Deck 9: Cost-Volume-Profit Analysis and Relevant Costing

Question 1

How are fixed costs represented graphically?

A)a horizontal line, staying the same irrespective of the level of activity.
B)starting at zero and increasing as a straight line as activity increases.
C)starting at a given point and increasing as a straight line as activity increases.
D)the intersection of the total costs and total revenue lines.

Answer 1

A

Question 2

Sand Art has increased its selling price to $35. All other costs remain constant (variable costs $25 per pot and fixed costs $50,000). The number of pots that have to be sold to break even is:

A)7,000 pots.
B)4,000 pots.
C)5,000 pots.
D)6,000 pots.

Answer 2

C

Question 3

An example of a variable cost is:

A)Manager's salary.
B)Local government rates.
C)Rent.
D)Cost of raw materials.

Answer 3

D

Question 4

If total costs are $90,000 at an output of 12,000 units and $105,000 at 15,000 units, fixed costs are:

A)$15,000.
B)$10,000.
C)$5,000.
D)$20,000.

Question 5

If total costs are $30,000 at an output of 2,000 units and $45,000 at an output of 3,500 units, and variable costs are $10 per unit, total fixed costs are:

A)$15,000
B)$10,000
C)$20,000
D)$25,000

Question 6

If the sales output of a firm increases, what will be the impact on the break-even point?

A)Increase.
B)Reduce.
C)No change.
D)Equal the margin of safety.

Question 7

Variable costs are represented graphically as:

A)starting at zero and increasing as a straight line as activity increases.
B)starting at a given point and increasing as a straight line as activity increases.
C)a horizontal line, staying the same irrespective of the level of activity.
D)the intersection of total costs and total revenue lines.

Question 8

Variable costs are best defined as:

A)varying from period to period.
B)varying directly in proportion to the number of employees.
C)varying directly in proportion to the level of activity.
D)varying over time.

Question 9

Which of the following is an example of a semi-fixed (semi-variable)cost?

A)cost of telephone calls.
B)total telephone account, both calls and rental.
C)cost of telephone rental.
D)none of the above.

Question 10

How is the break-even point best defined?

A)total costs equal to total revenue.
B)total level of activity equal to total revenue.
C)total fixed costs equal to total revenue.
D)total variable costs equal to total revenue.

Question 11

How are fixed costs best defined?

A)as fixed in relation to changes in activity over the relevant range of output.
B)as fixed for all time.
C)as fixed for 6 months.
D)as fixed for a given number of products.

Question 12

As output increases, variable costs per unit are:

A)semi-fixed.
B)constant.
C)variable.
D)proportional to total costs.

Question 13

Which of these would be considered a fixed cost?

A)Cost of fuel for a transport company.
B)Laundry costs to wash towels used by a hairdresser.
C)Insurance premium.
D)Materials used in production.

Question 14

What does an operating loss indicate?

A)sales are greater than break-even.
B)sales are less than break-even.
C)sales are equal to break-even.
D)none of the above.

Question 15

Sand Art sells ceramic pots. The pots sell for $30 each with variable costs totalling $25 per pot. Fixed costs are $50,000. The number of pots that have to be sold to break even is:

A)10,000 pots.
B)8,000 pots.
C)2,000 pots.
D)7,000 pots.

Question 16

The method that can be used to separate semi-variable costs into their fixed and variable components is

A)High-low method.
B)The line of best fit.
C)Linear regression method.
D)All of the above methods.

Question 17

How is the break-even point represented graphically?

A)the intersection of total costs and total revenue lines.
B)starting at zero and increasing as a straight line as activity increases.
C)starting at a given point and increasing as a straight line as activity increases.
D)a horizontal line, staying the same irrespective of the level of activity.

Question 18

The term 'relevant range,' means the range:

A)over which costs are relevant.
B)of activity within which an entity would normally operate.
C)where the firm will break-even.
D)over which the firm has a margin of safety.

Question 19

If total costs are $30,000 at an output of 3,000 units and $35,000 at an output of 3,500 units, variable costs per unit are:

A)$15 per unit.
B)$20 per unit.
C)$10 per unit.
D)$12 per unit.

