less than
under variable costing by the amount of fixed manufacturing costs included in the units sold
during the period that were not produced during the period.

a

8. Discuss the merits of absorption versus variable costing for management decision
making. The use of variable costing is consistent with cost-volume-profit analysis. Net
income under variable costing is unaffected by changes in production levels. Instead, it is
closely tied to changes in sales. The presentation of fixed costs in the variable costing
approach makes it easier to identify fixed costs and to evaluate their impact on the
company’s profitability.


6-4

Test Bank for ISV Managerial Accounting, Fourth Edition

TRUE-FALSE STATEMENTS
1.

The CVP income statement classifies costs as variable or fixed and computes a
contribution margin.

2.

In CVP analysis, cost includes manufacturing costs but not selling and administrative
expenses.

3.

When a company is in its early stages of operation, its primary goal is to generate a target
net income.

4.

The margin of safety tells a company how far sales can drop before it will be operating at
a loss.

5.

Sales mix is a measure of the percentage increase in sales from period to period.

6.

Sales mix is not important to managers when different products have substantially
different contribution margins.

7.

The weighted-average contribution margin of all the products is computed when
determining the break-even sales for a multi-product firm.

8.

If Conan Corporation sells two products with a sales mix of 75% : 25%, and the respective

contribution margins are $100 and $300, then weighted-average unit contribution margin
is $150.

9.

If fixed costs are $100,000 and weighted-average unit contribution margin is $50, then the
break-even point in units is 2,000 units.

10.

Net income can be increased or decreased by changing the sales mix.

11.

The break-even point in dollars is variable costs divided by the weighted-average
contribution margin ratio.

12.

When a company has limited resources, management must decide which products to
make and sell in order to maximize net income.

13.

When a company has limited resources to manufacture products, it should manufacture
those products which have the highest contribution margin per unit.

14.

If a company has limited machine hours available for production, it is generally more

profitable to produce and sell the product with the highest contribution margin per machine
hour.

15.

According to the theory of constraints, a company must identify its constraints and find
ways to reduce or eliminate them.

16.

Cost structure refers to the relative proportion of fixed versus variable costs that a
company incurs.

17.

Operating leverage refers to the extent to which a company’s net income reacts to a given
change in fixed costs.


Cost-Volume-Profit Analysis: Additional Issues

a

6-5

18.

The degree of operating leverage provides a measure of a company’s earnings volatility.

19.

If O’Brien Company has a margin of safety ratio of .60, it could sustain a 60 percent
decline in sales before it would be operating at a loss.

20.

A company with low operating leverage will experience a sharp increase in net income
with a given increase in sales.

21.

Variable costing is the approach used for external reporting under generally accepted
accounting principles.

a

22.

The difference between absorption costing and variable costing is the treatment of fixed
manufacturing overhead.

a

23.

Selling and administrative costs are period costs under both absorption and variable
costing.

a

24.

Manufacturing cost per unit will be higher under variable costing than under absorption
costing.

a

25.

Some fixed manufacturing costs of the current period are deferred to future periods
through ending inventory under variable costing.

a

26.

When units produced exceed units sold, income under absorption costing is higher than
income under variable costing.

a

27.

When units sold exceed units produced, income under absorption costing is higher than
income under variable costing.

a

28.

When absorption costing is used for external reporting, variable costing can still be used
for internal reporting purposes.

a

29.

When absorption costing is used, management may be tempted to overproduce in a given
period in order to increase net income.

a

30.

The use of absorption costing facilitates cost-volume-profit analysis.

Answers to True-False Statements
Item

1.
2.
3.
4.
5.

Ans.

T
F
F

T
F

Item

6.
7.
8.
9.
10.

Ans.

F
T
T
T
T

Item

11.
12.
13.
14.
15.

Ans.

F

T
F
T
T

Item

16.
17.
18.
19.
20.

Ans.

T
F
T
T
F

Item
a

21.
a
22.
a
23.
a

24.
a
25.

Ans.

F
T
T
F
F

Item
a

26.
a
27.
a
28.
a
29.
a
30.

Ans.

T
F
T

T
F


6-6

Test Bank for ISV Managerial Accounting, Fourth Edition

MULTIPLE CHOICE QUESTIONS
31.

Cost-volume-profit analysis is the study of the effects of
a. changes in costs and volume on a company’s profit.
b. cost, volume, and profit on the cash budget.
c. cost, volume, and profit on various ratios.
d. changes in costs and volume on a company’s profitability ratios.

32.

The CVP income statement classifies costs
a. as variable or fixed and computes contribution margin.
b. by function and computes a contribution margin.
c. as variable or fixed and computes gross margin.
d. by function and computes a gross margin.

33.

Contribution margin is the amount of revenue remaining after deducting
a. cost of goods sold.
b. fixed costs.

c. variable costs.
d. contra-revenue.

34.

Buerhrle’s CVP income statement included sales of 2,000 units, a selling price of $100,
variable expenses of $60 per unit, and fixed expenses of $44,000. Contribution margin is
a. $200,000.
b. $120,000.
c. $80,000.
d. $36,000.

35.

