Deck 2: Introduction to Cost Behavior and Cost Volume Profit Relationships

Question 1

As cost-driver level increases in the relevant range,a fixed cost does not change ________,but the fixed cost ________ becomes progressively smaller.

A) per unit of cost driver; total
B) in total; per unit of cost driver
C) per-unit; per unit of cost driver
D) in total; per year

Answer 1

B

Question 2

As cost-driver level decreases in the relevant range,fixed costs per unit of cost driver ________,but total fixed costs ________.

A) increase; do not change
B) decrease: do not change
C) do not change; increase
D) do not change; decrease

Answer 2

A

Question 3

Total fixed costs increase when the cost-driver level increases in the relevant range.

Answer 3

False

Question 4

Why is it important to identify the most appropriate cost drivers for a particular product?

A) so managers can identify the activities necessary to manufacture a product
B) so managers can control product costs better
C) so managers can predict product costs better and make better decisions
D) B and C

Question 5

Janitors clean the factory with scrubbing machines and polishing machines.Scrubbing machines scrub the factory floor and polishing machines polish the floor.The cost associated with cleaning the factory is treated as a product cost.What is a good cost driver for the Depreciation Expense associated with the scrubbing and polishing machines?

A) number of janitors operating machines
B) number of labor hours put in by janitors
C) number of kilowatt hours used
D) number of machine hours used

Question 6

What happens when the cost-driver level increases within the relevant range?

A) Total fixed costs remain unchanged.
B) Fixed costs per unit of cost driver increase.
C) Total variable costs decrease.
D) Variable costs per unit of cost driver increase.

Question 7

Consider the following activity: The installation of seats by an airplane manufacturer in a commercial airplane.What is an appropriate cost driver for the labor resources used for this activity?

A) number of service center hours
B) number of labor hours used to install seats
C) number of mechanic hours
D) number of engineering hours

Question 8

Consider the following activity: The manufacturer in a commercial airplane.What is an appropriate cost driver for the cost of the seats?

A) number of seats installed
B) number of labor hours used to install seats
C) number of mechanic hours
D) number of engineering hours

Question 9

Which of the following costs is a fixed cost?

A) cost of dairy ingredients used to produce ice cream
B) depreciation expense on factory building
C) fuel used by delivery trucks
D) labor wages of workers who mix dairy ingredients to make ice cream

Question 10

As the cost-driver level increases in the relevant range,variable costs per unit of cost driver ________ but total variable costs ________.

A) do not change; increase in direct proportion to the cost-driver activity level
B) do not change; decrease in direct proportion to the cost-driver activity level
C) increase; do not change
D) decrease; do not change

Question 11

The relevant range applies to ________.

A) variable costs only
B) fixed costs only
C) fixed costs and variable costs
D) none of the above

Question 12

Within the relevant range,the total amount of ________ cost changes in direct proportion to changes in the cost driver.Within the relevant range,the total amount of ________ cost does not change in direct proportion to changes in the cost driver.

A) fixed; variable
B) variable; fixed
C) step; mixed
D) mixed; step

Question 13

What happens when the cost-driver activity level decreases within the relevant range?

A) Total fixed costs increase.
B) Fixed costs per unit of cost driver decrease.
C) Total variable costs decrease.
D) Variable costs per unit of cost driver decrease.

Question 14

Cost drivers are ________.

A) the different functions in the value chain
B) different types of functional areas in the firm
C) measures of activities that require the use of resources and thereby cause costs
D) different types of cost calculations

Question 15

What happens when the cost-driver activity level increases within the relevant range?

A) Total fixed costs increase.
B) Fixed costs per unit of cost driver decrease.
C) Total variable costs decrease.
D) Variable costs per unit of cost driver decrease.

Question 16

A brainstorming group in the Research and Development area is charged with developing new product ideas for the company.What is a good cost driver of the cost of this activity?

A) number of parts in new products proposed
B) number of new product proposals
C) number of workers
D) number of engineering hours

Question 17

An increase in total variable costs usually indicates that ________.

A) the cost-driver activity level is decreasing
B) the cost-driver activity level is increasing
C) variable costs per unit is decreasing
D) fixed costs per unit is increasing

Question 18

Which of the following costs is a variable cost?

A) rental expense for factory building for manufacturer of electronics
B) lease cost for factory machine for manufacturer of electronics
C) fuel for airplane for airline
D) depreciation expense of airplane for airline

Question 19

What happens when the cost-driver activity level decreases within the relevant range?

A) Total fixed costs increase.
B) Fixed costs per unit of cost driver decrease.
C) Total variable costs increase.
D) Variable costs per unit of cost driver are unchanged.

