Deck 11: Cost Behavior and Cost-Volume-Profit Analysis

Question 1

A production supervisor's salary that does not vary with the number of units produced is an example of a fixed cost.

Answer 1

True

Question 2

Variable costs are costs that vary on a per-unit basis as the level of manufacturing activity changes.

Answer 2

False

Question 3

Cost behavior refers to the methods used to estimate costs for use in managerial decision making.

Answer 3

False

Question 4

Monthly rent on a factory building is an example of a fixed cost.

Question 5

The range of activity over which changes in cost are of interest to management is called the relevant range.

Question 6

A mixed cost has characteristics of both a variable cost and a fixed cost.

Question 7

Variable costs are costs that vary in total in direct proportion to changes in the activity level.

Question 8

The relevant range is useful for analyzing cost behavior for management decision-making purposes.

Question 9

Direct materials and direct labor costs are examples of variable costs of production.

Question 10

Fixed costs are costs that vary in total dollar amount as the level of activity changes.

Question 11

The variable cost per unit remains constant with changes in the level of activity.

Question 12

A rental cost of $40,000 plus $0.50 per machine hour of use is an example of a mixed cost.

Question 13

The fixed cost per unit varies with changes in the level of activity.

Question 14

The graph of the variable costs when plotted against the activity level appears as a line parallel to horizontal axis.

Question 15

Rental charges of $60,000 per year plus $2 for each machine hour over 15,000 hours is an example of a fixed cost.

Question 16

Cost behavior refers to the manner in which a cost changes as a related activity changes.

Question 17

Variable cost per unit remains the same regardless of activity level.

Question 18

Variable costs are costs that remain constant in total with changes in the activity level.

Question 19

Total fixed costs remain constant as the level of activity changes within the relevant range.

Question 20

Direct materials cost is an example of a fixed cost of production.

Question 21

The break-even point (in units) is calculated by dividing the total estimated fixed costs by the net sales of a period.

Question 22

If direct materials cost per unit increases, the break-even point will increase.

Question 23

If direct materials cost per unit decreases, the amount of sales necessary to earn a desired amount of profit will decrease.

Question 24

If employees accept a wage contract that decreases the unit contribution margin, the break-even point will decrease.

Question 25

The point in operations at which revenues and expenses are exactly equal is called the break-even point.

Question 26

If sales total $1,000,000, fixed costs total $200,000, and variable costs are 55% of the sales, the contribution margin ratio is 55%.

Question 27

For purpose of analysis, mixed costs can generally be separated into their variable and fixed components.

Question 28

Break-even analysis is a type of cost-volume-profit analysis.

Question 29

The ratio that indicates the percentage of each sales dollar available to cover the fixed costs and to provide operating income is termed as contribution margin ratio.

Question 30

A change in fixed costs as a result of increase in yearly insurance premium will decrease the break-even point.

Question 31

If fixed costs are $850,000 and the unit contribution margin is $50, profit is zero when 15,000 units are sold.

Question 32

If sales total $2,000,000, fixed costs total $600,000, and variable costs are 60% of the sales, the contribution margin ratio is 40%.

Question 33

A change in fixed costs as a result of increase in the property tax rates will increase the break-even point.

Question 34

The unit contribution margin is the dollars available from each unit of sales to cover fixed cost and provide income from operations.

Question 35

If direct materials cost per unit decreases, the break-even point will increase.

Question 36

If fixed costs are $220,000 and the unit contribution margin is $25, the sales necessary to earn an operating income of $30,000 are 10,000 units.

Question 37

Variable costs as a percentage of sales is equal to 100% minus the contribution margin ratio.

Question 38

If sales total $5,000,000, fixed costs total $400,000, and variable costs are 2,750,000, the contribution margin ratio is 45%.

Question 39

If fixed costs are $300,000 and variable costs are 70% of break-even sales, profit is zero when sales revenue is $1,000,000.

Question 40

The contribution margin ratio is the same as the variable cost ratio.

