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Mid-Term Revision - Cost Accounting
Mid-Term Revision - Cost Accounting
Mid-Term Revision
Content:
• Chapter 1 Revision
• Chapter 2 Revision
• Chapter 3 Revision
• Questions on Ch 1, 2, and 3
• Mid-term Exam 2017
• Questions on Ch 1,2 & 3 from Final Exam 2018
2018/2019
Chapter "1"
• Major Differences between Management Accounting and Financial Accounting:
Point of
Managerial Accounting Financial Accounting
Comparison
Help managers take decisions to Communicate financial position to
Purpose
achieve organization goals outsiders
Internal managers External users such as investors, banks,
Primary Users
(Managers of the organization) and suppliers
Focus and Future-oriented Past-oriented (Reports on 2016
Emphasis (budget for 2018 prepared in 2017) performance prepared in 2017)
Rules of Financial statement must be prepared in
Do not have to follow GAAP, but are
Measurement accordance with GAAP and be certified
based on cost-benefit analysis
and Reporting by external auditors
Very short information (hourly) to
Time span and very long information ( 15-20 years)
Annual and quarterly financial reports,
type of Reports include financial and
primarily on the company as a whole
reports nonfinancial information on products,
departments and strategies
Indirect effect on managers behaviors
Behavioral Designed to influence the behavior of
because managers’ compensation is
Issues managers and other employees
often based on financial results
1) Cost Accounting:
- Cost accounting measures, analyzes, and reports financial and nonfinancial information
relating to the cost of acquiring or using resources.
Cost: is a sacrificed resource (used resources) to achieve a specific objective (to get a benefit(s). A
cost is usually measured as a monetary amount.
Production and Distribution are the parts of the value chain associated with producing and
delivering a product or service. These are the two functions involved in the Supply-Chain.
▪ Professional Ethics:
1- Competence 3- Confidentiality
2- Integrity 4- Credibility (Objectivity)
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Chapter "2"
nd
2 Classification:
Costs can be classified according to its nature into:
Can be easily and economically traced to Cannot be easily and economically traced to
cost object. cost object.
Cost object:
Cost object is the purpose for which costs are being measured. In other words, anything for which
a measurement of cost is desired.
• Mixed Costs: costs that have both fixed and variable elements.
• Cost Driver: is what causes a cost to be incurred. Stated another way there is a cause-and-effect
relationship between the level of activity of the cost driver and the cost incurred.
Examples:
Cost → Cost driver
- Labor wages → Labor hours
- supervisory salaries → No. of people supervised
- Maintenance wages → No. of machine hours
- Depreciation → No. of machine hours
- Energy → Kilowatt hours
• Relevant Range:
Relevant Range is the range of activity within which costs behave as predicted. Outside this level of
activity (range), costs behave differently.
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Manufacturing companies have three types of inventory:
1. Direct Materials Inventory
2. Work-In-Process Inventory
3. Finished Goods Inventory
Period Cost: all costs on the income statement other than COGS. → (Nonmanufacturing Costs)
Inventoriable Costs are direct materials, direct labor, and factory overhead. (Manufacturing Costs)
Prime Cost = Direct Material + Direct Labor
Conversion Cost = Direct Labor + Manufacturing Overhead
Income Statement:
Sales Revenues xx
- Cost of goods sold (xx)
= Gross Profit (Gross Margin) XX
- Operating Expenses (xx)
= Operating Income XX
Note: Overtime labor costs are considered part of overhead due to the inability to precisely know
the true cause of these costs.
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Chapter "3"
Cost-volume-profit shows the relation among cost, revenues (volume) and profit.