Question 20

Semi-fixed costs are best defined as:

A)having both fixed and variable elements.
B)varying over time.
C)costs ignored in cost-volume-profit analysis.
D)none of the above.

Question 21

Use the information below to answer the following questions.
Sales Extraordinaire sells one particular photo frame. It estimates that it can sell as many frames as it produces. $\begin{array}{lr}\text { Sales price per unit } & \$ 6.00 \\\text { Variable cost per unit } & \$ 3.00 \\\text { Fixed costs per annum } & \$ 9,000\end{array}$

-Refer to the table above. The sale of 6,000 photo frames would result in:

A)a profit of $9,000.
B)a profit of $6,000.
C)a loss of $2,000.
D)a loss of $3,000.

Question 22

The vertical axes on a break-even chart and a profit-volume chart respectively are:

A)profit: sales revenue and costs.
B)volume of output: volume of output.
C)sales revenue and costs: profit.
D)fixed costs: sales revenue.

Question 23

Use the information below to answer the following questions.
Unique Tables manufacture coffee tables made of recycled timber. Market research has suggested that there will be strong demand for the tables. Due to this, management is debating whether to lease a new turning machine to meet increased production. To assist in their decisionmaking, the management accountant has supplied the following information: $\begin{array}{lll}&\text { Without }&\text {With }\\&\text { turning machine }&\text { turning machine }\\\hline\text { Expected level of sales } & 1,500 \text { units } & 1,500 \text { units } \\\text { Sales price per unit } & \$ 150 & \$ 150 \\\text { Variable costs per unit } & \$ 120 & \$ 110 \\\text { Fixed costs } & \$ 7500 & \$ 15,000\end{array}$

-Refer to the table above. At the current level of sales, which of the following results are achieved?

A)Without the turning machine profit of $45,000. With the turning machine profit of $52,500.
B)Without the turning machine profit of $30,000. With the turning machine profit of $22,500.
C)Without the turning machine profit of $37,500. With the turning machine profit of $45,000.
D)None of the above.

Question 24

The organisation more likely to be highly operationally geared is:

A)Internet service provider.
B)Vehicle manufacturer.
C)Takeaway food outlet.
D)Hairdresser.

Question 25

The statement of financial performance for LA Blues is: $$\begin{array} { l r } \text { Sales } & \$ 300,000 \\\text { Variable Expenses } & \$ 200,000 \\\text { Contribution Margin } & \$ 100,000 \\\text { Fixed Expenses } & \$ 20,000 \\\text { Profit } & \$ 80,000\end{array}$$ If the break-even point in sales dollars is $62,500, what is the margin of safety?

A)$7,500.
B)$20,000.
C)$17,500.
D)cannot be calculated.

Question 26

Contribution per unit is best described as:

A)the difference between total costs per unit and revenue per unit.
B)the difference between variable costs per unit and revenue per unit.
C)the difference between semi-fixed costs per unit and revenue per unit.
D)the difference between total fixed costs per unit and revenue per unit.

Question 27

How is margin of safety best described?

A)as the difference between the actual output and the break-even output.
B)as the difference between variable costs and total output.
C)as the difference between the fixed costs and total revenue.
D)as the difference between break-even point and total revenue.

Question 28

Use the information below to answer the following questions.
Sales Extraordinaire sells one particular photo frame. It estimates that it can sell as many frames as it produces. $\begin{array}{lr}\text { Sales price per unit } & \$ 6.00 \\\text { Variable cost per unit } & \$ 3.00 \\\text { Fixed costs per annum } & \$ 9,000\end{array}$

-Refer to the table above. The break-even point in units is:

A)1,800.
B)5,500.
C)1,285.
D)3,000.

Question 29

High operating gearing refers to:

A)an activity with fixed costs equal to its variable costs.
B)an activity with relatively high variable costs compared with its fixed costs.
C)an activity with relatively low fixed costs compared with its variable costs.
D)an activity with relatively high fixed costs compared with its variable costs.

