Question 1

The primary focus of a contribution margin income statement is on gross profit.

Accepted Answer

The primary focus of a contribution margin income statement is on contribution margin, which is the amount of revenue remaining after deducting variable expenses. Gross profit is the revenue remaining after deducting cost of goods sold, but does not take into account other variable expenses such as sales commissions or shipping costs.

Question 2

Jackson Company has provided the following information regarding the two products that it sells: $$\begin{array} { | l | r | c | } 
\hline & \text { Jet Boats } & \text { Ski Boats } \
\hline \text { Sales price per unit } & \$ 8,000 & \$ 20,000 \
\hline \text { Variable cost per unit } & \$ 4,800 & \$ 14,000 \
\hline
\end{array}$$ Annual fixed costs are $280,000.
How many units must be sold in order for Jackson to breakeven, assuming that Jackson sells five jet boats for every two ski boats sold?

Accepted Answer

Let's call the number of jet boats sold "J" and the number of ski boats sold "S".

We know that Jackson sells five jet boats for every two ski boats sold. So, we can write:

J = 5S/2

Next, we can write an expression for Jackson's total revenue (R):

R = 8000J + 20000S

We can also write an expression for Jackson's total variable costs (VC):

VC = 4800J + 14000S

Finally, we know that Jackson's total costs (TC) are equal to its fixed costs (FC) plus its variable costs (VC):

TC = FC + VC = 280000 + 4800J + 14000S

To find the breakeven point, we need to determine the values of J and S that make TC equal to R. So, we can write:

280000 + 4800J + 14000S = 8000J + 20000S

Simplifying this equation, we get:

3200J = 6000S - 280000

Substituting J = 5S/2, we get:

3200 (5S/2) = 6000S - 280000

Simplifying and solving for S, we get:

S = 20

So, Jackson must sell 20 ski boats. Using J = 5S/2, we get:

J = 50

Therefore, Jackson must sell 50 jet boats and 20 ski boats to breakeven. So, the answer is B.

Question 3

The purpose of managerial accounting is to provide managers with information that is useful for internal decision making.

Accepted Answer

Managerial accounting provides information that is relevant for internal decision making by managers such as budgeting, forecasting, performance evaluation, and planning. It helps managers to make informed decisions for the benefit of their organization.

Question 4

Divine Foods produces a gourmet condiment which sells for $16 per unit. Variable costs are $6 per unit, and fixed costs are $5,000 per month. If Divine expects to sell 1,500 units, compute the margin of safety in units.

Accepted Answer

Margin of safety in units = Expected sales - Break-even sales
Break-even sales = (Fixed costs / Contribution margin per unit)
Contribution margin per unit = Selling price per unit - Variable cost per unit
Contribution margin per unit = $16 - $6 = $10
Break-even sales = ($5,000 / $10) = 500 units
Margin of safety in units = 1,500 units - 500 units = 1,000 units. Therefore, the best choice is B.

Question 5

The type of information provided by managerial accounting differs from the information provided by financial accounting.

Accepted Answer

Managerial accounting provides internal information to help management make decisions and control the organization, while financial accounting provides external, standardized financial statements for investors, creditors, and other stakeholders.

Question 6

Divine Foods produces a gourmet condiment which sells for $16.00 per unit. Variable costs are $6 per unit, and fixed costs are $5,000 per month. If Divine expects to sell 1,500 units, compute the margin of safety in dollars.

Accepted Answer

The answer of Divine Foods produces a gourmet condiment which...

Question 7

Browning Company sells two products-X and Y. Product X is sold for $25 per unit and has a variable cost per unit of $15. Product Y is sold for $30 per unit and has a unit variable cost of $20. Total fixed costs for the company are $20,000. Browning Company typically sells three units of Product X for every unit of Product Y. What is the breakeven point in total units?

Accepted Answer

The answer of Browning Company sells two products-X and Y....

Question 8

Which of the following is true of variable costing?

Accepted Answer

Variable costing assigns only variable manufacturing costs to products, while fixed manufacturing costs are considered period costs and are expensed in the period in which they are incurred. Fixed administration overhead costs and variable selling overhead costs are not assigned to products under variable costing.

Question 9

Antique Works is owned and operated by a craftsman who makes replicas of historic firearms for museums, sportsmen, and collectors. The cost data are as follows: $$\begin{array} { | l | r | } 
\hline \text { Price per unit } & \$ 720 \
\hline \text { Variable costs per unit } & 470 \
\hline \text { Fixed costs per month } & 8,000 \
\hline
\end{array}$$ If Antique expects to sell 40 units per month, what is his margin of safety expressed in units per month?

