ABSORPTION/VARIABLE COSTING AND COST-VOLUME-PROFIT ANALYSIS

MULTIPLE CHOICE

1. Consider the following three product costing alternatives: process costing, job order costing,
and standard costing. Which of these can be used in conjunction with absorption costing?

a. job order costing

b. standard costing
c. process costing
d. all of them

2. In a recent period, Marvel Co. incurred $20,000 of fixed manufacturing overhead and
deducted $30,000 of fixed manufacturing overhead. Marvel Co. must be using

a. absorption costing.
b. variable costing.
c. direct costing.
d. standard costing.

3. Another name for absorption costing is

a. full costing.
b. direct costing.
c. job order costing.
d. fixed costing.

4. If a firm produces more units than it sells, absorption costing, relative to variable costing,
will result in

a. higher income and assets.

b. higher income but lower assets.
c. lower income but higher assets.
d. lower income and assets.

5. Under absorption costing, fixed manufacturing overhead could be found in all of the
following except the

a. work-in-process account.
b. finished goods inventory account.
c. Cost of Goods Sold.
d. period costs.

6. If a firm uses absorption costing, fixed manufacturing overhead will be included

a. only on the balance sheet.

b. only on the income statement.
c. on both the balance sheet and income statement.
d. on neither the balance sheet nor income statement.

7. Under absorption costing, if sales remain constant from period 1 to period 2, the company
will report a larger income in period 2 when

a. period 2 production exceeds period 1 production.

b. period 1 production exceeds period 2 production.
c. variable production costs are larger in period 2 than period 1.
d. fixed production costs are larger in period 2 than period 1.

8. The FASB requires which of the following to be used in preparation of external financial
statements?

11–1
Absorption/Variable Costing and Cost-Volume-Profit Analysis

a. variable costing
b. standard costing
c. activity-based costing
d. absorption costing

9. An ending inventory valuation on an absorption costing balance sheet would

a. sometimes be less than the ending inventory valuation under variable costing.
b. always be less than the ending inventory valuation under variable costing.
c. always be the same as the ending inventory valuation under variable costing.
d. always be greater than or equal to the ending inventory valuation under variable
costing.

10. Absorption costing differs from variable costing in all of the following except

a. treatment of fixed manufacturing overhead.

b. treatment of variable production costs.
c. acceptability for external reporting.
d. arrangement of the income statement.

11. Which of the following is not associated with absorption costing?

a. functional format
b. gross margin
c. period costs
d. contribution margin

12. Unabsorbed fixed overhead costs in an absorption costing system are

a. fixed manufacturing costs not allocated to units produced.

b. variable overhead costs not allocated to units produced.
c. excess variable overhead costs.
d. costs that cannot be controlled.

13. Profit under absorption costing may differ from profit determined under variable costing.
How is this difference calculated?

a. Change in the quantity of all units in inventory times the relevant fixed costs per
unit.
b. Change in the quantity of all units produced times the relevant fixed costs per unit.
c. Change in the quantity of all units in inventory times the relevant variable cost per
unit.
d. Change in the quantity of all units produced times the relevant variable cost per
unit.

14. What factor, related to manufacturing costs, causes the difference in net earnings
computed using absorption costing and net earnings computed using variable costing?

a. Absorption costing considers all costs in the determination of net earnings, whereas
variable costing considers fixed costs to be period costs.
b. Absorption costing allocates fixed overhead costs between cost of goods sold and
inventories, and variable costing considers all fixed costs to be period costs.
c. Absorption costing “inventories” all direct costs, but variable costing considers direct
costs to be period costs.
d. Absorption costing “inventories” all fixed costs for the period in ending finished
goods inventory, but variable costing expenses all fixed costs.

15. The costing system that classifies costs by functional group only is

a. standard costing.
b. job order costing.
c. variable costing.
d. absorption costing.

16. A functional classification of costs would classify “depreciation on office equipment”

as a
Absorption/Variable Costing and Cost-Volume-Profit Analysis

a. product cost.
b. general and administrative expense.
c. selling expense.
d. variable cost.

17. The costing system that classifies costs by both functional group and behavior is

a. process costing.
b. job order costing.
c. variable costing.
d. absorption costing.

18. Under variable costing, which of the following are costs that can be inventoried?

a. variable selling and administrative expense

b. variable manufacturing overhead
c. fixed manufacturing overhead
d. fixed selling and administrative expense

19. Consider the following three product costing alternatives: process costing, job order costing,
and standard costing. Which of these can be used in conjunction with variable costing?

a. job order costing

b. standard costing
c. process costing
d. all of them

20. Another name for variable costing is

a. full costing.
b. direct costing.
c. standard costing.
d. adjustable costing.