Buerhrle’s CVP income statement included sales of 2,000 units, a selling price of $100,
variable expenses of $60 per unit, and fixed expenses of $44,000. Net income is
a. $200,000.
b. $80,000.
c. $76,000.
d. $36,000.

36.

For Dye Company, at a sales level of 5,000 units, sales is $75,000, variable expenses
total $40,000, and fixed expenses are $21,000. What is the contribution margin per unit?
a. $2.80
b. $7.00
c. $8.00
d. $15.00

37.

If contribution margin is $200,000, sales is $300,000, and net income is $30,000, then
variable and fixed expenses are
a.
b.
c.
d.

Variable
$100,000
$100,000
$170,000
$500,000

Fixed
$270,000
$170,000
$100,000
$270,000


Cost-Volume-Profit Analysis: Additional Issues
38.

6-7

In a CVP income statement, cost of goods sold is generally
a. completely a variable cost.
b. completely a fixed cost.

c. neither a variable cost nor a fixed cost.
d. partly a variable cost and partly a fixed cost.

39. In a CVP income statement, a selling expense is generally
a. completely a variable cost.
b. completely a fixed cost.
c. neither a variable cost nor a fixed cost.
d. partly a variable cost and partly a fixed cost.
40.

Vazquez Company’s cost of goods sold is $350,000 variable and $200,000 fixed. The
company’s selling and administrative expenses are $250,000 variable and $300,000 fixed.
If the company’s sales is $1,400,000, what is its contribution margin?
a. $300,000
b. $800,000
c. $850,000
d. $900,000

41. Vazquez Company’s cost of goods sold is $350,000 variable and $200,000 fixed. The
company’s selling and administrative expenses are $250,000 variable and $300,000 fixed.
If the company’s sales is $1,400,000, what is its net income?
a. $300,000
b. $800,000
c. $850,000
d. $900,000
42.

Garland’s CVP income statement included sales of 3,000 units, a selling price of $100,
variable expenses of $60 per unit, and net income of $50,000. Fixed expenses are
a. $70,000.

b. $120,000.
c. $180,000.
d. $300,000.

43.

The contribution margin ratio is
a. sales divided by contribution margin.
b. sales divided by fixed expenses.
c. sales divided by variable expenses.
d. contribution margin divided by sales.

44.

For Danks Company, sales is $500,000, variable expenses are $310,000, and fixed
expenses are $140,000. Danks’ contribution margin ratio is
a. 10%.
b. 28%.
c. 38%.
d. 62%.


6-8

Test Bank for ISV Managerial Accounting, Fourth Edition

45.

For Contreras Company, sales is $1,000,000, fixed expenses are $300,000, and the
contribution margin per unit is $72. What is the break-even point?

a. $1,388,889 sales dollars
b. $416,667 sales dollars
c. 13,889 units
d. 4,167 units

46.

For Garland Company, sales is $1,000,000, fixed expenses are $300,000, and the
contribution margin ratio is 36%. What is net income?
a. $60,000
b. $108,000
c. $252,000
d. $360,000

47.

For Garland Company, sales is $1,000,000, fixed expenses are $300,000, and the
contribution margin ratio is 36%. What are the total variable expenses?
a. $192,000
b. $360,000
c. $640,000
d. $1,000,000

48.

In 2008, Masset sold 3,000 units at $500 each. Variable expenses were $350 per unit,
and fixed expenses were $200,000. What was Masset’s 2008 net income?
a. $250,000
b. $450,000
c. $1,050,000

d. $1,500,000

49.

In 2008, Masset sold 3,000 units at $500 each. Variable expenses were $350 per unit,
and fixed expenses were $200,000. The same selling price, variable expenses, and fixed
expenses are expected for 2009. What is Masset’s break-even point in sales dollars for
2009?
a. $666,667
b. $1,333,333
c. $1,500,000
d. $2,142,857

50.

In 2008, Masset sold 3,000 units at $500 each. Variable expenses were $350 per unit,
and fixed expenses were $200,000. The same selling price, variable expenses, and fixed
expenses are expected for 2009. What is Masset’s break-even point in units for 2009?
a. 1,333
b. 3,000
c. 4,285
d. 6,667

51.

The required sales in units to achieve a target net income is
a. (sales + target net income) divided by contribution margin per unit.
b. (sales + target net income) divided by contribution margin ratio.
c. (fixed cost + target net income) divided by contribution margin per unit.
d. (fixed cost + target net income) divided by contribution margin ratio.

Cost-Volume-Profit Analysis: Additional Issues

6-9

52.

For Jon Company, sales is $1,000,000, fixed expenses are $300,000, and the contribution
margin ratio is 36%. What is required sales in dollars to earn a target net income of
$200,000?
a. $555,556
b. $833,333
c. $1,388,889
d. $2,777,778

53.

Jenks Corporation reported sales of $2,000,000 last year (100,000 units at $20 each),
when the break-even point was 80,000 units. Jenks’ margin of safety ratio is
a. 20%.
b. 25%.
c. 80%.
d. 120%.

54.