Variable Cost = Variable Cost per Unit (VC/U) x Quantity of Units Sold (Q)
Contribution Margin
Note: CM % = 100% - VC %
Breakeven Point
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Note:
The sale of one additional unit above the breakeven point will increase profit by CM/unit
At BEP: To lower BEP you can:
- Total revenue = Total cost - Increase SP/U
- No profit, No loss (net income=zero) - Decrease FC
- Total revenue = VC + FC - Decrease VC/U
- TCM = FC or TR – VC = FC
Target operating = Total Fixed Cost + Target OI Target operating = Total Fixed Cost + Target OI
Income (Units) CM/U Income (Rev) CM%
or,
Target Income (Rev) = Target OI (units) x S.P
Net Income
Fixed Cost +
Target Net Income (After Tax) = (1 – Tax Rate)
Revenues CM%
Target Net Income (After Tax) = Target net income (After tax) x Selling Price
Revenues Units
Margin of Safety (In Units) = Budgeted (Actual) Sales Units – Breakeven Units
Change in Profits if Sales Units Change = Change in Sales Units × CM per unit
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Q 1 (True or False):
1) Assigning direct costs poses more problems than assigning indirect costs.
2) The distinction between direct and indirect costs is clearly set forth in Generally Accepted Accounting
Principles (GAAP).
3) Fixed costs in total will NOT change in the short run, but may change in the long run.
4) Variable costs per unit vary with the level of production or sales volume.
5) Fixed costs depend on the resources used, not the resources acquired.
6) Depreciation can be classified as either an inventoriable cost or a period cost, depending on what is
being depreciated.
7) Direct materials purchases equal production needs of direct materials minus beginning inventory of
direct materials plus desired ending inventory of direct materials.
8) Breakeven is the point where revenues equal total manufacturing costs.
9) If the selling price per unit is $50 and the contribution margin percentage is 40%, then the variable
cost per unit must be $20.
10) A company with sales of $50,000, variable costs of $35,000, and fixed costs of $25,000 will reach its
breakeven point if sales are increased by $10,000.
11) A planned decrease in selling price would be expected to cause an increase in the quantity sold.
12) If a company's breakeven revenue is $1,000 and its budgeted revenue is $1,250, then its margin of
safety percentage is 25%.
13) Period costs are those costs that benefit future periods.
14) Cost of goods sold refers to the products brought to completion, whether they were started before or
during the current accounting period.
15) The difference between sales quantity and total variable costs is commonly called “Contribution
Margin”.
16) Contribution margin = Contribution margin percentage * Revenues (in dollars)
17) It is assumed in CVP analysis that the unit selling price, unit variable costs, and unit fixed costs are
known and constant.
18) In CVP analysis, variable costs include direct variable costs, but do NOT include indirect variable costs.
19) The selling price per unit is $25, variable cost per unit $15, and fixed cost per unit is $4. When this
company operates above the breakeven point, the sale of one more unit will increase net income by
$6.
20) An increase in the tax rate will increase the breakeven point.
21) The margin of safety in units is calculated as the difference between budgeted sales revenue and
breakeven quantity.
22) If variable selling cost per unit increases, then the quantity needed to achieve break-even will
decrease.
23) Gross Margin will always be greater than contribution margin.
Q 2 (MCQs):
1) Production is one of the value-chain functions. Which one of the following is NOT an example of a
cost driver for production costs:
a. Labor hours b. Number of people supervised
c. Sales dollars d. Machine hours
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3) Cost behavior refers to:
a. How costs react to a change in the level of activity.
b. whether a cost is incurred in a manufacturing, merchandising, or service company.
c. Classifying costs as either inventoriable or period costs.
d. Whether a particular expense has been ethically incurred.
5) When the activity level is expected to decline within the relevant range, what effects will be
anticipated with respect to each of the following:
Fixed costs per unit Variable costs per unit
a. Increase Increase
b. Increase No change
c. No change No change
d. No change Increase
6) When 20,000 units are produced, fixed costs are $16 per unit. Therefore, when 40,000 units are
produced fixed costs will:
a. Increase to $32 per unit. b. Remain at $16 per unit.
c. Decrease to $8 per unit. d. Total $640,000.
7) When 10,000 units are produced, variable costs are $6 per unit. Therefore, when 20,000 units are
produced:
a. variable costs will total $120,000.
b. variable costs will total $60,000.
c. variable unit costs will increase to $12 per unit.
d. variable unit costs will decrease to $3 per unit.
