Vanderbeck 17e Chapter 10 Test Bank 2

CHAPTER 10: COST ANALYSIS FOR MANAGEMENT DECISION MAKING
1. Which of the following is a more descriptive term of the type of cost accounting often called "variable costing"?
a. Prime costing
b. Out-of-pocket costing
c. Direct costing
d. Relevant costing
ANSWER: c
RATIONALE: Variable costing may be considered a more descriptive term than direct costing because
only the variable costs are used to determine a product's cost.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: PRIN.EDWA.16.71 - LO 10-1
ACCREDITING STANDARDS: AACSB Analytic
ACCT.AICPA.FN.03 - Measurement
BUSPROG.03 - Analytic
IMA-Cost Management
OTHER: Bloom's: Remembering
2. What costs are treated as product costs under direct costing?

a. Only direct costs
b. Only variable manufacturing costs
c. All variable costs
d. All variable and fixed manufacturing costs
ANSWER: b
RATIONALE: Only variable production costs are treated as product costs in direct or variable costing.
Although all variable costs are subtracted from sales in order to determine the
contribution margin, only those variable costs related to the manufacturing process are
allocated to the products.
POINTS: 1
DIFFICULTY: Moderate
ACCREDITING STANDARDS: AACSB Reflective Thinking
BUSPROG.06 - Reflective Thinking
IMA-Cost Management
3. The basic assumption made in a variable costing system with respect to fixed costs is that all fixed costs are:
a. Sunk costs.
b. Product costs.
c. Fixed as to the total cost.
d. Period costs.
ANSWER: d
RATIONALE: The variable costing method assigns all fixed costs to the period in which they originated;
therefore, they are all classified as period costs.
POINTS: 1
DIFFICULTY: Easy
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IMA-Cost Management
OTHER: Bloom's: Understanding
4. Fortran Industries produces burner elements for stoves. Each element sells for $20, and the company sells
approximately 2,000,000 elements each year. Unit cost data for the year follows:
Direct material $5.00
Direct labor 3.00
Other costs: Variable Fixed

Manufacturing $2.50 $5.00
Distribution 1.50 1.00
The unit cost of an element for variable costing inventory purposes is:
a. $15.50
b. $12.00
c. $10.50
d. $7.00
ANSWER: c
RATIONALE: Under variable costing, only variable manufacturing costs are assigned to the product.
These costs include:
Direct materials $5.00
Direct labor 3.00
Variable manufacturing cost 2.50
Total variable costs $10.50
POINTS: 1
IMA-Cost Management
OTHER: Bloom's: Applying
5. Mobile, Inc., manufactured 700 units of Product A, a new product, during the year. Product A's variable and fixed
manufacturing costs per unit were $6.00 and $2.00, respectively. The inventory of Product A on December 31 of the year
consisted of 100 units. There was no inventory of Product A on January 1 of the year. What would be the change in the
dollar amount of inventory on December 31 if variable costing were used instead of absorption costing?
a. $800 decrease
b. $200 decrease
c. $600 decrease
d. $200 increase
ANSWER: b
RATIONALE: Ending inventory under absorption costing (100 units x $8) $800 Ending inventory under
variable costing (100 units x $5) 600 $200

POINTS: 1
IMA-Cost Management
6. Which of the following is true about absorption costing?