21. If a firm uses variable costing, fixed manufacturing overhead will be included

a. only on the balance sheet.

b. only on the income statement.
c. on both the balance sheet and income statement.
d. on neither the balance sheet nor income statement.

22. Under variable costing,

a. all product costs are variable.

b. all period costs are variable.
c. all product costs are fixed.
d. product costs are both fixed and variable.

23. How will a favorable volume variance affect net income under each of the following
methods?

Absorption Variable
a. reduce no effect
b. reduce increase
c. increase no effect
d. increase reduce
Absorption/Variable Costing and Cost-Volume-Profit Analysis

24. Variable costing considers which of the following to be product costs?

Fixed Fixed Variable Variable

Mfg. Costs Selling & Adm. Mfg. Costs Selling & Adm.
a. yes no yes no
b. yes no yes yes
c. no no yes yes
d. no no yes no

25. The variable costing format is often more useful to managers than the absorption costing
format because

a. costs are classified by their behavior.

b. costs are always lower.
c. it is required for external reporting.
d. it justifies higher product prices.

26. The difference between the reported income under absorption and variable costing is
attributable to the difference in the

a. income statement formats.

b. treatment of fixed manufacturing overhead.
c. treatment of variable manufacturing overhead.
d. treatment of variable selling, general, and administrative expenses.

27. Which of the following costs will vary directly with the level of production?

a. total manufacturing costs

b. total period costs
c. variable period costs
d. variable product costs

28. On the variable costing income statement, the difference between the “contribution margin”
and “income before income taxes” is equal to

a. the total variable costs.

b. the Cost of Goods Sold.
c. total fixed costs.
d. the gross margin.

29. For financial reporting to the IRS and other external users, manufacturing overhead costs
are

a. deducted in the period that they are incurred.

b. inventoried until the related products are sold.
c. treated like period costs.
d. inventoried until the related products have been completed.

30. In the application of “variable costing” as a cost-allocation process in manufacturing,

a. variable direct costs are treated as period costs.

b. nonvariable indirect manufacturing costs are treated as product costs.
c. variable indirect manufacturing costs are treated as product costs.
d. nonvariable direct costs are treated as product costs.

31. A basic tenet of variable costing is that period costs should be currently expensed. What is
the rationale behind this procedure?

a. Period costs are uncontrollable and should not be charged to a specific product.
b. Period costs are generally immaterial in amount and the cost of assigning the
amounts to specific products would outweigh the benefits.
c. Allocation of period costs is arbitrary at best and could lead to erroneous decision by
management.
d. Because period costs will occur whether production occurs, it is improper to allocate
these costs to production and defer a current cost of doing business.
Absorption/Variable Costing and Cost-Volume-Profit Analysis

32. Which of the following is a term more descriptive of the type of cost accounting often called
“direct costing”?

a. out-of-pocket costing
b. variable costing
c. relevant costing
d. prime costing

33. What costs are treated as product costs under variable (direct) costing?

a. only direct costs

b. only variable production costs
c. all variable costs
d. all variable and fixed manufacturing costs

34. Which of the following must be known about a production process in order to institute a
variable costing system?

a. the variable and fixed components of all costs related to production

b. the controllable and non-controllable components of all costs related to production
c. standard production rates and times for all elements of production
d. contribution margin and break-even point for all goods in production

35. Why is variable costing not in accordance with generally accepted accounting principles?

a. Fixed manufacturing costs are treated as period costs under variable costing.
b. Variable costing procedures are not well known in industry.
c. Net earnings are always overstated when using variable costing procedures.
d. Variable costing ignores the concept of lower of cost or market when valuing
inventory.

36. Which of the following is an argument against the use of direct (variable) costing?

a. Absorption costing overstates the balance sheet value of inventories.

b. Variable factory overhead is a period cost.
c. Fixed manufacturing overhead is difficult to allocate properly.
d. Fixed manufacturing overhead is necessary for the production of a product.

37. Which of the following statements is true for a firm that uses variable costing?

a. The cost of a unit of product changes because of changes in the number of units
manufactured.
b. Profits fluctuate with sales.
c. An idle facility variation is calculated.
d. None of the above.

38. An income statement is prepared as an internal report. Under which of the following
methods would the term contribution margin appear?