9) Wheel and Tire Manufacturing currently produces 1,000 tires per month. The following per unit
data apply for sales to regular customers:
Direct materials $20
Direct manufacturing labor 3
Variable manufacturing overhead 6
Fixed manufacturing overhead 10
Total manufacturing costs $39
The plant has capacity for 3,000 tires and is considering expanding production to 2,000 tires. What
is the total cost of producing 2,000 tires?
a. $39,000. b. $78,000. c. $68,000. d. $62,000.
10) When selling price per unit is $1,000, variable costs per unit are $400, fixed costs are $90,000. How
many units must be sold to yield after-tax net income of $18,000, assuming the tax rate is 40%?
A) 170 units B) 150 units C) 145 units D) 200 units
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11) Hardwood, Inc., produces and sells the finest quality office desks. The company expects the
following sales and costs for 2018 in its tables:
Revenues $500,000 (1,000 tables sold @ $500 per table), Variable costs $200,000, Fixed costs
$60,000. How many tables must be sold in order for Hardwood, Inc., to breakeven?
A) 100 units B) 200 units C) 300 units D) 400 units
12) XIAN Manufacturing produces a unique valve, and has the capacity to produce 50,000 valves
annually. Currently XIAN produces 40,000 valves and is thinking about increasing production to
45,000 valves next year. What is the most likely behavior of total manufacturing costs and unit
manufacturing costs given this change?
a. Total manufacturing costs will increase and unit manufacturing costs will stay the same.
b. Total manufacturing costs will increase and unit manufacturing costs will decrease.
c. Total manufacturing costs will stay the same and unit manufacturing costs will stay the same.
d. Total manufacturing costs will stay the same and unit manufacturing costs will decrease.
13) If the contribution margin ratio is 0.40, targeted operating income is $40,000, and fixed costs are
$60,000, then variable costs are:
A) $400,000. B) $150,000. C) $210,000. D) $320,000.
14) West Co. produces a product which sells for $40. Variable manufacturing costs are $18 per unit.
Fixed manufacturing costs are $5 per unit based on the current level of activity, and fixed selling
and administrative costs are $4 per unit. A selling commission of 15% of the selling price is paid on
each unit sold. The contribution margin per unit is:
A) $7 B) $17 C) $22 D) $16
15) East Company manufactures and sells a single product with a positive contribution margin. If the
selling price and the variable expense per unit both increase 5% and fixed expense do not change,
what is the effect on the contribution margin per unit and the contribution margin ratio.
Contribution margin per unit Contribution margin ratio
A) No change No change
B) Increase No change
C) No change Increase
D) Increase Decrease
16) Fixed costs equal $12,000, unit contribution margin equals $20, and the number of units sold equal
1,600. Operating income is:
A) $12,000. B) $20,000. C) $32,000. D) $40,000.
17) If selling price per unit is $30, variable costs per unit are $20, total fixed costs are $10,000, the tax
rate is 30%, and the company sells 5,000 units, net income is:
A) $12,000. B) $14,000. C) $28,000. D) $40,000.
18) At the breakeven point of 2,000 units, variable costs total $4,000 and fixed costs total $6,000. The
2,001st unit sold will contribute ________ to profits.
A) $1. B) $2. C) $3. D) $5.
19) Sales total $200,000 when variable costs total $150,000 and fixed costs total $30,000. The
breakeven point in sales dollars is:
A) $200,000. B) $120,000. C) $ 40,000. D) $ 30,000.
20) When fixed costs are $40,000 and variable costs are 20% of the selling price, then breakeven sales
are:
A) $40,000. B) $50,000. C) $200,000. D) indeterminable.
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Q 3 (MCQs):
1) If Bel Air Realtor plans an operating income of $210,000 and the tax rate is 30%, then Bel Air's
planned net income should be:
A) $63,000. B) $147,000. C) $273,000. D) $357,000.
