Deck 7: Costvolumeprofit Analysis and Marginal Analysis

Question 1

Semi-fixed costs are best defined as:

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

Answer 1

C

Question 2

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) materials used in production
D) insurance premium

Answer 2

D

Question 3

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

A) no change
B) increase
C) reduce
D) equal the margin of safety

Answer 3

A

Question 4

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

A) the sales price per unit for each alternative
B) a comparison of the contribution margin per limiting factor for each alternative
C) a comparison of the contribution margin for each alternative
D) remove the limiting factor

Question 5

Use the information below to answer the following questions.
Computer Expertise Ltd provides three services, the details for which are as follows: The demand for all services is unlimited. The ability to provide each 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 sales price
B) expert, because it has the highest contribution margin
C) basic, because it provides the highest dollar contribution per labour hour.
D) secretarial, because it is the most pleasurable for staff

Question 6

Relevant costs for decision-making are those costs that:

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

Question 7

If total costs are $80,000 at an output of 12,000 units and $95,000 at 15,000 units, fixed costs are:

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

Question 8

Eagle Co sells T-shirts. If the sales price per shirt is $10, the variable production costs are $3.50 per shirt and the fixed costs are $22,000 p.a., calculate the break-even point in sales dollars.

A) $6,286
B) $33,846
C) $3,385
D) $62,857

Question 9

The income statement for NY Blues is: The break-even point in sales dollars is:

A) $70,000
B) $80,000
C) $50,000
D) cannot be calculated

Question 10

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 Saver's profit if the special order is accepted?

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

Question 11

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. Sales price per unit $5.00
Variable cost per unit $2.00
Fixed costs per annum $9,000
Refer to the table above. Increasing the sales price to $6.00 and having a sales volume of 3,000 photo frames would result in:

A) breaking even.
B) a loss of $1,000.
C) a profit of $3,000.
D) a profit of $1,000.

Question 12

A business makes three different products, the details of which follow: 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) 120 machine hours
C) none
D) 240 machine hours

Question 13

Variable costs per unit are also known as:

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

Question 14

The correct statement is:

A) contribution margin contributes to profits.
B) contribution margin contributes to fixed costs.
C) contribution margin contributes to variable costs.
D) A and B are both correct.

Question 15

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: 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 staff for $50,000 per annum. The best advice to management is:

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

Question 16

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

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

Question 17

If total costs are $20,000 at an output of 1000 units and $35,000 at an output of 2,500 units, and variable costs are $10 per unit, total fixed costs are:

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

Question 18

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

Question 19

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

A) multi-product businesses
B) stepped fixed costs
C) the possibility of non-linear relationships
D) all of the above

Question 20

The contribution margin is so called because it contributes to:

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

Question 21

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

A) produce equal quantities of all products.
B) 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.
C) produce only the product with the highest contribution margin.
D) produce only the product with the highest contribution margin per unit of scarce factor.

Question 22

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

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

Question 23

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 24

Which organisation is more likely to be highly operationally geared?

A) internet service provider
B) takeaway food outlet
C) hairdresser
D) vehicle manufacturer

Question 25

Use the information below to answer the following questions.
Unique Tables manufactures 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 needs. To assist in their decision-making, the management accountant has supplied the following information:
Refer to the table above. The operating gearing for Unique Tables is:

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

Question 26

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: The fixed costs have been shared equally between the three functions.
Refer to the table above. Travel Made Easy supplies you with the following additional information. The fixed costs consist of $180,000 in rental and $90,000 in utilities and insurance. The floor space occupied by Holiday Packages staff is 15% of the total area and the remainder is shared equally by the other two services. All three services contribute equally to the utilities and insurance expense. Allocating fixed costs based on this information, the profit or loss of the Holiday Packages service would be:

A) a loss of $30,000.
B) a profit of $30,000.
C) a loss of $3,000.
D) a profit of $3,000.