For Bobby Company, sales is $1,000,000 (5,000 units), fixed expenses are $300,000, and
the contribution margin per unit is $80. What is the margin of safety in dollars?
a. $50,000

b. $250,000
c. $450,000
d. $700,000

55.

Margin of safety in dollars is
a. expected sales divided by break-even sales.
b. expected sales less break-even sales.
c. actual sales less expected sales.
d. expected sales less actual sales.

56.

The margin of safety ratio is
a. expected sales divided by break-even sales.
b. expected sales less break-even sales.
c. margin of safety in dollars divided by expected sales.
d. margin of safety in dollars divided by break-even sales.

57.

In 2008, McDougal sold 3,000 units at $500 each. Variable expenses were $350 per unit,
and fixed expenses were $195,000. The same variable expenses per unit and fixed
expenses are expected for 2009. If McDougal cuts selling price by 4%, what is
McDougal’s break-even point in units for 2009?
a. 1,300
b. 1,354
c. 1,440
d. 1,500

58.

In 2008, Thornton sold 3,000 units at $500 each. Variable expenses were $250 per unit,
and fixed expenses were $150,000. The same selling price is expected for 2009. Thornton
is tentatively planning to invest in equipment that would increase fixed costs by 20%, while
decreasing variable costs per unit by 20%. What is Thornton’s break-even point in units
for 2009?
a. 600
b. 720
c. 750
d. 900


6 - 10

Test Bank for ISV Managerial Accounting, Fourth Edition

59.

In 2008, Logan sold 1,000 units at $500 each, and earned net income of $40,000.
Variable expenses were $300 per unit, and fixed expenses were $160,000. The same
selling price is expected for 2009. Logan’s variable cost per unit will rise by 10% in 2009
due to increasing material costs, so they are tentatively planning to cut fixed costs by
$10,000. How many units must Logan sell in 2009 to maintain the same income level as
2008?
a. 882
b. 1,000
c. 1,056
d. 1,118

60.

Sales mix is
a. the relative percentage in which a company sells its multiple products.
b. the trend of sales over recent periods.
c. the mix of variable and fixed expenses in relation to sales.
d. a measure of leverage used by the company.

61.

In a sales mix situation, at any level of units sold, net income will be higher if
a. more higher contribution margin units are sold than lower contribution margin units.
b. more lower contribution margin units are sold than higher contribution margin units.
c. more fixed expenses are incurred.
d. weighted-average unit contribution margin decreases.

62.

Konerko Company sells two types of computer chips. The sales mix is 30% (Q-Chip) and
70% (Q-Chip Plus). Q-Chip has variable costs per unit of $30 and a selling price of $50.
Q-Chip Plus has variable costs per unit of $35 and a selling price of $65. The weightedaverage unit contribution margin for Konerko is
a. $23.
b. $25.
c. $27.
d. $50.

63.

Iguchi Company sells 2,000 units of Product A annually, and 3,000 units of Product B

annually. The sales mix for Product A is
a. 40%.
b. 60%.
c. 67%.
d. cannot determine from information given.

64.

Konerko Company sells two types of computer chips. The sales mix is 30% (Q-Chip) and
70% (Q-Chip Plus). Q-Chip has variable costs per unit of $30 and a selling price of $50.
Q-Chip Plus has variable costs per unit of $35 and a selling price of $65. Konerko’s fixed
costs are $540,000. How many units of Q-Chip would be sold at the break-even point?
a. 6,000
b. 7,043
c. 10,000
d. 14,000


Cost-Volume-Profit Analysis: Additional Issues

6 - 11

Use the following information for questions 65 and 66.
Uribe Company has a weighted-average unit contribution margin of $30 for its two products,
Standard and Supreme. Expected sales for Uribe are 40,000 Standard and 60,000 Supreme.
Fixed expenses are $1,800,000.
65.

How many Standards would Uribe sell at the break-even point?
a. 24,000

b. 36,000
c. 40,000
d. 60,000

66.

At the expected sales level, Uribe’s net income will be
a. $(300,000).
b. $ - 0 -.
c. $1,200,000.
d. $3,000,000.

Use the following information for questions 67–70.
Fields Corporation has two divisions; Sporting Goods and Sports Gear. The sales mix is 65% for
Sporting Goods and 35% for Sports Gear. Fields incurs $2,220,000 in fixed costs. The
contribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is 50%.
67.

The weighted-average contribution margin ratio is
a. 37%.
b. 40%.
c. 43%.
d. 50%.

68.

The break-even point in dollars is
a. $821,400.
b. $5,162,791.
c. $5,550,000.

d. $6,000,000.

69.

What will sales be for the Sporting Goods Division at the break-even point?
a. $1,800,000
b. $2,100,000
c. $3,355,814
d. $3,900,000

70.

What will be the total contribution margin at the break-even point?
a. $1,910,233
b. $2,220,000
c. $2,400,000
d. $2,580,000

71.

A shift from low-margin sales to high-margin sales
a. may increase net income, even though there is a decline in total units sold.
b. will always increase net income.
c. will always decrease net income.
d. will always decrease units sold.


6 - 12
72.

