Question 1

Complete each of the following contribution format income statements by supplying the missing numbers.
 $$\begin{array}{lccc}
& \textbf { Blue Co.  } & \textbf {Red, Inc. } \\
\text {Sales revenue} & ? & \$60,000 \
\text {Variable costs} & \underline{9,000} & \underline{\quad\quad?\quad\quad} \
\text {Contribution margin} & ? & 40,000 \
\text {Fixed costs }& \underline{12,000} & \underline{\quad\quad?\quad\quad} \
\text {Operating income} & ? & ? \
\text {Income taxes} & \underline{1,600} & \underline{4,000} \
\text {Net income} & \underline{\underline{\$4,800}} & \underline{\underline{\$16,000}} \

\end{array}$$

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Question 2

Restate the following income statement in contribution margin format.
 $\begin{array}{lrr}
\text { Sales } \$ 20 \text { per unit } & & \$ 14,000 \
\text { Less cost of goods sold } \$ 14 \text { per unit } & & \underline{9,800} \
\text { Gross margin } & & 4,200 \
\text { Less Operating costs: } & & \
\quad \text { Salaries } & 2,100 & \
\quad \text { Advertising } & 200 & \
\quad \text { Rent } & 1,000 & \
\quad \text { Delivery charges } \$ 0.20 \text { per unit } & \underline{140} & \underline{3,440} \
\text { Operating Income } & & \underline{\underline{\$ 760}}
\end{array}$

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Question 3

Restate the following income statement in contribution format.
 $$\begin{array}{lrr}
\text { Sales } \$ 20 \text { per unit } & & \$ 20,000 \
\text { Less cost of goods sold } \$ 6 \text { per unit } & & \underline{6,000} \
\text { Gross margin } & & 14,000 \
\text { Less operating expenses } & & \
\quad\text { Shipping charges } \$ 2 \text { per unit } & 2,000 & \
\quad\text { Salaries } & 3,000 & \
\quad\text { Utilities } & \underline{4,000} & \underline{9,000} \
\text { Operating Income } & & \underline{\underline{\$ 5,000}}
\end{array}$$

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Question 4

Upton,Inc.has collected the following information on its copying costs for the month.
 $$\begin{array}{lcc} 
 & \underline{\textbf { Number of copies }} &\underline{\textbf { Total copying costs }} \
\text { Week 1 } & 700  & \$ 290 \
\text { Week 2 } & 575  & \$ 260 \
\text { Week 3 } & 280  & \$ 150 \
\text { Week 4 } & 200  & \$ 100
\end{array}$$ 
a.Using the high-low-method,compute the variable cost per copy.
b.Compute the total fixed cost per month.
c.Represent the copy cost function in equation form.
d.What is the expected cost if 800 copies are made?

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Question 5

Complete each of the following contribution format income statements by supplying the missing numbers.
 $\begin{array}{lccc}
&\textbf { Blue Co.  } && \textbf {Red, Inc. } \\

\text { Sales revenue } & ? & & \$ 45,000 \
\text { Variable costs } & \underline{21,000} & & \underline{\quad\quad?\quad\quad} \
\text { Contribution margin } & 9,000 & & 25,000 \
\text { Fixed costs } & \underline{\quad\quad?\quad\quad} & & \underline{12,000} \
\text { Operating income } & 2,500 & & ? \
\text { Income taxes } &\underline{\quad\quad?\quad\quad} && \underline{4,000} \
\text { Net income }  & \underline{\underline{\$ 1,750}} &&\underline{\underline{\quad\quad?\quad\quad}}
\end{array}$

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Question 6

Gabbard and Fink CPA firm leases tax software from BGG Tax Software Company to prepare federal and state income tax returns.The lease agreement calls for a base charge of $5,000 per year plus $100 per year for each state for which returns are prepared.In addition,Gabbard and Fink are charged $2 $1 for federal and $1 for state for each tax return prepared.All of their clients have federal and state returns prepared,with 60 percent in Arkansas and 40 percent in Oklahoma.
a.What is the firm's total annual cost for the software if a total 2,500 returns are prepared?
b.What is the firm's cost per
c.What is the firm's cost per return if 2,000 are prepared?
d.Besides software lease cost,list five other costs that Gabbard and Fink must consider when they set the price they will charge their clients.

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Question 7

Nancy's Nursery provides and maintains live plants in office buildings.The company's 120 customers are charged $90 per month for this service,which includes weekly watering visits.The variable cost to service a customer's location is $22 per month.The company incurs $2,000 each month to maintain its equipment and service vans and $3,000 each month in  salaries.Nancy pays a CPA firm $5 per customer for accounting services.
a.Prepare Nancy's contribution format income statement for the month.
b.What is the expected monthly operating income if 10 customers are added?

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Question 8

Assume a selling price of $20 per unit, variable cost per unit of $12, and total fixed cost of $500. If 200 units are sold, calculate the contribution margin and the operating income.

