Deck 17: Costvolumeprofit Relationships

Question 1

Mixed costs are also called:

A) fixed.
B) relevant.
C) variable.
D) semi-variable.

Answer 1

semi-variable.

Question 2

Under the variable costing method the only items included in the product cost are:

A) direct materials, direct labour.
B) direct materials, direct labour, variable manufacturing overhead.
C) direct materials, direct labour, fixed manufacturing overhead.
D) direct materials, direct labour, variable and fixed manufacturing overhead.

Answer 2

direct materials, direct labour, variable manufacturing overhead.

Question 3

Under absorption costing, all of the following are product costs except:

A) fixed overhead.
B) variable overhead.
C) variable manufacturing costs.
D) selling and administrative expenses.

Answer 3

selling and administrative expenses.

Question 4

Variable costing is acceptable for:

A) financial statement purposes.
B) profit tax purposes.
C) internal use by management only.
D) profit tax purposes and for internal use by management.

Question 5

A company has contribution margin per unit of $18 and a contribution margin ratio of 40%. What is the unit selling price?

A) $30.00.
B) $45.00.
C) $7.20.
D) Cannot be determined.

Question 6

The level of activity at which total revenues equal total costs is the:

A) variable point.
B) fixed point.
C) semi-variable point.
D) break-even point.

Question 7

A company sells a product which has a unit sales price of $5, unit variable cost of $3 and total fixed costs of $100,000. The number of units the company must sell to break even is:

A) 50,000 units.
B) 20,000 units.
C) 200,000 units.
D) 33,333 units.

Question 8

In a CVP graph, the break-even point is at the intersection of the sales line and the:

A) fixed cost line.
B) variable cost line.
C) total cost line.
D) mixed cost line.

Question 9

A profit objective set by management for individual product lines is called:

A) break-even profit.
B) contribution profit.
C) CVP profit.
D) target profit.

Question 10

The formula for computing required sales in units to meet target profit is the sum of target profit plus:

A) fixed costs divided by contribution margin ratio.
B) variable costs divided by contribution margin ratio.
C) fixed costs divided by contribution margin per unit.
D) variable costs divided by contribution margin per unit.

Question 11

A company requires $850,000 in sales to meet its target profit. Its contribution margin is 30%, and fixed costs are $150,000. What is the target profit?

A) $255,000
B) $195,000
C) $350,000
D) $105,000

Question 12

Grant Company has fixed costs of $600,000 and variable costs are 40% of sales. What are the required sales if Grant Company desires profit of $60,000?

A) $1,100,000.
B) $1,000,000.
C) $1,650,000.
D) $1,500,000.

Question 13

Wombat Ltd requires sales of $2,000,000 to cover its fixed costs of $900,000 and to earn a target profit of $400,000. What percent are variable costs of sales?

A) 20%
B) 35%
C) 45%
D) 65%

Question 14

An increase in the unit variable cost will generally cause an increase in all of the following except:

A) the break-even point.
B) contribution margin.
C) total variable costs.
D) unit selling price.

Question 15

Break-even sales can be calculated for a mix of two or more products by determining the:

A) weighted average unit contribution margin of all products.
B) weighted average variable cost of each product.
C) total fixed cost of all products.
D) target profit margin of each product.

Question 16

The break-even point in units for multiple products is calculated by dividing:

A) fixed costs by gross profit.
B) fixed costs by weighted average contribution margin.
C) contribution margin by variable costs.
D) variable costs by fixed costs.

Question 17

The CVP income statement classifies costs and expenses as:

A) fixed or variable.
B) absorbed or deferred.
C) semi-variable or fully variable.
D) mixed or direct.

Question 18

Kiwi Ltd manufactures a single product. Annual production costs incurred in the manufacturing process are shown below for the production of 2,000 units. The Water and light and Maintenance are mixed costs. The fixed portions of these costs are $200 and $300, respectively.
Instructions: Calculate the expected costs to be incurred when production is 3,000 units. Use your knowledge of cost behaviour to determine which of the other costs are fixed or variable.

