Deck 4: Cost-Volume-Profit Analysis

Question 1

Total variable costs remain constant across all levels of activity within the relevant range.

Answer 1

False

Question 2

A step cost is similar to a variable cost, except that the relevant range is smaller for a step cost.

Answer 2

False

Question 3

The high-low method is subjective in that different managers viewing the same set of data may select different data points to use in estimating costs.

Answer 3

False

Question 4

The high-low method is used to estimate a cost equation that can be used to predict costs at estimated activity levels.

Question 5

Computer software is often used to conduct a regression analysis.

Question 6

The account analysis method of estimating fixed and variable costs uses software programs such as Microsoft Excel^® to fit a line to multiple data points.

Question 7

Direct labor and manufacturing overhead costs are examples of fixed costs.

Question 8

Total costs and activity are assumed to have a linear relationship within the relevant range.

Question 9

The variable cost per unit is the same at all activity levels within the relevant range.

Question 10

Total cost equals total fixed costs plus variable cost per unit times the activity level in units.

Question 11

In order to use CVP analysis, costs must be separated into fixed and variable components.

Question 12

When using the high-low method, total fixed cost is found by calculating the intercept point of the sloped line on the vertical axis.

Question 13

Mixed costs are also referred to as semivariable costs.

Question 14

Total variable costs change inversely with changes in volume or activity.

Question 15

Total production cost is generally a mixed cost.

Question 16

Fixed costs are the same in total amount at any activity level within the relevant range.

Question 17

Committed fixed costs are costs that can be changed easily in a relatively brief period of time.

Question 18

The high-low method fits a straight line to the data points that represent the highest and lowest cost levels of a particular activity.

Question 19

Variable costs per unit remain the same when the level of activity changes within the relevant range.

Question 20

Total fixed costs remain the same when the level of activity changes within the relevant range.

Question 21

Total fixed costs divided by the contribution margin ratio equals the break-even point in sales revenue.

Question 22

The margin of safety is the difference between the expected level of profit and break-even profit.

Question 23

Cost behavior patterns are assumed to be linear at all activity levels when a regression is used to estimate cost behavior.

Question 24

Companies that have higher operating leverage find that their profit level is more responsive to changes in sales volume than if operating leverage was low.

Question 25

A significant weakness of the high-low method is that the two data points chosen may not be representative of the relationship between cost and activity.

Question 26

Contribution margin is the difference between revenue and total costs.

Question 27

At the break-even point, total revenue equals total fixed costs.

Question 28

Firms that have relatively high levels of variable costs have high operating leverage.

Question 29

The contribution margin ratio is determined by subtracting total costs from total sales revenue, and then dividing by total sales revenue.

Question 30

At the break-even point, total fixed costs equal total contribution margin.

Question 31

Regression analysis is a method of estimating the slope and y-intercept using all available data points.

Question 32

When performing multiple product CVP analysis, a necessary assumption is that sales mix, variable cost per unit, and fixed cost per unit remain constant.

Question 33

If the contribution margin ratio is 32%, this means that every $1.00 of sales will contribute $0.32 towards covering fixed costs and generating a profit.

Question 34

Account analysis is a method used to estimate fixed and variable costs.

Question 35

When performing cost-volume-profit analysis with multiple products, it is assumed that the sales mix remains constant, even when a different number of total units are expected to be sold.

Question 36

If x = the number of units sold, profit = (contribution margin per unit × x) ‒ total fixed costs.

Question 37

CVP analysis for companies that sell more than one product assumes that the contribution margin ratio for all products is the same.

Question 38

Contribution margin ratio is another name for the gross margin ratio.

Question 39

Profit is equal to revenue minus total variable costs minus total fixed costs.

Question 40

The margin of safety is the difference between the current level of sales and break-even sales.

Question 41

Variable cost per unit

A) can be estimated by performing break-even calculations.
B) increases on a per unit basis when the level of activity increases.
C) is represented by the slope of the total cost line.
D) All of these answer choices are correct.

