Deck 22: Cost-Volume-Profit

Question 1

A variable cost remains constant per unit at various levels of activity.

Answer 1

True

Question 2

An activity index identifies the activity that has a causal relationship with a particular cost.

Answer 2

True

Question 3

Contribution margin is the amount of revenues remaining after deducting cost of goods sold.

Answer 3

False

Question 4

For CVP analysis, both variable and fixed costs are assumed to have a linear relationship within the relevant range of activity.

Question 5

Costs will not change in total within the relevant range of activity.

Question 6

An assumption of CVP analysis is that all costs can be classified as either variable or fixed.

Question 7

Unit contribution margin is the amount that each unit sold contributes towards the recovery of fixed costs and to income.

Question 8

The fixed cost element of a mixed cost is the cost of having a service available.

Question 9

The high-low method is used in classifying a mixed cost into its variable and fixed elements.

Question 10

The contribution margin ratio is calculated by multiplying the unit contribution margin by the unit sales price.

Question 11

In CVP analysis, the term cost includes manufacturing costs, and selling and administrative expenses.

Question 12

A fixed cost remains constant in total and on a per unit basis at various levels of activity.

Question 13

Changes in the level of activity will cause unit variable and unit fixed costs to change in opposite directions.

Question 14

When applying the high-low method, the variable cost element of a mixed cost is calculated before the fixed cost element.

Question 15

A mixed cost has both selling and administrative cost elements.

Question 16

The relevant range of activity is the activity level where the firm will earn income.

Question 17

If volume increases, all costs will increase.

Question 18

If the activity index decreases, total variable costs will decrease proportionately.

Question 19

For planning purposes, mixed costs are generally grouped with fixed costs.

Question 20

The difference between the costs at the high and low levels of activity represents the fixed cost element of a mixed cost.

Question 21

A variable cost is a cost that

A) varies per unit at every level of activity.
B) occurs at various times during the year.
C) varies in total in proportion to changes in the level of activity.
D) may or may not be incurred, depending on management's discretion.

Question 22

The break-even point is where total sales equal total variable costs.

Question 23

The contribution margin ratio of 40% means that 60 cents of each sales dollar is available to cover fixed costs and to produce a profit.

Question 24

Both variable and fixed costs are included in calculating the contribution margin.

Question 25

A cost which remains constant per unit at various levels of activity is a

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

Question 26

If more units are sold than are produced in a period, variable costing income will be greater than absorption costing income.

Question 27

For an activity base to be useful in cost behavior analysis,

A) the activity should always be stated in dollars.
B) there should be a correlation between changes in the level of activity and changes in costs.
C) the activity should always be stated in terms of units.
D) the activity level should be constant over a period of time.

Question 28

A target net income is calculated by taking actual sales minus the margin of safety.

Question 29

A cost-volume-profit graph shows the amount of net income or loss at each level of sales.

Question 30

A CVP income statement classifies total costs by functional areas.

Question 31

If the unit contribution margin is $1 and unit sales are 10,000 units above the break-even volume, then net income will be $10,000.

Question 32

The break-even point is equal to the fixed costs plus net income.

Question 33

The activity level is represented by an activity index such as direct labor hours, units of output, or sales dollars.

Question 34

For purposes of CVP analysis, mixed costs must be classified into their fixed and variable elements.

Question 35

The margin of safety is the difference between contribution margin and fixed costs.

Question 36

Variable costing is not acceptable in reporting to stockholders under generally accepted accounting principles.

Question 37

A CVP income statement shows contribution margin instead of gross profit.

Question 38

The margin of safety ratio is equal to the margin of safety in dollars divided by the actual or (expected) sales.

Question 39

A CVP income statement classifies expenses by function rather than by cost behavior.

Question 40

The trend in most companies is to have more variable costs and fewer fixed costs.

Question 41

An activity index might be referred to as a cost

A) driver.
B) multiplier.
C) element.
D) correlation.