Accepted Answer

The margin of safety in units is calculated as the difference between expected sales and break-even sales. Break-even sales = Fixed Costs / (Price per unit - Variable costs per unit) = 8,000 / (720 - 470) = 32 units. Margin of safety = 40 - 32 = 8 units.

Question 10

Under variable costing, the fixed manufacturing overhead costs are classified as period costs and are expensed in the period in which they are incurred.

Accepted Answer

Under variable costing, fixed manufacturing overhead costs are not considered as part of the cost of the product and are instead treated as period costs. As such, they are expensed in the period in which they are incurred, rather than being included as part of inventory and then expensed when sold like under absorption costing.

Question 11

Under variable costing, fixed manufacturing overhead costs are treated as a product cost.

Accepted Answer

Under variable costing, only variable manufacturing costs are treated as a product cost. Fixed manufacturing overhead costs are treated as a period cost and are expensed in the period incurred.

Question 12

Pep Soda, a local convenience store, sells soft drinks. It sells two large drinks for every small drink. A large drink sells for $1.50 with a variable cost of $0.60. A small drink sells for $1.00 with a variable cost of $0.50. The weighted average contribution margin is: (Round your intermediate calculations and final answer to two decimal places)

Accepted Answer

The answer of Pep Soda, a local convenience store, sells...

Question 13

Becky's Bakery sells three large muffins for every two small ones. A small muffin sells for $3.00, with a variable cost of $2.00. A large muffin sells for $5.00 with a variable cost of $2.50. What is the weighted-average contribution margin? (Round your intermediate calculations to one decimal place)

Accepted Answer

The answer of Becky's Bakery sells three large muffins for...

Question 14

Variable costing cannot be used for preparing financial reports for external users, such as investors and creditors.

Accepted Answer

Variable costing does not follow Generally Accepted Accounting Principles (GAAP), which are required for financial reporting purposes to external users. Therefore, variable costing is only used for internal decision-making purposes.

Question 15

Mist Company sells two products-A and B. Mist predicts that it will sell 2,500 units of A and 1,500 units of B during the next period. The unit contribution margins are $3.50 and $4.80, respectively. What is the weighted-average unit contribution margin?

Accepted Answer

The answer of Mist Company sells two products-A and B....

Question 16

Which of the following is true of absorption costing?

Accepted Answer

Absorption costing includes both variable and fixed manufacturing costs as product costs. Period costs, on the other hand, are expensed during the period in which they are incurred and are not included in the finished product cost.

Question 17

The only difference between absorption costing and variable costing in the determination of product costs is the way fixed manufacturing overhead costs are treated.

Accepted Answer

In absorption costing, fixed manufacturing overhead costs are included in the product costs, while in variable costing, they are treated as period costs and are expensed in the period in which they are incurred.

Question 18

McDaniel Company sells two products-J and B. McDaniel predicts that it will sell 7,200 units of J and 5,600 units of B in the next period. The unit contribution margins are $2.85 and $6.30, respectively. What is the weighted-average unit contribution margin?

Accepted Answer

The answer of McDaniel Company sells two products-J and B....

Question 19

Antique Works is owned and operated by a craftsman who makes replicas of historic firearms for museums, sportsmen, and collectors. He is currently producing 40 flintlock muskets per month. Cost data are as follows: $$\begin{array} { | l | r | } 
\hline \text { Price per unit } & \$ 720 \
\hline \text { Variable costs per unit } & 470 \
\hline \text { Fixed costs per month } & 8,000 \
\hline
\end{array}$$ If Antique expects to sell 40 units per month, how much is his margin of safety expressed in sales revenue?

Accepted Answer

Margin of Safety = Actual Sales - Break-even Sales
Break-even Sales = Fixed Costs / Contribution Margin Ratio
Contribution Margin Ratio = (Price - Variable Costs) / Price

Contribution Margin Ratio = (720 - 470) / 720 = 0.3472
Break-even Sales = 8,000 / 0.3472 = 23,016.51
Actual Sales = 40 units x $720 = $28,800
Margin of Safety = $28,800 - $23,016.51 = $5,783.49
Therefore, the margin of safety expressed in sales revenue is $5,760 (rounded to nearest dollar), which is option C.

Question 20

Which of the following costs is considered a period cost under variable costing?

Accepted Answer

Fixed manufacturing overhead is considered a period cost under variable costing because it is not directly tied to the production of specific units of product. Only variable manufacturing overhead is treated as a product cost under variable costing because it varies directly with production levels. Direct labor and direct materials are also considered product costs under variable costing as they are directly tied to the production of specific units of product.

Quiz 21: Cost-Volume-Profit Analysis