Question 42

When the level of activity decreases, total variable costs

A) increase.
B) remain the same.
C) decrease in direct proportion to the decrease in activity.
D) decrease, but at a slower rate than the level of activity.

Question 43

When the level of activity increases, total fixed costs

A) decrease.
B) remain the same within the relevant range.
C) decrease inversely with the change in activity.
D) increase within the relevant range.

Question 44

When dealing with a constrained resource situation, a company should generally produce only the product with the highest contribution margin ratio, as this will insure the highest profit level.

Question 45

When dealing with a constrained resource situation, a company should generally produce only the product with the highest contribution margin per unit in order to maximize profit

Question 46

Three costs incurred by Randall Rockers are summarized below at two different activity levels, 600 and 700 units: $\begin{array}{lrr}&600 \text { Units }& 700 \text { Units }\\\text { Cost A } & \$ 2,700 & \$ 3,150 \\\text { Cost B } & 2,940 & 3,360 \\\text { Cost C } & 4,800 & 5,600\end{array}$ Which of these costs is variable?

A) A, B, and C
B) A and C
C) A only
D) C only

Question 47

Common constraints found in business that impact production include hours of labor, hours of machine time, quantities of materials, and the cost of a product.

Question 48

If a company has only variable costs and its sales revenue increases by 20%, its profit will increase by an amount larger than 20%.

Question 49

Which of the following costs is least likely to be a variable cost?

A) Sales commissions
B) Direct labor
C) Indirect materials
D) Supervisory salaries

Question 50

When the level of activity increases, the variable cost per unit

A) decreases.
B) remains constant within the relevant range.
C) increases.
D) fluctuates, depending on the amount of the increase in activity.

Question 51

A company has a cost that is $7.00 per unit at a volume of 10,000 units and $5.00 per unit at a volume of 14,000 units. What type of cost is this?

A) Fixed costs
B) Variable costs
C) Mixed costs
D) Incremental costs

Question 52

When the level of activity increases, the fixed cost per unit

A) decreases.
B) remains the same.
C) increases.
D) fluctuates, depending on the amount of the increase in activity.

Question 53

Within the relevant range, variable costs

A) per unit change when the activity level changes.
B) are the same in total at different activity levels.
C) are the same amount per unit at any activity level.
D) None of these answer choices are correct.

Question 54

Step costs

A) per unit are the same for each range of volume.
B) are classified as step variable or step fixed depending on the range of activity for which the cost remains fixed.
C) change in total at every level of activity.
D) are considered to be step fixed costs within a relatively small range.

Question 55

Which of the following is most likely to be a variable cost?

A) Depreciation of a factory building
B) Direct labor
C) Factory janitor salaries
D) Total costs of producing products

Question 56

Which of the following components are included in a mixed cost?

A) A sunk cost and an opportunity cost
B) A fixed cost and a variable cost
C) A step cost and a semivariable cost
D) A product cost and a period cost

Question 57

The R Square is the slope of the regression line.

Question 58

When there is a constraint on how many units can be produced, the focus shifts from contribution margin per unit to contribution margin per unit of the constraint.

Question 59

A cost is $4,900 at 800 units, $5,600 at 900 units, and $6,200 at 980 units. This cost is a

A) variable cost.
B) fixed cost.
C) mixed cost.
D) step cost.

Question 60

Firms have no control over their level of operating leverage.

Question 61

Regression analysis

A) uses all the available data points to estimate a cost equation.
B) is less accurate than other methods of estimating costs.
C) estimates a cost equation that indicates the variable and fixed costs per unit.
D) is a method of determining the break-even point.

Question 62

C-Drive Components has collected the following production data for the past four months: $$\begin{array} { c r } \text { Units produced } & \text { Total cost } \\\hline 7,000 & \$ 16,500 \\10,000 & 22,500 \\8,500 & 17,750 \\9,000 & 21,000\end{array}$$ If the high-low method is used, what is the monthly total cost equation?