Test Bank for ISV Managerial Accounting, Fourth Edition
A shift from high-margin sales to low-margin sales
a. may decrease net income, even though there is an increase in total units sold.
b. will always decrease net income.
c. will always increase net income.
d. will always increase units sold.

Use the following information for questions 73 and 74.
Innova Discs has two divisions—Standard and Premium. Each division has hundreds of different
types of golf discs and disc golf products. The following information is available:
Sales
Variable costs
Contribution margin
Total fixed costs

Standard Division
$400,000
280,000
$120,000

Premium Division
$600,000
360,000
$240,000

Total
$1,000,000
$300,000

73.

What is the weighted-average contribution margin ratio?
a. 34%
b. 35%
c. 36%
d. 50%

74.

What is the break-even point in dollars?
a. $108,000
b. $833,333
c. $857,143
d. $882,353

75.

The sales mix percentages for Guillen’s Chicago and Charlotte Divisions are 70% and
30%. The contribution margin ratios are: Chicago (40%) and Charlotte (30%). Fixed costs
are $555,000. What is Guillen’s break-even point in dollars?
a. $194,250
b. $1,500,000
c. $1,585,714
d. $1681,818

76. A company can sell all the units it can produce of either Product A or Product B but not both.
Product A has a unit contribution margin of $16 and takes two machine hours to make and
Product B has a unit contribution margin of $30 and takes three machine hours to make. If
there are 1,000 machine hours available to manufacture a product, income will be
a. $2,000 more if Product A is made.

b. $2,000 less if Product B is made.
c. $2,000 less if Product A is made.
d. the same if either product is made.
77.

Dye Company can sell all the units it can produce of either Plain or Fancy but not both.
Plain has a unit contribution margin of $96 and takes two machine hours to make and
Fancy has a unit contribution margin of $120 and takes three machine hours to make.
There are 2,400 machine hours available to manufacture a product. What should Dye do?
a. Make Fancy which creates $24 more profit per unit than Plain does.
b. Make Plain which creates $8 more profit per machine hour than Fancy does.
c. Make Plain because more units can be made and sold than Fancy.
d. The same total profits exist regardless of which product is made.


Cost-Volume-Profit Analysis: Additional Issues
78.

What is the key factor in determining sales mix if a company has limited resources?
a. Contribution margin per unit of limited resource
b. The amount of fixed costs per unit
c. Total contribution margin
d. The cost of limited resources

79.

Jermaine’s Vittles can produce and sell only one of the following two products:
Oven
Hours Required
Crackers

0.2
Bread sticks
0.3

6 - 13

Contribution
Margin Per Unit
$3
$4

The company has oven capacity of 600 hours. How much will contribution margin be if it
produces only the most profitable product?
a. $6,000
b. $8,000
c. $9,000
d. $12,000
80.

S-Pod’s contribution margin is $10 per unit for Product A and $12 for Product B. Product
A requires 2 machine hours and Product B requires 4 machine hours. How much is the
contribution margin per unit of limited resource for each product?
A
B
a. $5.00
$3.00
b. $5.00
$3.33
c. $4.00
$3.00

d. $4.00
$3.33

81.

Cost structure
a. refers to the relative proportion of fixed versus variable costs that a company incurs.
b. generally has little impact on profitability.
c. cannot be significantly changed by companies.
d. refers to the relative proportion of operating versus nonoperating costs that a company
incurs.

82.

Outsourcing production will
a. reduce fixed costs and increase variable costs.
b. reduce variable costs and increase fixed costs.
c. have no effect on the relative proportion of fixed and variable costs.
d. make the company more susceptible to economic swings.

83.

Reducing reliance on human workers and instead investing heavily in computers and
online technology will
a. reduce fixed costs and increase variable costs.
b. reduce variable costs and increase fixed costs.
c. have no effect on the relative proportion of fixed and variable costs.
d. make the company less susceptible to economic swings.

6 - 14
84.

Test Bank for ISV Managerial Accounting, Fourth Edition
Cost structure refers to the relative proportion of
a. selling expenses versus administrative expenses.
b. selling and administrative expenses versus cost of goods sold.
c. contribution margin versus sales.
d. none of the above.

Use the following information for questions 85 and 86.
Small Fry Company has sales of $1,000,000, variable costs of $400,000, and fixed costs of
$450,000.
85.

Small Fry’s degree of operating leverage is
a. .80.
b. 1.50.
c. 1.67
d. 4.00.

86.

Small Fry’s margin of safety ratio is
a. .18.
b. .25.
c. .33.
d. .75.

87.

Which of the following statements is not true?
a. Operating leverage refers to the extent to which a company’s net income reacts to a
given change in sales.
b. Companies that have higher fixed costs relative to variable costs have higher
operating leverage.
c. When a company’s sales revenue is increasing, high operating leverage is good
because it means that profits will increase rapidly.
d. When a company’s sales revenue is decreasing, high operating leverage is good
because it means that profits will decrease at a slower pace than revenues decrease.

88.

Scottie Company’s degree of operating leverage is 1.5. Erstadt Corporation’s degree of
operating leverage is 4.5. Erstadt’s earnings would go up (or down) by ________ as much
as Scottie’s with an equal increase (or decrease) in sales.
a. 1/3
b. 2 times
c. 3 times
d. 6 times

89.