Question 30

Use the information below to answer the following questions.
Unique Tables manufacture coffee tables made of recycled timber. Market research has suggested that there will be strong demand for the tables. Due to this, management is debating whether to lease a new turning machine to meet increased production. To assist in their decisionmaking, the management accountant has supplied the following information: $\begin{array}{lll}&\text { Without }&\text {With }\\&\text { turning machine }&\text { turning machine }\\\hline\text { Expected level of sales } & 1,500 \text { units } & 1,500 \text { units } \\\text { Sales price per unit } & \$ 150 & \$ 150 \\\text { Variable costs per unit } & \$ 120 & \$ 110 \\\text { Fixed costs } & \$ 7500 & \$ 15,000\end{array}$

-Refer to the table above. As the level of sales increases above 1,500 units, the level of profit would increase:

A)at the same rate with or without the turning machine.
B)at a faster rate with the turning machine.
C)at a faster rate without the turning machine.
D)none of the above.

Question 31

If sales revenue totals $84,000, selling price is $6 per unit, variable costs are $2.50 per unit and fixed costs are $48,000 per annum, the profit that will be earned is:

A)$13,714.
B)$19,200.
C)$1,000.
D)$5,600.

Question 32

Which of the following statements is correct?

A)contribution margin contributes to profits.
B)contribution margin contributes to fixed costs.
C)contribution margin contributes to variable costs.
D)Both A and B.

Question 33

Selling price per unit less variable costs per unit is known as:

A)contribution margin.
B)direct cost.
C)avoidable cost.
D)all of the above.

Question 34

Which of these is a limitation in applying break-even analysis?

A)Stepped fixed costs.
B)The possibility of non-linear relationships.
C)Multi-product businesses.
D)All of the above.

Question 35

On a profit-volume chart, the slope of the graph is equal to:

A)profit per unit.
B)variable costs per unit.
C)contribution margin per unit.
D)fixed plus variable costs per unit.

Question 36

Hawk Co sells T-shirts. If the sales price per shirt is $10, the variable production costs are $7.00 per shirt and the fixed costs are $21,000 p.a., calculate the break-even point in sales dollars.

A)$24,000.
B)$30,000.
C)$7,000.
D)$3,000.

Question 37

Use the information below to answer the following questions.
Sales Extraordinaire sells one particular photo frame. It estimates that it can sell as many frames as it produces. $\begin{array}{lr}\text { Sales price per unit } & \$ 6.00 \\\text { Variable cost per unit } & \$ 3.00 \\\text { Fixed costs per annum } & \$ 9,000\end{array}$

-Refer to the table above. Increasing the sales price to $8.00 and having a sales volume of 3,000 photo frames would result in:

A)a profit of $6,000.
B)a loss of $1,000.
C)breaking even.
D)a profit of $1,000.

Question 38

A venture is said to be risky when the:

A)actual level of activity is less than the planned level of activity.
B)actual level of activity is greater than the planned level of activity.
C)planned level of activity is only slightly above the break-even point.
D)none of the above.

Question 39

When contribution margin per unit increases:

A)break-even output remains the same.
B)break-even output increases.
C)break-even output decreases.
D)fixed costs decrease.

Question 40

Use the information below to answer the following questions.
Unique Tables manufacture coffee tables made of recycled timber. Market research has suggested that there will be strong demand for the tables. Due to this, management is debating whether to lease a new turning machine to meet increased production. To assist in their decisionmaking, the management accountant has supplied the following information: $\begin{array}{lll}&\text { Without }&\text {With }\\&\text { turning machine }&\text { turning machine }\\\hline\text { Expected level of sales } & 1,500 \text { units } & 1,500 \text { units } \\\text { Sales price per unit } & \$ 150 & \$ 150 \\\text { Variable costs per unit } & \$ 120 & \$ 110 \\\text { Fixed costs } & \$ 7500 & \$ 15,000\end{array}$

-Refer to the table above. The operating gearing for Unique Tables is:

A)higher with the turning machine.
B)higher without the turning machine.
C)insignificant.
D)equal in both cases.

