Question 1

Fixed manufacturing overhead is considered a product cost under variable costing.

Accepted Answer

Under variable costing, only variable manufacturing overhead is considered a product cost. Fixed manufacturing overhead is treated as a period cost under this method.

Question 2

Water Rockets Company has provided the following information regarding the two products that it sells:

Annual fixed costs are $290,000.
How many units must be sold in order for Water Rockets to breakeven,assuming the company sells five jet boats for every two ski boats sold? (Round intermediary dollar amounts to the nearest dollar and round unit amounts up to the next whole unit. )

Accepted Answer

11ea8a42_4f9b_16c0_8b44_bf01d6fe0346_TB5024_00 
Weighted contribution = ($3,000 × 5 jet boats)+ ($5,000 × 2 ski boats)= $15,000 + $10,000 = $25,000
Weights = 5 jet boats + 2 ski boats = 7 boats
Weighted-average contribution margin per unit = $25,000 / 7 boats = $3,571 per boat
Required sales in units = (Fixed costs + Target profit)/ Contribution margin per unit
Required sales in units = ($290,000 + 0)/ $3,571 per boat = 82 boats
82 boats in the ratio of 5:2 are 59 jet boats and 24 ski boats.

Question 3

Following GAAP,the income statement issued to investors and creditors must ________.

Accepted Answer

According to GAAP (Generally Accepted Accounting Principles), the income statement must be prepared in the traditional format, which includes subtracting all expenses from revenues to arrive at net income. Variable costing and contribution margin formats are not required by GAAP and are internal management tools for decision-making. Showing the value of contribution margin may be helpful, but it is not a requirement under GAAP.

Question 4

In absorption costing,all product costs are recorded first as assets in the inventory accounts.

Accepted Answer

In absorption costing, all product costs (direct materials, direct labor, and manufacturing overhead) are included in the cost of goods sold as inventory and recorded as assets in the inventory accounts until the products are sold.

Question 5

Answer the following absorption costing questions:

Accepted Answer

The answer of Answer the following absorption costing questions:
 ...

Question 6

Satinwood Company sells two product finishes-Mahogany and Aspen.Satinwood predicts that it will sell 7,200 units of Mahogany and 5,600 units of Aspen in the next period.The unit contribution margins are $3.15 and $6.30,respectively.What is the weighted-average unit contribution margin?

Accepted Answer

D)Weighted contribution = (7,200 × $3.15)+ (5,600 × $6.30)= $57,960
Weights = 7,200 units + 5,600 units = 12,800 units
Weighted-average contribution margin per unit = $57,960 / 12,800 = $4.53

Question 7

Which of the following statements is true of absorption costing?

Accepted Answer

Absorption costing considers all fixed manufacturing overhead costs as product costs, which are included in the cost of goods sold. This is in contrast to variable manufacturing overhead costs, which are considered period costs and are expensed in the current period. Options A and B are incorrect because both variable and fixed selling and administrative costs are considered period costs and are expensed in the current period. Option D is incorrect because variable manufacturing overhead costs are considered product costs under absorption costing.

Question 8

The traditional income statement format is prepared under absorption costing.

Accepted Answer

The traditional income statement includes all costs (both fixed and variable) and is prepared under absorption costing, which allocates fixed manufacturing overhead costs to units produced.

Question 9

Grimes Foods produces a gourmet salsa which sells for $28 per unit.Variable costs are $8 per unit,and fixed costs are $7,000 per month.If Grimes expects to sell 1,500 units,compute the margin of safety in dollars.

Accepted Answer

A)
 11ea8a42_4f9a_a189_8b44_edfed23b483b_TB5024_00 Required sales in units = (Fixed costs + Target profit)/ Contribution margin per unit
Required sales in units = ($7,000 + 0)/ $20 = 350 units
Margin of safety in units × Sales price per unit = Margin of safety in dollars
(1,500 units - 350 units)× $28 per unit = $32,200

Question 10

Absorption costing is required by the Generally Accepted Accounting Principles (GAAP)for financial statements issued to investors,creditors,and other external users.

Accepted Answer

Absorption costing is a required method under GAAP for financial reporting purposes. It includes all manufacturing costs, both fixed and variable, as part of the cost of inventory and is used to determine the cost of goods sold.

Question 11

Which of the following is true of the traditional format of the income statement?

Accepted Answer

The traditional format of the income statement is prepared under the absorption method, which allocates both fixed and variable costs to products or services. Option A is incorrect because the traditional format can be prepared using either of the costing methods (absorption or variable). Option B is incorrect because contribution margin is not a line item in the traditional format, but rather it is used in the calculation of gross profit. Option C is incorrect because the traditional format is allowed under GAAP.