The margin of safety ratio
a. is computed as actual sales divided by break-even sales.
b. indicates what percent decline in sales could be sustained before the company would
operate at a loss.
c. measures the ratio of fixed costs to variable costs.
d. is used to determine the break-even point.

Cost-Volume-Profit Analysis: Additional Issues

6 - 15

90.

A cost structure which relies more heavily on fixed costs makes the company
a. more sensitive to changes in sales revenue.
b. less sensitive to changes in sales revenue.
c. either more or less sensitive to changes in sales revenue, depending on other factors.
d. have a lower break-even point.

91.

A company with a higher contribution margin ratio is
a. more sensitive to changes in sales revenue.
b. less sensitive to changes in sales revenue.
c. either more or less sensitive to changes in sales revenue, depending on other factors.
d. likely to have a lower breakeven point.

92.

The degree of operating leverage
a. does not provide a reliable measure of a company’s earnings volatility.
b. cannot be used to compare companies.
c. is computed by dividing total contribution margin by net income.
d. measures how much of each sales dollar is available to cover fixed expenses.

a

93.

Only direct materials, direct labor, and variable manufacturing overhead costs are
considered product costs when using
a. full costing.
b. absorption costing.
c. variable costing.
d. product costing.

a

94.

When a company assigns the costs of direct materials, direct labor, and both variable and
fixed manufacturing overhead to products, that company is using
a. operations costing.
b. absorption costing.
c. variable costing.
d. product costing.

a

95.

Companies recognize fixed manufacturing overhead costs as period costs (expenses)
when incurred when using
a. full costing.
b. absorption costing.
c. product costing.

d. variable costing.

a

96.

Under absorption costing and variable costing, how are fixed manufacturing costs
treated?
a.
b.
c.
d.

Absorption
Product Cost
Product Cost
Period Cost
Period Cost

Variable
Product Cost
Period Cost
Product Cost
Period Cost


6 - 16
a

97.

Test Bank for ISV Managerial Accounting, Fourth Edition
Under absorption costing and variable costing, how are variable manufacturing costs
treated?
a.
b.
c.
d.

a

98.

99.

Variable
Product Cost
Period Cost
Product Cost
Period Cost

Under absorption costing and variable costing, how are direct labor costs treated?
a.
b.
c.
d.

a

Absorption

Product Cost
Product Cost
Period Cost
Period Cost

Absorption
Product Cost
Product Cost
Period Cost
Period Cost

Variable
Product Cost
Period Cost
Product Cost
Period Cost

Fixed selling expenses are period costs
a. under both absorption and variable costing.
b. under neither absorption nor variable costing.
c. under absorption costing, but not under variable costing.
d. under variable costing, but not under absorption costing.

a

100. Which cost is not charged to the product under variable costing?
a. Direct materials
b. Direct labor
c. Variable manufacturing overhead
d. Fixed manufacturing overhead

a

101. Which cost is charged to the product under variable costing?
a. Variable manufacturing overhead
b. Fixed manufacturing overhead
c. Variable administrative expenses
d. Fixed administrative expenses

a

102. Variable costing
a. is used for external reporting purposes.
b. is required under GAAP.
c. treats fixed manufacturing overhead as a period cost.
d. is also known as full costing.

Use the following information for questions 103–107.
Briscoe Company sells its product for $40 per unit. During 2008, it produced 60,000 units and
sold 50,000 units (there was no beginning inventory). Costs per unit are: direct materials $10,
direct labor $6, and variable overhead $2. Fixed costs are: $480,000 manufacturing overhead,
and $60,000 selling and administrative expenses.
a

103. The per unit manufacturing cost under absorption costing is
a. $16.
b. $18.
c. $26.
d. $27.

Cost-Volume-Profit Analysis: Additional Issues
a

104.

6 - 17

The per unit manufacturing cost under variable costing is
a. $16.
b. $18.
c. $26.
d. $27.

a

105. Cost of goods sold under absorption costing is
a. $900,000.
b. $1,080,000.
c. $1,300,000.
d. $1,560,000.

a

106. Ending inventory under variable costing is
a. $180,000.
b. $260,000.
c. $400,000.
d. $900,000.

a

107.

Under absorption costing, what amount of fixed overhead is deferred to a future period?
a. $20,000
b. $80,000
c. $100,000
d. $480,000

a

108.

Net income under absorption costing is gross profit less
a. cost of goods sold.
b. fixed manufacturing overhead and fixed selling and administrative expenses.
c. fixed manufacturing overhead and variable manufacturing overhead.
d. variable selling and administrative expenses and fixed selling and administrative
expenses.

a

109.

Net income under variable costing is contribution margin less
a. cost of goods sold.
b. fixed manufacturing overhead and fixed selling and administrative expenses.
c. fixed manufacturing overhead and variable manufacturing overhead.
d. variable selling and administrative expenses and fixed selling and administrative

expenses.

a

110.