a. No fixed factory overhead is charged to production.
b. It is also known as direct costing.
c. The term used to designate the difference between sales and cost of goods sold is the “manufacturing margin.”
d. Overapplied factory overhead is reflected in the income statement as a reduction cost of goods sold.
ANSWER: d
RATIONALE: Overapplied factory overhead occurs only with absorption costing. Choices a, b and c are
characteristics of variable costing.
POINTS: 1
DIFFICULTY: Challenging
IMA-Cost Management
7. Which of the following does not appear on an income statement prepared using variable costing?
a. Gross margin/profit.
b. Manufacturing margin
c. Fixed production costs.
d. Variable production costs.
ANSWER: a
RATIONALE: The term commonly used in variable costing to designate the difference between sales
and variable cost of goods sold is manufacturing margin. It is a absorption costing
statement that would be expected to show gross margin/profit.
POINTS: 1
IMA-Cost Management
8. On a variable costing income statement, the difference between sales and variable cost of goods sold is called:
a. gross margin.
b. contribution margin.
c. profit margin.
d. manufacturing margin.
ANSWER: d
RATIONALE: On a variable costing income statement, the difference between sales and variable cost
of goods sold is called manufacturing margin.
POINTS: 1
DIFFICULTY: Easy
IMA-Cost Management
9. 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
only direct costs.
b. Absorption costing "inventories" all direct costs, but variable costing considers direct costs to be period costs.
c. Absorption costing "inventories" all fixed manufacturing costs for the period in ending finished goods
inventory, but variable costing expenses all fixed costs.
d. Absorption costing allocates fixed manufacturing costs between cost of goods sold and inventories, and
variable costing considers all fixed costs to be period costs.
ANSWER: d
RATIONALE: Absorption costing considers fixed manufacturing costs to be an essential element of cost
in producing a product; therefore, fixed manufacturing costs are allocated to the
inventories and cost of goods sold. However, when variable costing is used, all fixed
costs for a given period are charged only to that period.
POINTS: 1
IMA-Cost Management
10. Net income reported under variable costing will exceed net income reported under absorption costing for a given
period if:
a. Production equals sales for that period.
b. Production exceeds sales for that period.
c. Sales exceed production for that period.
d. The variable overhead exceeds the fixed overhead.
ANSWER: c
RATIONALE: When production exceeds sales under the absorption cost method, the unsold (ending)
inventory contains part of the fixed cost of the period which, along with other inventory
costs, are deferred to the next period. Under the variable costing method, all fixed costs
are charged to the current period. Therefore, when production exceeds sales and results
in unsold inventory, net income reported under absorption costing will exceed the net
income reported under variable costing for the period. Alternatively, when sales exceed
production, fixed costs for prior periods are included in cost of goods sold which results in
lower net income than variable costing.
POINTS: 1
IMA-Cost Management
OTHER: Bloom's: Analyzing
11. A manager can increase income under absorption costing by

a. increasing variable costs.
b. increasing production.
c. increasing fixed costs.
d. increasing leased assets.
ANSWER: b
RATIONALE: By increasing production, the fixed costs are absorbed by more units. This lowers the cost
per unit and thus increases income.
POINTS: 1
IMA-Cost Management
12. The use of either absorption or variable costing will make little difference in companies
a. with large inventories.
b. using JIT.
c. with high fixed costs.
d. with high variable costs.
ANSWER: b
RATIONALE: If JIT or just-in-time is used then inventories levels are minimized. Absorption and
variable cost would have nearly identical results as no costs are deferred in inventories.
POINTS: 1
IMA-Cost Management

13. A basic tenet of variable costing is that fixed overhead costs should be currently expensed. What is the basic rationale
behind this procedure?
a. Fixed overhead costs will occur whether or not production occurs and so it presents a clearer picture of how
changes in production volume affect costs and income.
b. Fixed overhead costs are generally immaterial in amount and the cost of assigning the amounts to specific
products would outweigh the benefits.
c. Allocation of fixed overhead costs is arbitrary at best and could lead to erroneous decisions by management.
d. Fixed overhead costs are uncontrollable and should not be charged to a specific product.
ANSWER: a
RATIONALE: Variable costing assumes that the category of costs defined as fixed costs will occur with
or without production and should be charged as expenses in the period in which they are
incurred as a current cost. It highlights the relationship between sales and variable
production costs thus providing a clearer picture of how changes in production volume
affect costs and income.
POINTS: 1
IMA-Cost Management
14. Absorption cost is required for:

a. income tax purposes.
b. external financial reporting but not income tax purposes.
c. both external financial reporting and income tax purposes.
d. neither external financial reporting nor income tax purposes.
ANSWER: c
RATIONALE: Although variable costing may provide useful information for internal decision making, it is
not a generally accepted accounting method of reporting inventory for external financial
statements nor is it permitted by the Internal Revenue Service to compute taxable
income.
POINTS: 1
DIFFICULTY: Easy
IMA-Reporting
15. Segment profitability analysis may be used to evaluate the profitability of:
a. Divisions.
b. Sales territories.
c. Product lines.
d. All of these are correct.

