Question 1

For profit planning purposes, the following equation is used: Target Sales Units = (FC + P) CM per Unit.

Accepted Answer

This equation is commonly known as the breakeven point formula and is used to calculate the number of units a company needs to sell in order to cover fixed costs, variable costs, and achieve a targeted profit. FC stands for fixed costs, P stands for target profit, and CM per Unit stands for contribution margin per unit.

Question 2

Adding a desired profit level to breakeven computations will lower the number of sales units.

Accepted Answer

Adding a desired profit level to breakeven computations increases the number of sales units needed, as it requires covering both fixed costs and the additional profit target.

Question 3

As production increases, what should you expect to happen to the fixed costs per unit?

Accepted Answer

Fixed costs are costs that do not vary with the level of production. As production increases, total fixed costs remain the same, but are spread out over a larger number of units, leading to a decrease in fixed costs per unit.

Question 4

Which of the following would not require the use of cost behavior analysis?

Accepted Answer

Transferring production costs from one department to another is an accounting procedure that does not involve analyzing how costs change with activity levels, unlike the other options which involve planning and decision-making based on cost behavior.

Question 5

Breakeven sales in dollars can be obtained without knowing the contribution margin per unit.

Accepted Answer

Breakeven sales in dollars can be calculated by dividing total fixed costs by the contribution margin ratio (CM% = CM per unit/Unit selling price). Therefore, knowing the contribution margin per unit is not necessary to calculate breakeven sales in dollars.

Question 6

A retail manager is preparing a budget for the coming year and is considering the various costs of the retail store. What is the best approach for the manager to take when budgeting for the cost of the store's merchandise?

Accepted Answer

The cost of merchandise for the year will depend on the amount of sales, but the unit cost of each sale will stay fairly constant. This approach takes into account the potential fluctuations in sales and inventory levels, and allows for adjustments in the budget based on actual sales performance. It also ensures that the unit cost of each sale is consistent, which helps with pricing and profitability analysis.

Question 7

Cost-volume-profit analysis assumes costs and revenues have a close linear approximation.

Accepted Answer

Cost-volume-profit analysis assumes that costs and revenues have a close linear approximation, meaning that they vary proportionally with changes in activity levels. This assumption allows for the prediction of profits at different levels of sales and assists in decision-making regarding pricing and production levels. However, it should be noted that this assumption may not always hold true in real-world situations, particularly in industries with high fixed costs or variable costs that do not vary in direct proportion to changes in sales volume.

Question 8

An insurance company pays its employees a commission of 6 percent on each sale. What is the proper classification of the cost of sales commissions?

Accepted Answer

Sales commissions are paid as a percentage of each sale, so the amount of the commission expense will vary alongside the level of sales. Therefore, sales commissions are classified as a variable cost.

Question 9

Which of the following statements most accurately explains the behavior of costs?

Accepted Answer

There is no one-size-fits-all answer to the behavior of costs as they can be fixed, variable or a combination of both. The behavior of costs depends on the specific business and its operations.

Question 10

Suppose a company rents a building for $250,000 a year for the purpose of manufacturing between 80,000 and 140,000 units (the relevant range of activity). The rental cost per unit of production will __________ as production levels increase.

Accepted Answer

The rental cost per unit of production will decrease as production levels increase because the fixed cost of the building rental will be spread across a larger number of units produced. This is an example of economies of scale, where the average cost per unit decreases as production levels increase. Therefore, option C is the best choice.

Question 11

Which of the following statements is true regarding fixed and variable costs?

Accepted Answer

Fixed costs remain constant regardless of the level of production, while variable costs change with the level of production. Therefore, fixed costs are constant in total, and variable costs are constant per unit.

Question 12

Cost-volume-profit analysis cannot be used to estimate a targeted profit for service businesses.

Accepted Answer

Cost-volume-profit analysis can be used to estimate a targeted profit for service businesses, as long as the cost, volume, and price per unit or service are accurately determined.

Question 13

The level of operating capacity that is needed to meet expected sales demand is called

Accepted Answer

Normal capacity is the level of operating capacity needed to meet expected sales demand. Practical capacity is the maximum output that can be achieved within a certain period of time. Ideal capacity is the maximum output that can be achieved under ideal conditions. Excess capacity is the difference between actual output and normal capacity.

Question 14

The variable cost per unit ____________ as the number of sales increase.

Accepted Answer

The variable cost per unit remains constant regardless of the number of sales, as it is defined as the cost that varies with production volume but is constant per unit.

Question 15

The typical relationship between variable costs and volume may be described best as follows:

Accepted Answer

Variable costs increase in direct proportion to increases in volume because they are costs that vary with the level of output or sales.

Question 16

If direct materials costs are decreased, the breakeven point will decrease.

Accepted Answer

When direct materials costs decrease, the cost per unit decreases, which in turn reduces the breakeven point as less revenue is needed to cover the costs.

Question 17

Service businesses do not have any overhead costs.

Accepted Answer

Service businesses, like any other businesses, have overhead costs such as rent, utilities, insurance, and wages for employees.

Question 18

In cost-volume-profit analysis, sales revenue is computed by multiplying units sold by the selling price per unit, and the targeted profit is projected by management.

Accepted Answer

This statement is true. Sales revenue is calculated by multiplying the number of units sold by the selling price per unit. The targeted profit is projected by management and is typically expressed as a percentage of sales or a monetary value.

Question 19

Which of the following costs is a variable manufacturing cost?

Accepted Answer

Direct labor costs are a variable manufacturing cost because they increase or decrease directly with the level of production.

Question 20

Cost-volume-profit analysis is not appropriate for service businesses.

Accepted Answer

Cost-volume-profit analysis can be used for service businesses, although it may require some adaptations compared to manufacturing businesses. For example, instead of calculating unit costs, service businesses may need to calculate the cost per hour of service or the cost per customer. Additionally, the relationship between sales volume and costs may not be as straightforward for service businesses, since many costs are fixed regardless of the number of customers served. However, cost-volume-profit analysis can still be a useful tool for understanding the profitability of service businesses and making decisions about pricing, cost control, and capacity utilization.

Quiz 23: Cost Behavior Analysis