Absorption costing Variable costing

a. no no
b. no yes
c. yes no
d. yes yes

39. In an income statement prepared as an internal report using the variable costing method,
fixed manufacturing overhead would

a. not be used.
b. be used in the computation of operating income but not in the computation of the
contribution margin.
c. be used in the computation of the contribution margin.
d. be treated the same as variable manufacturing overhead.
Absorption/Variable Costing and Cost-Volume-Profit Analysis

40. Variable costing has an advantage over absorption costing for which of the following
purposes?

a. analysis of profitability of products, territories, and other segments of a business

b. determining the CVP relationship among the major factors of selling price, sales mix,
and sales volume
c. minimizing the effects of inventory changes on net income
d. all of the above

41. In the variable costing income statement, which line separates the variable and fixed costs?

a. selling expenses
b. general and administrative expense
c. product contribution margin
d. total contribution margin

42. A firm presently has total sales of $100,000. If its sales rise, its

a. net income based on variable costing will go up more than its net income based on
absorption costing.
b. net income based on absorption costing will go up more than its net income based
on variable costing.
c. fixed costs will also rise.
d. per unit variable costs will rise.

43. CVP analysis requires costs to be categorized as

a. either fixed or variable.

b. fixed, mixed, or variable.
c. product or period.
d. standard or actual.

44. With respect to fixed costs, CVP analysis assumes total fixed costs

a. per unit remain constant as volume changes.

b. remain constant from one period to the next.
c. vary directly with volume.
d. remain constant across changes in volume.

45. CVP analysis relies on the assumptions that costs are either strictly fixed or strictly variable.
Consistent with these assumptions, as volume decreases total

a. fixed costs decrease.

b. variable costs remain constant.
c. costs decrease.
d. costs remain constant.

46. According to CVP analysis, a company could never incur a loss that exceeded its total

a. variable costs.
b. fixed costs.
c. costs.
d. contribution margin.

47. CVP analysis is based on concepts from

a. standard costing.
b. variable costing.
c. job order costing.
d. process costing.
Absorption/Variable Costing and Cost-Volume-Profit Analysis

48. Cost-volume-profit analysis is a technique available to management to understand better

the interrelationships of several factors that affect a firm’s profit. As with many such
techniques, the accountant oversimplifies the real world by making assumptions. Which of
the following is not a major assumption underlying CVP analysis?

a. All costs incurred by a firm can be separated into their fixed and variable
components.
b. The product selling price per unit is constant at all volume levels.
c. Operating efficiency and employee productivity are constant at all volume levels.
d. For multi-product situations, the sales mix can vary at all volume levels.

49. In CVP analysis, linear functions are assumed for

a. contribution margin per unit.

b. fixed cost per unit.
c. total costs per unit.
d. all of the above.

50. Which of the following factors is involved in studying cost-volume-profit relationships?

a. product mix
b. variable costs
c. fixed costs
d. all of the above

51. Cost-volume-profit relationships that are curvilinear may be analyzed linearly by considering
only

a. fixed and mixed costs.

b. relevant fixed costs.
c. relevant variable costs.
d. a relevant range of volume.

52. After the level of volume exceeds the break-even point

a. the contribution margin ratio increases.

b. the total contribution margin exceeds the total fixed costs.
c. total fixed costs per unit will remain constant.
d. the total contribution margin will turn from negative to positive.

53. Which of the following will decrease the break-even point?

Decrease in Increase in direct Increase in

fixed cost labor cost selling price
a. yes yes yes
b. yes no yes
c. yes no no
d. no yes no

54. At the break-even point, fixed costs are always

a. less than the contribution margin.

b. equal to the contribution margin.
c. more than the contribution margin.
d. more than the variable cost.

55. The method of cost accounting that lends itself to break-even analysis is

a. variable.
b. standard.
c. absolute.
d. absorption.
Absorption/Variable Costing and Cost-Volume-Profit Analysis

56. Given the following notation, what is the break-even sales level in units?

SP = selling price per unit, FC = total fixed cost, VC = variable cost per unit

a. SP/(FC/VC)
b. FC/(VC/SP)
c. VC/(SP – FC)
d. FC/(SP – VC)

57. Consider the equation X = Sales – [(CM/Sales) × (Sales)]. What is X?

a. net income
b. fixed costs
c. contribution margin
d. variable costs

58. If a firm’s net income does not change as its volume changes, the firm(‘s)

a. must be in the service industry.

b. must have no fixed costs.
c. sales price must equal $0.
d. sales price must equal its variable costs.

59. Break-even analysis assumes over the relevant range that

a. total variable costs are linear.

b. fixed costs per unit are constant.
c. total variable costs are nonlinear.
d. total revenue is nonlinear.

