Managerial accounting tools for business decision making 8th edition weygandt test bank

Managerial Accounting Tools for Business Decision Making 8th Edition Weygandt Test Bank Visit to download the full and correct content document: https://testbankdeal.com/dow nload/managerial-accounting-tools-for-business-decision-making-8th-edition-weygand t-test-bank/

CHAPTER 6 COST-VOLUME-PROFIT ANALYSIS: ADDITIONAL ISSUES SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item

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Brief Exercises 126.

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

FOR INSTRUCTOR USE ONLY

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6-2

Test Bank for Managerial Accounting, Eighth Edition

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item

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Learning Objective 1 MC 45. MC 51.

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MC 50. MC 56.

Learning Objective 2 MC 68. MC 73.

MC 69. MC 74.

MC 70. MC 75.

MC 71. MC 126.

MC 72. MC 127.

Learning Objective 3 MC 128. BE 142.

MC 129. BE 143.

MC 141. Ex 158.

Learning Objective 4 MC 88. MC 92.

MC 89. MC 130.

MC 90. MC 131.

MC 91. MC 136.

Learning Objective 5a MC 110. MC 119.

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C = Completion BE = Brief Exercise

The chapter also contains four Short-Answer Essay questions.

FOR INSTRUCTOR USE ONLY

Ex = Exercise

Cost-Volume-Profit Analysis: Additional Issues

6-3

CHAPTER LEARNING OBJECTIVES 1. Apply basic CVP concepts. The CVP income statement classifies costs and expenses as variable or fixed and reports contribution margin in the body of the statement. 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 break-even point in units is fixed costs divided by unit contribution margin. The break-even point in dollars is fixed costs 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.

2. 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.

3. 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.

4. Indicate 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 experiences a sharp increase (decrease) in net income with a given increase (decrease) in sales. The degree of operating leverage is measured by dividing contribution margin by net income. a

5. 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. 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. 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.

FOR INSTRUCTOR USE ONLY

6-4

Test Bank for Managerial Accounting, Eighth Edition

TRUE-FALSE STATEMENTS 1.

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

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

2.

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

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic/Critical Thinking, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

3.

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

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

4.

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

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

5.

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

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

6.

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

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

7.

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

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

8.

If Buttercup, Inc. sells two products with a sales mix of 75% : 25%, and the respective contribution margins are $80 and $240, then weighted-average unit contribution margin is $120.

Ans: T, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics Solution: (.75 x $80) + (.25 x $240) = $120

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.

Ans: T, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $100,000 / $50 = 2,000 units (Fixed Costs / Unit contribution margin = break-even point in units)

10.

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

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

11.

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

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

FOR INSTRUCTOR USE ONLY

Cost-Volume-Profit Analysis: Additional Issues 12.

6-5

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

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

13.

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

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

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.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

15.

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

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

16.

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

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

17.

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

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

18.

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

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

19.

If Sprinkle Industries 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.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

20.

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

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics a

21.

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

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting a

22.

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

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

FOR INSTRUCTOR USE ONLY

6-6 a

23.

Test Bank for Managerial Accounting, Eighth Edition Selling and administrative costs are period costs under both absorption and variable costing.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting a

24.

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

Ans: F, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics a

25.

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

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting a

26.

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

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics a

27.

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

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting a

28.

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

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting a

29.

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

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics a

30.

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

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic/Critical Thinking, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

Answers to True-False Statements Item

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FOR INSTRUCTOR USE ONLY

Item a

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Cost-Volume-Profit Analysis: Additional Issues

6-7

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.

Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

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.

Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

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.

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

34.

Moonwalker’s CVP income statement included sales of 5,000 units, a selling price of $100, variable expenses of $60 per unit, and fixed expenses of $110,000. Contribution margin is a. $500,000. b. $300,000. c. $200,000. d. $90,000.

Ans: c, LO: 1, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($100 - $60) x 5,000 = $200,000 ((Selling price per unit – variable expense per unit) x units sold = Contribution Margin)

35.

Moonwalker’s CVP income statement included sales of 5,000 units, a selling price of $100, variable expenses of $60 per unit, and fixed expenses of $110,000. Net income is a. $500,000. b. $200,000. c. $190,000. d. $90,000.

Ans: d, LO: 1, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: ($100- $60) x 5,000 = $200,000; $200,000 – 110,000 = $90,000

36.

For Buffalo Co., at a sales level of 4,000 units, sales is $75,000, variable expenses total $50,000, and fixed expenses are $21,000. What is the contribution margin per unit? a. $5.25 b. $6.25 c. $12.50 d. $18.75

Ans: b, LO: 1, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

FOR INSTRUCTOR USE ONLY

6-8

Test Bank for Managerial Accounting, Eighth Edition

Solution: $75,000 - $50,000 = $25,000; $25,000 / 4,000 = $6.25 (Sales - Variable expenses = Contribution Margin; Contribution Margin / Units sold = contribution margin per unit)

FOR INSTRUCTOR USE ONLY

Cost-Volume-Profit Analysis: Additional Issues 37.

6-9

If contribution margin is $140,000, sales is $300,000, and net income is $40,000, then variable and fixed expenses are a. b. c. d.

Variable $160,000 $160,000 $100,000 $440,000

Fixed $260,000 $100,000 $160,000 $260,000

Ans: b, LO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $300,000 - $140,000 = $160,000 variable; $140,000 - $40,000 = $100,000 fixed (Sales – Contribution margin = Variable Expenses; Contribution margin – Net Income = Fixed Expenses)

38.

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.

Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

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.

Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

40.

Hinge Manufacturing’s cost of goods sold is $420,000 variable and $240,000 fixed. The company’s selling and administrative expenses are $300,000 variable and $360,000 fixed.

If the company’s sales is $1,580,000, what is its contribution margin? a. $260,000 b. $860,000 c. $920,000 d. $980,000

Ans: b, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: FSA Solution: $1,580,000 - $420,000 - $300,000 = $860,000 (Sales – Variable Cost of Goods Sold – Variable Selling and Administrative Expenses = Contribution Margin)

41. Hinge Manufacturing’s cost of goods sold is $420,000 variable and $240,000 fixed. The company’s selling and administrative expenses are $300,000 variable and $360,000 fixed.