The manufacturing cost per unit for absorption costing is
a. usually, but not always, higher than manufacturing cost per unit for variable costing.
b. usually, but not always, lower than manufacturing cost per unit for variable costing.
c. always higher than manufacturing cost per unit for variable costing.
d. always lower than manufacturing cost per unit for variable costing.

a

111. The one primary difference between variable and absorption costing is that under
a. variable costing, companies charge the fixed manufacturing overhead as an expense
in the current period.
b. absorption costing, companies charge the fixed manufacturing overhead as an
expense in the current period.
c. variable costing, companies charge the variable manufacturing overhead as an
expense in the current period.
d. absorption costing, companies charge the variable manufacturing overhead as an
expense in the current period.


6 - 18

Test Bank for ISV Managerial Accounting, Fourth Edition

a

112. Net income under absorption costing is higher than net income under variable costing
a. when units produced exceed units sold.
b. when units produced equal units sold.
c. when units produced are less than units sold.
d. regardless of the relationship between units produced and units sold.

a

113. Some fixed manufacturing overhead costs of the current period are deferred to future
periods under
a. absorption costing.
b. variable costing.
c. both absorption and variable costing.
d. neither absorption nor variable costing.

Use the following information for questions 114–118.
Jack Company sells its product for $11,000 per unit. Variable costs per unit are: manufacturing,
$6,000, and selling and administrative, $125. Fixed costs are: $30,000 manufacturing overhead,
and $40,000 selling and administrative. There was no beginning inventory at 1/1/07. Production
was 20 units per year in 2007–2009. Sales was 20 units in 2007, 16 units in 2008, and 24 units in
2009.
a

114. Income under absorption costing for 2008 is
a. $8,000.
b. $14,000.
c. $16,000.
d. $22,000.

a

115. Income under absorption costing for 2009 is
a. $33,000.
b. $39,000
c. $41,000
d. $47,000.

a

116. Income under variable costing for 2008 is
a. $8,000.
b. $14,000
c. $16,000
d. $22,000.

a

Income under variable costing for 2009 is
a. $33,000.
b. $39,000.
c. $41,000.
d. $47,000.

117.

a

118. For the three years 2007–2009,
a. absorption costing income exceeds variable costing income by $6,000.

b. absorption costing income equals variable costing income.
c. variable costing income exceeds absorption costing income by $6,000.
d. absorption costing income may be greater than, equal to, or less than variable costing
income, depending on the situation.


Cost-Volume-Profit Analysis: Additional Issues
a

a

119. When production exceeds sales,
a. some fixed manufacturing overhead costs are deferred until a future
absorption costing.
b. some fixed manufacturing overhead costs are deferred until a future
variable costing.
c. variable and fixed manufacturing overhead costs are deferred until a
under absorption costing.
b. variable and fixed manufacturing overhead costs are deferred until a
under variable costing.

120.

6 - 19

period under
period under
future period
future period

When production exceeds sales,
a. ending inventory under variable costing will exceed ending inventory under absorption
costing.
b. ending inventory under absorption costing will exceed ending inventory under variable
costing.
c. ending inventory under absorption costing will be equal to ending inventory under
variable costing.
d. ending inventory under absorption costing may exceed, be equal to, or be less than
ending inventory under variable costing.

a

121. Management may be tempted to overproduce when using
a. variable costing, in order to increase net income.
b. variable costing, in order to decrease net income.
c. absorption costing, in order to increase net income.
d. absorption costing, in order to decrease net income.

a

122. If a division manager’s compensation is based upon the division’s net income, the
manager may decide to meet the net income targets by increasing production when using
a. variable costing, in order to increase net income.
b. variable costing, in order to decrease net income.
c. absorption costing, in order to increase net income.
d. absorption costing, in order to decrease net income.
a

a

123. Expected sales for next year for the Huxtable Division is 150,000 units. Bill Cosby,
manager of the Huxtable Division, is under pressure to improve the performance of the
Division. As he plans for next year, he has to decide whether to produce 150,000 units or
180,000 units. The Huxtable Division will have higher net income if Bill Cosby decides to
produce
a. 180,000 units if income is measured under absorption costing.
b. 180,000 units if income is measured under variable costing.
c. 150,000 units if income is measured under absorption costing.
d. 150,000 units if income is measured under variable costing.

124. Which of the following is a potential advantage of variable costing relative to absorption
costing?
a. Net income is affected by changes in production levels.
b. The use of variable costing is consistent with cost-volume-profit analysis.
c. Net income computed under variable costing is not closely tied to changes in sales
levels.
d. More than one of the above.


6 - 20
a

Test Bank for ISV Managerial Accounting, Fourth Edition

125. Companies that use just-in-time processing techniques will
a. have greater differences between absorption and variable costing net income.
b. have smaller differences between absorption and variable costing net income.
c. not be able to use absorption costing.
d. not be able to use variable costing.

Answers to Multiple Choice Questions
Item

31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.

Ans.

a
a
c
c
d
b
b
d
d
b

a
a
d
c

Item

45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.

Ans.

d
a
c
a
a
a

c
c
a
b
b
c
d
a

Item

59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.

Ans.

d
a

a
c
a
a
a
c
a
d
d
b
a
a

Item

73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.

