Question 1

The margin of safety ratio
A) is computed as actual sales divided by break-even sales.
B) indicates what percent decline in sales could be sustained before the company would operate at a loss.
C) measures the ratio of fixed costs to variable costs.
D) is used to determine the break-even point.

Accepted Answer

The margin of safety ratio indicates what percent decline in sales could be sustained before the company would operate at a loss.

Question 2

Use the following information for questions 
Sprinkle Co. sells its product for $60 per unit. During 2019, it produced 60,000 units and sold 50,000 units (there was no beginning inventory). Costs per unit are: direct materials $15, direct labor $9, and variable overhead $3. Fixed costs are: $720,000 manufacturing overhead, and $90,000 selling and administrative expenses.
-The per unit manufacturing cost under variable costing is
A) $24.
B) $27.
C) $39.
D) $40.

Accepted Answer

The per unit manufacturing cost under variable costing is calculated as follows: 
Direct materials + Direct labor + Variable overhead 
= $15 + $9 + $3 
= $27

Question 3

Only direct materials, direct labor, and variable manufacturing overhead costs are considered product costs when using
A) full costing.
B) absorption costing.
C) variable costing.
D) product costing.

Accepted Answer

Only direct materials, direct labor, and variable manufacturing overhead costs are considered product costs when using variable costing. This is because variable costing only includes costs that vary with changes in production levels. Full costing and absorption costing include fixed manufacturing overhead costs as product costs, while product costing is not a specific costing method.

Question 4

Use the following information for questions 
Sprinkle Co. sells its product for $60 per unit. During 2019, it produced 60,000 units and sold 50,000 units (there was no beginning inventory). Costs per unit are: direct materials $15, direct labor $9, and variable overhead $3. Fixed costs are: $720,000 manufacturing overhead, and $90,000 selling and administrative expenses.
-Under absorption costing, what amount of fixed overhead is deferred to a future period?
A) $30,000
B) $120,000
C) $150,000
D) $720,000

Accepted Answer

Under absorption costing, all manufacturing costs, including fixed overhead, are allocated to the units produced. Since not all units produced were sold, some fixed overhead is deferred to future periods. The fixed overhead cost per unit is $720,000 / 60,000 units = $12 per unit. With 10,000 units (60,000 produced - 50,000 sold) in ending inventory, the deferred fixed overhead is 10,000 units * $12/unit = $120,000.

Question 5

Variable costing
A) is used for external reporting purposes.
B) is required under GAAP.
C) treats fixed manufacturing overhead as a period cost.
D) is also known as full costing.

Accepted Answer

Variable costing treats fixed manufacturing overhead as a period cost, which means it is expensed in the period it is incurred rather than being allocated to the cost of goods sold. This is different from full costing, which allocates all manufacturing costs, both variable and fixed, to the cost of goods sold. Variable costing is not required under GAAP and is typically used for internal management purposes rather than external reporting.

Question 6

Which of the following statements is not true?
A) Operating leverage refers to the extent to which a company's net income reacts to a given change in sales.
B) Companies that have higher fixed costs relative to variable costs have higher operating leverage.
C) When a company's sales revenue is increasing, high operating leverage is good because it means that profits will increase rapidly.
D) When a company's sales revenue is decreasing, high operating leverage is good because it means that profits will decrease at a slower pace than revenues decrease.

Accepted Answer

Statement D is not true. In fact, when a company's sales revenue is decreasing, high operating leverage is bad because it means that profits will decrease at a faster pace than revenues decrease.

Question 7

Cost structure refers to the relative proportion of
A) selling expenses versus administrative expenses.
B) selling and administrative expenses versus cost of goods sold.
C) contribution margin versus sales.
D) none of the above.

Accepted Answer

Cost structure refers to the types and relative proportions of fixed and variable costs that a business incures. None of the options A, B, or C accurately describe this concept, as they focus on specific expense categories or ratios rather than the overall composition of costs.