Question 19

Ace Ventura is considering opening a Kwik Oil Centre. He estimates that the following costs will be incurred during his first year of operations: Rent $6,000, Depreciation on equipment $7,000, Wages $13,700, Motor oil $1.20 per litre. He estimates that each oil change will require 5 litres of oil. Oil filters will cost $3.00 each. He must also pay the Kwik Corporation a franchise fee of $1.25 per oil change since he will operate the business as a franchise. In addition, water and light costs are expected to behave in relation to the number of oil changes as follows:
Mr Ventura anticipates that he can provide the oil change service with a filter at $20.00 each.
Instructions:
(a) Using the high-low method, determine variable costs per unit and total fixed costs.
(b) Determine the break-even point in number of oil changes and sales dollars.
(c) Without regard to your answers in parts (a) and (b), determine the oil changes required to earn a target profit of $20,000, assuming fixed costs are $28,000 and the contribution margin per unit is $10.

Question 20

Kelly Hayes operates a bed and breakfast hotel in a beach resort area of Noosa. Depreciation on the hotel is $60,000 per year. Kelly employs a maintenance person at an annual salary of $30,000 per year and a cleaning person at an annual salary of $24,000 per year. Rates and taxes are $10,000 per year. The rooms rent at an average price of $50 per person per night including breakfast. Other costs are laundry service at $4.00 per person per night and the cost of food which is $6.00 per person per night.
Instructions:
(a) Determine the number of rentals and the sales revenue Kelly needs to break-even using the contribution margin technique
(b) If the current level of rentals is 4,000, by what percentage can rentals decrease before Kelly has to worry about making a loss?
(c) Kelly is considering upgrading the breakfast service to attract more business and increase prices. This will cost an additional $5.00 for food costs per person per night. Kelly feels she can increase the room rate to $65 per person per night. Determine the number of rentals and the sales revenue Kelly needs to break even if the changes are made.

Question 21

Uluru Ltd reports the following results for the month of November:
Management is considering the following independent courses of action to increase profit.
1.Increase selling price by 10% with no change in total variable costs.
2.Reduce variable costs to 67% of sales.
3.Reduce fixed costs by $30,000.
Instructions: If maximising profit is the objective, which is the best course of action?

Question 22

Bondi Ltd had a loss of $100,000 in 2017 when the selling price per unit was $20, the variable costs per unit were $12, and the fixed costs were $400,000. Management expects per unit data and total fixed costs to be the same in 2018. Management has set a goal of earning a target profit of $100,000 in 2018.
Instructions:
(a) Compute the units sold in 2017.
(b) Compute the number of units that would have to be sold in 2018 to reach management's desired profit level.
(c) Assume that Bondi Ltd sells the same number of units in 2018 as they did in 2017. What would the selling price have to be in order to reach the target profit?

Question 23

In 2018, Wollongong Manufacturing had a break-even point of $800,000 based on a selling price of $10 per unit and fixed costs of $320,000. In 2019, the selling price and variable costs per unit did not change, but the break-even point increased to $950,000.
Instructions:
(a) Compute the variable cost per unit and the contribution margin ratio for 2018.
(b) Using the contribution margin ratio, compute the increase in fixed costs for 2019.

Question 24

The income statement for Adelaide Ltd for 2017 appears below.
Instructions: Answer the following independent questions and show computations using the contribution margin technique to support your answers:
1. What was the company's break-even point in sales dollars in 2017?
2. How many additional units would the company have had to sell in 2017 in order to earn a target profit of $60,000?
3. If the company is able to reduce variable costs by $2.00 per unit in 2018 and other costs and unit revenues remain unchanged, how many units will the company have to sell in order to earn a target profit of $50,000?

Question 25

Beerwah Ltd developed the following information for its product:
Instructions: Answer the following independent questions and show computations using the contribution margin technique to support your answers.
1. How many units must be sold to break-even?
2. What is the total sales dollars that must be generated for the company to earn a target profit of $60,000?
3. If the company is presently selling 75,000 units, but plans to spend an additional $135,000 on an advertising program, how many additional units must the company sell to earn the same profit it is now making?
4. Using the original data in the problem, compute a new break-even point in units if the unit sales price is increased 20%, unit variable cost is increased by 10%, and total fixed costs are increased by $198,000.

Question 26

Townsville Ltd estimates that variable costs will be 60% of sales and fixed costs will total $1,600,000. The selling price of the product is $10, and 500,000 units will be sold.
Instructions
: Using the mathematical equation:
(a) Compute the break-even point in units and dollars.
(b) Compute the margin of safety in dollars and as a ratio.
(c) Compute profit.