60. To compute the break-even point in units, which of the following formulas is used?

a. FC/CM per unit

b. FC/CM ratio
c. CM/CM ratio
d. (FC+VC)/CM ratio

61. A firm’s break-even point in dollars can be found in one calculation using which of the
following formulas?

a. FC/CM per unit

b. VC/CM
c. FC/CM ratio
d. VC/CM ratio

62. The contribution margin ratio always increases when the

a. variable costs as a percentage of net sales increase.

b. variable costs as a percentage of net sales decrease.
c. break-even point increases.
d. break-even point decreases.

63. In a multiple-product firm, the product that has the highest contribution margin per unit will

a. generate more profit for each $1 of sales than the other products.
b. have the highest contribution margin ratio.
c. generate the most profit for each unit sold.
d. have the lowest variable costs per unit.
Absorption/Variable Costing and Cost-Volume-Profit Analysis

64. _____________ focuses only on factors that change from one course of action to another.

a. Incremental analysis
b. Margin of safety
c. Operating leverage
d. A break-even chart

65. The margin of safety would be negative if a company(‘s)

a. was presently operating at a volume that is below the break-even point.

b. present fixed costs were less than its contribution margin.
c. variable costs exceeded its fixed costs.
d. degree of operating leverage is greater than 100.

66. The margin of safety is a key concept of CVP analysis. The margin of safety is the

a. contribution margin rate.

b. difference between budgeted contribution margin and actual contribution margin.
c. difference between budgeted contribution margin and break-even contribution
margin.
d. difference between budgeted sales and break-even sales.

67. Management is considering replacing an existing sales commission compensation plan with
a fixed salary plan. If the change is adopted, the company’s

a. break-even point must increase.

b. margin of safety must decrease.
c. operating leverage must increase.
d. profit must increase.
Absorption/Variable Costing and Cost-Volume-Profit Analysis

68. As projected net income increases the

a. degree of operating leverage declines.

b. margin of safety stays constant.
c. break-even point goes down.
d. contribution margin ratio goes up.

69. A managerial preference for a very low degree of operating leverage might indicate that

a. an increase in sales volume is expected.

b. a decrease in sales volume is expected.
c. the firm is very unprofitable.
d. the firm has very high fixed costs.

Use the following information for questions 70–73.

Young Corporation has the following standard costs associated with the manufacture and sale of
one of its products:

Direct material $3.00 per unit

Direct labor 2.50 per unit
Variable manufacturing overhead 1.80 per unit
Fixed manufacturing overhead 4.00 per unit (based on an estimate
of 50,000 units per year)
Variable selling expenses .25 per unit
Fixed SG&A expense $75,000 per year

During 2001, its first year of operations, Young manufactured 51,000 units and sold 48,000. The
selling price per unit was $25. All costs were equal to standard.

70. Under absorption costing, the standard production cost per unit for 2001 was

a. $11.30.
b. $7.30.
c. $11.55.
d. $13.05.

71. Under variable costing, the standard production cost per unit for 2001 was

a. $11.30.
b. $7.30.
c. $7.55.
d. $11.55.

72. Based on variable costing, the income before income taxes for the year was

a. $570,600.
b. $560,000.
c. $562,600.
d. $547,500.

73. The volume variance under absorption costing is

a. $8,000 F.
b. $4,000 F.
c. $4,000 U.
d. $8,000 U.
Absorption/Variable Costing and Cost-Volume-Profit Analysis

Use the following information for questions 74–76.

The following information is available for X Co. for its first year of operations:

Sales in units 5,000

Production in units 8,000
Manufacturing costs:
Direct labor $3 per unit
Direct material 5 per unit
Variable overhead 1 per unit
Fixed overhead $100,000
Net income (absorption method) $30,000
Sales price per unit $40

74. What would X Co. have reported as its income before income taxes if it had used variable
costing?

a. $30,000
b. ($7,500)
c. $67,500
d. can’t be determined from the information given

75. What was the total amount of SG&A expense incurred by X Co.?

a. $30,000
b. $62,500
c. $6,000
d. can’t be determined from the information given

76. Based on variable costing, what would X Co. show as the value of its ending inventory?

a. $120,000
b. $64,500
c. $27,000
d. $24,000

Use the following information for questions 77–79.

The following information has been extracted from P Co.’s financial records for its first year of
operations:

Units produced 10,000

Units sold 7,000
Variable costs per unit:
Direct material $8
Direct labor 9
Manufacturing overhead 3
SG&A 4
Fixed costs:
Manufacturing overhead $70,000
SG&A 30,000

77. Based on absorption costing, P Co.’s income in its first year of operations will be

a. $21,000 higher than it would be under variable costing.

b. $70,000 higher than it would be under variable costing.
c. $30,000 higher than it would be under variable costing.
d. higher than it would be under variable costing, but the exact difference cannot be
determined from the information given.