If the company’s sales is $1,580,000, what is its net income? a. $260,000 b. $860,000 c. $920,000 d. $980,000 Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: $1,580,000 - $420,000 - $240,000 - $300,000 - $360,000 = $260,000 (Sales – Variable Cost of Goods Sold – Fixed Cost of Goods Sold – Variable selling and administrative expenses – Fixed selling and administrative expenses = Net Income)

FOR INSTRUCTOR USE ONLY

6 - 10 42.

Test Bank for Managerial Accounting, Eighth Edition Woolford’s CVP income statement included sales of 5,000 units, a selling price of $50, variable expenses of $30 per unit, and net income of $25,000. Fixed expenses are a. $75,000. b. $100,000. c. $150,000. d. $250,000.

Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: ((5,000 x ($50-$30)) - $25,000 = $75,000 (Units Sold x (Selling price – variable expense per unit)) – Net Income = Fixed Expenses)

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.

Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

44.

For Pierce Company, sales is $500,000, variable expenses are $340,000, and fixed expenses are $140,000. Pierce’s contribution margin ratio is a. 4%. b. 28%. c. 32%. d. 68%.

Ans: c, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($500,000 - $340,000) / $500,000 = .32 or 32% (Sales – Variable Expenses) / Sales = Contribution Margin Ratio)

45.

For Sanborn Co., sales is $1,000,000, fixed expenses are $300,000, and the contribution margin per unit is $60. What is the break-even point? a. $1,666,667 sales dollars b. $500,000 sales dollars c. 16,667 units d. 5,000 units

Ans: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $300,000 / $60 = 5,000 units (Fixed Expenses / Contribution margin per unit = Break even point in units)

46.

For Franklin, Inc., sales is $2,000,000, fixed expenses are $600,000, and the contribution margin ratio is 36%. What is net income? a. $120,000 b. $216,000 c. $504,000 d. $720,000

Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: $2,000,000 x .36 = $720,000; $720,000 - $600,000 = $120,000 (Sales x Contribution margin ratio = Contribution Margin; Contribution Margin – Fixed Expenses = Net Income)

FOR INSTRUCTOR USE ONLY

Cost-Volume-Profit Analysis: Additional Issues 47.

6 - 11

For Franklin, Inc., sales is $2,000,000, fixed expenses are $600,000, and the contribution margin ratio is 36%. What are the total variable expenses? a. $384,000 b. $720,000 c. $1,280,000 d. $2,000,000

Ans: c, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $2,000,000 x (1 - .36) = $1,280,000 (Sales x (1 – Contribution margin ratio) = Total variable expenses)

48.

In 2019, Teller Company sold 3,000 units at $600 each. Variable expenses were $420 per unit, and fixed expenses were $240,000. What was Teller’s 2019 net income? a. $300,000 b. $540,000 c. $1,260,000 d. $1,800,000

Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: (3,000 x ($600 - $420)) - $240,000 = $300,000 (Units Sold x (Selling price – Variable expense per unit) – Fixed Expenses = Net Income)

49.

In 2019, Teller Company sold 3,000 units at $600 each. Variable expenses were $420 per unit, and fixed expenses were $270,000. The same selling price, variable expenses, and fixed expenses are expected for 2020. What is Teller’s break-even point in sales dollars for 2020? a. $900,000 b. $2,700,000 c. $1,800,000 d. $2,571,429

Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $270,000 / (($600 - $420)/620) = $900,000 (Fixed expenses / ((Selling price – Variable expense per unit) / Selling price) = Break-even point in sales dollars)

50.

In 2019, Teller Company sold 3,000 units at $600 each. Variable expenses were $420 per unit, and fixed expenses were $270,000. The same selling price, variable expenses, and fixed expenses are expected for 2020. What is Teller’s break-even point in units for 2020? a. 1,500 b. 643 c. 450 d. 750

Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $270,000 / ($600- $420) = 1,500 (Fixed expenses / (Selling price – Variable expense per unit) = Break-even point in units)

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.

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

FOR INSTRUCTOR USE ONLY

6 - 12 52.

Test Bank for Managerial Accounting, Eighth Edition For Wickham Co., sales is $3,000,000, fixed expenses are $900,000, and the contribution margin ratio is 36%. What is required sales in dollars to earn a target net income of $600,000? a. $1,666,667 b. $2,500,000 c. $4,166,667 d. $8,333,333

Ans: c, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($900,000 + $600,000) / .36 = $4,166,667 ((Fixed expenses + Target net income) / Contribution margin = Required sales in dollars)

53.

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

Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: (100,000 – 80,000) x $20 = $400,000 / $2,000,000 = .20 or 20% (Expected (Actual) sales – Break even sales) x Selling price = Margin of Safety in Dollars / Expected (Actual) Sales = Margin of safety ratio)

54.

For Wilder Corporation, sales is $1,600,000 (8,000 units), fixed expenses are $480,000, and the contribution margin per unit is $80. What is the margin of safety in dollars? a. $80,000 b. $400,000 c. $720,000 d. $1,120,000

Ans: b, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $480,000/ $80 = 6,000; $1,600,000 / 8,000 = $200; 6,000 x $200 = $1,200,000; $1,600,000 - $1,200,000 = $400,000 (Fixed Expenses / Contribution margin per unit =Break even sales in units; Budgeted (Expected) Sales / units = Selling price; Break even sales in units x Selling price = Break-Even Sales in Dollars; Budgeted (Expected) Sales – Break-Even Sales in Dollars = Margin of Safety in Dollars)

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.

Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

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.

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

FOR INSTRUCTOR USE ONLY

Cost-Volume-Profit Analysis: Additional Issues 57.

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In 2019, Hagar Corp. sold 3,000 units at $500 each. Variable expenses were $350 per unit, and fixed expenses were $780,000. The same variable expenses per unit and fixed expenses are expected for 2020. If Hagar cuts selling price by 4%, what is Hagar’s breakeven point in units for 2020? a. 5,200 b. 5,416 c. 5,760 d. 6,000

Ans: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $780,000 / (($500 X .96) - $350) = 6,000 (Fixed expenses / ((Selling price X (1 – Selling price cut percentage) – Variable Expense per unit = Break-even point in units)

58.