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Question 9

MousePad Computer Company,in addition to its retail sales,conducts night classes in computer technology.MousePad has provided you the following information:
 $\begin{array}{ll}
\text { Number of students } & 120 \
\text { Revenue per student } & \$ 450 \
\text { Student-related variable costs } & \$ 100 \text { per studen } \
\text { Salary for three instructors } & \$ 1,800 \text { each } \
\text { Administrative costs } & \$ 30 \text { per student } \
\text { Maintenance on building } & \$ 15,000 \text { per year }
\end{array}$

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Question 10

Data concerning Engel Company's activity for the first three months are shown below.
 $\begin{array}{lcc}
\textbf { Month } & \textbf { Machine Hours } & \textbf { Repair Cost } \
\text { January } & 4,000 & \$ 3,100 \
\text { February } & 4,800 & \$ 3,500 \
\text { March } & 3,600 & \$ 2,900
\end{array}$ Using the high-low method of analysis,determine the estimated variable cost per machine hour and the total fixed cost.

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Question 11

Bailey Jones owns a catering company that stages banquets and parties for both individuals and companies.The business is seasonal,with heavy demand during the summer months and year-end holidays and light demand at other times.Bailey has gathered the following cost information from the past year:
 $$\begin{array}{|l|l|l|}
\hline \underline{\textbf {Month}} & \underline{\textbf {Labor Hours}} & \underline{\textbf {Overhead Costs}} \
\hline \text {January} & 2,500 & \$ 57,000 \
\hline \text {February} & 2,800 & 59,000 \
\hline \text {March} & 3,000 & 60,000 \
\hline \text {April} & 4,200 & 64,000 \
\hline \text {May} & 4,500 & 67,000 \
\hline \text {June} & 5,500 & 71,000 \
\hline \text {July} & 6,500 & 74,000 \
\hline \text {August} & 7,500 & 77,000 \
\hline \text {September} & 7,000 & 75,000 \
\hline \text {October} & 4,500 & 68,000 \
\hline \text {November} & 3,100 & 62,000 \
\hline \text {December} & \underline{6,500} & \underline{73,000} \
\hline\quad \text {Total} & \underline{\underline{57,600}} & \underline{\underline{\$805,000}} \
\hline
\end{array}$$ 
a.Using the high-low method,compute the overhead cost per labor hour and the fixed overhead cost per month.
b.Bailey has booked 2,800 labor hours for the coming month.How much overhead should he expect to incur?
c.If Bailey books one more catering job for the month,requiring 200 labor hours,how much additional overhead should he expect to incur?
d.Bailey recently attended a meeting of the local Chamber of Commerce,at which he heard an accounting professor discuss regression analysis and its business applications.After the meeting,Bailey enlisted the professor's assistance in preparing a regression analysis of the overhead data he collected.This analysis yielded an estimated fixed cost of $48,000 per month and a variable cost of $4 per labor hour.Why do these estimates differ from your high-low estimates,calculated in part a?

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Question 12

FastPrint Company leases a machine that stuffs,seals,and stamps envelopes in one process.FastPrint's lease agreement calls for a base charge of $4,000 per year plus $0.25 for every envelope over 1,000 the machine processes per month.
a.What is the firm's total annual cost for the lease if a total of 2,500 envelopes are processed each month?
b.What is the firm's total processing cost per envelope at a level of 2,500 envelopes processed each month?
c.What is the firm's processing cost per envelope if only 1,500 envelopes are processed each month?

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Question 13

Indicate which of the following costs are classified as mixed,step,or variable costs.
 $$\begin{array}{|l|c|c|c|}
\hline & \textbf {Mixed} & \textbf {Step}& \textbf {Variable} \
\hline \text {a.\quad Phone plan where you are charged for each minute used} & & & \
\hline \text {b.\quad Factory overhead} & & & \
\hline \text {c.\quad Plan that pays \$5 for every 100 soda cans recycled} & & & \
\hline \text {d.\quad Charges for gasoline purchased for your car} & & & \
\hline \text {e.\quad A phone plan where the user purchases 10 -minute}  & & & \
\quad\quad\text {increments of time}\
\hline
\end{array}$$

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Question 14

Complete the following table,identifying the following as fixed,variable or mixed cost.
 $$\begin{array} { l l l l l l } 
& &\textbf { Activity level }  & & \textbf { Cost Behavior } &\
& \mathbf {5,000} \textbf { Units } & \mathbf { 6 , 0 0 0 } \textbf { units } & \mathbf { 7,000} \textbf { units }&\textbf { F, V, M }\
\text { Cost A } & \$ 15,000 & \$ 16,000 & \$ 17,000 &  & \
\text { Cost B } & \$ 5,000 & \$ 6,000 & \$ 7,000 & & \
\text { Cost C } & \$ 15,000 & \$ 15,000 & \$ 15,000 & & \
\text { Cost D } & \$ 10,000 & \$ 12,000 & \$ 14,000 &  & \
\text { Cost E } & \$ 1,200 & \$ 1,300 & \$ 1,400 &  &
\end{array}$$

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Question 15

Assume a selling price of $20 per unit, variable cost per unit of $12, and total fixed cost of $500. If 200 units are sold, calculate the contribution margin ratio.