78. Based on absorption costing, the Cost of Goods Manufactured for P Co.’s first year would be

a. $200,000.
b. $270,000.
c. $300,000.
d. $210,000.
Absorption/Variable Costing and Cost-Volume-Profit Analysis

79. Based on absorption costing, what amount of period costs will P Co. deduct?

a. $70,000
b. $79,000
c. $30,000
d. $58,000

80. For its most recent fiscal year, a firm reported that its contribution margin was equal to 40
percent of sales and that its net income amounted to 10 percent of sales. If its fixed costs
for the year were $60,000, how much were sales?

a. $150,000
b. $200,000
c. $600,000
d. can’t be determined from the information given

81. At its present level of operations, a small manufacturing firm has total variable costs equal
to 75 percent of sales and total fixed costs equal to 15 percent of sales. Based on variable
costing, if sales change by $1.00, income will change by

a. $0.25.
b. $0.10.
c. $0.75.
d. can’t be determined from the information given.

82. You obtain the following information regarding fixed production costs from a manufacturing
firm for fiscal year 2001:

Fixed costs in the beginning inventory $ 16,000

Fixed costs incurred this period 100,000

Which of the following statements is not true:

a. The maximum amount of fixed production costs that this firm could deduct using
absorption costs in 2001 is $116,000.
b. The maximum difference between this firm’s 2001 income based on absorption
costing and its income based on variable costing is $16,000.
c. Using variable costing, this firm will deduct no more than $16,000 for fixed
production costs.
d. If this firm produced substantially more units than it sold in 2001, variable costing
will probably yield a lower income than absorption costing.
Absorption/Variable Costing and Cost-Volume-Profit Analysis

Use the following information for questions 83–86.

Simple Corp. produces a single product. The following cost structure applied to its first year of
operations, 2001:

Variable costs:
SG&A $2 per unit
Production $4 per unit
Fixed costs (total cost incurred for the year):
SG&A $14,000
Production $20,000

83. Assume for this question only that during 2001 Simple Corp. manufactured 5,000 units and
sold 3,800. There was no beginning or ending work-in-process inventory. How much larger
or smaller would Simple Corp.’s income be if it uses absorption rather than variable costing?

a. The absorption costing income would be $6,000 larger.

b. The absorption costing income would be $6,000 smaller.
c. The absorption costing income would be $4,800 larger.
d. The absorption costing income would be $4,000 smaller.

84. Assume for this question only that Simple Corp. manufactured and sold 5,000 units in 2001.
At this level of activity it had an income of $30,000 using variable costing. What was the
sales price per unit?

a. $16.00
b. $18.80
c. $12.80
d. $14.80

85. Assume for this question only that Simple Corp. produced 5,000 units and sold 4,500 units
in 2001. If Simple uses absorption costing, it would deduct period costs of

a. $24,000.
b. $34,000.
c. $27,000.
d. $23,000.

86. Assume for this question only that Simple Corp. manufactured 5,000 units and sold 4,000 in
2001. If Simple employs a costing system based on variable costs, the company would end
2001 with a finished goods inventory of

a. $4,000.
b. $8,000.
c. $6,000.
d. $5,000.

Use the following information for questions 87–89.

The following information was extracted from the first year absorption-based accounting records of
Confused Co.

Total fixed costs incurred $100,000

Total variable costs incurred 50,000
Total period costs incurred 70,000
Total variable period costs incurred 30,000
Units produced 20,000
Units sold 12,000
Unit sales price $12

87. What is Cost of Goods Sold for Confused Co.’s first year?

a. $80,000
b. $90,000
c. $48,000
Absorption/Variable Costing and Cost-Volume-Profit Analysis

d. can’t be determined from the information given

88. If Confused Co. had used variable costing in its first year of operations, how much income
(loss) before income taxes would it have reported?

a. ($6,000)
b. $54,000
c. $26,000
d. $2,000

89. Based on variable costing, if Confused had sold 12,001 units instead of 12,000, its income
before income taxes would have been

a. $9.50 higher.
b. $11.00 higher.
c. $8.50 higher.
d. $8.33 higher.

90. Z Corp. incurred the following costs in 2001 (its first year of operations) based on
production of 10,000 units:

Direct material $5 per unit

Direct labor $3 per unit
Variable product costs $2 per unit
Fixed product costs (in total) $100,000

When Z Corp. prepared its 2001 financial statements, its Cost of Goods Sold was listed at
$100,000. Based on this information, which of the following statements must be true:

a. Z Corp. sold all 10,000 units that it produced.

b. Z Corp. sold 5,000 units.
c. Z Corp. had a very profitable year.
d. From the information given, one cannot tell whether Z Corp.’s financial statements
were prepared based on variable or absorption costing.