In 2019, Carow sold 3,000 units at $500 each. Variable expenses were $250 per unit, and fixed expenses were $500,000. The same selling price is expected for 2020. Carow is tentatively planning to invest in equipment that would increase fixed costs by 20%, while decreasing variable costs per unit by 20%. What is Carow’s break-even point in units for 2020? a. 2,000 b. 2,400 c. 2,500 d. 3,000

Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($500,000 * 1.20) / ($500 – ($250 * .80)) = 2,000 (Fixed expenses x Increase Percentage in Fixed Cost) / (Selling price – (Variable costs per unit x Decrease Percentage in Variable Costs) = Break-even point in units)

59.

In 2019, Raleigh 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 2020. Raleigh’s variable cost per unit will rise by 10% in 2020 due to increasing material costs, so they are tentatively planning to cut fixed costs by $10,000. How many units must Raleigh sell in 2020 to maintain the same income level as 2019? a. 882 b. 1,000 c. 1,056 d. 1,118

Ans: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $160,000 + $40,000 – 10,000 / ($500 – ($300 x 1.10)) = 1,118 (Fixed expenses + Net Income – Fixed Expense cut) / (Selling price – (Variable cost per unit x Variable cost percentage increase)) = Units required to maintain the same income level)

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.

Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

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.

FOR INSTRUCTOR USE ONLY

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Test Bank for Managerial Accounting, Eighth Edition

Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

62.

Ramirez Corporation sells two types of computer hard drives. The sales mix is 30% (QDrive) and 70% (Q-Drive Plus). Q-Drive has variable costs per unit of $90 and a selling price of $150. Q-Drive Plus has variable costs per unit of $105 and a selling price of $195.

The weighted-average unit contribution margin for Ramirez is a. $69. b. $75. c. $81. d. $150.

Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: (.30 x ($150 -$90)) + (.70 x ($195 - $105)) = $81 (Q-Drive Sales mix X (Selling price – Variable cost per unit) + (Q-Drive Plus Sales Mix x (Selling price – Variable costs per unit) = Weighted-average unit contribution margin)

63.

Capitol Manufacturing sells 4,000 units of Product A annually, and 6,000 units of Product B annually. The sales mix for Product A is a. 40%. b. 60%. c. 67%. d. Cannot determine from information given.

Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: 4,000 / (4,000 + 6,000) = .40 or 40% (Product A Units Sold / (Product A Units Sold + Product B Units Sold))

64.

Ramirez Corporation sells two types of computer hard drives. The sales mix is 30% (QDrive) and 70% (Q-Drive Plus). Q-Drive has variable costs per unit of $90 and a selling price of $150. Q-Drive Plus has variable costs per unit of $105 and a selling price of $195.

Ramirez’s fixed costs are $891,000. How many units of Q-Drive would be sold at the break-even point? a. 3,300 b. 4,455 c. 11,000 d. 7,700

Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: (.30 x ($150 -$90)) + (.70 x ($195 - $105)) = $81; $891,000 / $81 = 11,000; 11,000 x .3 = 3,300 ((Q-Drive Sales Mix X (Selling Price – Variable costs per unit)) + (Q-Drive Plus Sales Mix X (Selling price – Variable costs per unit)) = Units Sold at Break- even point)

Use the following information for questions 65 and 66.

Roosevelt Corporation has a weighted-average unit contribution margin of $30 for its two products, Standard and Supreme. Expected sales for Roosevelt are 40,000 Standard and 60,000 Supreme. Fixed expenses are $1,800,000.

65.

How many Standards would Roosevelt sell at the break-even point? a. 24,000 b. 36,000 c. 40,000 d. 60,000

Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: 40,000 / (40,000 + 60,000) = .40 or 40% (Standard); 60,000 / (40,000 + 60,000) = .60 (Supreme); $1,800,000 / $30 = 60,000; 60,000 x .40 = 24,000

FOR INSTRUCTOR USE ONLY

Cost-Volume-Profit Analysis: Additional Issues

6 - 15

(Expected Sales (Standard) / (Expected Sales (Standard) + Expected Sales (Supreme) = Standard Sales Mix; Expected Sales (Supreme) / (Expected Sales (Standard) + Expected Sales (Supreme)) = Supreme Sales Mix; Fixed Cost / Weighted Average unit contribution margin = Break-even in units; Break-even in units x Standard Sales Mix = Break-even point in units for Standard)

FOR INSTRUCTOR USE ONLY

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Test Bank for Managerial Accounting, Eighth Edition

66.

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

Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: 40,000 * $30 = $1,200,000 (Expected Sales (Standard) X Weighted average unit contribution margin = Net Income at the expected sales level

Use the following information for questions 67–70.

Swanson Company has two divisions; Sporting Goods and Sports Gear. The sales mix is 65% for Sporting Goods and 35% for Sports Gear. Swanson incurs $6,660,000 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%.

Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: (.65 x .30) + (.35 x .50) = .37 or 37% ((Sales Mix: Sporting Goods x Contribution margin: Sporting Goods) + (Sales Mix: Sports Gear x Contribution margin: Sporting Goods) = weighted average contribution margin) = Weighted Average Contribution Margin)

68.

The break-even point in dollars is a. $2,464,200. b. $15,488,373. c. $16,650,000. d. $18,000,000.

Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: (.65 x .30) + (.35 x .50) = .37 or 37%; $6,660,000 / .37 = $18,000,000 ((Sales Mix: Sporting Goods x Contribution margin: Sporting Goods) + (Sales Mix: Sports Gear x Contribution margin: Sporting Goods) = weighted average contribution margin) = Weighted Average Contribution Margin; Fixed Costs / Weighted Average Contribution Margin = Break-even point in dollars)

69.

What will sales be for the Sporting Goods Division at the break-even point? a. $5,400,000 b. $6,300,000 c. $10,067,442 d. $11,700,000

Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: (.65 x .30) + (.35 x .50) = .37 or 37%; $6,660,000 /.37 = $18,000,000; $18,000,000 x .65 = $11,700,000 ((Sales Mix: Sporting Goods x Contribution margin: Sporting Goods) + (Sales Mix: Sports Gear x Contribution margin: Sporting Goods) = weighted average contribution margin) = Weighted Average Contribution Margin; Fixed Costs / Weighted Average Contribution Margin = Break-even point in dollars); Break-even point in dollars x Sales mix: Sporting Goods = Break-even sales in dollars for Sporting Goods Division)

70.