Question 12

Zest Soda,a local convenience store,sells soft drinks.It sells two large drinks for every small drink.A large drink sells for $1.70 with a variable cost of $0.40.A small drink sells for $1.10 with a variable cost of $0.30.What is the weighted average contribution margin? (Round your intermediate calculations and final answer to two decimal places. )

Accepted Answer

11ea8a42_4f9b_3dd2_8b44_ff5e1f2e5d06_TB5024_00 
Total weighted contribution = $2.60 + $0.80 = $3.40
Weights = 2 large drinks + 1 small drink = 3 drinks
Weighted-average contribution margin per unit = $3.40 / 3 drinks = $1.13 per drink

Question 13

Absorption costing considers fixed selling and administrative costs as product costs.

Accepted Answer

Absorption costing includes all manufacturing costs (both fixed and variable) in the cost of a product, but it does not treat fixed selling and administrative costs as product costs; these are considered period costs and are expensed in the period they are incurred.

Question 14

Americana Replics is owned and operated by a craftsman who makes replicas of historic firearms for museums,sportsmen,and collectors.He is currently producing 63 flintlock muskets per month.Cost data for the muskets are as follows:

If Rustic expects to sell 60 units per month,how much is his margin of safety expressed in sales revenue? (Round unit calculations up to the next whole unit. )

Accepted Answer

C)
 11ea8a42_4f9a_c89d_8b44_27f386af37e6_TB5024_00 Required sales in units = (Fixed costs + Target profit)/ Contribution margin per unit
Required sales in units = ($8,400 + 0)/ $270 = 32 units
Expected sales - Breakeven sales = Margin of safety in units
60 units - 32 units = 28 units
Margin of safety in units × Sales price per unit = Margin of safety in dollars
28 units × $750 per unit = $21,000

Question 15

Gloria's Bakery sells three large muffins for every two small ones.A small muffin sells for $6 with a variable cost of $2.A large muffin sells for $8 with a variable cost of $2.50.What is the weighted-average contribution margin? (Round your intermediate calculations to one decimal place. )

Accepted Answer

11ea8a42_4f9b_16c1_8b44_a54c5a81f63e_TB5024_00 
Total weighted contribution = $16.50 + $8.00 = $24.50
Weights = 3 large muffins + 2 small muffins = 5 muffins
Weighted-average contribution margin per unit = $24.50 / 5 muffins = $4.90 per muffin

Question 16

Rustic Replicas is owned and operated by a craftsman who makes replicas of historic firearms for museums,sportsmen,and collectors.He is currently producing 43 flintlock muskets per month.The cost data for the muskets are as follows:

If Rustic expects to sell 40 units per month,what is his margin of safety expressed in units per month?

Accepted Answer

A)
 11ea8a42_4f9a_c89b_8b44_537f47a1f907_TB5024_00 Required sales in units = (Fixed costs + Target profit)÷ Contribution margin per unit
Required sales in units = ($8,100 + 0)÷ $270 = 30 units
Expected sales - Breakeven sales = Margin of safety in units
40 units - 30 units = 10 units

Question 17

Absorption costing considers direct materials,direct labor,variable manufacturing overhead,and fixed manufacturing overhead as product costs.

Accepted Answer

Absorption costing includes all these costs as part of the cost of producing a product.

Question 18

Lambert Company sells two products-X and Y.Lambert predicts that it will sell 2,500 units of X and 2,000 units of Y during the next period.The unit contribution margins are $4.00 and $5.10,respectively.What is the weighted-average unit contribution margin?

Accepted Answer

A)Weighted contribution = ($4.00 × 2,500 units)+ ($5.10 × 2,000 units)= $10,000 + $10,200 = $20,200
Weighted-average contribution margin per unit = $20,200 / 4,500 units = $4.49 per unit

Question 19

Diaz Foods produces a gourmet salsa which sells for $28 per unit.Variable costs are $8 per unit,and fixed costs are $7,000 per month.If Diaz expects to sell 1,700 units,compute the margin of safety in units.

Accepted Answer

B)
 11ea8a42_4f9a_a188_8b44_99bced2b9984_TB5024_00 Required sales in units = (Fixed costs + Target profit)/ Contribution margin per unit
Required sales in units = ($7,000 + 0)/ $20 = 350 units
Expected sales - Breakeven sales = Margin of safety in units
1,700 units - 350 units = 1,350 units

Question 20

Brevard Company sells two products-A and B.Product A is sold for $26 per unit and has a variable cost per unit of $16.Product B is sold for $34 per unit and has a unit variable cost of $21.Total fixed costs for the company are $50,000.Brevard Company typically sells three units of Product A for every unit of Product B.What is the breakeven point in total units?

Accepted Answer

11ea8a42_4f9a_efae_8b44_0561186e34b8_TB5024_00 
Weighted contribution = ($10 × 3)+ ($13 × 1)= $43
Weighted-average contribution margin per unit = $43 / 4 = $10.75
Required sales in units = (Fixed costs + Target profit)/ Contribution margin per unit
Required sales in units = ($50,000 + 0)/ $10.75 per unit = 4,651 units

Quiz 21: Cost-Volume-Profit Analysis