Use the following information for questions 91–93.

Three new companies (X, Y, and Z) began operations on January 1, 2001. Consider the following
operating costs that were incurred by these companies during the complete calendar year 2001:

Company X Company Y Company Z

Production in units 10,000 10,000 10,000
Sales price per unit $10 $10 $10
Fixed production costs $10,000 $20,000 $30,000
Variable production costs $30,000 $20,000 $10,000
Variable SG&A $10,000 $20,000 $30,000
Fixed SG&A $30,000 $20,000 $10,000

91. Based on sales of 7,000 units, which company will report the greater income before income
taxes for 2001 under absorption costing?

a. Company X
b. Company Y
c. Company Z
d. All of the companies will report the same income.

92. Based on sales of 7,000 units, which company will report the greater income before income
taxes for 2001 under variable costing?

a. Company X
b. Company Y
c. Company Z
d. All of the companies will report the same income.

93. Based on sales of 10,000 units, which company will report the greater income before
income taxes for 2001 under variable costing?
Absorption/Variable Costing and Cost-Volume-Profit Analysis

a. Company X
b. Company Y
c. Company Z
d. All of the companies will report the same income before income taxes.

Use the following information for questions 94–96.

JV Co. produces a single product that sells for $7.00 per unit. Standard capacity is 100,000 units
per year; 100,000 units were produced and 80,000 units were sold during the year. Manufacturing
costs and selling and administrative expenses are presented below.

There were no variances from the standard variable costs. Any under- or overapplied overhead is
written off directly at year-end as an adjustment to cost of goods sold.

Fixed costs Variable costs

Direct material $0 $1.50 per unit produced
Direct labor 0 1.00 per unit produced
Manufacturing overhead 150,000 0.50 per unit produced
Selling & Admin. 80,000 0.50 per unit sold

JV had no inventory at the beginning of the year.

94. In presenting inventory on the balance sheet at December 31, the unit cost under
absorption costing is

a. $2.50.
b. $3.00.
c. $3.50.
d. $4.50.

95. What is the net income under variable costing?

a. $50,000
b. $80,000
c. $90,000
d. $120,000

96. What is the net income under absorption costing?

a. $50,000
b. $80,000
c. $90,000
d. $120,000
Absorption/Variable Costing and Cost-Volume-Profit Analysis

97. A firm has fixed costs of $200,000 and variable costs per unit of $6. It plans on selling
40,000 units in the coming year. To realize a profit of $20,000, the firm must have a sales
price per unit of at least

a. $11.00.
b. $11.50.
c. $10.00.
d. $10.50.

98. A firm has fixed costs of $200,000 and variable costs per unit of $6. It plans on selling
40,000 units in the coming year. If the firm pays income taxes on its income at a rate of 40
percent, what sales price must the firm use to obtain an after-tax profit of $24,000 on the
40,000 units?

a. $11.60
b. $11.36
c. $12.00
d. $12.50

Use the following information for questions 99–102.

Below is an income statement for Bender Co. for 2001:

Sales $ 400,000
Variable costs (125,000 )
Contribution margin $ 275,000
Fixed costs (200,000)
Profit before taxes $ 75,000

99. What is Bender’s degree of operating leverage?

a. 3.67
b. 5.33
c. 1.45
d. 2.67

100. Based on the cost and revenue structure on the income statement, what was Bender’s
break-even point for 2001 in dollars?

a. $200,000
b. $325,000
c. $300,000
d. $290,909

101. What was Bender’s margin of safety for 2001?

a. $200,000
b. $75,000
c. $100,000
d. $109,091

102. Assuming that the fixed costs are expected to remain at $200,000 for 2002 and the sales
price per unit and variable costs per unit are also expected to remain constant, how much
profit before taxes will be produced if the company anticipates 2002 sales rising to 130
percent of the 2001 level?

a. $97,500
b. $195,000
c. $157,500
d. A prediction cannot be made from the information given.
Absorption/Variable Costing and Cost-Volume-Profit Analysis

Use the following information for questions 103 and 104.

