Question 1

The margin of safety is the amount:

Accepted Answer

The margin of safety is the amount that sales can decrease before the company will suffer a loss. It can be expressed in dollars or units and is calculated by subtracting break-even sales revenue from sales revenue under review.

Question 2

Bradley Inc. has the capacity to make 100,000 windows. Bradley is currently operating at 80% capacity. The windows usually sell for $20.00 each. Costs for each window follow:  The Army has offered to buy 10,000 windows for $12.00 each for barracks. Bradley should:

Accepted Answer

Bradley has enough excess capacity to manufacture 20,000 additional units (100,000 x (1 - .80). The relevant costs are:
 11eb16ac_dffd_cc5f_984d_0bb7f0f682f6_TB6154_00 The $12.00 special selling price exceeds the variable costs of $10.00 for a contribution margin of $2.00 each, or a total contribution margin of $20,000 (10,000 x $2.00).

Question 3

Jasper Company makes two versions of one product, Standard and Deluxe. In November, sales of standard and Deluxe amount to $680,000 and $520,000, respectively. The contribution margin ratio for Standard is 30% and Standard had direct fixed production and administrative costs of $125,000. The contribution margin ratio for Deluxe was 40% and direct fixed costs were $160,000. Common costs that couldn't be allocated in a meaningful way were $100,000.
Prepare a segmented income statement for the month of November.

Accepted Answer

The answer of Jasper Company makes two versions of one...

Question 4

The Company is planning to sell Product Z for $10 a unit. Variable costs are $6 a unit and fixed costs are $100,000. If the company is currently selling 30,000 units, what is the margin of safety in units?

Accepted Answer

11eb16ac_dffd_572a_984d_8dbd3fe9b89d_TB6154_00 With sales volume of 30,000 units, the margin of safety would be 30,000 - 25,000 or 5,000 units.

Question 5

The following data relate to a year's budgeted activity for Jorgensen Corporation, a single product company:  Total fixed costs remain unchanged within the relevant range in which the company is currently operating. 
a.What is the projected annual break-even sales in units?
b.What dollar amount of sales would Jorgenson need to achieve operating income of $30,000?
c.If fixed costs increased $7,500, how many more units must be sold to break even?

Accepted Answer

The answer of The following data relate to a year's...

Question 6

The Blue Saints Band is holding a concert in Toronto. Fixed costs relating to staging a concert are $350,000. Variable costs per patron are $5.00. The selling price for a tickets $25.00. The Blue Saints Band has sold 23,000 tickets so far. At the current level of sales, what is the margin of safety ratio?

Accepted Answer

Break-even volume (dollars) = Fixed cost / Contribution margin ratio.
Break-even volume = $350,000 / ($25 - $5 / $20)
Break-even volume = $350,000 / 80% = $437,500
Sales dollars at current level = $25 x 23,000 = $575,000
Margin of safety = Sales revenue - break-even sales revenue
Margin of safety = $575,000 - $437,500 = $137,500
Margin of safety ratio = Margin of safety / sales
Margin of safety ratio = $137,500 / $575,000 = 23.9%

Question 7

The Blue Saints Band is holding a concert in Toronto. Fixed costs relating to staging a concert are $350,000. Variable costs per patron are $5.00. The selling price for a tickets $25.00. The Blue Saints Band has sold 23,000 tickets so far. At the current level of sales, what is the margin of safety in dollars?

Accepted Answer

Break-even volume (dollars) = Fixed cost / Contribution margin ratio.
Break-even volume = $350,000 / ($25 - $5 / $20)
Break-even volume = $350,000 / 80% = $437,500
Sales dollars at current level = $25 x 23,000 = $575,000
Margin of safety = Sales revenue - break-even sales revenue
Margin of safety = $575,000 - $437,500 = $137,500

Question 8

The difference in cost between two alternatives, such as to make a component part of a final product versus buying the part from an outside supplier is called:

Accepted Answer

The difference in cost between two alternatives is the differential cost.

Question 9

Chapman Corporation manufactures lamps. Management is currently studying whether the company should continue to make the cord assembly or purchase them from Graham Company for $5.25. Chapman needs 20,000 cord assemblies a year. If the part is purchased, the company can not use the released facilities for another manufacturing activity. Chapman's unit cost to manufacture the cord assembly is:  The decision Chapman should make and the related differential income is:

Accepted Answer

The answer of Chapman Corporation manufactures lamps. Management is currently...

Question 10

Donellan Company produces a special gear used in automatic transmissions. Each gear sells for $30, and the company sells approximately 500,000 gears each year. Unit cost data for the year follows:  Donellan has received an offer from a foreign manufacturer to purchase 25,000 gears. Domestic sales would be unaffected by this transaction. If the offer is accepted, variable distribution costs will increase $1.00 per gear for insurance, shipping, and import duties. The relevant unit cost to a pricing decision on this offer is:

Accepted Answer

11eb16ac_dffd_cc5d_984d_97a62cc3b35e_TB6154_00 The fixed manufacturing and distribution costs are irrelevant to the decision because they are not changed by the 25,000 gear order.