ANSWER: d
RATIONALE: Segment profitability analysis may be used to evaluate the profitability of divisions, sales
territories, product lines, or other identifiable organizational unit.
POINTS: 1
DIFFICULTY: Easy
IMA-Performance Measurement
16. When evaluating profitability of a segment, costs that are directly identifiable with a specific segment are called:
a. Direct costs.
b. Common costs.
c. Indirect costs.
d. Fixed costs.
ANSWER: a
RATIONALE: Direct costs are costs, variable or fixed, that are directly identifiable with a specific
segment, so they would disappear if that segment was eliminated.
POINTS: 1
DIFFICULTY: Easy
17. When evaluating profitability of a segment, costs that would disappear if the company eliminated the segment are
called:
a. Direct costs.
b. Common costs.
c. Indirect costs.
d. Fixed costs.
ANSWER: a
RATIONALE: Direct costs are costs, variable or fixed, that are directly identifiable with a specific
segment, so they would disappear if that segment was eliminated.
POINTS: 1

18. The excess of revenue over variable costs, including manufacturing, selling and administrative costs, is called:
a. Gross margin.
b. Manufacturing margin.
c. Contribution margin.
d. Segment margin.
ANSWER: c
RATIONALE: Contribution margin is defined as sales less variable costs.
POINTS: 1
DIFFICULTY: Easy
19. Johns Company operates in three different industries each of which is appropriately regarded as a reportable
segment. Segment No. 1 contributed 60 percent of Johns Company's total sales. Sales for Segment No. 1 were $500,000
and total variable costs were $400,000. Total common costs for all segments were $320,000. Johns allocates common
costs based on the ratio of each segment's sales to the total sales. What should be the contribution margin presented for
Segment No. 1?
a. $(100,000)
b. $ 8,000
c. $ 20,000
d. $ 100,000
ANSWER: d
RATIONALE: Segment No. 1
Sales $500,000
Less variable costs 400,000
Contribution margin $100,000
POINTS: 1
20. Nolan Company has two segments: Audio and Video. Sales for the Audio Segment were $500,000, and variable
costs were 60% of sales. The Video Segment also had sales of $500,000, but variable costs were 60% of sales. Fixed
costs directly traceable to the Audio and Video segments were $150,000 and $120,000, respectively. Common fixed costs
of $200,000 were arbitrarily allocated equally to each segment.
What was the contribution margin of the Audio Segment.
a. $50,000
b. $300,000

c. $200,000
d. $150,000
ANSWER: c
RATIONALE: Sales $500,000
Variable costs (500,000 x 60%) 300,000
POINTS: 1
DIFFICULTY: Easy
21. Nolan Company has two segments: Audio and Video. Sales for the Audio Segment were $500,000, and variable
costs were 40% of sales. The Video Segment also had sales of $500,000, but variable costs were 60% of sales. Fixed
costs directly traceable to the Audio and Video segments were $150,000 and $120,000, respectively. Common fixed costs
of $200,000 were arbitrarily allocated equally to each segment.
What was the segment margin of the Video Segment?
a. $200,000
b. $ 80,000
c. $(20,000)
d. $ 150,000
ANSWER: b
RATIONALE: Sales $500,000
Variable costs (500,000 x 60%) 300,000
Contribution margin 200,000
Direct fixed costs 120,000
Segment margin $ 80,000
POINTS: 1
22. Consider the Marshall Company’s segment analysis:

Division A Division B Total Company
Sales $300,000 $200,000 $500,000
Variable costs 150,000 150,000 300,000
Contribution margin 150,000 50,000 200,000
Direct fixed costs 50,000 30,000 80,000
Segment margin 100,000 20,000 120,000
Allocated common fixed costs 90,000 60,000 150,000
Operating income (loss) $ 10,000 $(40,000) $(30,000)
Common costs are allocated based on sales dollars. If Marshall eliminates Segment B, what is the impact on the operating
loss of the company?
a. The loss decreases by $40,000.
b. The loss increases by $20,000.
c. The loss decreases by $60,000.
d. The loss increases by $40,000.
ANSWER: b
RATIONALE: Since the common costs are arbitrarily allocated, a more appropriate segment analysis
follows:
Division A Division B Total Company
Sales $300,000 $200,000 $500,000
Variable costs 150,000 150,000 300,000
Direct fixed costs 50,000 30,000 80,000
Segment margin 100,000 20,000 120,000
Common fixed costs - - 150,000
Operating income (loss) $100,000 $ 20,000 $(30,000)
It is apparent from this analysis, that the company would lose $20,000 of profits.
POINTS: 1
IMA-Decision Analysis
OTHER: Bloom's: Evaluating
23. A technique that uses the degrees of cost variability to measure the effect of changes in volume on resulting profits is:
a. Standard costing.
b. Variance analysis.
c. Cost-volume-profit analysis.
d. Segment profitability analysis.
ANSWER: c
RATIONALE: Cost-volume-profit analysis uses the degrees of cost variability to measure the effect of
changes in volume on profitability.
POINTS: 1
DIFFICULTY: Easy
24. If the selling price and the variable cost per unit both increase 10 percent and fixed costs do not change, what is the
effect on the contribution margin per unit and the contribution margin ratio?