2) The Marietta Company has fixed costs of $40,000 and variable costs are 75% of the selling price. To
realize profits of $10,000 from sales of 50,000 units, the selling price per unit:
A) must be $1.00. B) must be $1.33. C) must be $4.00. D) is indeterminable.
5) Assume only the specified parameters change in a cost-volume-profit analysis. If the contribution
margin increases by $6 per unit, then operating profits will:
A) also increase by $6 per unit. B) increase by less than $6 per unit.
C) decrease by $6 per unit. D) be indeterminable.
6) Bassman Company operates on a contribution margin of 30% and currently has fixed costs of
$400,000. Next year, sales are projected to be $2,000,000. An advertising campaign is being
evaluated that costs an additional $60,000. How much would sales have to increase to justify the
additional expenditure?
A) $120,000. B) $180,000. C) $200,000. D) $600,000.
8) Suppose that management believes that a 10% reduction in the selling price will result in a 10%
increase in sales. If this proposed reduction in selling price is implemented:
A) operating income will decrease by $8,000. B) operating income will increase by $8,000.
C) operating income will decrease by $16,000. D) operating income will increase by $16,000.
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Answer questions (9-11) using the information below:
Nancy's Niche sells a single product. 8,000 units were sold resulting in $80,000 of sales revenue,
$20,000 of variable costs, and $10,000 of fixed costs.
9) If variable costs decrease by $1 per unit, the new breakeven point is:
A) 1,539 units. B) 492 units.
C) $11,765 in total sales dollars. D) None of these answers are correct.
10) If the contribution margin ratio is 0.40, targeted operating income is $80,000, and targeted sales
volume in dollars is $500,000, then total fixed costs are:
A) $80,000. B) $100,000. C) $120,000. D) $200,000.
11) If the contribution margin ratio is 0.40, targeted operating income is $50,000, and fixed costs are
$75,000, then sales volume in dollars is:
A) $250,000. B) $312,500. C) $275,000. D) $350,000.
16) What are the period costs per unit associated with Product ICT101?
a. $4. b. $16. c. $20. d. $52.
17) What is the selling price per unit associated with Product ICT101?
a. $140. b. $160. c. $200. d. $150.
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Q 4 (MCQs):
2) Within the relevant range, if there is a change in the level of the cost driver, then:
a. total fixed costs and total variable costs will change.
b. total fixed costs and total variable costs will remain the same.
c. total fixed costs will remain the same and total variable costs will change.
d. total fixed costs will change and total variable costs will remain the same.
3) What are the variable costs per unit associated with Product ICT101?
a. $18. b. $22. c. $88. d. $92.
4) What are the fixed costs per unit associated with Product ICT101?
a. $102. b. $48. c $52. d. $32.
5) In the cost classification system used by manufacturing firms, assembly workers' wages would be
included in all of the following EXCEPT:
a. Product cost. b. Prime cost. c. Conversion cost. d. Period cost.
11) Kenefic Company sells its only product for $9 per unit, variable production costs are $3 per unit,
and selling costs are $1.50 per unit. Fixed costs for 10,000 units are $5,000. The contribution margin
is:
A) $6 per unit. B) $4.50 per unit. C) $5.50 per unit. D) $4 per unit.
15) The number of units that must be sold to achieve $6,000 of operating income is:
A) 1,000 units. B) 1,166 units.
C) 1,200 units. D) None of these answers are correct.
17) If the breakeven point is 1,000 units and each unit sells for $50, then:
A) Selling 1,250 units will result in a profit. B) Sales of $40,000 will result in a loss.
C) Sales of $50,000 will result in zero profit. D) All of these answers are correct.
18) If breakeven point is 1,000 units, each unit sells for $30, and fixed costs are $10,000, then on a
graph the:
A) Total revenue line and the total cost line will intersect at $30,000 of revenue.
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B) total cost line will be zero at zero units sold.
C) revenue line will start at $10,000.
D) All of these answers are correct.
20) How many ticket packages will Ruben need to sell to break even?
A) 34 packages. B) 50 packages. C) 100 packages. D) 150 packages.