A) Total cost = $2,500 + ($2.00 × units produced)
B) Total cost = $3,750 + ($2.75 × units produced)
C) Total cost = $1,500 + ($2.00 × units produced)
D) Total cost = $500 + ($2.25 × units produced)

Question 63

Window Shine is provides window cleaning service. Information concerning costs and number of windows cleaned for three months during 2014 appear below: $\begin{array}{clr}\text { Month }&\text { Activity }& \text { Cost }\\\text { May } & 18,000 \text { windows } & \$ 84,000 \\\text { July } & 21,000 \text { windows } & 94,500 \\\text { September } & 20,400 \text { windows } & 94,800\end{array}$ Using the high-low method, what is the amount of total fixed costs?

A) $10,500
B) $3,000
C) $21,000
D) $78,857

Question 64

A cost is $34,500 at an activity level of 23,000 units, and $42,000 at an activity level of 28,000 units. What type of cost is this?

A) Fixed costs
B) Variable costs
C) Mixed costs
D) Sunk costs

Question 65

Hardigree Insurance has collected the following information over the last six months. $$\begin{array} { c c c } \text { Month } & \text { Units produced } & \text { Total costs } \\\text { March } & 2,000 & \$ 6,700 \\\text { April } & 3,200 & 9,400 \\\text { May } & 2,200 & 7,100 \\\text { June } & 3,000 & 9,500 \\\text { July } & 2,800 & 8,000 \\\text { August } & 2,100 & 6,600\end{array}$$ Using the high-low method, how much is the variable cost per unit?

A) $2.25
B) $2.55
C) $2.80
D) $3.14

Question 66

Hardigree Insurance has collected the following information over the last six months. $$\begin{array} { c c c } \text { Month } & \text { Units produced } & \text { Total costs } \\\text { March } & 2,000 & \$ 6,700 \\\text { April } & 3,200 & 9,400 \\\text { May } & 2,200 & 7,100 \\\text { June } & 3,000 & 9,500 \\\text { July } & 2,800 & 8,000 \\\text { August } & 2,100 & 6,600\end{array}$$ Using the high-low method, what is the estimated total cost in a month when 3,100 units are produced?

A) $9,175
B) $6,975
C) $4,732
D) $6,932

Question 67

Which of the following is not a method that is used to estimate variable and fixed costs?

A) Account analysis
B) High-low method
C) CVP analysis
D) Regression analysis

Question 68

The range of activity for which estimates and predictions are likely to be accurate is the

A) incremental range.
B) margin of safety.
C) relevant range.
D) range of opportunity.

Question 69

The account analysis approach to estimating fixed and variable costs

A) requires at least five years of historical data.
B) is based on the professional judgment of the manager.
C) is not useful for general and selling expenses.
D) is only used if the data for the high-low method or regression analysis is not available.

Question 70

The high-low method calculates the total fixed cost as the

A) difference between total variable costs and total costs at a particular activity level.
B) difference between the unit variable cost and the unit total cost.
C) change in cost divided by the change in activity level for two points.
D) change in activity level divided by the change in cost for two points.

Question 71

A significant weakness of the high-low method is that

A) a significant amount of management expertise is necessary to break out the variable and fixed costs.
B) the two data points that are used may not be representative of the general relationship between cost and activity.
C) the calculations are so complex that a computer is usually necessary in order to get accurate results.
D) monthly data must be collected for at least three years before the method can be used.

Question 72

Which of the following is a cost estimation approach that is not based on fitting historical data points to a line?

A) Account analysis
B) High-low method
C) Regression analysis
D) Margin of safety analysis

Question 73

Total costs were $38,400 when 16,000 units were produced and $41,100 when 17,200 units were produced. If the high-low method is used, how much are estimated total costs for a production level of 17,100 units?

A) $39,750
B) $40,861
C) $41,040
D) $40,875

Question 74

Duradyne, Inc. has total costs of $18,000 when 2,000 units are produced and $26,000 when 5,200 units are produced. During March, 4,000 units were produced and sold for $8 each. If the high-low method is used, how much is the variable cost per unit?