a. Contribution margin per unit and the contribution margin ratio both remain unchanged.
b. Contribution margin per unit and the contribution margin ratio both increase.
c. Contribution margin per unit increases and the contribution margin ratio decreases.
d. Contribution margin per unit increases and the contribution ratio remains unchanged.
ANSWER: d
RATIONALE: If the selling price is originally greater than the variable cost and they both increase by
the same percentage, the absolute increase in selling price will be greater than the
variable cost increase. Therefore, the contribution margin will be increased. If the relative
increase in both items is the same, the ratio measuring them will not be affected. To
prove this numerically, assume sales are $10 and variable costs are $5. A 10% increase
will make sales $11 and variable costs $5.50. Original Example With 10% Increase
Contribution margin $10 - $5 = $5 $11 - $5.50 = $5.50
Contribution margin ratio $5 / $10 = 50% $5.50 / $11 = 50%
POINTS: 1
25. The Company is planning to sell Product Z for $20 a unit. Variable costs are $12 a unit and fixed costs are
$100,000. What must total sales be to break even?
a. $266,667
b. $250,000
c. $200,000
d. $166,667
ANSWER b
:
RATION Selling price $20.00 100%
ALE: Variable costs 12.00 60%
Contribution margin $ 8.00 40%
Break-even sales Fixed cost
=
volume Contribution margin ratio
$100,000
=
.40
= $250,000
POINTS: 1
DIFFICU Moderate
LTY:
LEARNIN PRIN.EDWA.16.74 - LO 10-4
G OBJEC
TIVES:
ACCRED AACSB Analytic
ITING ST ACCT.AICPA.FN.03 - Measurement

ANDARD BUSPROG.03 - Analytic
S: IMA-Decision Analysis
26. Consider the income statement for Bayless Company:

Sales $400,000
Variable costs 325,000
Fixed costs 30,000
Net income $ 45,000
What is the break-even point in sales dollars (rounded to the nearest dollar)?
a. $264,063
b. $92,308
c. $160,000
d. $240,000
ANSWER: c
RATIONALE: Break-even point in dollars = Fixed cost / contribution margin ratio Break-even point =
$30,000 / ($75,000/$400,000) Break-even point = $30,000 / 18.75% = $160,000
POINTS: 1
27. Chase Company’s new product is expected to have a sales price of $15 and variable unit price of $7. Fixed costs are
expected to be $560,000. What is the break-even point in sales dollars?
a. $840,000
b. $1,050,000
c. $560,000
d. $1,200,000
ANSWER: b
RATIONALE: Sales price per unit $15
Variable cost per unit 7
Contribution margin per unit $8
Contribution margin ratio = Contribution margin / sales = 8 / 15 = 53.33% Break-even
point in sales dollars = Fixed cost / contribution margin ratio Break-even point in sales
dollars = $560,000 / 53.33% = $1,050,000
POINTS: 1
28. Break-even sales volume in units is determined by:

a. Dividing the fixed cost by the difference between the unit selling price and unit variable costs.
b. Subtracting the fixed cost from the contribution margin.
c. Dividing the fixed cost by the unit selling price.
d. Subtracting the variable cost per unit from the unit selling price.
ANSWER: a
RATIONALE: Break-even sales volume = fixed costs / (unit selling price - unit variable cost)
POINTS: 1
DIFFICULTY: Easy
29. Consider the following information for the Cornwall Company:

Sales price per unit $ 130
Total fixed costs 840,000
How many units must Cornwall sell to break even?
a. 7,000
b. 16,800
c. 12,000
d. 8,400
ANSWER: b
Contribution margin per unit $ 50
Break-even point in units = Fixed cost / Contribution margin per unit Break-even point in
units = 840,000 / 50 = 16,800
POINTS: 1
30. 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 $10.00. The selling price for a tickets $30.00. The Blue Saints Band has sold
23,000 tickets so far.
How many tickets does the Blue Saints Band need to sell to break even?
a. 23,000
b. 20,000
c. 14,000
d. 17,500
ANSWER: d
RATIONALE: Break-even sales volume (units) = Fixed cost / Unit contribution margin Break-even sales
volume = $350,000 / ($30 - $10) = 17,500 tickets.
POINTS: 1
31. Chase Company’s new product is expected to have a sales price of $16 and variable unit price of $8. Fixed costs are
expected to be $560,000. What is the break-even point in units?
a. 56,000
b. 70,000
c. 37,333
d. 80,000
ANSWER: b
Break-even point in units = Fixed cost / contribution margin per unit Break-even point in
units = $560,000 / $8 = 70,000
POINTS: 1
32. Consider the following information for the Dehning Company:

Sales price per unit $ 130
Total fixed costs 840,000
What are Dehning's variable costs at the break-even point?
a. $490,000
b. $1,344,000
c. $840,000
d. $588,000
ANSWER: b
Contribution margin per unit $ 50
Break-even point in units = Fixed cost / Contribution margin per unit Break-even point in
units = 840,000 / 50 = 16,800 16,800 units x $80 = $1,344,000
POINTS: 1
33. Queen, Ltd. has one product. Its sales price and variable cost per unit are $25 and $20, respectively. Last year, Queen
sold 25,000 units, which was 5,000 more than the break-even point. What were Queen’s fixed expenses?
a. $100,000
b. $125,000
c. $300,000
d. There is not enough information to answer the question.
ANSWER: a
At the break-even point, the total contribution margin is equal to fixed costs. (25,000 -
5,000) x $5 = $100,000
POINTS: 1
34. Each of the following would affect the break-even point except a change in the:
a. Variable cost per unit.
b. Total fixed costs.
c. Sales price per unit.
d. Number of units sold.
ANSWER: d
RATIONALE: A change in the number of units sold will not have any effect on the determination of the
break-even point.
POINTS: 1
35. Tennenholtz Company’s break-even graph is depicted below. The line labeled “C” is:
a. The sales line.

b. The contribution margin line.
c. The total cost line.
d. The variable cost line.
ANSWER: a
RATIONALE: The upward slope line from the origin (0,0) represents total sales.
POINTS: 1
36. Tennenholtz Company’s break-even graph is depicted below. Which area indicates the break-even point?

a. E.
b. G.
c. A.
d. H.
ANSWER: c
RATIONALE: The area labeled “A” indicates the break-even point, the intersection of the revenue line,
labeled “C” and the total cost line, which is labeled “D.”
POINTS: 1
37. Franklin Company is a medium-sized manufacturer of bicycles. During the year a new line called "Radical" was made
available to Franklin's customers. The break-even point for sales of Radical is $250,000 with a contribution margin ratio
of 40 percent. Assuming that the profit for the Radical line during the year amounted to $80,000, total sales during the
year would have amounted to:
a. $450,000.
b. $420,000.
c. $400,000.
d. $475,000.
ANSWER: a
RATIONALE: Break-even sales $250,000
Contribution margin ratio x 40%
Calculated fixed cost (must equal contribution margin to 100,000
break-even
Net income $ -0-
Sales to make $80,000 profit:
.60S + $100,000 (fixed) + $80,000
Sales =
(profit)
.40S = $100,000 + $80,000
S = $180,000 .40
S = $450,000
POINTS: 1
38. Kehler Corporation wished to market a new product for $2.00 a unit. Fixed costs to manufacture this product are
$100,000. The contribution margin is 40 percent. How many units must be sold to realize net income of $100,000 from
this product?
a. 200,000
b. 250,000
c. 300,000
d. 350,000
ANSWER: b
RATIONALE: Selling price $ 2.00
Contribution margin x 40%
Contribution margin $ .80
Fixed cost $100,000

Net income 100,000
Total $200,000
Total $200,000 / $.80 = 250,000 units
POINTS: 1
ACCT.AICPA.BB.07 - Critical Thinking
How many tickets does the Blue Saints Band need to sell to achieve net income of $75,000.