Question 20

Janitors clean the factory at the end of each workday.The wages of the janitors are used to determine the cost of the only manufactured product in the factory.What is a good cost driver for the wages of the janitors?

A) number of janitors
B) number of kilowatt hours used
C) number of machine hours on cleaning machines
D) number of labor hours worked by janitors

Question 21

The break-even point on the cost-volume-profit graph is where the ________.

A) total cost line intersects the net profit line
B) total cost line intersects the net loss line
C) revenue line intersects the total cost line
D) revenue line intersects the variable cost line

Question 22

If an individual chunk of step costs applies to a large range of cost-driver activity,the step costs are treated as ________ within that range.

A) variable costs
B) mixed costs
C) fixed costs
D) semivariable costs

Question 23

To construct the Total Cost line on a cost-volume-profit graph,plot ________ and then plot ________.

A) mixed costs; step costs
B) step costs; mixed costs
C) fixed costs; variable costs
D) fixed costs; fixed costs plus variable costs

Question 24

Variable costs per unit of the cost driver increase when the cost-driver level increases in the relevant range.

Question 25

Two types of costs that each combine fixed cost and variable cost behaviors are ________ and ________.

A) capacity costs; incremental costs
B) semi-fixed costs; semivariable costs
C) composite costs; average costs
D) step costs; mixed costs

Question 26

It is misleading to call a cost-volume-profit graph a break-even graph.Why?

A) The graph reveals more information than the break-even point.
B) The graph does not show the break-even point.
C) The main purpose of the graph is to show the cost drivers for different activity levels.
D) The main purpose of the graph is to show the margin of safety.

Question 27

Which example is NOT a step cost?

A) When oil and gas exploration activity reaches a certain level in a given area, a company leases an additional rig. The lease cost of the rigs is a step cost.
B) When ten nurses are added to a shift, a nursing supervisor is also added to the shift. The salaries of the nursing supervisors are a step cost.
C) When a telemarketing company adds ten workers to a shift, a supervisor is also added to the shift. The salaries of the supervisors are a step cost.
D) When a manufacturing company ceases production, a skeleton crew of maintenance workers continues to work, but the rest are terminated. When production resumes, maintenance workers are rehired in direct proportion to the amount of production. The wages of the maintenance workers are a step cost.

Question 28

Total variable costs increase when the cost-driver level increases in the relevant range.

Question 29

With mixed costs,the ________ element is unchanged over the relevant range and the ________ element varies proportionately with cost-driver activity.

A) variable cost; fixed cost
B) fixed cost; variable cost
C) fixed cost; step cost
D) step cost; variable cost

Question 30

In a small construction firm,a crew supervisor is added for every ten workers employed.The salaries of the crew supervisors are a ________.

A) variable cost
B) mixed cost
C) step cost
D) fixed cost

Question 31

The relevant range is the limit of cost-driver level within which a specific relationship between costs and the cost driver is valid.

Question 32

On a cost-volume-profit graph,the vertical distance between the Revenue line and the Total Cost line represents ________ or ________.

A) mixed cost; step cost
B) variable cost; fixed cost
C) net profit; net loss
D) step cost; fixed cost

Question 33

A compensation plan where the sales force is paid salary plus commission is a ________.

A) purely variable cost
B) mixed cost
C) step cost
D) fixed cost

Question 34

With mixed costs,the fixed cost element is viewed as the ________ and the variable cost element is viewed as the ________.

A) step cost; cost of capacity
B) cost of capacity; incremental cost of using capacity
C) variable cost; cost of capacity
D) step cost; mixed cost

Question 35

Step costs change abruptly at different levels of cost-driver activity.

Question 36

If individual cost steps are uniform and the decision being made spans a number of steps,the step costs are treated as a ________.

A) fixed cost
B) mixed cost
C) incremental cost
D) variable cost

Question 37

Mixed costs are composed of only fixed costs.

Question 38

Costs that change abruptly at different levels of activity because the resources are available only in indivisible chunks are called ________.

A) mixed costs
B) variable costs
C) fixed costs
D) step costs

Question 39

On a cost-volume-profit graph,when the Total Cost line is higher than the Total Revenue line,the difference represents ________.

A) net income
B) a positive return on the investment
C) a net loss
D) not enough information is presented

Question 40

A cost-volume-profit graph has a line for ________ and a line for ________.

A) revenues; variable costs only
B) revenues; fixed costs only
C) revenues; total costs
D) net profit; net loss

Question 41

The CVP graph shows how costs behave over different relevant ranges.

Question 42

The break-even point is the level of revenue at which revenue equals fixed costs.

Question 43

If a company faces declining sales over time,it must restructure its costs to break-even at a lower volume.In order to carry this out,what costs can be reduced?