Question 41

If the unit selling price is $50, the volume of sales is $450,000, sales at the break-even point amount to $375,000, and the maximum possible sales are $550,000, the margin of safety will be 2,000 units.

Question 42

If the unit selling price is $40, the volume of sales is $3,000,000, sales at the break-even point amount to $2,500,000, and the maximum possible sales are $3,300,000, the margin of safety will be 12,500 units.

Question 43

Only a single line, which represents the difference between total sales revenues and total costs, is plotted on the profit-volume chart.

Question 44

Only a single line, which represents the difference between total sales revenues and total costs, is plotted on the cost-volume-profit chart.

Question 45

Cost behavior refers to the manner in which:

A) a cost changes as the related activity changes.
B) a cost is allocated to products.
C) a cost is used in setting selling prices.
D) a cost is estimated.

Question 46

If fixed costs are $450,000 and the unit contribution margin is $50, the sales necessary to earn an operating income of $30,000 are 14,000 units.

Question 47

Which of the following activity bases would be the most appropriate for food costs of a hospital?

A) Number of cooks scheduled to work
B) Number of x-rays taken
C) Number of patients who are admitted in the hospital
D) Number of scheduled surgeries

Question 48

If the volume of sales is $6,000,000 and sales at the break-even point amount to $5,000,000, the margin of safety will be 20%.

Question 49

If a business sells two products, it is not possible to estimate the break-even point.

Question 50

Cost-volume-profit analysis can be presented in both graphically and equation form.

Question 51

Which of the following is an example of a cost that remains the same in total as the number of units produced changes?

A) Direct labor
B) Salary of a factory supervisor
C) Depreciation on factory equipment under units of production method
D) Direct materials

Question 52

Which of the following graphs illustrates the behavior of a total fixed cost within the specified relevant range?

A) Graph 2
B) Graph 3
C) Graph 4
D) Graph 1

Question 53

Which of the following best describes the behavior of the variable cost per unit?

A) Decreases with increase in production
B) Decreases with decrease in production
C) Remains constant with change in production
D) Increases with increase in production

Question 54

If a business sells four products, it is not possible to estimate the break-even point.

Question 55

A low operating leverage is normal for highly automated industries.

Question 56

Even if a business sells six products, it is possible to estimate the break-even point.

Question 57

Costs that remain constant on a per-unit level as the level of activity changes are called:

A) fixed costs.
B) mixed costs.
C) opportunity costs.
D) variable costs.

Question 58

DeGiaimo Co. has an operating leverage of 5. If next year's sales are expected to increase by 10%, then the company's operating income will increase by 50%.

Question 59

If the volume of sales is $4,000,000 and sales at the break-even point amount to $3,200,000, the margin of safety will be 20%.

Question 60

If the volume of sales is $6,000,000 and sales at the break-even point amount to $4,800,000, the margin of safety will be 25%.

Question 61

Tucker Co. manufactures office furniture. During the most productive month of the year, 3,600 desks were manufactured at a total cost of $192,000. In its slowest month, the company made 1,200 desks at a cost of $72,000. Using the high-low method of cost estimation, total fixed costs per month are:

A) $120,000.
B) $12,000.
C) $72,000.
D) $11,600.

Question 62

Given the following costs and activity observations for Pike Company's utilities, use the high-low method to calculate Pike's variable utilities costs per machine hour. $\begin{array}{lll}\text { Machine Hours}&\text { Cost }\\15,000 & \$ 8,300 & \text { May } \\20,000 & 10,400 & \text { June } \\12,000 & 7,200 & \text { July } \\18,000 & 9,500 & \text { August }\end{array}$

A) $0.55
B) $0.60
C) $0.52
D) $0.40

Question 63

Which of the following describes the behavior of the fixed cost per unit?

A) Decreases with increase in production
B) Decreases with decrease in production
C) Remains constant with changes in production
D) Increases with increase in production

Question 64

Which of the following costs is a mixed cost?