Question 27

Use the information below to answer the following questions.
Computer Expertise Ltd provides three services, the details for which are as follows: The demand for all services is unlimited. The ability to provide each service is limited by the availability of qualified staff and therefore the labour time available.
Refer to the table above. The demand for the 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 for agency staff?

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

Question 28

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. Xon Company can produce the components internally for a total variable cost of $30 per component and has spare capacity. What will be the impact on Xon's profit if Eon's offer is accepted?

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

Question 29

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. Sales price per unit $5.00
Variable cost per unit $2.00
Fixed costs per annum $9,000
Refer to the table above. The sale of 5,000 photo frames would result in:

A) a loss of $3,000.
B) a loss of $2,000.
C) a profit of $6,000.
D) a profit of $5,000.

Question 30

When contribution margin per unit increases:

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

Question 31

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

A) fixed costs
B) total costs
C) variable costs
D) relevant costs

Question 32

Sales revenue per unit less variable costs per unit is known as:

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

Question 33

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

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

Question 34

Use the information below to answer the following questions.
Unique Tables manufactures 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 needs. To assist in their decision-making, the management accountant has supplied the following information:
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 $30,000; with the turning machine profit of $22,500
B) without the turning machine profit of $37,500; with the turning machine profit of $45,000
C) without the turning machine profit of $45,000; with the turning machine profit of $52,500
D) none of the above

Question 35

As output increases, variable costs per unit are:

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

Question 36

Break-even point is represented graphically as:

A) starting at zero and increasing in a straight line as activity increases.
B) starting at a given point and increasing in 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 37

Management may justifiably hesitate to close a service because of:

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

Question 38

An example of a semi-fixed (semi-variable) cost is:

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

Question 39

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

A) accepting or rejecting a special order
B) closing a department
C) make or buy decisions
D) all of the above

Question 40

The term 'relevant range', as used in break-even analysis, means the range:

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

Question 41

Fixed costs are best defined as:

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

Question 42

The margin of safety is best described as:

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

Question 43

Flower Art has increased its selling price to $25. All other costs remain constant (variable costs $15 per pot and fixed costs $40,000). The number of pots that have to be sold to break even is:

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

Question 44

High operating gearing refers to:

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

Question 45

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

A) the quality of other products
B) loss of in-house expertise and specialisation
C) the reliability of supply
D) loss of control over quality

Question 46

Which method can be used to separate semi-variable costs into their fixed and variable components?

A) the line of best fit
B) high-low method
C) linear regression method
D) all of the above methods

Question 47

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

Question 48

Fixed costs are represented graphically as:

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

Question 49

The break-even point is best defined as:

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

Question 50

Variable costs are best defined as:

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

Question 51

Variable costs are represented graphically as:

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

Question 52

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

Question 53

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

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

Question 54

Contribution per unit is best described as:

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

Question 55

Information necessary for decision-making includes:

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

Question 56

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

Question 57

If total costs are $20,000 at an output of 2000 units and $25,000 at an output of 2,500 units, variable costs per unit are:

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

Question 58

Which of these would be considered a variable cost?

A) cost of raw materials
B) manager's salary
C) local government rates
D) rent

Question 59

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

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

Question 60

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. Sales price per unit $5.00
Variable cost per unit $2.00
Fixed costs per annum $9,000
Refer to the table above. The break-even point in units is:

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

Question 61

A venture is said to be risky when:

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

Question 62

Flower Art sells ceramic pots. The pots sell for $20 each, with variable costs totalling $15 per pot. Fixed costs are $40,000. The number of pots that have to be sold to break even is:

A) 9,000 pots.
B) 7,000 pots.
C) 2,000 pots.
D) 8,000 pots.

Question 63

Use the information below to answer the following questions.
Unique Tables manufactures 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 needs. To assist in their decision-making, the management accountant has supplied the following information:
Refer to the table above. As the level of sales increases above 1,500 units, the level of profit would increase:

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

Question 64

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