A) variable costs only
B) fixed costs only
C) variable and fixed costs
D) step costs only

Question 44

The CVP graph uses the assumption that costs are linear over the relevant range.

Question 45

Suppose a hotel has annual fixed costs applicable to its rooms of $2.0 million for its 300-room hotel.Average daily room rents are $50 per room and average variable costs are $10 for each room rented.It operates 365 days per year.If the hotel is completely full throughout the year,what is net income for one year?

A) $1,280,000
B) $2,380,000
C) $3,180,000
D) $4,380,000

Question 46

An assumption of the CVP analysis is that the sales mix can fluctuate.

Question 47

Beckham Company has the following information available:
$\begin{array}{ll}\text { Selling price per unit } & \$ 100 \\\text { Variable cost per unit } & \$ 55 \\\text { Fixed costs per year } & \$ 400,000 \\\text { Expected sales per year } & 20,000 \text { units }\end{array}$
What is the expected operating income for a year?

A) $480,000
B) $500,000
C) $680,000
D) $700,000

Question 48

Gnat Company,a producer of electronic devices,has the following information:
$\begin{array} { l } \text {Selling price per unit }& \$5.00\\ \text { Variable cost per unit}&\$3.00 \\ \text { Total fixed costs}&\$900,000.00 \\\end{array}$

The contribution-margin ratio is ________.

A) 30%
B) 40%
C) 60%
D) 100%

Question 49

Which of the following is NOT an underlying assumption of cost-volume-profit analysis?

A) We can classify expenses into fixed and variable categories.
B) In multiproduct companies, sales mix will be constant.
C) Revenues and expenses are linear over the relevant range.
D) The inventory level changes significantly during the period.

Question 50

The break-even point is located at the intersection of the total revenue line and the total costs line on a cost-volume-profit graph.

Question 51

An assumption of the CVP analysis is that changes in efficiency are expected.

Question 52

Suppose a Super 9 Hotel has annual fixed costs applicable to its rooms of $1.0 million for its 300-room hotel.Average daily room rents are $60 per room and average variable costs are $10 for each room rented.It operates 365 days per year.If the hotel is one-half full throughout the entire year,what is the amount of net income for one year?

A) $1,737,500
B) $4,475,000
C) $5,475,000
D) $5,570,000

Question 53

Herman Loebl Company,a producer of salsa,has the following information:
$\begin{array}{ll}\text { Income tax rate } & 30 \% \\\text { Selling price per unit } & \$ 8.00 \\\text { Variable cost per unit } & \$ 3.00 \\\text { Total fixed costs } & \$ 90,000.00\end{array}$
The contribution margin per unit is ________.

A) $2.00
B) $3.00
C) $5.00
D) $8.00

Question 54

The horizontal axis on the CVP graph is the dollars of cost and revenue.

Question 55

On a cost-volume-profit graph,the net profit area is found ________.

A) at the break-even point
B) to the right of the break-even point
C) to the left of the break-even point
D) to the right of the intersection of the y-axis and x-axis

Question 56

On a cost-volume-profit graph,at the point where the Total Revenue line intersects the Total Cost line,________.

A) net income is positive
B) net income is negative
C) net income is zero
D) not enough information is given

Question 57

Kaprelian Company sells desks at $480 per desk.The variable costs are $300 per desk.Total fixed costs for the period are $400,000.The contribution margin ratio is ________.

A) 22.5%
B) 37.5%
C) 40.6%
D) 62.5%

Question 58

The vertical axis on the cost-volume-profit graph is the ________.

A) dollars of net profit
B) sales volume in units
C) margin of safety
D) dollars of cost and revenue

Question 59

The horizontal axis on the cost-volume-profit graph is the ________.

A) dollars of cost
B) sales volume in units
C) dollars of revenue
D) net income

Question 60

The sales mix is the relative proportions or combinations of quantities of different products that constitute total sales.

Question 61

If the total amount of fixed costs increases,what is the effect on the break-even point? (Assume no other changes.)

A) The break-even point increases.
B) The break-even point decreases.
C) The break-even point remains the same.
D) The break-even point is zero.

Question 62

Assume the sales price is $100 per unit and the total fixed costs are $75,000.The break-even volume in dollar sales is $250,000.What is the variable cost per unit?

A) $30
B) $70
C) $100
D) $125

Question 63

Sharpie Company has variable costs of 75% of total revenues and fixed costs of $40 million per year.What is the break-even point in dollars?

A) $40 million
B) $53.33 million
C) $100 million
D) $160 million

Question 64

Christian Corporation sells desks at $480 per desk.The variable costs are $300 per desk.Total fixed costs for the period are $540,000.The break-even point in desks is ________.