Question 27

Lucas Ltd has prepared the following cost-volume-profit graph:
Instructions
For the items listed , enter to the left of the item, the letter in the graph which best corresponds to the item.
-Activity base

Question 28

Lucas Ltd has prepared the following cost-volume-profit graph:
Instructions
For the items listed , enter to the left of the item, the letter in the graph which best corresponds to the item.
-Break-even point

Question 29

Lucas Ltd has prepared the following cost-volume-profit graph:
Instructions
For the items listed , enter to the left of the item, the letter in the graph which best corresponds to the item.
-Dollars

Question 30

Lucas Ltd has prepared the following cost-volume-profit graph:
Instructions
For the items listed , enter to the left of the item, the letter in the graph which best corresponds to the item.
-Fixed costs

Question 31

Lucas Ltd has prepared the following cost-volume-profit graph:
Instructions
For the items listed , enter to the left of the item, the letter in the graph which best corresponds to the item.
-Loss

Question 32

Lucas Ltd has prepared the following cost-volume-profit graph:
Instructions
For the items listed , enter to the left of the item, the letter in the graph which best corresponds to the item.
-Profit

Question 33

Lucas Ltd has prepared the following cost-volume-profit graph:
Instructions
For the items listed , enter to the left of the item, the letter in the graph which best corresponds to the item.
-Revenues

Question 34

Lucas Ltd has prepared the following cost-volume-profit graph:
Instructions
For the items listed , enter to the left of the item, the letter in the graph which best corresponds to the item.
-Total costs

Question 35

Lucas Ltd has prepared the following cost-volume-profit graph:
Instructions
For the items listed , enter to the left of the item, the letter in the graph which best corresponds to the item.
-Variable costs

Question 36

Bribie Island Baskets Ltd. manufactures a single basket that is sold to wholesalers for $20. The contribution margin ratio is 40%. Bribie's fixed expenses total $600,000.
Instructions:
(a) Compute the variable cost per unit.
(b) Compute how many baskets Bribie will have to sell in order to break even.
(c) Compute how many baskets Bribie will have to sell in order to make a target profit of $16,000.
(d) Prove your answer in part (c) above by preparing a cost-volume-profit income statement at that level of activity.

Question 37

Altitude Cycles Ltd is a small manufacturer of mountain bikes. The bikes sell for $750 each. The variable costs of each unit include the following:
In addition, $180,000 of fixed overhead is incurred annually. Selling and administrative expenses are fixed costs totalling $140,000 and $100,000, respectively.
Assume all the bikes that are manufactured are sold.
Instructions:
(a) Assuming Altitude Cycles uses absorption costing, compute the unit cost for one bike.
(b) Assuming Altitude Cycles uses variable costing, compute the unit cost for one bike.
(c) Compute the required sales in units necessary to achieve a target profit of $210,000.
(d) Compute the margin of safety ratio for Altitude Cycles assuming actual sales of $1,125,000.

Question 38

Match the items below by choosing the appropriate code letter :

-The amount of sales remaining after deducting variable costs.

A) Activity level
B) Variable costs
C) Fixed costs
D) Sales mix
E) Relevant range
F) Mixed costs
G) Break-even point
H) Contribution margin
I) Margin of safety
J) Contribution margin ratio
K) Variable costing
L) Absorption costing

Question 39

Match the items below by choosing the appropriate code letter :

-Costs that contain both a variable and a fixed cost element.

A) Activity level
B) Variable costs
C) Fixed costs
D) Sales mix
E) Relevant range
F)Mixed costs
G) Break-even point
H) Contribution margin
I) Margin of safety
J) Contribution margin ratio
K) Variable costing
L) Absorption costing

Question 40

Match the items below by choosing the appropriate code letter :

-The percentage of sales dollars available to cover fixed costs and produce profit.

A) Activity level
B) Variable costs
C) Fixed costs
D) Sales mix
E) Relevant range
F) Mixed costs
G) Break-even point
H) Contribution margin
I) Margin of safety
J) Contribution margin ratio
K) Variable costing
L) Absorption costing

Question 41

Match the items below by choosing the appropriate code letter :

-Identifies the activity which causes changes in the behaviour of costs.

A) Activity level
B) Variable costs
C) Fixed costs
D) Sales mix
E) Relevant range
F) Mixed costs
G) Break-even point
H) Contribution margin
I) Margin of safety
J) Contribution margin ratio
K) Variable costing
L) Absorption costing

Question 42

Match the items below by choosing the appropriate code letter :

-The difference between actual or expected sales and sales at the break-even point.

A) Activity level
B) Variable costs
C) Fixed costs
D) Sales mix
E) Relevant range
F) Mixed costs
G) Break-even point
H) Contribution margin
I) Margin of safety
J) Contribution margin ratio
K) Variable costing
L) Absorption costing

Question 43

Match the items below by choosing the appropriate code letter :

-Costs that vary in total directly and proportionately with changes in the activity level.