Question 11

Another term for cost incurred to sell and deliver products is:

Accepted Answer

Another term for selling and delivery costs is distribution costs.

Question 12

Cleese Company currently purchases a finished part from Idle Company, but is considering using it excess capacity to make the part. Normal capacity is 20,000 hours, but Cleese is currently running at 17,000 hours. Details about budgeted factory overhead follow:  The relevant unit cost Cleese should use to decide whether to make or buy the part is:

Accepted Answer

11eb16ac_dffe_4195_984d_3ff40276a0e1_TB6154_00 * 2,000 hours / 1,000 units = 2 hours per unit.

Question 13

The Tijama Manufacturing Company has determined the cost of manufacturing a unit of product to be as follows, based on normal production of 50,000 units per year:  Operating statistics for the month of August and September include:  The selling price is $70 per unit. There were no inventories on August 1, and there is no work in process at September 30.
Prepare comparative income statements for each month under the following methods: 
a.Absorption costing method
b.Direct costing method

Accepted Answer

The answer of The Tijama Manufacturing Company has determined the...

Question 14

Bradley Inc. has the capacity to make 100,000 windows. Bradley is currently operating at 100% capacity. The windows usually sell for $20.00 each. Costs for each window follow:  The Army has offered to buy 10,000 windows for $12.00 each for barracks. Bradley should:

Accepted Answer

Bradley should reject the offer if it would have to displace orders for the windows that are priced higher than $12.00.

Question 15

Consider the income statement for Pickbury Farm:  What is the margin of safety ratio (to the nearest percentage point)?

Accepted Answer

Break-even point in dollars = Fixed cost / contribution margin ratio
Break-even point = $80,000 / ($150,000/$500,000)
Break-even point = $80,000 / 30% = $266,667
Margin of safety ratio = (sales - break-even sales) / sales
Margin of safety ratio = ($500,000 - $266,667) / $500,000
Margin of safety ratio = $233,333 / $500,000 = 46.67%

Question 16

An example of a distribution cost that can be directly assigned to selling activity would be:

Accepted Answer

Commissions would be directly linked to specific sales. The other costs are indirect costs of selling.

Question 17

In performing an activity-based costing study for distribution costs, appropriate cost drivers for preparing orders for shipment would include all of the following except the:

Accepted Answer

The time devoted to selling each product would not impact the cost for preparing the orders for shipping.

Question 18

The Blue Saints Band is holding a concert in Toronto. Fixed costs relating to staging a concert are $350,000. Variable costs per patron are $5.00. The selling price for a tickets $25.00. The Blue Saints Band has sold 23,000 tickets so far. How many tickets does the Blue Saints Band need to sell to achieve net income of $50,000 after income tax, assuming the income tax rate is 50%?

Accepted Answer

Target volume (units) = (Fixed cost + (target net income/(1 - tax rate)) / Unit contribution margin.
Target volume = ($350,000 + ($50,000 / (1 - .5) / ($25 - $5)
Target volume = $350,000 + $100,000 / $20 = 22,500 tickets

Question 19

The practice of accepting a selling price when there is excess capacity, as long as it exceeds variable cost is called:

Accepted Answer

The practice of accepting a selling price when there is excess capacity as long as it exceeds variable cost is called contribution pricing, thus contributing some positive contribution margin in times of excess capacity.

Question 20

A traditional break-even chart is illustrated below:  Identify each letter on the above chart, using the proper terminology.

Accepted Answer

The answer of A traditional break-even chart is illustrated below:...

Quiz 10: Cost Analysis for Management Decision Making

The margin of safety is the amount:

Bradley Inc. has the capacity to make 100,000 windows. Bradley is currently operating at 80% capacity. The windows usually sell for $20.00 each. Costs for each window follow: The Army has offered to buy 10,000 windows for $12.00 each for barracks. Bradley should:

The Company is planning to sell Product Z for $10 a unit. Variable costs are $6 a unit and fixed costs are $100,000. If the company is currently selling 30,000 units, what is the margin of safety in units?

The difference in cost between two alternatives, such as to make a component part of a final product versus buying the part from an outside supplier is called:

Another term for cost incurred to sell and deliver products is:

Bradley Inc. has the capacity to make 100,000 windows. Bradley is currently operating at 100% capacity. The windows usually sell for $20.00 each. Costs for each window follow: The Army has offered to buy 10,000 windows for $12.00 each for barracks. Bradley should:

Consider the income statement for Pickbury Farm: What is the margin of safety ratio (to the nearest percentage point) ?

An example of a distribution cost that can be directly assigned to selling activity would be:

In performing an activity-based costing study for distribution costs, appropriate cost drivers for preparing orders for shipment would include all of the following except the:

The practice of accepting a selling price when there is excess capacity, as long as it exceeds variable cost is called:

A traditional break-even chart is illustrated below: Identify each letter on the above chart, using the proper terminology.