a. 21,250
b. 14,000
c. 17,500
d. 17,000
ANSWER: a
RATIONALE: Target volume (units) = (Fixed cost + target net income) / Unit contribution margin.
Target volume = $350,000 + $75,000 / ($25 - $5) Target volume = $425,000 / $20 =
21,250 tickets
POINTS: 1
40. Consider the income statement for Pickbury Farm:

Sales $500,000
Fixed costs 80,000
Net income $ 70,000
At what sales level does Pickbury achieve net income of $200,000?

a. $700,000
b. $933,333
c. $300,000
d. $666,666
ANSWER: b
RATIONALE: Target sales volume = (Fixed cost + Target profit) / contribution margin ratio Target sales
volume = ($80,000 + $200,000) / ($150,000/$500,000) Target sales volume = $280,000 /
30% = $933,333
POINTS: 1
41. If the fixed costs related to a product increase while variable costs and sales price remain constant, what will happen to
(1) contribution margin and (2) break-even point?
Contribution Break-even
Margin Point
a. Unchanged Unchanged

b. Unchanged Increase
c. Increase Decrease
d. Decrease Increase
ANSWER: b
RATIONALE: The contribution margin is determined using only variable costs and is unaffected by fixed
costs. The fixed cost increase, however, will require more sales to break even. To prove
numerically, assume that the sales price is $10 per unit and variable costs are $5 per
unit. The contribution margin of $10 - $5 = $5 does not change. However, if fixed costs
increase from $10,000 to $20,000, the break even point increases from 2,000 units
($10,000/$5) to 4,000 units ($20,000/$5).
POINTS: 1
42. Which of the following would cause the break-even point to change?
a. Sales volume increased.
b. Fixed costs increased due to addition to physical plant.
c. Total variable costs increased as a function of higher production.
d. Total production decreased.
ANSWER: b
RATIONALE: An increase in fixed cost will also increase the break-even point. Changes in production
levels will not impact the break-even point.
POINTS: 1
43. A company increased the selling price for its product from $1.00 to $1.20 a unit when total fixed costs increased from
$400,000 to $450,000 and variable cost per unit remained unchanged. How would these changes affect the break-even
point?
a. The break-even point in units would be increased.
b. The break-even point in units would be decreased.
c. The break-even point in units would remain unchanged.
d. The effect cannot be determined from the information given.
ANSWER: b
RATIONALE: The change in fixed cost from $400,000 to $450,000 represents an increase of 12.5
percent; therefore, if the contribution margin increases:
1. by more than 12.5 percent, the break-even point would decrease.
2. at 12.5 percent, the break-even point would be unchanged.
3. by less than 12.5 percent, the break-even point would increase.
The relative change in contribution margin is 20%; therefore, the effect of the change is a
decrease in the break-even point. To prove numerically, assume variable costs are $.20
per unit: Contribution Margin Break-even point in units
Selling price $1.00; fixed $400,000/ $.80 = 500,000
$1.00 - $.20 = $.80
costs $400,000 units
Selling price $1.20; fixed $1.20 - $.20 = $450,000/ $1.00 =
costs $450,000 $1.00 450,000 units
POINTS: 1
44. The relative percentage of unit sales among the various products made by a firm is the:
a. sales volume.
b. sales margin.
c. sales mix.
d. sales ratio.
ANSWER: c
RATIONALE: The sales mix is the relative percentage of unit sales among the various products made
by a firm.
POINTS: 1
DIFFICULTY: Easy
45. Consider the following information about the Gumm Company:

Unit Sales Unit Variable
Budgeted Sales Price Cost
Mint gum 6,000 cases $5.00 $3.00
Bubble gum 4,000 cases $6.00 $3.50
Budgeted fixed costs are $550,000. The weighted-average unit contribution margin is:
a. $2.25
b. $3.25
c. $2.20
d. $2.30
ANSWER: c
RATIONALE: Number of units Unit CM Total
Mint gum (CM 5.00 - 2.00) 6,000 $2.00 $12,000
Bubble gum (CM 6.00 - 4,000 $2.50 10,000
3.50)
Total 10,000 $22,000
$22,000 / 10,000 units = $2.20 per case
POINTS: 1
46. Calico Corporation makes the following products:

Unit Contribution
Budgeted Sales Margin
Cotton cloth 1,500,000 yds. $.80
Wool cloth 1,000,000 yds. $.75
Budgeted fixed costs are $1,560,000. The break-even point in total yards is:
a. 2,000,000
b. 2,500,000
c. 1,950,000
d. 2,080,000
ANSWER: a
RATIONALE: Weighted-average contribution margin:
Number of
Unit CM Total
units
Cotton cloth 1,500,000 $.80 $1,200,000
Wool cloth 1,000,000 $.75 750,000
Total 2,500,000 $1,950,000
$1,950,000 / 2,500,000 units = $.78 per yard Break-even in units = fixed cost / weighted-
average contribution margin Break-even = $1,560,000 / $.78 = 2,000,000 yards
POINTS: 1
47. Consider the following information about the Gumm Company:

Unit Contribution
Budgeted Sales Margin
Mint gum 6,000 cases $2.00
Bubble gum 4,000 cases $2.50
Budgeted fixed costs are $550,000. The break-even number of cases for the mint gum is:
a. 250,000
b. 100,000
c. 132,000
d. 150,000
ANSWER: d
RATIONALE: Weighted-average contribution margin:
Number of
Unit CM Total
units
Mint gum 6,000 $2.00 $12,000
Bubble gum 4,000 $2.50 10,000
Total 10,000 $22,000
$22,000 / 10,000 units = $2.20 per case Break-even in units = fixed cost / weighted-
average contribution margin Break-even = $550,000 / $2.20 = 250,000 case 250,000
units x (6,000/10,000) = 150,000 cases of mint gum.
POINTS: 1
48. The margin of safety is the amount:

a. by which the sales price per unit exceeds the variable cost per unit.
b. that the contribution margin exceeds fixed cost.
c. by which the profit calculated under absorption costing exceeds the profit calculated under variable costing.
d. that sales can decrease before the company will suffer a loss.
ANSWER: d
RATIONALE: 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.
POINTS: 1
DIFFICULTY: Easy
49. A Company is planning to sell Product Z for $10 a unit. Variable costs are $6 a unit and fixed costs are $110,000. If
the company is currently selling 30,000 units, what is the margin of safety in units?
a. 2,500
b. 5,000
c. 27,500
d. 25,000
ANSWER a
:
RATION Selling price $10.00 100%
ALE: Variable costs 6.00 60%
Contribution margin $ 4.00 40%
Break-even in Fixed cost
=
units Contribution margin per unit
$110,000
=
$4.00
= 27,500
With sales volume of 30,000 units, the margin of safety would be 30,000 - 27,500 or 2,500 units.
POINTS: 1
DIFFICU Moderate
LTY:
LEARNIN PRIN.EDWA.16.75 - LO 10-5
G OBJEC
TIVES:
ACCRED AACSB Analytic
ITING ST ACCT.AICPA.FN.03 - Measurement
ANDARD BUSPROG.03 - Analytic
S: IMA-Decision Analysis
At the current level of sales, what is the margin of safety in dollars?
a. $162,500
b. $112,500
c. $180,000
d. $115,000
ANSWER: a
RATIONALE: 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 24,000 = $600,000 Margin of safety =
Sales revenue - break-even sales revenue Margin of safety = $600,000 - $437,500 =
$162,500
POINTS: 1
51. Consider the income statement for Pickbury Farm:

Sales $500,000
Fixed costs 80,000
Net income $ 70,000
What is the margin of safety ratio (to the nearest percentage point)?
a. 47%
b. 70%
c. 30%
d. 88%
ANSWER: a
RATIONALE: 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%
POINTS: 1
52. Spire Ridge Company produces bells. Fixed costs are $800,000. Variable costs per bell are $60.00, and each bell
sells for $100.00. The company’ sales budget calls for sales of 24,000 units.
At the budgeted level of sales, what is the margin of safety ratio?