Question 42

An increase in the level of activity will have the following effects on unit costs for variable and fixed costs:
Unit Variable Cost Unit Fixed Cost

A) Increases Decreases
B) Remains constant Remains constant
C) Decreases Remains constant
D) Remains constant Decreases

Question 43

The increased use of automation and less use of the work force in companies has caused a trend towards an increase in

A) both variable and fixed costs.
B) fixed costs and a decrease in variable costs.
C) variable costs and a decrease in fixed costs.
D) variable costs and no change in fixed costs.

Question 44

The relevant range of activity refers to the

A) geographical areas where the company plans to operate.
B) activity level where all costs are curvilinear.
C) levels of activity over which the company expects to operate.
D) level of activity where all costs are constant.

Question 45

If a firm increases its activity level,

A) costs should remain the same.
B) most costs will rise.
C) no costs will remain the same.
D) some costs will change, others will remain the same.

Question 46

Which of the following is not a fixed cost?

A) Direct materials
B) Depreciation
C) Lease charge
D) Property taxes

Question 47

Firms operating at 100% capacity

A) are common.
B) are the exception rather than the rule.
C) have no fixed costs.
D) have no variable costs.

Question 48

Which of the following is not a cost classification?

A) Mixed
B) Multiple
C) Variable
D) Fixed

Question 49

Which of the following would be the least controllable fixed costs?

A) Property taxes
B) Rent
C) Research and development
D) Management training programs

Question 50

Changes in activity have a(n) _________ effect on fixed costs per unit.

A) positive
B) negative
C) inverse
D) neutral

Question 51

Cost behavior analysis is a study of how a firm's costs

A) relate to competitors' costs.
B) relate to general price level changes.
C) respond to changes in the level of business activity.
D) respond to changes in the gross national product.

Question 52

Which of the following is not a plausible explanation of why variable costs often behave in a curvilinear fashion?

A) Labor specialization
B) Overtime wages
C) Total variable costs are constant within the relevant range
D) Availability of quantity discounts

Question 53

Fixed costs normally will not include

A) property taxes.
B) direct labor.
C) supervisory salaries.
D) depreciation on buildings and equipment.

Question 54

Two costs at Simpson, Inc. appear below for specific months of operation. Which type of costs are these?

A) Delivery costs and utilities are both variable.
B) Delivery costs and utilities are both mixed.
C) Utilities are mixed and delivery costs are variable.
D) Delivery costs are mixed and utilities are variable.

Question 55

Cost behavior analysis applies to

A) retailers.
B) wholesalers.
C) manufacturers.
D) all entities.

Question 56

If the activity level increases 10%, total variable costs will

A) remain the same.
B) increase by more than 10%.
C) decrease by less than 10%.
D) increase 10%.

Question 57

Why is identification of a relevant range important?

A) It is required under GAAP.
B) Cost behavior outside of the relevant range is not linear, which distorts CVP analysis.
C) It directly impacts the number of units of product a customer buys.
D) It is a cost that is incurred by a company that must be accounted for.

Question 58

A fixed cost is a cost which

A) varies in total with changes in the level of activity.
B) remains constant per unit with changes in the level of activity.
C) varies inversely in total with changes in the level of activity.
D) remains constant in total with changes in the level of activity.

Question 59

Which of the following costs are variable?

A) 1 and 2
B) 1 and 4
C) only 1
D) only 2

Question 60

Cost activity indexes might help classify costs as

A) temporary.
B) permanent.
C) variable.
D) transient.

Question 61

The high-low method is often employed in analyzing

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

Question 62

In CVP analysis, the term "cost"

A) includes only manufacturing costs.
B) means cost of goods sold.
C) includes manufacturing costs plus selling and administrative expenses.
D) excludes all fixed manufacturing costs.

Question 63

In applying the high-low method, what is the fixed cost?