A) Activity level
B) Variable costs
C) Fixed costs
D) Sales mix
E) Relevant range
F) Mixed costs
G) Break-even point
H) Contribution margin
I) Margin of safety
J) Contribution margin ratio
K) Variable costing
L) Absorption costing

Question 44

Match the items below by choosing the appropriate code letter :

-The level of activity at which total sales equal total costs.

A) Activity level
B) Variable costs
C) Fixed costs
D) Sales mix
E) Relevant range
F) Mixed costs
G) Break-even point
H) Contribution margin
I) Margin of safety
J) Contribution margin ratio
K) Variable costing
L) Absorption costing

Question 45

Match the items below by choosing the appropriate code letter :

-The range over which the company expects to operate during the year.

A) Activity level
B) Variable costs
C) Fixed costs
D) Sales mix
E) Relevant range
F) Mixed costs
G) Break-even point
H) Contribution margin
I) Margin of safety
J) Contribution margin ratio
K) Variable costing
L) Absorption costing

Question 46

Match the items below by choosing the appropriate code letter :

-Costs that remain the same in total regardless of changes in the activity level.

A) Activity level
B) Variable costs
C) Fixed costs
D) Sales mix
E) Relevant range
F) Mixed costs
G) Break-even point
H) Contribution margin
I) Margin of safety
J) Contribution margin ratio
K) Variable costing
L) Absorption costing

Question 47

Match the items below by choosing the appropriate code letter :

-A costing approach in which all manufacturing costs are charged to the product.

A) Activity level
B) Variable costs
C) Fixed costs
D) Sales mix
E) Relevant range
F) Mixed costs
G) Break-even point
H) Contribution margin
I) Margin of safety
J) Contribution margin ratio
K) Variable costing
L) Absorption costing

Question 48

Match the items below by choosing the appropriate code letter :

-The relative combination in which an entity's products are sold.

A) Activity level
B) Variable costs
C) Fixed costs
D) Sales mix
E) Relevant range
F) Mixed costs
G) Break-even point
H) Contribution margin
I) Margin of safety
J) Contribution margin ratio
K) Variable costing
L) Absorption costing

Question 49

Match the items below by choosing the appropriate code letter :

-A costing approach in which only variable manufacturing costs are product costs and fixed manufacturing costs are period costs (expenses).

A) Activity level
B) Variable costs
C) Fixed costs
D) Sales mix
E) Relevant range
F) Mixed costs
G) Break-even point
H) Contribution margin
I) Margin of safety
J) Contribution margin ratio
K) Variable costing
L) Absorption costing

Question 50

Ethics: Gannon Company requires its marketing managers to submit estimated cost-volume-profit data on all requests for new products, or expansions of a product line.
Linda Oslo is a new manager. Her calculations show a fixed cost for a new project at $100,000 and a variable cost of $5. Since the selling price is only $15 for the proposed product, 10,000 would need to be sold to break even. That is approximately twice the volume estimate for the first year. She shares her dismay with Tina Smythe, another manager.
Tina strongly advises her to revise her estimates. She points out that several of the costs that had been classified as fixed costs could be considered variable, since they are step costs and mixed costs. When the data has been revised classifying those costs as variable costs, the project appears viable.
Required:
1.Who are the stakeholders in this decision?
2.Is it ethical for Linda to revise the costs as indicated? Briefly explain.
3.What should Linda do?

Question 51

Communication: William Dexter has been the manager for two years of the production department of a company manufacturing toys made of plastic-coated cardboard. One of the toys is a paper doll, whose 'clothes' are made of acetate, and stay on the doll with static electricity. The company's sales were mainly to large educational institutions until last year, when the dolls were sold for the first time to a large discount retailer. The dolls were sold out immediately, and enough orders received to keep the department at full capacity for the immediate future.
The fixed costs for the department are $50,000, with $1 per unit variable costs. Each set consists of a doll and one set of clothes and sells for $3. The maximum volume is 100,000 units. With the increased volume, Mr Dexter is considering two options to improve profitability. One would reduce variable costs to $0.75, and the other would reduce fixed costs to $35,000.
Required
Given the fact that sales are increasing, make a short (one paragraph) recommendation to Mr Dexter about which option he should choose. Support your recommendation with a calculation showing him how profitability will change with each option.