What will be the total contribution margin at the break-even point? a. $5,730,699 b. $6,660,000 c. $6,720,000 d. $7,740,000

Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: Total Contribution Margin = Total Fixed Costs = $6,660,000

FOR INSTRUCTOR USE ONLY

Cost-Volume-Profit Analysis: Additional Issues

6 - 17

(Total Contribution Margin = Total Fixed Costs)

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.

Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

72.

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.

Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

Use the following information for questions 73 and 74.

MacCloud Industries has two divisions—Standard and Premium. Each division has hundreds of different types of tennis racquets and tennis products. The following information is available: Sales Variable costs Contribution margin Total fixed costs 73.

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

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

Total $1,000,000

$300,000

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

Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: Standard: $120,000 / $400,000 = .30; Premium: $240,000 / $600,000 = .40; (.40 x .30) + (.60 x .40) = .36 or 36% (Contribution Margin / Sales = Contribution Margin ratio; (Sales mix: Standard x Contribution Margin Ratio: Standard) + (Sales mix: Premium x Contribution Margin Ratio: Premium) = Weighted-average contribution margin ratio

74.

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

Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: Standard: $120,000 / $400,000 = .30; Premium: $240,000 / $600,000 = .40; (.40 x .30) + (.60 x .40) = .36 or 36%; $300,000 / .36 = $833,333 (Contribution Margin / Sales = Contribution Margin ratio; (Sales mix: Standard x Contribution Margin Ratio: Standard) + (Sales mix: Premium x Contribution Margin Ratio: Premium) = Weighted-average contribution margin ratio; Total Fixed Costs / Weighted-average contribution margin ratio = Break-even point in dollars)

75.

The sales mix percentages for Novotna’s Boston and Seattle Divisions are 70% and 30%.

The contribution margin ratios are: Boston (40%) and Seattle (30%). Fixed costs are $2,220,000. What is Novotna’s break-even point in dollars? a. $777,000 b. $6,000,000 c. $6,342,856 d. $6,727,272 FOR INSTRUCTOR USE ONLY

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Test Bank for Managerial Accounting, Eighth Edition

Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: (.70 x .40) + (.30 x .30) = .37; $2,220,000 / .37 = 6,000,000 (Sales Mix: Boston x Contribution Margin Ratio: Boston) + (Sales Mix: Seattle x Contribution Margin Ratio: Seattle) = Weighted-average contribution margin ratio; Fixed Costs / Weighted-average contribution margin ratio = Break-even point in dollars)

FOR INSTRUCTOR USE ONLY

Cost-Volume-Profit Analysis: Additional Issues 76.

6 - 19

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 5,000 machine hours available to manufacture a product, income will be a. $10,000 more if Product A is made. b. $10,000 less if Product B is made. c. $10,000 less if Product A is made. d. the same if either product is made.

Ans: c, LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: $16 / 2 = $8 x 5,000 = $40,000; $30 / 3 = $10 x 5,000 = $50,000.

(Product A: Unit Contribution Margin / Product A: Machine Hours to Make) x Product A: Machine Hours Available = Net Income (Product A); (Product A: Unit Contribution Margin / Product B: Machine Hours to Make) x Product B: Machine Hours Available = Net Income (Product B); Net Income (Product B) – Net Income (Product A) = Difference in Net Income)

77.

Brooks Corporation can sell all the units it can produce of either Plain or Fancy but not both.

Plain has a unit contribution margin of $72 and takes two machine hours to make and Fancy has a unit contribution margin of $90 and takes three machine hours to make. There are 2,400 machine hours available to manufacture a product. What should Brooks do? a. Make Fancy which creates $18 more profit per unit than Plain does. b. Make Plain which creates $6 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.

Ans: b, LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $72 / 2 = $36; $90 / 3 = $30 (Unit Contribution Margin: Plain / Machine Hours to Make = Contribution Margin per unit of limited resources: Plain; Unit Contribution Margin: Fancy / Machine hours to Make = Contribution Margin per unit of limited resources Fancy)

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

Ans: a, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

79.

Greg’s Breads can produce and sell only one of the following two products: Oven Hours Required Muffins 0.2 Coffee Cakes 0.3

Contribution Margin Per Unit $3 $4

The company has oven capacity of 1,500 hours. How much will contribution margin be if it produces only the most profitable product? a. $15,000 b. $20,000 c. $22,500 d. $30,000 Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: Muffins: $3 / .2 = $15.00; $4/ .3 = $13.33; $15 x 1,500 = $22,500 (Muffins: Contribution Margin Per Unit / Muffins: Oven Hours Required = Muffins (Contribution Margin per unit of limited resources); Coffee Cakes: Contribution Margin Per Unit / Coffee Cakes: Oven Hours Required = Coffee Cakes (Contribution Margin per unit of limited resources); Muffins: Contribution Margin per unit of limited resources x Hours of Oven Capacity = Most profitable product

FOR INSTRUCTOR USE ONLY

6 - 20 80.

Test Bank for Managerial Accounting, Eighth Edition Curtis Corporation’s contribution margin is $25 per unit for Product A and $30 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. $12.50 $7.50 b. $12.50 $8.33 c. $10.00 $7.50 d. $10.00 $8.33

Ans: a, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: A: $25 / 2 = $12.50; B: $30 / 4 = $7.50 (Product A: Contribution margin per unit / Product A: Machine Hours = Product A: Contribution Margin per unit of limited resources; (Product B: Contribution margin per unit / Product B: Machine Hours = Product B: Contribution Margin per unit of limited resources)

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.

Ans: a, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

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.

Ans: a, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

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.

Ans: b, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

84.

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.

Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Cost Management

FOR INSTRUCTOR USE ONLY

Cost-Volume-Profit Analysis: Additional Issues

6 - 21

Use the following information for questions 85 and 86.

Mercantile Corporation has sales of $2,000,000, variable costs of $800,000, and fixed costs of $900,000.

85.

Mercantile’s degree of operating leverage is a. 1.33. b. 1.67. c. 1.50. d. 4.00.

Ans: d, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $2,000,000 - $800,000 = $1,200,000 CM; $2,000,000 - $800,000 - $900,000 = $300,000; $1,200,000 / $300,000 = 4.0 (Sales – Variable Costs = Contribution Margin; Sales- Variable Costs – Fixed Costs = Net Operating Income; Contribution Margin / Net Operating Income = Operating leverage)

86.