Question 41

A marginal analysis of two or more possible courses of action takes into account:

A)all the revenue received from each course of action.
B)all of the costs involved in each course of action.
C)only the fixed costs involved in each course of action.
D)only the costs that vary with each course of action.

Question 42

Wombat World is a small zoo displaying native animals. The entrance fee is $15 per person. Variable costs of running the zoo are $8 per visitor and fixed costs are $200,000 per annum. The number of visitors that would be needed to make a profit of $20,000 per annum is:

A)1,333.
B)31,429.
C)14,667.
D)27,500.

Question 43

Information necessary for decision-making includes:

A)both quantitative and qualitative information.
B)quantitative information only.
C)information reported in financial reports only.
D)qualitative information only.

Question 44

The contribution margin is so called because it contributes to:

A)variable costs.
B)fixed and variable costs.
C)fixed costs and profit.
D)fixed costs.

Question 45

Use the information below to answer the following questions.
Computers Expertise Ltd provides three services, the details for which are as follows: $\begin{array}{llll}& \underline{\text { Basic} }& \underline{ \text { Secretarial }} & \underline{ \text { Expert }}\\ \text { Sales price per unit } & \$ 20 & \$ 30 & \$ 50 \\\text { Variable cost per unit } & \$ 10 & \$ 12 & \$ 15 \\\text { (paper, transport, etc.) } & & & \\\text { Labour time per unit } & 1 \text { hour } & 2 \text { hours } & 5 \text { hours } \\\text { Annual fixed costs } & \$ 20,000 & &\end{array}$
The demand for all service is unlimited. The ability to provide the service is limited by the availability of qualified staff and therefore the labour time available.

-Refer to the table above. Which product is the most profitable?

A)Expert, because it has the highest contribution margin.
B)Expert, because it has the highest sales price.
C)Secretarial, because it is the most pleasurable for staff.
D)Basic, because it provides the highest dollar contribution per labour hour.

Question 46

Screen Saver Industries has spare production capacity due to the cancellation of a customer order. An overseas retail chain has offered the business an order for 300 units at a price of $25 each. The variable cost of the units is $20 each and the fixed costs are $3 per unit. What will be the impact on Screen Savers profit if the special order is accepted?

A)$1,500 increase.
B)$1,500 decrease.
C)$600 increase.
D)$600 decrease.

Question 47

Xon Company needs 1,000 components for one of its products. It can subcontract production of the components to the Eon Company for $40 each. The business can produce the components internally for a total variable cost of $30 per component. Xon Company has spare capacity. What will be the impact on Xon's profit if Eon's offer is accepted?

A)$10,000 decrease.
B)$10,000 increase.
C)$1,000 increase.
D)$1,000 decrease.

Question 48

Use the information below to answer the following questions.
Travel Made Easy Ltd provides three services: International travel, Interstate travel, and Holiday Packages. The results for the year were as follows: $$\begin{array} { l r r c r } & \text { International } & \text { Interstate } & \text { Packages } & \text { Total } \\\hline\text { Revenue } & \$ 200,000 & \$ 200,000 & \$ 100,000 & \$ 500,000 \\\text { Variable costs } & \underline{ 50,000}& \underline{60,000} & \underline{40,000 }& \underline{ 150,000 }\\\text { Contribution } & 150,000 & 140,000 & 60,000 & 350,000 \\\text { Fixed costs } & \underline{90,000}& \underline{90,000} & \underline{90,000 }& \underline{270,000} \\\text { Net Profit } & \underline{\$ 60,000} & \underline{ \$ 50,000 }& \underline{ ( \$ 30,000 )} & \underline{ \$ 80,000} \\\end{array}$$ The Fixed costs have been shared equally between the three functions.

-Refer to the table above. Assume that Travel Made Easy can sublet the space occupied by the Holiday Packages for $50,000 per annum. The best advice to management is:

A)to close the service and save $40,000.
B)do not close the service, because profit would decrease by $10,000.
C)do not close the service, because profit would decrease by $40,000.
D)to close the service, and the business would make a profit of $130,000.