21) How many ticket packages will Ruben need to sell in order to achieve $60,000 of operating income?
A) 367 packages. B) 434 packages. C) 1,100 packages. D) 1,300 packages.
22) For every $25,000 of ticket packages sold, operating income will increase by:
A) $6,250. B) $12,500.
C) $18,750. D) an indeterminable amount.
24) If targeted operating income is $40,000, then targeted sales revenue is:
A) $350,000. B) $233,333. C) $166,667. D) $250,000.
25) What minimum volume of sales dollars is required to earn an aftertax net income of $30,000?
A) $465,000. B) $330,000. C) $390,000. D) $165,000.
26) What is the number of units that must be sold to earn an after-tax net income of $42,000?
A) 3,750 units. B) 4,625 units. C) 3,050 units. D) 1,875 units.
27) If selling price per unit $30, variable cost per unit $20, and fixed cost per unit $3. When this
company operate above breakeven point, the sale of one more unit will increase net profit by:
A) $7 B) $17 C) $10 D) $3
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28) When 20,000 units are produced, fixed costs are $16 per unit. Therefore when 8,000 units are
produced fixed costs per unit will…………………
A) increase to $80 B)decrease to $8 C) decrease to $10 D) increase to $40
Inventories:
October 1 October 31
Direct materials $4,000 $5,000
Factory supplies $3,000 $2,500
Office supplies $1,500 $1,000
Work in process $13,000 $15,000
Finished goods units 0 2,000 units
Sales units are 8,000 units
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Q 6:
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Q 7:
Given the following information for unit costs:
- Direct materials $40
- Direct manufacturing labor $ 8
- Variable manufacturing overhead $12
- Fixed manufacturing overhead $23
- Sales commission (2% of sales) $ 6
- Fixed administrative salaries $ 9
- Total $ 98
Required: compute the following per unit
1. Variable cost 2. Fixed cost
3. Inventoriable cost 4. Period cost
5. Prime cost 6. Conversion cost
7. Operating income
Q 8:
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Q 9:
Q 10:
Answer questions (1-15) using the following information:
Rotana Company produces and sells product (X). The following information is available:
Production and sales units 1,000
Direct labor cost $40,000
Marketing and administrative cost $160,000
Sales revenue $866,000
Additional information:
a) Direct labor cost represents 20% of the prime cost and 10% of conversion costs.
b) 65% of the factory overhead costs are fixed costs.
c) 25% of the marketing and administrative costs are variable costs.
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Q 11:
Given the following information for product (A):
- Selling price / unit $10
- Total variable cost per unit $7
- Total fixed cost $12,000
- Current sales units 5000 units
Required:
1- If the selling price is reduced to $8.5 per unit and sales units are increased to 6,500 unit. What is
expected change in operating income?
2- If it is desired to achieve net income after tax 3,000 and the tax rate 20% and the same current
sales units are maintained. How much should be the selling price per unit assuming that variable
cost per unit will be the same.
3- If an additional advertising will cost 2,500 and will increase sales units to 5,500 unit. Should
advertising be done or not?
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Q 12:
Gilley, Inc., sells a single product. The company's most recent income statement is given below.
Sales (4,000 units) $120,000
Less variable expenses (68,000)
Contribution margin 52,000
Less fixed expenses (40,000)
Net income $ 12,000
Required:
a. Contribution margin per unit is $ ________ per unit
b. If sales are doubled to $240,000, total variable costs will equal $ ________
c. If sales are doubled to $240,000, total fixed costs will equal $ ________
d. If 10 more units are sold, profits will increase by $ ________
e. Compute how many units must be sold to break even. # ________
f. Compute how many units must be sold to achieve profits of $20,000. # ________
Q 13:
Black Pearl, Inc., sells a single product. The company's most recent income statement is given below.
Sales $50,000
Less variable expenses (30,000)
Contribution margin 20,000
Less fixed expenses (12,500)
Net income $ 7,500
Required:
a. Contribution margin ratio is ________ %
b. Breakeven point in total sales dollars is $ ________
c. To achieve $40,000 in net income, sales must total $ ________
d. If sales increase by $50,000, net income will increase by $ ________
Q 14:
The Brown Shoe Company produces its famous shoe, the Divine Loafer that sells for $70 per pair.