Timberline produces and sells a single product. Information on its costs for 2001 follow:

Variable costs:
SG&A $2 per unit
Production $4 per unit
Fixed costs:
SG&A $12,000 per year
Production $15,000 per year

103. Assume Timberline produced and sold 5,000 units in 2001. At this level of activity, it
produced a profit of $18,000. What was Timberline’s sales price per unit?

a. $15.00
b. $11.40
c. $9.60
d. $10.00

104. In 2002, Timberline estimates that it will produce and sell 4,000 units. The variable costs
per unit and the total fixed costs are expected to be the same as in 2001. However, it
anticipates a sales price of $16 per unit. What is Timberline’s projected margin of safety in
2002?

a. $7,000
b. $20,800
c. $18,400
d. $13,000

105. Story Manufacturing incurs annual fixed costs of $250,000 in producing and selling “Tales.”
Estimated unit sales for 2001 are 125,000. An after-tax income of $75,000 is desired by
management. The company projects its income tax rate at 40 percent. What is the
maximum amount that Story can expend for variable costs per unit and still meet its profit
objective if the sales price per unit is estimated at $6?

a. $3.37
b. $3.59
c. $3.00
d. $3.70
Absorption/Variable Costing and Cost-Volume-Profit Analysis

Use the following information for questions 106 and 107.

The following information relates to financial projections of Big Co. for 2001:

Projected sales 60,000 units

Projected variable costs $2.00 per unit
Projected fixed costs $50,000 per year
Projected unit sales price $7.00

106. How many units would Big Co. need to sell in 2001 to earn a profit before taxes of
$10,000?

a. 25,714
b. 10,000
c. 8,571
d. 12,000

107. If Big Co. achieves its projections in 2001, what will be its degree of operating leverage?

a. 6.00
b. 1.20
c. 1.68
d. 2.40

108. Signal Co. manufactures a single product. For 2001, the company had sales of $90,000,
variable costs of $50,000, and fixed costs of $30,000. Signal expects its cost structure and
sales price per unit to remain the same in 2002, however total sales are expected to jump
by 20 percent. If the 2002 projections are realized, net income in 2002 should exceed net
income in 2001 by

a. 100 percent.
b. 80 percent.
c. 20 percent.
d. 50 percent.

Use the following information for questions 109–111.

Diversified Corp. manufactures and sells two products: X and Y. The operating results of the
company for 2001 follow:

Product X Product Y
Sales in units 2,000 3,000
Sales price per unit $10 $5
Variable costs per unit 7 3

In addition, the company incurred total fixed costs in the amount of $9,000.

109. How many total units would the company have needed to sell to breakeven in 2001?

a. 3,750
b. 750
c. 3,600
d. 1,800

110. If the company would have sold a total of 6,000 units in 2001, consistent with CVP
assumptions how many of those units would you expect to be Product Y?

a. 3,000
b. 4,000
c. 3,600
d. 3,500

111. How many units would the company have needed to sell in 2001 to produce a profit of
$12,000?

a. 8,750
b. 20,000
c. 10,000
Absorption/Variable Costing and Cost-Volume-Profit Analysis

d. 8,400

112. Below is an income statement for Jewell Co. for 2002:

Sales $ 300,000
Variable costs (150,000 )
Contribution margin $ 150,000
Fixed costs (100,000 )
Profit before taxes $ 50,000

What was the company’s margin of safety in 2002?

a. $50,000
b. $100,000
c. $150,000
d. $25,000

113. Below is an income statement for Jewell Co. for 2002:

Sales $ 300,000
Variable costs (150,000)
Contribution margin $ 150,000
Fixed costs (100,000)
Profit before taxes $ 50,000

If the unit sales price for Jewell’s sole product was $10, how many units would it have
needed to sell in 2002 to produce a profit of $40,000?

a. 27,500
b. 29,000
c. 28,000
d. can’t be determined from the information given

114. A firm estimates that it will sell 100,000 units of its sole product in the coming period. It
projects the sales price at $40 per unit, the CM ratio at 60 percent, and profit at $500,000.
What is the firm budgeting for fixed costs in the coming period?

a. $1,600,000
b. $2,400,000
c. $1,100,000
d. $1,900,000
Absorption/Variable Costing and Cost-Volume-Profit Analysis

115. Hat Co. manufactures a western-style hat that sells for $10 per unit. This is its sole product
and it has projected the break-even point at 50,000 units in the coming period. If fixed
costs are projected at $100,000, what is the projected contribution margin ratio?

a. 80 percent
b. 20 percent
c. 40 percent
d. 60 percent

116. Brando Co. manufactures little boxes of “bad attitudes.” Each box sells for $15. The firm’s
projected costs for 2002 are listed below:

Variable costs per unit:

Production $5
SG&A 1
Fixed costs:
Production $40,000
SG&A 60,000
Estimated volume 20,000 units

What is Brando’s projected margin of safety for 2002?

a. $133,333
b. $150,000
c. $80,000
d. $100,000

117. Brando Co. manufactures little boxes of “bad attitudes.” Each box sells for $15. The firm’s
projected costs for 2002 are listed below:

Variable costs per unit:

Production $5
SG&A 1
Fixed costs:
Production $40,000
SG&A 60,000
Estimated volume 20,000 units

What is Brando’s projected degree of operating leverage for 2002?

a. 2.25
b. 1.80
c. 3.75
d. 1.67

Use the following information for questions 118–120.