Mercantile’s margin of safety ratio is a. .15. b. .25. c. .33. d. .75.

Ans: b, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $900,000 / (($2,000,000 - $800,000/$2,000,000) = $1,500,000; ($2,000,000 - $1,500,000) / $2,000,000 = .25 or 25% (Fixed Costs/ Contribution Margin Ratio) = Break even in dollars; (Expected (Budgeted) Sales – Break-even in dollars) / Expected (Budgeted) Sales) = Margin of Safety ratio)

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.

Ans: d, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

88.

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

Ans: c, LO: 4, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: 3 / 1.5 = 2.0 times (Miller: Degree of Operating Leverage / Warren’s: Degree of Operating Leverage = Earnings increases (times)

FOR INSTRUCTOR USE ONLY

6 - 22 89.

Test Bank for Managerial Accounting, Eighth Edition 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.

Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

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.

Ans: a, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

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.

Ans: a, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

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.

Ans: c, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics 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.

Ans: c, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics 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.

Ans: b, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

FOR INSTRUCTOR USE ONLY

Cost-Volume-Profit Analysis: Additional Issues a

95.

6 - 23

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.

Ans: d, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting 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

Ans: b, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics a

97.

Under absorption costing and variable costing, how are variable 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

Ans: a, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics a

98.

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

Absorption Product Cost Product Cost Period Cost Period Cost

Variable Product Cost Period Cost Product Cost Period Cost

Ans: a, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics a

99.

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.

Ans: a, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting 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

Ans: d, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

FOR INSTRUCTOR USE ONLY

6 - 24

Test Bank for Managerial Accounting, Eighth Edition

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

Ans: a, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting 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.

Ans: c, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

Use the following information for questions 103–107.

Sprinkle Co. sells its product for $60 per unit. During 2019, it produced 60,000 units and sold 50,000 units (there was no beginning inventory). Costs per unit are: direct materials $15, direct labor $9, and variable overhead $3. Fixed costs are: $720,000 manufacturing overhead, and $90,000 selling and administrative expenses. a

103. The per unit manufacturing cost under absorption costing is a. $24. b. $27. c. $39. d. $40.

Ans: c, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management Solution: $15 + $9 + $3 + $720,000 / 60,000 = $39 (Direct Materials per unit + Direct labor per unit + Variable overhead per unit + (Fixed Costs / Units Produced) = per unit manufacturing cost under absorption costing) a

104. The per unit manufacturing cost under variable costing is a. $24. b. $27. c. $39. d. $40.

Ans: b, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management Solution: $15 + 9 + 3 = $27 (Direct Materials per unit + Direct labor per unit + Variable overhead per unit = per unit manufacturing cost under variable costing) a

105. Cost of goods sold under absorption costing is a. $1,350,000. b. $1,620,000. c. $1,950,000. d. $1,560,000.

Ans: c, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: $15 + $9 + $3 + $720,000 / 60,000 = $39; $39 x 50,000 = $1,950,000 (Direct Materials per unit + Direct labor per unit + Variable overhead per unit + (Fixed Costs / Units Produced) = per unit manufacturing cost under absorption costing); Per unit manufacturing cost x units sold = Cost of goods sold under absorption costing)

FOR INSTRUCTOR USE ONLY

Cost-Volume-Profit Analysis: Additional Issues

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a

106. Ending inventory under variable costing is a. $270,000. b. $390,000. c. $600,000. d. $1,350,000.

Ans: a, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: $15 + 9 + 3 = $27; $27 x (60,000 – 50,000) = $270,000 a

107. Under absorption costing, what amount of fixed overhead is deferred to a future period? a. $30,000 b. $120,000 c. $150,000 d. $720,000

Ans: b, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $720,000 / 60,000 = $12; $12 x 50,000 = $600,000; $720,000 – 600,000 = $120,000 (Fixed Costs / Units produced = per unit fixed cost; Fixed costs - (per unit fixed costs x units sold) = Amount of fixed overhead deferred to a future period) 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.

Ans: d, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Business Economics 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.

Ans: b, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Business Economics 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.

Ans: c, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics 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.

Ans: a, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

FOR INSTRUCTOR USE ONLY

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Test Bank for Managerial Accounting, Eighth Edition

FOR INSTRUCTOR USE ONLY

Cost-Volume-Profit Analysis: Additional Issues

6 - 27

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.

Ans: a, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting 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.

Ans: a, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

Use the following information for questions 114–118.

Nielson Corp. sells its product for $6,600 per unit. Variable costs per unit are: manufacturing, $3,600, and selling and administrative, $75. Fixed costs are: $18,000 manufacturing overhead, and $24,000 selling and administrative. There was no beginning inventory at 1/1/15. Production was 20 units per year in 2018–2020. Sales were 20 units in 2018, 16 units in 2019, and 24 units in 2020. a

114. Income under absorption costing for 2019 is a. $4,800. b. $8,400. c. $9,600. d. $13,200.

Ans: b, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: $18,000 / 20 = $900; $6,600 - $3,600 - $900 = ($2,100 x 16) = 33,600; 33,600 – 24,000 – ($75 x 16) = 8,400 (Fixed Manufacturing Overhead / Units produced = per unit fixed manufacturing cost; (Selling price per unit – Variable manufacturing cost per unit – Fixed manufacturing cost per unit) x Units Sold: 2019 = Income under absorption costing) a

115. Income under absorption costing for 2020 is a. $19,800. b. $23,400. c. $24,600. d. $28,200.

Ans: c, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: $18,000 / 20 = $900; $6,600 - $3,600 - $900 = ($2,100 x 24 = 50,400; 50,400 – 24,000 – ($75 x 24) = 24,600 (Fixed Manufacturing Overhead / Units produced = per unit fixed manufacturing cost; (Selling price per unit – Variable manufacturing cost per unit – Fixed manufacturing cost per unit) x Units Sold: 2020 = Income under absorption costing)

a

116. Income under variable costing for 2019 is a. $4,800. b. $8,400. c. $9,600. d. $13,200.

Ans: a, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: $6,600 - $3,600 - $75 = $2,925 x 16 = 46,800; 46,800 – 18,000 - 24,000 = $4,800 (Selling price per unit – Variable Manufacturing cost per unit – Variable Selling and Administrative per unit) x Units Sold: 2016) – Fixed Manufacturing Overhead – Fixed Selling and Administrative = Income under variable costing for 2019)