Question 49

Use the information below to answer the following questions.
Travel Made Easy Ltd provides three services: International travel, Interstate travel, and Holiday Packages. The results for the year were as follows: $$\begin{array} { l r r c r } & \text { International } & \text { Interstate } & \text { Packages } & \text { Total } \\\hline\text { Revenue } & \$ 200,000 & \$ 200,000 & \$ 100,000 & \$ 500,000 \\\text { Variable costs } & \underline{ 50,000}& \underline{60,000} & \underline{40,000 }& \underline{ 150,000 }\\\text { Contribution } & 150,000 & 140,000 & 60,000 & 350,000 \\\text { Fixed costs } & \underline{90,000}& \underline{90,000} & \underline{90,000 }& \underline{270,000} \\\text { Net Profit } & \underline{\$ 60,000} & \underline{ \$ 50,000 }& \underline{ ( \$ 30,000 )} & \underline{ \$ 80,000} \\\end{array}$$ The Fixed costs have been shared equally between the three functions.

-Refer to the table above. Management is contemplating closing the Holiday Packages service; this would involve a cost saving of $40,000 per annum, namely, the variable costs. The fixed costs are not expected to change. The best advice to management is:

A)close the service, and the business would make a profit of $110,000.
B)do not close the service, because profit would decrease by $60,000.
C)close the service and save $40,000.
D)do not close the service, because profit would decrease by $90,000.

Question 50

Use the information below to answer the following questions.
Computers Expertise Ltd provides three services, the details for which are as follows: $\begin{array}{llll}& \underline{\text { Basic} }& \underline{ \text { Secretarial }} & \underline{ \text { Expert }}\\ \text { Sales price per unit } & \$ 20 & \$ 30 & \$ 50 \\\text { Variable cost per unit } & \$ 10 & \$ 12 & \$ 15 \\\text { (paper, transport, etc.) } & & & \\\text { Labour time per unit } & 1 \text { hour } & 2 \text { hours } & 5 \text { hours } \\\text { Annual fixed costs } & \$ 20,000 & &\end{array}$
The demand for all service is unlimited. The ability to provide the service is limited by the availability of qualified staff and therefore the labour time available.

-Refer to the table above. The demand for Secretarial Service is very strong, however, Computer Expertise does not have sufficient labour hours available to meet the demand. An employment agency is able to supply qualified staff to provide the Secretarial Service. What is the maximum price Computer Expertise should be prepared to pay per hour?

A)$9.
B)$18.
C)$30.
D)$12.

Question 51

For short-run decisions, which costs can normally be deemed to be irrelevant?

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

Question 52

Pretty Dolls Pty Ltd usually sell 30,000 dolls per annum. This year, they have excess stock of 10,000 dolls; they usually retail the dolls at $35 per unit. Their variable cost per unit is $20 and their annual fixed costs are $30,000. They have received 'a one time only expression of interest' from an overseas retail chain to purchase 7,500 units at $29 per unit. What would be the best advice you could provide to Pretty Dolls?

A)Do not accept the order, as it is not worthwhile pursuing 'a one time only expression of interest.'
B)Do not accept the offer, as a loss will be incurred.
C)Do not accept the order, as the variable cost plus the fixed costs per unit amount to $30 per unit.
D)Accept the offer, as it will lead to a $9 per unit contribution to fixed costs.

Question 53

A business may prefer to make a product that it could subcontract at a cheaper price because:

A)they may be concerned that having gained their business, the subcontractor could increase the price charged.
B)by subcontracting the business, they may find supply is less reliable.
C)by subcontracting the business, they may lose control over quality.
D)all of the above.

Question 54

Which of these is not a relevant qualitative factor in deciding to outsource a product rather than continue making it?

A)Loss of in-house expertise and specialisation.
B)Loss of control over quality.
C)The quality of other products.
D)The reliability of supply.

Question 55

On a profit-volume chart, the output where the graph line crosses the axis is the output where:

A)profit equals zero.
B)the firm breaks even.
C)fixed costs are zero.
D)Both A and B.

Question 56

Variable costs per unit are also known as:

A)marginal costs.
B)break-even costs.
C)activity costs.
D)semi-variable costs.