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Question 16

Restate the following income statement in contribution format.
 $\begin{array}{llr}
\text { Sales } \$ 10 \text { per unit } && \$ 5,000 \
\text { Less cost of goods sold } \$ 6 \text { per unit } & & \underline{3,000} \
\text { Gross margin } & & 2,000 \
\text { Less operating expenses } & & \
\quad\text { Commissions } \$ .60 \text { per unit } & 300 & \
\quad\text { Salaries } & \underline{800} & \underline{1,100} \
\text { Operating Income } & & \underline{\underline{\$ 900}}
\end{array}$

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Question 17

Stegman,Ltd.,provides nationwide passenger train service on 21,000 miles of routes.Selected operating data for fiscal 2014 are shown below. 
 \[\begin{array}{|l|c|c|c|c|}
\hline & \textbf {Fuel Expense} & \textbf {Passengers} & \textbf {Passenger} & \textbf {Train Miles} \
\hline \underline{\textbf {Month}} & \underline{\textbf {000s}} & \underline{\textbf {000s}} & \underline{\textbf {Miles 000 s}} & \underline{\textbf {000s}} \
\hline \text {October 2013} & \$20,075 & 2,145 & 450,857 & 3,098 \
\hline \text {November 2013} & \$22,037 & 2,154 & 451,448 & 3,091 \
\hline \text {December 2013} & \$22,435 & 2,180 & 373,533 & 3,141 \
\hline \text {January 2014} & \$23,613 & 2,151 & 377,438 & 3,178 \
\hline \text {February 2014} & \$21,931 & 2,136 & 461,088 & 2,825 \
\hline \text {March 2014} & \$26,204 & 2,174 & 458,762 & 3,175 \
\hline \text {April 2014} & \$24,698 & 2,207 & 470,311 & 3,096 \
\hline \text {May 2014} & \$24,832 & 2,296 & 492,429 & 3,197 \
\hline \text {June 2014} & \$23,239 & 2,291 & 540,655 & 3,076 \
\hline \text {July 2014} & \$24,481 & 2,414 & 578,133 & 3,191 \
\hline \text {August 2014} & \$25,459 & 2,430 & 563,986 & 3,315 \
\hline \text {September 2014} & \$25,021 & 2,148 & 448,263 & 3,066 \
\hline
\end{array}\] 
a.The above data provide three possible activity measures that could influence fuel expense.Use the high-low method to develop a cost formula for fuel expense for each of the three measures.
b.Do any of the cost formulas you developed in a appear to be a poor choice for estimating future train operations expense? Why?
c.Which formula do you think will make the most accurate predictions? Why?

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Question 18

Vest Construction Company's cost of renting a crane for the last four months is as follows:
 $$\begin{array}{lcr}
\textbf { Month } & \textbf { Hours of Operation } & \textbf { Rental Cost } \
\text { January } & 35 & \$ 1,200 \
\text { February } & 42 & \$ 1,350 \
\text { March } & 45 & \$ 1,400 \
\text { April } & 40 & \$ 1,290
\end{array}$$ Using the high-low method,what is the company's estimated variable and fixed component of operating expenses?

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Question 19

King Comics is a wholesaler of popular comic books.The company's records indicate the following financial results:
 $\begin{array}{lcc}
\textbf { Units Sold } & \begin{array}{c}
\textbf { Current Year } \
\mathbf{5 0 , 0 0 0}
\end{array} & \begin{array}{c}
\text { Previous Year } \
\mathbf{4 0 , 0 0 0}
\end{array} \
\hline\ \text { Sales revenue } & \$ 2 5 0 , 0 0 0 & \$ 2 0 0 , 0 0 0 \
\text { Cost of goods sold } & \underline{175,500} & \underline{140,000} \
\text { Gross margin } & 7 4 , 5 0 0 & 60,000 \
\text { Operating expenses } & \underline{2 3 , 5 0 0} & \underline{20,000} \
\text { Net operating income } & \underline{\underline{\$ 5 1 , 0 0 0}} & \underline{\underline{\$ 4 0 , 0 0 0}}
\end{array}$ Using the high-low method,what is the company's estimated variable and fixed component of operating expenses?

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Question 20

Suppose Kathy Lentz Company sells hand tatted lace for $25 per yard.Her materials cost $4 per yard and labor costs her $10 per yard.She also estimates her fixed cost to be $50 per month.If she sells 2,000 yards of lace during the month,what is her contribution margin ratio?

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Quiz 2: Cost Behavior and Cost Estimation Summary of Questions by Objectives and Blooms Taxonomy

Assume a selling price of $20 per unit, variable cost per unit of $12, and total fixed cost of $500. If 200 units are sold, calculate the contribution margin and the operating income.

Assume a selling price of $20 per unit, variable cost per unit of $12, and total fixed cost of $500. If 200 units are sold, calculate the contribution margin ratio.

Suppose Kathy Lentz Company sells hand tatted lace for $25 per yard.Her materials cost $4 per yard and labor costs her $10 per yard.She also estimates her fixed cost to be $50 per month.If she sells 2,000 yards of lace during the month,what is her contribution margin ratio?