A) 1,125
B) 1,800
C) 3,000
D) 4,230

Question 65

Jensen Company produces dolls.Each doll sells for $20.00.Variable costs are $14.00 per unit.If the break-even volume in dollars is $1,446,000,then the total fixed costs for the period are ________.

A) $361,500
B) $433,800
C) $516,425
D) $1,446,000

Question 66

If the variable cost per unit increases,what is the effect on the break-even point? (Assume no other changes.)

A) The break-even point increases.
B) The break-even point decreases.
C) The break-even point remains the same.
D) The break-even point is zero.

Question 67

Assume Hull Company has the following information available:
$\begin{array} { l } \text {Selling price per unit }&\$100\\ \text {Variable cost per unit }&\$45\\ \text { Fixed costs per year}&\$400,000\\ \text {Expected sales per year (units) }&20,000\\\end{array}$

If fixed costs increase by $200,000,what is the break-even point in units?

A) 6,667
B) 10,000
C) 12,000
D) 13,000

Question 68

Assume the sales price is $34 per unit and the variable cost is $19 per unit.The break-even point is 12,000 units.What are total fixed costs?

A) $180,000
B) $190,000
C) $340,000
D) $530,000

Question 69

Cornwell Company,a producer of electronic components,has the following information:
$\begin{array}{ll}\text { Income tax rate } & 30 \% \\\text { Selling price per unit } & \$ 8.00 \\\text { Variable cost per unit } & \$ 3.00\\\text { Total fixed costs }&\$120,000.00\end{array}$
The break-even point in dollars is ________.

A) $150,000
B) $180,000
C) $192,000
D) $320,000

Question 70

Murphy Company produces dolls.Each doll sells for $20.00.Variable costs per unit are $14.00 and total fixed costs for the period are $435,000.What is the break-even point in units?

A) 21,750
B) 31,071
C) 51,176
D) 72,500

Question 71

Step Company has total variable costs of 80% of total revenues and fixed costs of $20 million per year.What is the break-even point expressed in total revenue dollars?

A) $10 million
B) $12.5 million
C) $20 million
D) $100 million

Question 72

Assume Mussa Company has the following information available:
$\begin{array} { l } \text {Selling price per unit }&\$100\\ \text {Variable cost per unit }&\$45\\ \text { Fixed costs per year}&\$420,000\\ \text {Expected sales per year (units) }&20,000\\\end{array}$

If fixed costs increase by $200,000,what is the expected operating income?

A) $280,000
B) $480,000
C) $680,000
D) $1,380,000

Question 73

Abbott Company sells desks at $480 per desk.The variable costs are $372 per desk.Total fixed costs for the period are $456,840.The break-even volume in dollars is ________.

A) $456,840
B) $589,471
C) $1,573,560
D) $2,030,400

Question 74

If the selling price per unit increases,what is the effect on the break-even point? (Assume no other changes.)

A) The break-even point increases.
B) The break-even point decreases.
C) The break-even point remains the same.
D) The break-even point is zero.

Question 75

Johnson Company produces dolls.Each doll sells for $20.00.Variable costs per unit are $14.00 and total fixed costs for the period are $300,000.What is the break-even volume in dollars?

A) $50,000
B) $621,429
C) $1,000,000
D) $1,450,000

Question 76

Assume the sales price is $100 per unit and the variable cost is $75 per unit.Total fixed costs are $150,000.Then the break-even volume in dollar sales is ________.

A) $1,500
B) $150,000
C) $200,000
D) $600,000

Question 77

Suppose Shady Lane Hotel has annual fixed costs applicable to its rooms of $1.0 million for its 300-room hotel.Average daily room rents are $60 per room and average variable costs are $10 for each room rented.It operates 365 days per year.What percent of occupancy is needed to breakeven?

A) 3.65%
B) 18.3%
C) 27.4%
D) 34.3%

Question 78

Which action will decrease a company's break-even point?

A) reducing total fixed costs
B) decreasing contribution margin per unit
C) increasing variable cost per unit
D) decreasing the selling price per unit

Question 79

Suppose Sunnyside Hotel has annual fixed costs applicable to its rooms of $1.0 million for its 300-room hotel.Average daily room rents are $60 per room,and average variable costs are $10 for each room rented.It operates 365 days per year.What is the break-even point in number of rooms rented?

A) 20,000
B) 30,000
C) 100,000
D) 120,000

Question 80

The sales price is $30 per unit,the contribution margin is $8 per unit and total fixed costs are $32,000.What is the break-even point in units?

A) 857
B) 1,200
C) 2,000
D) 4,000