Question 8

Miller Manufacturing's degree of operating leverage is 1.5. Warren Corporation's degree of operating leverage is 3. Warren's earnings would go up (or down) by ________ as much as Miller's with an equal increase (or decrease) in sales.
A) 1/2
B) 1.5 times
C) 2 times
D) 4.5 times

Accepted Answer

Degree of Operating Leverage (DOL) is a measure of the sensitivity of a company's earnings to changes in sales volume. The formula for DOL is Contribution Margin divided by Operating Income. A higher DOL means that a company's earnings are more sensitive to changes in sales volume.

Given that Warren Corporation's degree of operating leverage is three times that of Miller Manufacturing, Warren's earnings would go up or down by 3 times as much as Miller's with an equal increase or decrease in sales. Therefore, if Miller's earnings go up or down by 1 unit, Warren's earnings would go up or down by 3 units. Hence the answer is C) 2 times.

Question 9

The degree of operating leverage
A) does not provide a reliable measure of a company's earnings volatility.
B) cannot be used to compare companies.
C) is computed by dividing total contribution margin by net income.
D) measures how much of each sales dollar is available to cover fixed expenses.

Accepted Answer

The degree of operating leverage is computed by dividing total contribution margin by net income. This metric helps in understanding how a company's operating income changes with a change in its sales volume, highlighting the impact of fixed and variable costs on profitability.

Question 10

Companies recognize fixed manufacturing overhead costs as period costs (expenses) when incurred when using
A) full costing.
B) absorption costing.
C) product costing.
D) variable costing.

Accepted Answer

Fixed manufacturing overhead costs are considered period costs (expenses) under variable costing, as they are not allocated to products but are expensed in the period in which they are incurred. Full costing, absorption costing, and product costing all involve allocating fixed overhead costs to products, and therefore do not treat them as period costs.

Question 11

Which cost is not charged to the product under variable costing?
A) Direct materials
B) Direct labor
C) Variable manufacturing overhead
D) Fixed manufacturing overhead

Accepted Answer

Fixed manufacturing overhead is not charged to the product under variable costing.

Question 12

Use the following information for questions 
Mercantile Corporation has sales of $2,000,000, variable costs of $800,000, and fixed costs of $900,000.
-Mercantile's degree of operating leverage is
A) 1.33.
B) 1.67.
C) 1.50.
D) 4.00.

Accepted Answer

The degree of operating leverage (DOL) is calculated as: DOL = Contribution Margin / Operating Income. Contribution Margin = Sales - Variable Costs = $2,000,000 - $800,000 = $1,200,000. Operating Income = Contribution Margin - Fixed Costs = $1,200,000 - $900,000 = $300,000. Therefore, DOL = $1,200,000 / $300,000 = 4.00.

Question 13

Fixed selling expenses are period costs
A) under both absorption and variable costing.
B) under neither absorption nor variable costing.
C) under absorption costing, but not under variable costing.
D) under variable costing, but not under absorption costing.

Accepted Answer

Fixed selling expenses are considered period costs under both absorption and variable costing methods, as they are not directly tied to the production of goods and are expensed in the period in which they occur.

Question 14

Use the following information for questions 
Mercantile Corporation has sales of $2,000,000, variable costs of $800,000, and fixed costs of $900,000.
-Mercantile's margin of safety ratio is
A) .15.
B) .25.
C) .33.
D) .75.

Accepted Answer

The margin of safety ratio is calculated as (Sales - Break-even Sales) / Sales. First, find the break-even point: Break-even Sales = Fixed Costs / (1 - Variable Costs/Sales) = $900,000 / (1 - $800,000/$2,000,000) = $900,000 / (1 - 0.4) = $900,000 / 0.6 = $1,500,000. Then, Margin of Safety = ($2,000,000 - $1,500,000) / $2,000,000 = $500,000 / $2,000,000 = 0.25.

Question 15

Use the following information for questions 
Sprinkle Co. sells its product for $60 per unit. During 2019, it produced 60,000 units and sold 50,000 units (there was no beginning inventory). Costs per unit are: direct materials $15, direct labor $9, and variable overhead $3. Fixed costs are: $720,000 manufacturing overhead, and $90,000 selling and administrative expenses.
-The per unit manufacturing cost under absorption costing is
A) $24.
B) $27.
C) $39.
D) $40.