Operating income for 2011 is as follows:
Sales revenue ($70 per pair) $350,000
Variable cost ($30 per pair) 150,000
Contribution margin 200,000
Fixed cost 100,000
Operating income $100,000
Brown Shoe Company would like to increase its profitability over the next year by at least 25%. To do so,
the company is considering the following options:
1- Replace a portion of its variable labor with an automated machining process. This would result in a
20% decrease in variable cost per unit, but a 15% increase in fixed costs. Sales would remain the same.
2- Spend $25,000 on a new advertising campaign, which would increase sales by 10%.
3- Increase both selling price by $10 per unit and variable costs by $8 per unit by using a higher quality
leather material in the production of its shoes. The higher priced shoe would cause demand to drop by
approximately 20%.
4- Add a second manufacturing facility which would double Brown’s fixed costs, but would increase sales
by 60%.
Required:
Evaluate each of the alternatives considered by Brown Shoes. Do any of the options meet or exceed
Brown’s targeted increase in income of 25%? What should Brown do?
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Q 15:
Compaq Computers incurs the following costs:
A. Electricity cost for the plant assembling the Presario computer line of products.
B. Transportation costs for shipping the Presario line of products to retail chain.
C. Payment to David Kelley Designer for design of the Armada Notebook.
D. Salary of computer scientist working on the next generation of minicomputers.
E. Cost of Compaq employees’ visit to a major customer to demonstrate Compaq’s ability to
interconnect with other computers.
F. Purchases of competitors’ products for testing against potential Compaq products.
G. Payment to television network for running Compaq advertisements.
H. Costs of Cables purchased from outside to be used with Compaq printers.
Required:
1- Classify each of the cost items (A-H) as one of the business functions of the value chain.
Q 16 (True or False):
Q 17 (MCQs):
1) Management accounting:
A) Focuses on estimating future revenues, costs, and other measures to forecast activities and
their results.
B) Provides information about the company as a whole.
C) Reports information that has occurred in the past that is verifiable and reliable.
D) Provides information that is generally available only on a quarterly or annual basis.
2) Financial accounting:
A) Focuses on the future and includes activities such as preparing next year's operating budget.
B) Must comply with GAAP (generally accepted accounting principles).
C) Reports include detailed information on the various operating segments of the business such as
product lines or departments.
D) Is prepared for the use of department heads and other employees.
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3) Which of the following descriptors refers to management accounting information?
A) It is verifiable and reliable. B) It is driven by rules.
C) It is prepared for shareholders. D) It provides reasonable and timely estimates.
4) Cost accounting:
A) Provides information on the efficiency of factory labor.
B) Provides information on the cost of servicing commercial customers.
C) Provides information on the performance of an operating division.
D) All of these answers are correct.
6) ________ describe(s) the flow of goods, services, and information from the purchase of materials
to the delivery of products to consumers, regardless of whether those activities occur in the same
organization or with other organizations.
A) Supply chain. B) Key success factors.
C) Continuous improvement. D) Customer focus.