Ans.

Item

Ans.

c
b
b
c
b
a
c
a
a
a
b
d
d
b

87.
88.
89.
90.
91.
92.
a
93.
a

94.
a
95.
a
96.
a
97.
a
98.
a
99.
a
100.

d
c
b
a
a
c
c
b
d
b
a
a
a
d

Item

a

101.
a
102.
a
103.
a
104.
a
105.
a
106.
a
107.
a
108.
a
109.
a
110.
a
111.
a
112.
a
113.
a
114.

Ans.

a
c
c
b
c
a
b
d
b
c
a
a
a
b

Item
a

115.
a
116.
a
117.
a
118.
a
119.
a

120.
a
121.
a
122.
a
123.
a
124.
a
125.

Ans.

c
a
d
b
a
b
c
c
a
b
b

BRIEF EXERCISES
BE 126
Haldi Corporation sells three different sets of sportswear. Sleek sells for $30 and has variable
costs of $18; Smooth sells for $50 and has variable costs of $30; Potent sells for $90 and has

variable costs of $45. The sales mix of the three sets is: Sleek, 50%; Smooth, 30%; and Potent,
20%.
Instructions
What is the weighted-average unit contribution margin?
Solution 126

(6–8 min.)

Sleek:
50% × ($30 – $18)
=
Smooth:
30% × ($50 – $30)
=
Potent:
20% × ($90 – $45)
=
Weighted-average unit contribution margin

$ 6
6
9
$21


Cost-Volume-Profit Analysis: Additional Issues

6 - 21

BE 127

Garrett Corporation sells two product lines. The sales mix of the product lines is: Standard, 60%;
and Deluxe, 40%. The contribution margin ratio of each line is: Standard, 35%; and Deluxe, 45%.
Garrett’s fixed costs are $1,950,000.
Instructions
What is the dollar amount of Deluxe sales at the break-even point?
Solution 127

(6–8 min.)

Standard:
60% × 35%
=
Deluxe:
40% × 45%
=
Weighted-average contribution margin ratio

21%
18%
39%

$1,950,000 ÷ 39% = $5,000,000 break-even point in dollars
Dollar amount of Deluxe sales at the break-even point: $5,000,000 × 40% = $2,000,000.
BE 128
Carpenter Company provided the following information concerning two products:
Contribution margin per unit
Machine hours required for one unit

Product 12
$20

2.5 hours

Product 43
$15
1.5 hours

Instructions
Compute the contribution margin per unit of limited resource for each product. Which product
should Carpenter tell its sales personnel to “push” to customers?
Solution 128

(3–5 min.)

Product 12: $20 ÷ 2.5 hours = $8
Product 43: $15 ÷ 1.5 hours = $10
Sales personnel should push Product 43.
BE 129
Ace Company makes two products, footballs and baseballs. Additional information follows:
Units
Sales
Variable costs
Fixed costs
Net income
Yards of leather per unit
Profit per unit
Contribution margin per unit

Footballs
2,000
$60,000

24,000
10,000
$26,000
1.25
$13.00
$18.00

Baseballs
3,000
$25,000
13,750
5,250
$ 6,000
0.25
$2.00
$3.75


6 - 22

Test Bank for ISV Managerial Accounting, Fourth Edition

BE 129 (cont.)
Assume that Ace is able to order an additional 2,000 yards of leather and wishes to maximize its
income. Of the additional units it produces, at least 400 of each product are necessary for sales.
Instructions
How many units of each must be produced?
Solution 129

(5–7 min.)

Footballs
$18 ÷ 1.25 = $14.40

Contribution margin per yard

Baseballs
$3.75 ÷ .25 = $15

Produce more baseballs since CM per constraint is more.
Minimum for footballs: 400 × 1.25 yd. = 500 yd.
Material remaining for baseballs: 2,000 – 500 = 1,500 yd.
# of baseballs: 1,500 ÷ .25 = 6,000 baseballs
BE 130
Norton Corporation is considering buying new equipment for its factory. The new equipment will
reduce variable labor costs but increase depreciation expense. Contribution margin is expected to
increase from $250,000 to $300,000. Net income is expected to remain the same at $100,000.
Instructions
Compute the degree of operating leverage before and after the purchase of the new equipment
and interpret your results.
Solution 130
Before:
After

(4–6 min.)
Contribution margin
$250,000
$300,000

÷
÷

÷

Net Income
$100,000
$100,000

=
=
=

Degree of operating leverage
2.5
3.0

After the new equipment is purchased, Norton’s earnings would go up (or down) by 1.2 times (3 ÷
2.5) as much as it would have before the purchase, with an equal increase (or decrease) in sales.
a

BE 131

Huskie Company produces footballs. It incurred the following costs this year:
Direct materials
Direct labor
Fixed manufacturing overhead
Variable manufacturing overhead
Fixed selling and administrative expenses
Variable selling and administrative expenses

$25,000
31,000

22,000
38,000
23,000
14,000

Instructions
What are the total product costs for the company under variable costing?


Cost-Volume-Profit Analysis: Additional Issues
a

Solution 131

(3–5 min.)