Accepted Answer

Under absorption costing, the per unit manufacturing cost includes direct materials, direct labor, variable overhead, and a portion of fixed manufacturing overhead. The calculation is as follows: Direct materials ($15) + Direct labor ($9) + Variable overhead ($3) + Fixed manufacturing overhead allocated per unit ($720,000 / 60,000 units = $12) = $39 per unit.

Question 16

Which cost is charged to the product under variable costing?
A) Variable manufacturing overhead
B) Fixed manufacturing overhead
C) Variable administrative expenses
D) Fixed administrative expenses

Accepted Answer

Variable costing only includes variable manufacturing costs in the product cost. It excludes fixed manufacturing overhead and all administrative expenses.

Question 17

When a company assigns the costs of direct materials, direct labor, and both variable and fixed manufacturing overhead to products, that company is using
A) operations costing.
B) absorption costing.
C) variable costing.
D) product costing.

Accepted Answer

Absorption costing assigns all manufacturing costs, both variable and fixed, to products. This includes direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead.

Question 18

A cost structure which relies more heavily on fixed costs makes the company
A) more sensitive to changes in sales revenue.
B) less sensitive to changes in sales revenue.
C) either more or less sensitive to changes in sales revenue, depending on other factors.
D) have a lower break-even point.

Accepted Answer

A cost structure that relies more heavily on fixed costs means that a significant portion of costs is incurred regardless of sales revenue. As a result, any decrease in sales revenue can have a larger impact on the company's profitability, making it more sensitive to changes in sales revenue.

Question 19

A company with a higher contribution margin ratio is
A) more sensitive to changes in sales revenue.
B) less sensitive to changes in sales revenue.
C) either more or less sensitive to changes in sales revenue, depending on other factors.
D) likely to have a lower breakeven point.

Accepted Answer

A company with a higher contribution margin ratio means that a larger portion of each sale contributes towards covering fixed costs and generating profit. This also means that a larger portion of each sale is affected by changes in sales revenue, making the company more sensitive to changes in sales. Therefore, option A is the correct answer.

Question 20

Use the following information for questions 
Sprinkle Co. sells its product for $60 per unit. During 2019, it produced 60,000 units and sold 50,000 units (there was no beginning inventory). Costs per unit are: direct materials $15, direct labor $9, and variable overhead $3. Fixed costs are: $720,000 manufacturing overhead, and $90,000 selling and administrative expenses.
-Cost of goods sold under absorption costing is
A) $1,350,000.
B) $1,620,000.
C) $1,950,000.
D) $1,560,000.

Accepted Answer

The answer of Use the following information for questions 
Sprinkle...

Quiz 6: Cost-Volume-Profit Analysis: Additional Issues

The margin of safety ratio

Only direct materials, direct labor, and variable manufacturing overhead costs are considered product costs when using

Variable costing

Which of the following statements is not true?

Cost structure refers to the relative proportion of

Miller Manufacturing's degree of operating leverage is 1.5. Warren Corporation's degree of operating leverage is 3. Warren's earnings would go up (or down) by ________ as much as Miller's with an equal increase (or decrease) in sales.

The degree of operating leverage

Companies recognize fixed manufacturing overhead costs as period costs (expenses) when incurred when using

Which cost is not charged to the product under variable costing?

Use the following information for questions Mercantile Corporation has sales of $2,000,000, variable costs of $800,000, and fixed costs of $900,000. -Mercantile's degree of operating leverage is

Fixed selling expenses are period costs

Use the following information for questions Mercantile Corporation has sales of $2,000,000, variable costs of $800,000, and fixed costs of $900,000. -Mercantile's margin of safety ratio is

Which cost is charged to the product under variable costing?

When a company assigns the costs of direct materials, direct labor, and both variable and fixed manufacturing overhead to products, that company is using

A cost structure which relies more heavily on fixed costs makes the company

A company with a higher contribution margin ratio is