FOR INSTRUCTOR USE ONLY

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Test Bank for Managerial Accounting, Eighth Edition

FOR INSTRUCTOR USE ONLY

Cost-Volume-Profit Analysis: Additional Issues

6 - 29

a

117. Income under variable costing for 2020 is a. $19,800. b. $23,400. c. $24,600. d. $28,200.

Ans: d, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: $6,600 - $3,600 - $75 = $2,925 x 24 = 70,200; 70200 – 18,000 - 24,000 = $28,200 (Selling price per unit – Variable Manufacturing cost per unit – Variable Selling and Administrative per unit) x Units Sold: 2017) – Fixed Manufacturing Overhead – Fixed Selling and Administrative = Income under variable costing for 2017) a

118. For the three years 2018–2020, a. absorption costing income exceeds variable costing income by $8,000. b. absorption costing income equals variable costing income. c. variable costing income exceeds absorption costing income by $8,000. d. absorption costing income may be greater than, equal to, or less than variable costing income, depending on the situation.

Ans: b, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting a

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

Ans: a, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting a

120. 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.

Ans: b, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting 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.

Ans: c, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

FOR INSTRUCTOR USE ONLY

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Test Bank for Managerial Accounting, Eighth Edition

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

Ans: c, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics a

123. Expected sales for next year for the Beresford Company is 150,000 units. Curt Planters, manager of the Beresford 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 170,000 units. The Beresford Company will have higher net income if Curt Planters decides to produce a. 170,000 units if income is measured under absorption costing. b. 170,000 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.

Ans: a, LO: 5, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics a

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.

Ans: b, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics a

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.

Ans: b, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Leverage Technology, AICPA FN: Leverage Technology, AICPA PC: Project Management, IMA: Business Applications

FOR INSTRUCTOR USE ONLY

Cost-Volume-Profit Analysis: Additional Issues

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Item

Ans.

Answers to Multiple Choice Questions Item

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

Item

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

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

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

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92. a 93. a 94. a 95. a 96. a 97. a 98. a 99. a 100.

FOR INSTRUCTOR USE ONLY

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

Item a

101.

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. a

Ans.

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

Item a

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116. a 117. a 118. a 119. a 120. a 121. a 122. a 123. a 124. a 125. a

c a d b a b c c a b b

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Test Bank for Managerial Accounting, Eighth Edition

BRIEF EXERCISES BE 126 Archer Industries 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 $70 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?

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 126

(6–8 min.)

Sleek: 50% × ($30 – $18) = Smooth: 30% × ($50 – $30) = Potent: 20% × ($70 – $45) = Weighted-average unit contribution margin

$ 6 6 5 $17

BE 127 Lazaro Inc. 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, 40%; and Deluxe, 45%.

Lazaro’s fixed costs are $1,575,000.

Instructions What is the dollar amount of Deluxe sales at the break-even point?

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 127

(6–8 min.)

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

24% 18% 42%

$1,575,000 ÷ 42% = $3,750,000 break-even point in dollars Dollar amount of Deluxe sales at the break-even point: $3,750,000 × 40% = $1,500,000.

BE 128 Hunt, Inc. provided the following information concerning two products: Contribution margin per unit Machine hours required for one unit

Product 12 $22 2 hours

Product 43 $18 1.5 hours

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

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

FOR INSTRUCTOR USE ONLY

Cost-Volume-Profit Analysis: Additional Issues Solution 128

6 - 33

(3–5 min.)

Product 12: $22 ÷ 2.0 hours = $11 Product 43: $18 ÷ 1.5 hours = $12 Sales personnel should push Product 43.

BE 129 Gallery Corporation 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 2,500 $25,000 13,750 5,250 $ 6,000 0.30 $2.40 $4.50

Assume that Gallery is able to order an additional 2,500 yards of leather and wishes to maximize its income. Of the additional units it produces, at least 500 of each product are necessary for sales.

Instructions How many units of each must be produced?

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 129

(5–7 min.)

Contribution margin per yard

Footballs $18 ÷ 1.25 = $14.40

Baseballs $4.50 ÷ .30 = $15

Produce more baseballs since CM per constraint is more.

Minimum for footballs: 500 × 1.25 yd. = 625 yd.

Material remaining for baseballs: 2,500 – 625 = 1,875 yd. # of baseballs: 1,875 ÷ .30 = 6,250 baseballs

BE 130 Marina Manufacturing 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.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

FOR INSTRUCTOR USE ONLY

6 - 34

Test Bank for Managerial Accounting, Eighth Edition

Solution 130 Before: After

(4–6 min.)

Contribution margin $250,000 $300,000

÷ ÷ ÷

Net Income $100,000 $100,000

= = =

Degree of operating leverage 2.50 3.00

After the new equipment is purchased, Marina’s earnings would go up (or down) by 1.2 times (3.00 ÷ 2.50) as much as it would have before the purchase, with an equal increase (or decrease) in sales.

BE 131 The degree of operating leverage for Gurney, Inc. and Dough Company are 2.4 and 5.6 respectively. Both have net incomes of $75,000. Determine their respective contribution margins.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Easy, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

Solution 131

(4–6 min.)

Degree of operating leverage = Contribution margin ÷ Net Income Gurney Inc. Contribution margin

2.4 = Contribution margin ÷ $75,000 = $75,000  2.4 = $180,000

Dough Company Contribution margin

5.6 = Contribution margin ÷ 75,000 = $75,000  5.6 = $420,000

a

BE 132

Swift Co. 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

$35,000 31,000 22,000 38,000 23,000 14,000

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

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management a

Solution 132

(3–5 min.)

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

$ 35,000 31,000 38,000 $104,000

FOR INSTRUCTOR USE ONLY

Cost-Volume-Profit Analysis: Additional Issues

6 - 35

a

BE 133

Swift Co. 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

$40,000 31,000 22,000 38,000 23,000 14,000

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

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management a

Solution 133

(3–5 min.)

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

$ 40,000 31,000 22,000 38,000 $131,000

a

BE 134

During 2019, Basler Manufacturing 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.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting a

Solution 134

(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

FOR INSTRUCTOR USE ONLY

120,000 30,000

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

6 - 36

Test Bank for Managerial Accounting, Eighth Edition

a

BE 135

During 2019, Basler Manufacturing produced 60,000 units and sold 55,000 for $10 per unit.