Direct materials
Direct labor
Variable manufacturing overhead
Total product costs under variable costing
a

6 - 23

$25,000
31,000
38,000
$94,000

BE 132

Huskie Company produces footballs. It incurred the following costs this year:
Direct materials
Direct labor
Fixed manufacturing overhead
Variable manufacturing overhead
Fixed selling and administrative expenses
Variable selling and administrative expenses

$25,000
31,000
22,000
38,000
23,000
14,000

Instructions
What are the total product costs for the company under absorption costing?
a

Solution 132

(3–5 min.)

Direct materials
Direct labor
Fixed manufacturing overhead
Variable manufacturing overhead
Total product costs under absorption costing
a

$ 25,000
31,000
22,000
38,000
$116,000

BE 133

During 2008, Nowak Corporation produced 60,000 units and sold 55,000 for $10 per unit.
Variable manufacturing costs were $4 per unit. Annual fixed manufacturing overhead was
$120,000 ($2 per unit). Variable selling and administrative costs were $1 per unit sold, and fixed
selling and administrative costs were $30,000.
Instructions
Prepare a variable costing income statement.
a

Solution 133

(5–7 min.)

Sales (55,000 × $10)
Variable cost of goods sold (55,000 × $4)
Variable selling and administrative expenses (55,000 × $1)
Contribution margin
Fixed manufacturing overhead
Fixed selling and administrative expenses
Net income

$550,000

$220,000
55,000
120,000
30,000

275,000
275,000
150,000
$125,000


6 - 24
a

Test Bank for ISV Managerial Accounting, Fourth Edition

BE 134

During 2008, Nowak Corporation produced 60,000 units and sold 55,000 for $10 per unit.
Variable manufacturing costs were $4 per unit. Annual fixed manufacturing overhead was
$120,000 ($2 per unit). Variable selling and administrative costs were $1 per unit sold, and fixed
selling and administrative costs were $30,000.
Instructions
Prepare an absorption costing income statement.
a

Solution 134

(5–7 min.)

Sales (55,000 × $10)
Cost of goods sold (55,000 × $6)
Gross margin
Variable selling and administrative expenses (55,000 × $1)
Fixed selling and administrative expenses
Net income

$550,000
330,000
220,000
$55,000
30,000

85,000
$135,000

EXERCISES
Ex. 135
Trail King manufactures mountain bikes. It has fixed costs of $5,360,000. Trail King’s sales mix
and contribution margin per unit is shown as follows:
Sales Mix
20%
55%
25%

Destroyer
Voyager
Rebel

Contribution Margin

$120
$ 60
$ 40

Instructions
Compute the number of each type of bike that the company would need to sell in order to break
even under this product mix.
Solution 135

Destroyer
Voyager
Rebel

(8–12 min.)
Sales Mix
20%
55%
25%

×
×
×
×

Contribution Margin
$120
$ 60
$ 40

Weighted-Average

Contribution Margin
$24
$33
$10
$67

Total break-even sales = $5,360,000 ÷ $67 = 80,000 bikes
Destroyer
Voyager
Rebel

Sales Mix
20%
55%
25%

×
×
×

80,000
80,000
80,000

=
=
=

16,000 bikes
44,000 bikes

20,000 bikes


Cost-Volume-Profit Analysis: Additional Issues

6 - 25

Ex. 136
Account-Able Company provides primarily two lines of service: accounting and tax. Accountingrelated services represent 60% of its revenue and provide a contribution margin ratio of 30%. Tax
services represent 40% of its revenue and provide a 45% contribution margin ratio. The
company’s fixed costs are $9,000,000.
Instructions
(a) Calculate the revenue from each type of service that the company must achieve to break
even.
(b) The company has a desired net income of $1,800,000. What amount of revenue would
Account-Able earn from tax services if it achieves this goal with the current sales mix?
Solution 136

(10–15 min.)

(a)
Accounting
Tax

Contribution
Margin Ratio
30%
45%

Sales Mix

60%
40%

Weighted-Average
Contribution Margin Ratio
18%
18%
36%

Total break-even sales = $9,000,000 ÷ .36 = $25,000,000
Accounting
Tax

Sales Mix
60%
×
40%
×

$25,000,000 = $15,000,000
$25,000,000 = $10,000,000

(b) Sales to achieve target net income = ($9,000,000 + $1,800,000) ÷ .36 = $30,000,000
Tax

Sales Mix
40%
×

$30,000,000 = $12,000,000

Ex. 137
Mad City Flash Company sells computers and video game systems. The business is divided into
two divisions along product lines. Variable costing income statements for the current year are
presented below:
Computers
VG Systems
Total
Sales
$700,000
$300,000
$1,000,000
Variable costs
420,000
210,000
630,000
Contribution margin
$280,000
$ 90,000
370,000
Fixed costs
259,000
Net income
$ 111,000
Instructions
(a) Determine the sales mix and contribution margin ratio for each division.
(b) Calculate the company’s weighted-average contribution margin ratio.
(c) Calculate the company’s break-even point in dollars.
(d) Determine the sales level, in dollars, for each division at the break-even point.