Question 57

Relevant costs for decision-making are those costs that:

A)vary amongst alternatives.
B)represent fixed costs only.
C)are the same for all alternatives.
D)none of the above.

Question 58

L Ltd can subcontract out one of its components at $18 each. The business can produce the component internally for a total cost of $19 including the allocation of fixed costs at $5 per component. L Ltd has spare capacity. Should it make the component internally or contract it out?

A)Make the component as the variable cost of $14 ($19-$5)for internal production is cheaper than the $18 cost of subcontracting.
B)Subcontract as the total cost of subcontracting at $18 is cheaper than the cost of $19 for internal production.
C)Subcontract as it will be easier.
D)None of the above.

Question 59

Management's concern about 'scarce resource' is primarily due to:

A)the desire to make the most efficient use of scarce resources.
B)the desire to maximise total revenue.
C)the desire to minimise total costs.
D)social and environmental reasons.

Question 60

Opal Incorporated sold 30,000 units of its product last year with the following results: $\begin{array}{lr}\text { Sales revenue } & \$ 900,000 \\\text { Variable Costs } & 630,000 \\\text { Contribution Margin } & 270,000 \\\text { Fixed Costs } & \underline{190,000} \\\text { Operating Profit } & \$ 80,000\end{array}$ The company expects variable costs to increase by $3 per unit this year.
REQUIRED:
a)Assuming the unit sales price remains constant, compute the unit contribution margin for this year.
b)Given the expected change in variable costs, how many units will have to be sold this year to earn the same operating profit as last year?

Question 61

In which of these short-term decision areas are fixed costs generally irrelevant?

A)Make or buy decisions.
B)Closing a department.
C)Accepting or rejecting a special order.
D)All of the above.

Question 62

Where several products are produced and there is a scarce factor, what is the rule for deciding on the optimum product mix?

A)produce only the product with the highest contribution margin.
B)produce only the product with the highest contribution margin per unit of scarce factor.
C)produce as much as can be sold of the product with the highest contribution margin per unit of scarce factor, and use any remaining resource to produce the product with the next highest contribution margin per unit of scarce factor etc.
D)produce equal quantities of all products.

Question 63

Why may management justifiably hesitate to close a service:

A)because of emotional attachment to providing the service.
B)because the loss made in providing one service can be compensated by the profit made by providing other services.
C)because closing one service may lead to a decline in the demand of other services.
D)all of the above.

Question 64

A Business makes three different products, the details of which follow: $\begin{array}{llll}\text { Product code } & \text { A1 } & \text { A2 } & \text { A3 } \\\text { Selling price } & \$ 50 & \$ 46 & \$ 40 \\\text { Variable cost } & \$ 20 & \$ 24 & \$ 16\\\text { Weekly demand-units } & 50 & 40 & 60 \\\text { Machine time per unit } & 4 \text { hours } & 4 \text { hours } & 6 \text { hours }\end{array}$ The maximum machine time available is 350 hours per week. How many machine hours should be spent manufacturing product A3?

A)35 machine hours.
B)240 machine hours.
C)120 machine hours.
D)None.

Question 65

The following information relates to component AHB2 manufactured by Aquarius Electronics. $$\begin{array} { l l r } \text { Internal Manufacturing cost: } & \text { Direct materials } & \$ 30 \\\text { (per unit) } & \text { Direct labour } & 18 \\& \text { Variable manufacturing overhead } & 9 \\& \text { Fixed manufacturing overhead } & \underline { 17 } \\&& \underline { 74 } \\& \\\text { External acquisition price (per unit) } & & \$ 54\end{array}$$ REQUIRED:
a)Based on the financial data presented, should Aquarius continue to manufacture the part or source it from the external supplier?
b)What other factors need to be taken into account?

Question 66

Which is the approach to take in the short-run when considering the most efficient sales mix where there is a limiting factor?

A)Remove the limiting factor.
B)The sales price per unit for each alternative.
C)A comparison of the contribution margin per limiting factor for each alternative.
D)A comparison of the contribution margin for each alternative.