Variable manufacturing costs were $5 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.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting a

Solution 135

(5–7 min.)

Sales (55,000 × $10) Cost of goods sold (55,000 × $7) Gross margin Variable selling and administrative expenses (55,000 × $1) Fixed selling and administrative expenses Net income

$550,000 385,000 165,000 $55,000 30,000

85,000 $ 80,000

EXERCISES Ex. 136 Kindle, Inc. manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 12.5% of sales. The income statement for the year ending December 31, 2019, is as follow.

KINDLE, INC. Income Statement Year Ending December 31, 2019 Sales $130,000 Cost of goods sold Variable $58,500 Fixed 14,350 72,850 Gross margin 57,150 Selling and marketing expenses Commissions $16,250 Fixed costs 17,100 33,350 Operating income $ 23,800 The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 10% and incur additional fixed costs of $13 million.

Instructions (a) Under the current policy of using a network of sales agents, calculate Kindle, Inc.'s breakeven point in sales dollars for the year 2019. (b) Calculate the company's break-even point in sales dollars for the year 2019 if it hires its own sales force to replace the network of agents. (c) Calculate the degree of operating leverage at sales of $130 million if (1) Kindle, Inc. uses sales agents, and (2) Kindle, Inc. employs its own sales staff.

Ans: N/A, LO: 1, 4, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

FOR INSTRUCTOR USE ONLY

Cost-Volume-Profit Analysis: Additional Issues a

Solution 136

6 - 37

(15–18 min.)

(a)

Reformat the income statement to CVP format. All amounts are in $000s.

Sales ........................................................................... $130,000 Variable costs ($58,500 + $16,250) ............................

74,750 Contribution margin .....................................................

55,250 Less: Fixed costs ($14,350 + $17,100) .......................

31,450 Operating income........................................................

23,800 Contribution margin ratio = $55,250 + $130,000 = 42.5% Break-even point = $31,450  42.5% = $74,000

(b)

If a hired workforce replaces sales agents, commissions will be reduced to 10% of sales, or $13,000, but fixed costs will increase by $13,000.

Sales ........................................................................... $130,000 Variable costs ($58,500 + $13,000) ............................

71,500 Contribution margin .....................................................

58,500 Less: Fixed costs ($31,450 + $13,000) .......................

44,450 Operating income........................................................ $ 14,050

Contribution margin ratio = $58,500  $130,000 = 45% Break-even point = $44,450  45% = $98,778 (c)

Operating leverage = contribution margin  operating income Current situation: from part (a) $55,250  $23,800 = 2.32 Proposed situation: from part (b) $58,500  $14,050 = 4.16

Ex. 137 Qwik Service has over 200 auto-maintenance service outlets nationwide. It provides primarily two lines of service: oil changes and brake repair. Oil change-related services represent 75% of its sales and provide a contribution margin ratio of 20%. Brake repair represents 25% of its sales and provides a 60% contribution margin ratio. The company's fixed costs are $15,000,000 (that is, $75,000 per service outlet).

Instructions (a) Calculate the dollar amount of each type of service that the company must provide in order to break even. (b) The company has a desired net income of $45,000 per service outlet. What is the dollar amount of each type of service that must be provided by each service outlet to meet its target net income per outlet?

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

FOR INSTRUCTOR USE ONLY

6 - 38

Test Bank for Managerial Accounting, Eighth Edition

Solution 137

(12–15 min.)

(a) Weighted-Average Contribution Margin Ratio Oil changes × .15 Brake repair × .15 .30 Total break-even sales in dollars = $15,000,000  .30 = $50,000,000

Oil changes Brake repair Total sales

Sales Mix Percentage 75% 25%

Contribution Margin Ratio 20% 60%

Sales Mix Percentage 75% 25%

Total Break-even Sales in Dollars $50,000,000 $50,000,000

× ×

Sales Dollars Needed Per Product $37,500,000 $12,500,000 $50,000,000

(b) Sales to achieve target net income = ($75,000 + $45,000)  .30 = $400,000 Sales Dollars Sales Mix Total Needed Per Product Percentage Sales Needed Per Store Oil changes 75% × $400,000 $300,000 Brake repair 25% × $400,000 $100,000 Total sales $400,000

Ex. 138 Seaver Corporation manufactures mountain bikes. It has fixed costs of $4,140,000. Seaver’s sales mix and contribution margin per unit is shown as follows: Sales Mix 25% 45% 30%

Green Brown Blue

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.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 138

Green Brown Blue

(8–12 min.)

Sales Mix 25% 45% 30%

× × × ×

Contribution Margin $120 $ 60 $ 40

Total break-even sales = $4,140,000 ÷ $69 = 60,000 bikes FOR INSTRUCTOR USE ONLY

Weighted-Average Contribution Margin $30 $27 $12 $69

Cost-Volume-Profit Analysis: Additional Issues Ex 138

6 - 39

(cont.)

Green Brown Blue

Sales Mix 25% 45% 30%

× × ×

60,000 60,000 60,000

= = =

15,000 bikes 27,000 bikes 18,000 bikes

Ex. 139 DeMont Tax Services 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 40% contribution margin ratio. The company’s fixed costs are $4,590,000.

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 $1,700,000. What amount of revenue would DeMont earn from tax services if it achieves this goal with the current sales mix?

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

Solution 139

(10–15 min.)

(a) Accounting Tax

Contribution Margin Ratio 30% 40%

Sales Mix 60% 40%

Weighted-Average Contribution Margin Ratio 18% 16% 34%

Total break-even sales = $4,590,000 ÷ .34 = $13,500,000

Accounting Tax

Sales Mix 60% × 40% ×

$13,500,000 = $8,100,000 $13,500,000 = $5,400,000

(b) Sales to achieve target net income = ($4,590,000 + $1,700,000) ÷ .34 = $18,500,000 Tax

Sales Mix 40% ×

$18,500,000 = $7,400,000

Ex. 140 Blue Chance Co. 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 296,000 Net income $ 74,000

FOR INSTRUCTOR USE ONLY

6 - 40 Ex 140

Test Bank for Managerial Accounting, Eighth Edition (cont.)

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.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 140

(15–20 min.)