Below are income statements that apply to three companies: A, B, and C:

Company A Company B Company C

Sales $100 $100 $100
Variable costs (10) (20) (30)
Contribution margin $90 $80 $70
Fixed costs (30) (20) (10 )
Profit before taxes $ 60 $ 60 $ 60

118. Within the relevant range, if sales go up by $1 for each firm, which firm will experience the
greatest increase in profit?

a. Company A
b. Company B
c. Company C
d. can’t be determined from the information given
Absorption/Variable Costing and Cost-Volume-Profit Analysis

119. Within the relevant range, if sales go up by one unit for each firm, which firm will
experience the greatest increase in net income?

a. Company A
b. Company B
c. Company C
d. can’t be determined from the information given

120. At sales of $100, which firm has the highest margin of safety?

a. Company A
b. Company B
c. Company C
d. They all have the same margin of safety.

121. Alan is interested in entering the catfish farming business. He estimates if he enters this
business, his fixed costs would be $50,000 per year and his variable costs would equal 30
percent of sales. If each catfish sells for $2, how many catfish would Alan need to sell to
generate a profit that is equal to 10 percent of sales?

a. 40,000
b. 41,667
c. 35,000
d. No level of sales can generate a 10 percent net return on sales.

122. The following information pertains to Nova Co.’s cost-volume-profit relationships:

Break-even point in units sold 1,000

Variable costs per unit $500
Total fixed costs $150,000

How much will be contributed to profit before taxes by the 1,001st unit sold?

a. $650
b. $500
c. $150
d. $0

123. Information concerning Label Corporation’s Product A follows:

Sales $300,000
Variable costs 240,000
Fixed costs 40,000

Assuming that Label increased sales of Product A by 20 percent, what should the profit
from Product A be?

a. $20,000
b. $24,000
c. $32,000
d. $80,000

124. Lindsay Company reported the following results from sales of 5,000 units of Product A for
June:

Sales $200,000
Variable costs (120,000)
Fixed costs (60,000 )
Operating income $ 20,000

Assume that Lindsay increases the selling price of Product A by 10 percent in July. How
many units of Product A would have to be sold in July to generate an operating income of
$20,000?

a. 4,000
b. 4,300
c. 4,500
d. 5,000
Absorption/Variable Costing and Cost-Volume-Profit Analysis

125. On a break-even chart, the break-even point is located at the point where the total

a. revenue line crosses the total fixed cost line.

b. revenue line crosses the total contribution margin line.
c. fixed cost line intersects the total variable cost line.
d. revenue line crosses the total cost line.

126. In a CVP graph, the slope of the total revenue line indicates the

a. rate at which profit changes as volume changes.

b. rate at which the contribution margin changes as volume changes.
c. ratio of increase of total fixed costs.
d. total costs per unit.

127. In a CVP graph, the area between the total cost line and the total revenue line represents
total

a. contribution margin.
b. variable costs.
c. fixed costs.
d. profit.

128. In a CVP graph, the area between the total cost line and the total fixed cost line yields the

a. fixed costs per unit.

b. total variable costs.
c. profit.
d. contribution margin.

129. If SAB Company’s fixed costs were to increase, the effect on a profit-volume graph would
be that the

a. contribution margin line would shift upward parallel to the present line.
b. contribution margin line would shift downward parallel to the present line.
c. slope of the contribution margin line would be more pronounced (steeper).
d. slope of the contribution margin line would be less pronounced (flatter).

130. If SAB Company’s variable costs per unit were to increase but its unit selling price stays
constant, the effect on a profit-volume graph would be that the

a. contribution margin line would shift upward parallel to the present line.
b. contribution margin line would shift downward parallel to the present line.
c. slope of the contribution margin line would be pronounced (steeper).
d. slope of the contribution margin line would be less pronounced (flatter).

131. The most useful information derived from a cost-volume-profit chart is the

a. amount of sales revenue needed to cover enterprise variable costs.

b. amount of sales revenue needed to cover enterprise fixed costs.
c. relationship among revenues, variable costs, and fixed costs at various levels of
activity.
d. volume or output level at which the enterprise breaks even.