ANSWERS
Q 1:
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
F F T F F T T F F F T F F F F T F F F F
21 22 23
F F F
Q 2:
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
C C A B B C A C C D B B B D B B C C B B
Q 3:
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
B C C B A C B A C C B B C A A C C
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Q 4:
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
B C D B D A B A B C B D D A C D D A A C
21 22 23 24 25 26 27 28 29
D A B A C A C D A
Q 5:
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
A C B C D D B C B B C D B A D C
Q 6:
11 12 13 14 15 16 17 18 19 20 21 22 23
B C A B A D B A A B B C C
Q 7:
1. Variable cost per unit = 40+8+12+6=$66
2. Fixed cost per unit = 23+9 =32
3. Inventoriable costs= 40+8+12+23=$83
4. Period costs= 6+9 = $15
5. Prime cost =40+8=$48
6. Conversion cost =8+12+23=$43
7. Operating income= (6/2%) - 98 = $202
Q 8:
Variable Cost Fixed Cost
Cost item Amount Cost item Amount
Carpenter wages $15,000 Supervision Cost $6,000
Glue for assembly 500 Equipment Depreciation 12,000
Supervision cost 4,000 Equipment maintenance 2,500
Equipment maintenance 2,500 Office supplies 4,000
Lumber 10,000
Metal brackets for drawers 2,000
Total $34,000 Total $24,500
Q 9:
Q 10:
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
B A A C B D A C D A C B D B A
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Q 11:
a. Contribution margin ratio is $20,000 / $50,000 = 40%
b. Fixed costs $12,500 / 0.40 CM% = $31,250 in sales
c. [Fixed costs $12,500 + Net income $40,000] / 0.40 CM% = $131,250 in sales
d. $50,000 × 0.40 CM% = $20,000 increase in net income
Q 12:
1. Old contribution margin = 10 – 7 = $3
Total contribution margin for old sales units = 3 × 5,000 = $15,000
New contribution margin = 8.5 – 7 = $1.5
Total contribution margin for new sales units = 1.5 × 6,500 = $9,750
Then, the change in operating income $5,250 decrease
Q 13:
a. Contribution margin per unit is $30 - $17 = $13
b. $68,000 × 2 = $136,000
c. $40,000
d. Contribution margin of $13 × 10 units = $130
e. Fixed costs of $40,000 / Contribution margin per unit $13 = 3,077 units
f. (Fixed costs of $40,000 + Profits $20,000) / CM per unit $13 = 4,616 units
Q 14:
Contribution margin per pair of shoes = $70 – $30 = $40
Fixed costs = $100,000
Units sold = Total sales ÷ Selling price = $350,000 ÷ $70 per pair = 5,000 pairs of shoes
1. Variable costs decrease by 20%; Fixed costs increase by 15%
Sales revenues 5,000 × $70 $350,000
Variable costs 5,000 × $30 × (1 – 0.20) 120,000
Contribution margin 230,000
Fixed costs $100,000 × 1.15 115,000
Operating income $115,000
2. Increase advertising (fixed costs) by $25,000; Increase sales 10%
Sales revenues 5,000 × 1.10 × $70.00 $385,000
Variable costs 5,000 × 1.10 × $30.00 165,000
Contribution margin 220,000
Fixed costs ($100,000 + $25,000) 125,000
Operating income $ 95,000
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3. Increase selling price by $10.00; Sales decrease 20%; Variable costs increase by $8
Sales revenues 5,000 × 0.80 × ($70 + $10) $320,000
Variable costs 5,000 × 0.80 × ($30 + $8) 152,000
Contribution margin 168,000
Fixed costs 100,000
Operating income $ 68,000
4. Double fixed costs; Increase sales by 60%
Sales revenues 5,000 × 1.60 × $70 $560,000
Variable costs 5,000 × 1.60 × $30 240,000
Contribution margin 320,000
Fixed costs $100,000 × 2 200,000
Operating income $120,000
- Alternative 4 yields the highest operating income. Choosing alternative 4 will give Derby a 20%
increase in operating income [($120,000 – $100,000)/$100,000 = 20%], which is less than the
company’s 25% targeted increase.
Q 15:
A Production
B Distribution
C Design of products and processes
D Research and development
E Customer service or marketing
F Research and development or Design of products and processes
G Marketing
H Production
Q 16:
1 2 3 4 5 6 7 8 9 10 11
F F T F F F T T F T T
Q 17:
1 2 3 4 5 6 7 8
A B D D C A D C
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
C B B A A C C A C B A A D D C C D C D B
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
D D A B B A C A C B B C C A D B C D C D
1 2 3 8 9 10 11 13 14 15 16 17 20 21 22
C B D A D A C C B A B C B C A
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Final Exam 2018
Questions on Ch 1, 2 & 3: