Deck 3: Using Costs in Decision Making

Question 1

Governments are frequent users of cost reimbursement contracts.

Answer 1

True

Question 2

Fixed costs depend on the resources acquired,not the resources used.

Answer 2

True

Question 3

For external reporting,generally accepted accounting principles require that costs be classified as either variable or fixed costs.

Answer 3

False

Question 4

The salary of the company president is a fixed manufacturing cost.

Question 5

Fixed costs:

A)may be either direct or indirect costs.
B)vary with production or sales volume.
C)include parts and materials used to manufacture a product.
D)can be adjusted in the short run to meet actual demands.

Question 6

To perform cost-volume-profit analysis,a company must be able to separate costs into fixed and variable components.

Question 7

Selling price per unit is $60,variable cost per unit is $30,and fixed cost per unit is $20.When this company operates above the break-even point,the sale of one more unit will increase net income by $10.

Question 8

Break-even point is NOT an important concept since the goal of business is to make a profit.

Question 9

In markets where the organization faces a market-determined price,the organization can set its price using cost plus pricing.

Question 10

Currently,most companies consider annual salary costs as:

A)a fixed cost.
B)a variable cost.
C)an opportunity cost.
D)a period cost.

Question 11

The time over which a decision maker can adjust capacity is referred to as the short run.

Question 12

Which of the following describes a variable cost?

A)Variable cost are always indirect costs.
B)Variable costs increase in total when the actual level of activity increases.
C)Variable costs include most personnel costs and depreciation on machinery.
D)Variable costs can always be traced directly to the cost object.

Question 13

Currently,most personnel costs are classified as fixed costs.

Question 14

In recent years,fixed costs have decreased as a proportion of total manufacturing costs.

Question 15

Describe a variable cost.Describe a fixed cost.Explain why the distinction between variable and fixed costs is important in management accounting.

Question 16

Variable costs vary with the level of production or sales volume.

Question 17

Cost-volume-profit analysis may be used for single-product and multiproduct analysis but not in a service environment.

Question 18

Fixed costs depend on:

A)the amount of resources used.
B)the amount of resources acquired.
C)the volume of production.
D)the volume of sales.

Question 19

For general customers,the price charged for a product must cover its long-run cost to the organization.

Question 20

The most widespread use of cost information is in budgeting.

Question 21

A company with sales of $100,000,variable costs of $70,000,and fixed costs of $50,000 will reach its break-even point if sales are increased by $20,000.

Question 22

The break-even point in units for a year is:

A)2,000 units.
B)3,000 units.
C)5,000 units.
D)10,000 units.

Question 23

The contribution margin per unit is:

A)$6.50.
B)$3.50.
C)$3.00.
D)$1.75.

Question 24

The number of units that must be sold annually to achieve $52,500 of profits is:

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

Question 25

All of the following are assumed in a cost-volume-profit analysis EXCEPT:

A)a constant product mix.
B)fixed costs increase when activity increases.
C)revenue per unit does not change as volume changes.
D)all costs can be classified as either fixed or variable.

Question 26

If the sales mix consists of two units of Product X and one unit of Product Y,what is the break-even point in units for a year?

A)2,000 units of Y and 4,000 units of X
B)2,025 units of Y and 4,050 units of X
C)4,025 units of Y and 8,050 units of X
D)4,000 units of Y and 8,000 units of X

Question 27

If sales increase by $19,500 in a year,profits will increase by:

A)$10,500.
B)$17,500.
C)$19,500.
D)$35,000.

Question 28

The number of units that EJL must sell annually to make a profit of $75,000 is:

A)7,500 units.
B)18,000 units.
C)21,000 units.
D)30,000 units.

Question 29

The break-even point is the level at which revenues:

A)equal fixed costs.
B)equal variable costs.
C)equal fixed costs minus flexible costs.
D)equal variable costs plus capacity-related costs.

Question 30

Cost-volume-profit analysis assumes all of the following EXCEPT:

A)all costs are purely variable or fixed.
B)units manufactured equal units sold.
C)total variable costs remain the same over the relevant range.
D)total fixed costs remain the same over the relevant range.

Question 31

What is the operating income for a year,assuming actual sales total 150,000 units,and the sales mix is two units of Product X and one unit of Product Y?

A)$1,200,000
B)$1,250,000
C)$1,750,000
D)None of the above is correct.

Question 32

The number of units that EJL must sell each year to break even is:

A)4,853 units.
B)7,857 units.
C)11,000 units.
D)13,000 units.

Question 33

The break-even point in units is:

A)total costs divided by variable costs per unit.
B)contribution margin per unit divided by revenue per unit.
C)fixed costs divided by contribution margin per unit.
D)(fixed costs plus variable costs)divided by contribution margin per unit.

Question 34

Contribution margin equals revenues minus:

A)product costs.
B)period costs.
C)variable costs.
D)fixed costs.

Question 35

If the sales mix consists of two units of Product X and one unit of Product Y,what is the weighted revenue per unit of composite product?

A)$10.00
B)$11.66
C)$13.33
D)$15.00

Question 36

The contribution margin per unit is:

A)$7.50.
B)$10.50.
C)$12.
D)$14.

Question 37

Cost-volume-profit analysis is used PRIMARILY by management:

A)as a planning tool.
B)for control purposes.
C)to establish a target net income for next year.
D)to attain extremely accurate financial results.

Question 38

In multiproduct situations,when the sales mix shifts toward the product with the highest contribution margin per unit,then:

A)total revenues will decrease.
B)breakeven quantity will increase.
C)total contribution margin will decrease.
D)operating income will increase.

Question 39

If the sales mix shifts to one unit of Product X and two units of Product Y,then the contribution margin per unit of composite product will:

A)increase per unit.
B)stay the same.
C)decrease per unit.
D)be undeterminable.

Question 40

In multiproduct situations when the sales mix shifts toward the product with the lowest contribution margin per unit,the break-even quantity will decrease.

Question 41

An example of a sunk cost is the historical cost paid for equipment.

Question 42

What is meant by the term break-even point? Why should a manager be concerned about the break-even point?

Question 43

Depreciation expense allocated to a product line is a relevant cost when deciding to discontinue that product.

Question 44

When replacing an old machine with a new machine,the book value of the old machine is a relevant cost.

Question 45

For a particular decision,differential revenues and costs are always relevant.

Question 46

Yurus Manufacturing Company produces two products,X and Y.The following information is presented for both products:

Total fixed costs $234,000
Required:
Assume the sales mix is 3 units of X for every unit of Y:
a.What is the weighted revenue per unit of composite average product,the weighted average variable cost,and the weighted contribution margin per unit of composite average product?
b.What is the break-even point in units of both X and Y?

Question 47

Jeffrey's,Inc.,sells a single product.The company's most recent income statement is given below.

Required:
a.Contribution margin ratio is _______________
b.Break-even point in total sales dollars is _______________
c.To achieve $40,000 in net income,sales must total _______________
d.If sales increase by $50,000 from a $200,000 level,
net income will increase by _______________

Question 48

Explain when a manager would use cost-volume-profit analysis.

Question 49

In 2011,SSPC Company has sales of 8,000 units at $10 each,variable costs totaling $20,000,and fixed costs of $30,000.In 2008,the company expects annual insurance costs to increase by $4,000 to $9,000.
Required:
a.Calculate operating income and the breakeven point in units for 2011.
b.Calculate the breakeven point in units for 2012.

Question 50

In make-or-buy decisions,the suppliers' reputation for quality and service is a relevant quantitative factor.

Question 51

Opportunity costs are implicit costs.

Question 52

When opportunity costs exist,they are always relevant.

Question 53

When a firm maximizes profits it will simultaneously minimize opportunity costs.

Question 54

For decision-making,differential costs assist in choosing between alternatives.

Question 55

Avoidable costs are eliminated when a product is outsourced.

Question 56

Sunk costs are always irrelevant costs for decision making.

Question 57

Sunshine,Inc.sells a single product.The company's most recent income statement is given below.

Required:
a.Contribution margin per unit is _______________
b.If sales are doubled to $240,000,
total variable costs will equal _______________
c.If sales are doubled to $240,000,
total fixed costs will equal _______________
d.If Sunshine is past the breakeven point and
10 more units are sold,profits will increase by _______________
e.Compute how many units must be sold to break even. _______________
f.Compute how many units must be sold
to achieve a profit of $20,000. _______________

Question 58

A cost may be relevant for one decision,but not relevant for a different decision.

Question 59

If the sales mix shifts to one unit of Product X and two units of Product Y,then the break-even point in units for a year will:

A)increase.
B)stay the same.
C)decrease.
D)be undeterminable.

Question 60

Alistar's Best reported the following for 2011:

Required:
a.Compute the contribution margin.
b.Compute the gross margin.
c.Compute the operating income.

Question 61

In determining whether to keep or drop a product line,avoidable fixed costs are relevant to the decision.

Question 62

Bid prices and costs that are relevant for regular orders are the same costs that are relevant for one-time-only special orders.

Question 63

For decision making,a listing of the relevant costs:

A)will help the decision maker concentrate on the pertinent data.
B)will only include future costs.
C)will only include costs that differ among the decision alternatives.
D)should include all of the above.

Question 64

For one-time-only special orders,variable costs may be relevant but not fixed costs.

Question 65

If a company is deciding whether to outsource a part,the reliability of the supplier is an important factor to consider.

Question 66

A processing cycle efficiency (PCE)of 18% indicates better efficiency than a PCE of 50%.

Question 67

Outsourcing is risk-free to the purchaser of a part because the supplier now has the responsibility of producing the part.

Question 68

In linear programming,total fixed costs will remain unchanged regardless of the production plan.

Question 69

If a company is deciding whether to outsource a part,business-sustaining costs are always unavoidable.

Question 70

Costs are relevant to a particular decision if they:

A)are variable costs.
B)are fixed costs.
C)differ across, the decision alternatives being considered.
D)remain unchanged across the alternatives being considered.

Question 71

Costs that cannot be changed by any decision made now or in the future are:

A)fixed costs.
B)indirect costs.
C)avoidable costs.
D)sunk costs.

Question 72

Problems involving two or more constraints are often solved using linear programming.

Question 73

Sunk costs include:

A)the original cost of the existing system.
B)the original cost of the new system.
C)the current salvage value of the existing system.
D)the annual operating cost of the new system.

Question 74

Which of the following costs are NEVER relevant in the decision-making process?

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

Question 75

Sunk costs:

A)are relevant.
B)are differential.
C)have future implications.
D)are ignored when evaluating alternatives.

Question 76

In evaluating different alternatives,it is useful to concentrate on:

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

Question 77

Sometimes qualitative factors are the most important factors in make-or-buy decisions.

Question 78

When deciding to purchase a new cutting machine or continue using the old machine,the following costs are all relevant EXCEPT the:

A)$100,000 cost of the old machine.
B)$40,000 cost of the new machine.
C)$20,000 disposal value of the old machine.
D)$6,000 annual savings in operating costs if the new machine is purchased.

Question 79

The cost of a computer system installed last year is an example of:

A)a sunk cost.
B)a relevant cost.
C)a differential cost.
D)an avoidable cost.

Question 80

In determining whether to keep or drop a product line,product contribution is calculated as sales minus variable costs,minus avoidable fixed costs.