A) $17,500
B) $36,000
C) $14,000
D) $50,000

Question 64

For analysis purposes, the high-low method usually produces a(n)

A) reasonable estimate.
B) precise estimate.
C) overstated estimate.
D) understated estimate.

Question 65

At the high level of activity in November, 7,000 machine hours were run and power costs were $12,000. In April, a month of low activity, 2,000 machine hours were run and power costs amounted to $6,000. Using the high-low method, the estimated fixed cost element of power costs is

A) $12,000.
B) $6,000.
C) $3,600.
D) $8,400.

Question 66

Tommy's Seafood used high-low data from June and July to determine its variable cost of $15 per unit. Additional information follows: If Tommy's produces 2,300 units in August, how much is its total cost expected to be?

A) $10,000
B) $49,500
C) $34,500
D) $44,500

Question 67

Simon Company's high and low level of activity last year was 60,000 units of product produced in May and 20,000 units produced in November. Machine maintenance costs were $78,000 in May and $30,000 in November. Using the high-low method, determine an estimate of total maintenance cost for a month in which production is expected to be 45,000 units.

A) $67,500
B) $72,000
C) $58,500
D) $60,000

Question 68

Which of the following is not a mixed cost?

A) Car rental fee
B) Electricity
C) Depreciation
D) Telephone Expense

Question 69

If Whisper Wings Airlines cuts its domestic fares by 30%,

A) its fixed costs will decrease.
B) profit will increase by 30%.
C) a profit can only be earned by decreasing the number of flights.
D) a profit can be earned either by increasing the number of passengers or by decreasing variable costs.

Question 70

A mixed cost contains

A) a variable element and a fixed element.
B) both selling and administrative costs.
C) both retailing and manufacturing costs.
D) both operating and nonoperating costs.

Question 71

If graphed, fixed costs that behave in a curvilinear fashion resemble a(n)

A) S-curve.
B) inverted S-curve.
C) straight line.
D) stair-step pattern.

Question 72

The graph of variable costs that behave in a curvilinear fashion will

A) approximate a straight line within the relevant range.
B) be sharply kinked on both sides of the relevant range.
C) be downward sloping.
D) be a stair-step pattern.

Question 73

In using the high-low method, the fixed cost

A) is determined by subtracting the total cost at the high level of activity from the total cost at the low activity level.
B) is determined by adding the total variable cost to the total cost at the low activity level.
C) is determined before the total variable cost.
D) may be determined by subtracting the total variable cost from either the total cost at the low or high activity level.

Question 74

Which one of the following is a name for the range over which a company expects to operate?

A) Mixed range
B) Fixed range
C) Variable range
D) Relevant range

Question 75

In applying the high-low method, what is the unit variable cost?

A) $1.44
B) $1.25
C) $1.60
D) Cannot be determined from the information given.

Question 76

Townsend, Inc. collected the following production data for the past month: If the high-low method is used, what is the monthly total cost equation?

A) Total cost = $4,400 + $11/unit
B) Total cost = $5,500 + $10/unit
C) Total cost = $0 + $15/unit
D) Total cost = $3,300 + $12/unit

Question 77

In applying the high-low method, which months are relevant?

A) January and February
B) January and April
C) February and April
D) February and March

Question 78

The high-low method is criticized because it

A) is not a graphical method.
B) is a mathematical method.
C) ignores much of the available data by concentrating on only the extreme points.
D) doesn't provide reasonable estimates.

Question 79

Richert Company's activity for the first three months of 2010 are as follows: Using the high-low method, how much is the cost per machine hour?

A) $1.00
B) $1.50
C) $1.13
D) $0.89

Question 80

Which of the following is not true about the graph of a mixed cost?

A) It is possible to determine the amount of the fixed cost from the graph.
B) There is a total cost line on the graph.
C) The fixed cost portion of the graph is the same amount at all levels of activity.
D) The variable cost portion of the graph is rectangular in shape.