A) Salary of a factory supervisor
B) Electricity costs of $2 per kilowatt-hour
C) Rental costs of $5,000 per month plus $0.30 per machine hour of use
D) Straight-line depreciation on factory equipment

Question 65

Given the following cost and activity observations for Merritt Company's utilities, use the high-low method to calculate Merritt's fixed costs per month. $\begin{array}{lll}\text { Machine Hours}&\text { Cost }\\20,000 & \$ 52,600 & \text { January } \\29,000 & 75,100 & \text { February } \\22,000 & 57,000 & \text { March } \\24,500 & 64,000 & \text { April }\end{array}$

A) $25,100
B) $50,000
C) $22,500
D) $2,600

Question 66

Winston Co. manufactures office furniture. During the most productive month of the year, 3,500 desks were manufactured at a total cost of $84,400. In its slowest month, the company made 1,100 desks at a cost of $46,000. Using the high-low method of cost estimation, total fixed costs are:

A) $56,000.
B) $28,400.
C) $17,600.
D) $29,900.

Question 67

As production increases, fixed costs per unit would:

A) increase.
B) decrease.
C) remain the same.
D) either increase or decrease, depending on the variable costs.

Question 68

Which of the following graphs illustrates the behavior of a total variable cost?

A) Graph 2
B) Graph 3
C) Graph 4
D) Graph 1

Question 69

Costs that vary in total in direct proportion to changes in an activity level are called:

A) fixed costs.
B) sunk costs.
C) variable costs.
D) differential costs.

Question 70

For the purpose of analysis, mixed costs are generally:

A) classified as fixed costs.
B) classified as variable costs.
C) classified as period costs.
D) separated into their variable and fixed cost components.

Question 71

As production increases, what should happen to the variable costs per unit?

A) Remain constant
B) Increase
C) Decrease
D) Either increase or decrease, depending on the fixed costs

Question 72

Knowing how costs behave to change in the level of activity is useful to management for all the following reasons except for:

A) predicting customer demand.
B) predicting profits as sales and production volumes change.
C) estimating costs.
D) changing an existing product production.

Question 73

Which of the following statements is true regarding fixed and variable costs?

A) Both costs are constant when considered on a per-unit basis.
B) Both costs are constant when considered on a total basis.
C) Fixed costs are fixed in total, and variable costs are fixed per unit.
D) Variable costs are fixed in total, and fixed costs vary in total.

Question 74

The systematic examination of the relationships among selling prices, volume of sales and production, costs, expenses, and profits is termed as:

A) contribution margin analysis.
B) cost-volume-profit analysis.
C) budgetary analysis.
D) gross profit analysis.

Question 75

Which of the following is an example of a cost that varies in total as the number of units produced changes?

A) Salary of a production supervisor
B) Direct materials cost
C) Property taxes on factory buildings
D) Straight-line depreciation on factory equipment

Question 76

Which of the following graphs illustrates the nature of a mixed cost?

A) Graph 2
B) Graph 3
C) Graph 4
D) Graph 1

Question 77

Given the following costs and activity observations for Pike Company's utilities, use the high-low method to calculate Pike Company's variable utilities costs per machine hour. $$\begin{array}{l}\begin{array} { l l l } \text { Machine Hours}&\text { Cost }\\15,000 & \$ 3,100 & \text { March } \\10,000 & 2,700 & \text { April } \\12,000 & 2,900 & \text { May } \\18,000 & 3,500 & \text { June}\end{array}\end{array}$$

A) $0.10
B) $0.19
C) $0.21
D) $0.27

Question 78

The graph of a variable cost per unit when plotted against its related activity base appears as a:

A) circle.
B) rectangle.
C) straight line.
D) curved line.

Question 79

Which of the following is an example of a cost that varies in total as the number of units produced changes?

A) Electricity cost per KWH to operate factory equipment
B) Monthly rent on a factory building
C) Straight-line depreciation on factory equipment
D) Salary of a production supervisor

Question 80

Which of the following activity bases would be the most appropriate for gasoline costs of a delivery service such as UPS?

A) Number of trucks employed
B) Number of miles driven
C) Number of trucks in service
D) Number of packages delivered