A) $2.50
B) $0.40
C) $2.00
D) $4.00

Question 75

A cost is $11,000 at 1,000 units, $12,000 at 2,000 units, and $13,000 at 3,000 units. Using the high-low method, how much is the fixed portion of these costs?

A) $1,000
B) $10,000
C) $20,000
D) The answer depends on the actual activity.

Question 76

Management of MRC Enterprises has provided the following output from Excel^®:
$\begin{array}{lr}\hline\text { SUMMARY OUTPUT }\\\hline\text { Statistics }\\\hline \text { Multiple R } & 0.8939072 \\\text { R Square } & 0.7990702 \\\text { Adjusted R2 } & 0.7458377 \\\text { Standard Enor } & 10744.516 \\\text { Observations } & 6 \\\hline\end{array}$

$\begin{array}{lrrrrr}\hline\text { ANOVA }&df&SS&MS&F&\text { Signpificance }F\\\hline \text { Regression } & 1 & 1836429 & 1836429 & 1590745 & 0.0162864 \\\text { Resichual } & 4 & 46177852 & 11544463 & & \\\text { Total } & 5 & 2298208 & & & \\\hline\end{array}$

$\begin{array}{lrlllllll}\hline \text { Coefficients } & \text { Sid Enor } & t \text { Stat } & \text { P-value } & \text { Lower 95\% } & \text { Upper 05\% } & \text { Lower 95\% }& \text { Upper 95\% } \\\hline \text { Intercept } & 47757.05 & 34958.30 & 1.36611 & 0.24366 & 49302.764 & 144816.58 & 49302 . & 144816.5 \\\text { X Variable 1 } & 6.364 & 1.595798 & 3.98841 & 0.01628 & 1.9340590 & 10.795352 & 1.9340 & 10.79535\\\hline\end{array}$
What is the estimated cost for a production level of 1,200 units?

A) $1,730
B) $55,394
C) $7,636
D) There is not enough information provided to determine the answer..

Question 77

Princeton offers a large range of undergraduate courses. The University is interested in determining the cost equation for the facilities cost as a function of student credit hours so that it can more accurately budget its facilities costs as enrollment grows. Information for the high and low cost semesters and volumes for last 5 years appears below: $\begin{array}{cll}\text { Semester }& \text { Student Credit Hours } & \text { Facilities Cost }\\\text { Spring 2014 } & 160,000 & \$ 750,000 \\\text { Fall 2017 } & 140,000 & \$ 660,000\end{array}$ Using the high-low method, with student credit hours as the activity driver, what is the equation for facilities cost (FC) as a function of student credit hours?

A) FC = $4.50 / student credit hour
B) FC = $1.14 / student credit hour
C) FC = $30,000 + $4.50 / student credit hour
D) FC = $568,182 + $0.22 / student credit hour

Question 78

Walsh Company graphed its units produced and total production costs for the past eight months. What is this called?

A) Incremental analysis
B) Regression analysis
C) Contribution margin
D) Scattergraph

Question 79

Ranger Pressure Cleaners has total monthly costs of $5,800 when 3,200 units are produced and $6,425 when 3,700 units are produced. If the high-low method is used, how much is the estimated total monthly fixed cost?

A) $625
B) $6,113
C) $7,250
D) $1,800

Question 80

Hardigree Insurance has collected the following information over the last six months. $$\begin{array} { c c c } \text { Month } & \text { Units produced } & \text { Total costs } \\\text { March } & 2,000 & \$ 6,700 \\\text { April } & 3,200 & 9,400 \\\text { May } & 2,200 & 7,100 \\\text { June } & 3,000 & 9,500 \\\text { July } & 2,800 & 8,000 \\\text { August } & 2,100 & 6,600\end{array}$$ Using the high-low method, how much is the total fixed cost?

A) $2,300
B) $2,200
C) $4,400
D) $7,910