Deck 20: Cost-Volume-Profit Analysis

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

Total fixed costs change as the level of activity changes.

Question 5

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

Question 6

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

Question 7

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

Question 8

Unit variable cost does not change as the number of units of activity changes.

Question 9

Direct materials cost that varies with the number of units produced is an example of a fixed cost of production.

Question 10

In order to choose the proper activity base for a cost, managerial accountants must be familiar with the operations of the entity.

Question 11

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

Question 12

Because variable costs are assumed to change in direct proportion to changes in the activity level, the graph of the variable costs when plotted against the activity level appears as a circle.

Question 13

Rental charges of $40,000 per year plus $3 for each machine hour over 18,000 hours is an example of a fixed cost.

Question 14

Total variable costs change as the level of activity changes.

Question 15

Variable costs are costs that remain constant in total dollar amount as the level of activity changes.

Question 16

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

Question 17

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

Question 18

The relevant activity base for a cost depends upon which base is most closely associated with the cost and the decision-making needs of management.

Question 19

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

Question 20

Variable costs are costs that vary on a per-unit basis with changes in the activity level.

Question 21

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

Question 22

The contribution margin ratio is the same as the profit-volume ratio.

Question 23

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

Question 24

If sales total $2,000,000, fixed costs total $800,000, and variable costs are 60% of sales, the contribution margin ratio is 40%.

Question 25

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

Question 26

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

Question 27

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

Question 28

If fixed costs are $500,000 and variable costs are 60% of break-even sales, profit is zero when sales revenue is $930,000.

Question 29

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

Question 30

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

Question 31

If yearly insurance premiums are increased, this change in fixed costs will result in an increase in the break-even point.

Question 32

The amount of dollars available from each unit of sales to cover fixed cost and profit is the unit variable cost.

Question 33

If the property tax rates are increased, this change in fixed costs will result in a decrease in the break-even point.

Question 34

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

Question 35

A rental cost of $20,000 plus $0.70 per machine hour of use is an example of a mixed cost.

Question 36

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

Question 37

The data required for determining the break-even point for a business are the total estimated fixed costs for a period stated as a percentage of sales.

Question 38

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

Question 39

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

Question 40

If sales total $2,000,000, fixed costs total $800,000, and variable costs are 60% of sales, the contribution margin ratio is 60%.

Question 41

A low operating leverage is normal for highly automated industries.

Question 42

Garmo Co. has an operating leverage of 5. Next year's sales are expected to increase by 10%. The company's operating income will increase by 50%.

Question 43

The break-even point is not as relevant in a service company as it is in a manufacturing company.

Question 44

If fixed costs are $450,000 and the unit contribution margin is $50, the sales necessary to earn an operating income of $50,000 are 10,000 units.

Question 45

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

Question 46

Cost behavior refers to the manner in which a cost

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

Question 47

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 is 11,500 units.

Question 48

If fixed costs are $650,000 and the unit contribution margin is $30, the sales necessary to earn an operating income of $30,000 are 14,000 units.

Question 49

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

Question 50

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

Question 51

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 is 14,500 units.

Question 52

With respect to cost-volume-profit analysis for service companies, a cost may be defined as fixed or variable, depending on the unit of analysis.

Question 53

Companies with large amounts of fixed costs will generally have a high operating leverage.

Question 54

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

Question 55

If the volume of sales is $7,000,000 and sales at the break-even point amount to $4,800,000, the margin of safety is 45.8%.

Question 56

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

Question 57

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 is 25%.

Question 58

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

Question 59

The reliability of cost-volume-profit analysis does not depend on the assumption that costs can be accurately divided into fixed and variable components.

Question 60

Cost-volume-profit relationships in a service company are measured with respect to customers and activities, rather than units of product.

Question 61

The three most common cost behavior classifications are

A)variable costs, product costs, and sunk costs
B)fixed costs, variable costs, and mixed costs
C)variable costs, period costs, and differential costs
D)variable costs, sunk costs, and opportunity costs

Question 62

Figure 1 ​
Which of the following graphs in Figure 1 illustrates the behavior of a total fixed cost?

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

Question 63

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

A)number of nurses scheduled to work
B)how many MRIs are taken
C)number of patients who stay in the hospital
D)quantity of prescriptions filled

Question 64

Which of the following costs 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)units-of-production depreciation on factory equipment
D)direct materials

Question 65

Most operating decisions of management focus on a narrow range of activity called the ______ of production.

A)relevant range
B)strategic level
C)optimal level
D)tactical operating level

Question 66

Figure 1 ​
Which of the following graphs in Figure 1 illustrates the nature of a mixed cost?

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

Question 67

Costs that vary in total in direct proportion to changes in an activity level are called ______ costs.

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

Question 68

Which of the following is not an example of a cost that varies in total as the number of units produced changes?

A)electricity per KWH to operate factory equipment
B)direct materials cost
C)straight-line depreciation on factory equipment
D)wages of assembly worker

Question 69

For purposes of analysis, mixed costs are

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 70

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

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

Question 71

Costs that remain constant in total dollar amount as the level of activity changes are called ________ costs.

A)fixed
B)mixed
C)product
D)variable

Question 72

Figure 1 ​
Which of the following graphs in Figure 1 illustrates the behavior of a total variable cost?

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

Question 73

Strait Co. manufactures office furniture. During the most productive month of the year, 3,000 desks were manufactured at a total cost of $59,000. In the month of lowest production, the company made 1,125 desks at a cost of $38,000. Using the high-low method of cost estimation, total fixed costs are

A)$21,000
B)$25,400
C)$42,000
D)$13,000

Question 74

Which of the following is not an example of a cost that varies in total as the number of units produced changes?

A)electricity per KWH to operate factory equipment
B)direct materials cost
C)insurance premiums on factory building
D)wages of assembly worker

Question 75

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

A)It varies in increasing proportion with changes in the activity level.
B)It varies in decreasing proportion with changes in the activity level.
C)It remains constant with changes in the activity level.
D)It varies in direct proportion with the activity level.

Question 76

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

A)decreases with increasing production
B)decreases with decreasing production
C)remains constant with changes in production
D)increases with increasing production

Question 77

A cost that has characteristics of both a variable cost and a fixed cost is called a

A)variable/fixed cost
B)mixed cost
C)discretionary cost
D)sunk cost

Question 78

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

A)number of truck drivers
B)total miles driven
C)number of trucks in service
D)number of packages picked up

Question 79

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 80

Which of the following is an example of a mixed cost?

A)salary of a factory supervisor
B)electricity costs of $3 per kilowatt-hour
C)rental costs of $10,000 per month plus $0.30 per machine hour of use
D)straight-line depreciation on factory equipment