(a) Sales mix: Computers: VG Systems Contribution margin ratio: Computers: VG Systems:

$700,000 ÷ ($700,000 + $300,000) = 70% $300,000 ÷ ($700,000 + $300,000) = 30% $280,000 ÷ $700,000 = 40% $ 90,000 ÷ $300,000 = 30%

(b) Weighted-average contribution margin ratio = (70% × 40%) + (30% × 30%) = 37% (c) Break-even point in dollars = $296,000 ÷ .37 = $800,000 (d) Sales dollars at break-even point: Computers: $800,000 × .70 = $560,000 VG Systems: $800,000 × .30 = $240,000

Ex. 141 Hewitt Co. has 4,000 machine hours available to produce either Product 22 or Product 44. The cost accounting department developed the following unit information for each product: Product 22 Product 44 Sales price $27 $50 Direct materials 6 8 Direct labor 3 2 Variable manufacturing overhead 4 5 Fixed manufacturing overhead 3 5 Machine time required 20 minutes 60 minutes Instructions Management wants to know which product to produce in order to maximize the company’s income. Taking into consideration the constraints under which the company operates, prepare a report to show which product should be produced and sold.

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

FOR INSTRUCTOR USE ONLY

Cost-Volume-Profit Analysis: Additional Issues Solution 141

6 - 41

(10–12 min.)

Contribution margin per unit Sales price Variable costs Direct materials Direct labor Variable overhead Contribution margin Machine hours required:

Product 22 $27 $6 3 4

13 $ 14

Product 44 $50 $8 2 5

15 $35

1/3 hr

1 hr

Contribution margin per unit of limited resource: ($14 ÷ .33 1 3 ) $ 42 ($35 ÷ 1) Machine hours available × 4,000 Contribution margin $168,000

$ 35 × 4,000 $140,000

The company should produce and sell Product 22.

Ex. 142 Reynolds, Inc. manufactures and sells two products. Relevant per unit data concerning each product are given below: Product Standard Deluxe Selling price $50 $75 Variable costs $26 $33 Machine hours 2 3 Instructions (a) Compute the contribution margin per unit of limited resource for each product. (b) If 1,000 additional machine hours are available, which product should be manufactured?

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 142

(6–8 min.)

(a)

Product Contribution margin per unit Machine hours required Contribution margin per unit of limited resource

Standard $24 ÷2 $12

Deluxe $42 ÷3 $14

(b) The Deluxe product should be manufactured because it results in the highest contribution margin per machine hour: $14 × 1,000 = $14,000.

Ex. 143 Oscar Corporation produces and sells three products. Unit data concerning each product is shown below.

Product X Y Z Selling price $200 $300 $250 Direct labor costs 45 75 60 FOR INSTRUCTOR USE ONLY

6 - 42

Test Bank for Managerial Accounting, Eighth Edition

Other variable costs Ex 143 (cont.)

110

130

102

The company has 2,000 hours of labor available to build inventory in anticipation of the company's peak season. Management is trying to decide which product should be produced. The direct labor hourly rate is $15.

Instructions (a) Determine the number of direct labor hours per unit. (b) Determine the contribution margin per direct labor hour. (c) Determine which product should be produced and the total contribution margin for that product.

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 143

(10–12 min.)

(a) Product X: $45  $15 = 3 hours per unit Product Y: $75  $15 = 5 hours per unit Product Z: $60  $15 = 4 hours per unit (b) Selling price Variable costs Contribution margin Direct labor hours per unit Contribution margin per direct labor hour

X $200 155 45 3 $ 15

Product Y $300 205 95 5 $ 19

Z $250 162 88 4 $ 22

(c) Product Z should be produced because it generates the highest contribution margin per direct labor hour.

Product X Total direct labor hours available 2,000 Contribution margin per direct labor hour 22 Total contribution margin $44,000

Ex. 144 Shanahan Co. of Dublin, Ireland is contemplating a major change in its cost structure. Currently, all of its drafting work is performed by skilled draftsmen. Mike Shanahan the owner, is considering replacing the draftsmen with a computerized drafting system.

However, before making the change, Mike would like to know the consequences of the change, since the volume of business varies significantly from year to year. Shown below are CVP income statements for each alternative.

Manual System Computerized System Sales $1,500,000 $1,500,000 Variable costs 1,200,000 900,000 Contribution margin 300,000 600,000 Fixed costs 150,000 450,000 Net income $150,000 $150,000

FOR INSTRUCTOR USE ONLY

Cost-Volume-Profit Analysis: Additional Issues Ex. 144

6 - 43

(cont.)

Instructions (a) Determine the degree of operating leverage for each alternative. (b) Which alternative would produce the higher net income if sales increased by $300,000?

Ans: N/A, LO: 4, Bloom: AN, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 144

(10–12 min.)

(a) Manual system Computerized system

Contribution Margin

÷

Net Income

=

$300,000 $600,000

÷ ÷

$150,000 $150,000

= =

Degree of Operating Leverage 2.0 4.0

(b) The computerized system would produce profits that are 2.0 times (4.0 ÷ 2.0) as much as the manual system. With a $300,000 increase in sales, net income would increase $60,000 ($210,000 - $150,000) under the manual system and $120,000 ($270,000 - $150,000) under the computerized system Manual System Computerized System Sales $1,800,000 $1,800,000 Variable costs 1,440,000* 1,080,000** Contribution margin 360,000 720,000 Fixed costs 150,000 450,000 Net income $210,000 $270,000 *($1,200,000 ÷ $1,500,000) × $1,800,000 **($900,000 ÷ $1,500,000) × $1,800,000

Ex. 145 The following CVP income statements are available for Chantal Corp. and Mantle, Inc. Chantal Corp.

Mantle, Inc. Sales revenue $700,000 $700,000 Variable costs 350,000 210,000 Contribution margin 350,000 490,000 Fixed costs 225,000 365,000 Net income $125,000 $125,000 Instructions (a) Compute the degree of operating leverage for each company. (b) Assume that sales revenue decreases by 20%. Prepare a CVP income statement for each company.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 145 (a) Chantal Mantle

(15–20 min.)

Contribution Margin $350,000 $490,000

÷ ÷ ÷

Net Income $125,000 $125,000

= = =

FOR INSTRUCTOR USE ONLY

Degree of Operating Leverage 2.8 3.9