a. 20.0%
b. 16.7%
c. 44.4%
d. 33.3%
ANSWER: b
RATIONALE: Break-even volume (dollars) = Fixed cost / Contribution margin ratio.
Break-even volume = $800,000 / ($100 - $60 / $100) Break-even volume = $800,000 /
40% = $2,000,000 Sales dollars at budgeted level = $100 x 24,000 = $2,400,000 Margin
of safety = Sales revenue - break-even sales revenue Margin of safety = $2,400,000 -
$2,000,000 = $400,000 Margin of safety ratio = Margin of safety / sales Margin of safety
ratio = $400,000 / $2,400,000 = 16.7%
POINTS: 1
53. The margin of safety ratio is equal to:

a. Net operating income percentage / Contribution margin ratio.
b. Contribution margin / Sales.
c. Contribution margin / Net operating income.
d. Margin of safety / Fixed cost.
ANSWER: a
RATIONALE: The margin of safety ratio can be calculated as: 1) Margin of safety / Sales, or 2) Net
operating income percentage / Contribution margin ratio.
POINTS: 1
54. Income taxes

a. will increase the break-even point.
b. will decrease the break-even point.
c. have no impact on the break-even point.
d. may increase or decrease the break-even point depending upon the income tax rate.
ANSWER: c
RATIONALE: The break-even point is the point where total revenues are equal to total expenses and
operating income is zero, which results in no income tax.
POINTS: 1
55. If a company has an income tax rate of 40% and fixed costs of $105,000, and wishes to earn an after-tax profit of
$150,000, what must its pre-tax income be?
a. $375,000
b. $425,000
c. $250,000
d. $175,000
ANSWER: c

RATIONALE: To earn an after-tax profit of $150,000, a company must earn a pretax profit of $250,000
($150,000 / (1 - .4)).
POINTS: 1
56. A company has fixed costs of $700,000. The selling price and variable cost per unit are $50.00, and $10.00,
respectively.
How many units does the company need to sell to achieve net income of $100,000 after income tax, assuming the income
tax rate is 50%?
a. 2,500
b. 18,000
c. 22,500
d. 17,500
ANSWER: c
RATIONALE: Target volume (units) = (Fixed cost + (target net income/(1 - tax rate)) / Unit contribution
margin.
Target volume = ($700,000 + ($100,000 / (1 - .5) / ($50 - $10) Target volume = $700,000
+ $200,000 / $40 = 22,500 tickets
POINTS: 1
57. A study that highlights the significant cost and revenue data between two alternatives is a(n):
a. cost analysis.
b. income analysis.
c. differential analysis.
d. distribution analysis.
ANSWER: c
RATIONALE: A study that highlights the significant cost and revenue data between two alternatives is a
differential analysis.
POINTS: 1
DIFFICULTY: Easy
58. 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:
a. Variable cost.
b. Differential cost.
c. Product cost.
d. Indirect cost.
ANSWER: b
RATIONALE: The difference in cost between two alternatives is the differential cost.
POINTS: 1
DIFFICULTY: Easy
59. 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:
Direct material $9.00
Direct labor 8.00
Other costs: Variable Fixed

Manufacturing $3.00 $7.00
Distribution 5.00 3.00
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:
a. $18.00.
b. $20.00.
c. $24.00.
d. $26.00.
ANSWER: d
RATIONALE: Direct materials $ 9.00
Direct labor 8.00
Variable manufacturing cost 3.00
Variable distribution cost 5.00
Increase in variable distribution costs 1.00
Total $26.00
The fixed manufacturing and distribution costs are irrelevant to the decision because they
are not changed by the 25,000 gear order.
POINTS: 1
60. 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:
Direct materials $ 5.00
Direct labor 3.00
Variable factory overhead 2.00
Fixed factory overhead 4.00
Total $14.00
The Army has offered to buy 10,000 windows for $12.00 each for barracks. Bradley should:
a. Reject the offer because it currently does not have enough capacity to accept the order.
b. Reject the order because the company will lose $20,000 on the order.
c. Accept the offer because the company will realize $20,000 in additional contribution margin.
d. Accept the offer because the company will realize $40,000 in additional contribution margin.
ANSWER: c
RATIONALE: Bradley has enough excess capacity to manufacture 20,000 additional units (100,000 x
(1 - .80). The relevant costs are:
Direct labor 3.00
Total $10.00
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).
POINTS: 1
61. 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:
Direct labor 3.00
Total $14.00
The Army has offered to buy 10,000 windows for $12.00 each for barracks. Bradley should:
a. Reject the offer because it currently does not have enough capacity to accept the order.

b. Reject the order because the company will lose $20,000 on the order.
c. Accept the offer because the company will realize $20,000 in additional contribution margin.
d. Accept the offer because the company will realize $40,000 in additional contribution margin.
ANSWER: a
RATIONALE: Bradley should reject the offer if it would have to displace orders for the windows that are
priced higher than $12.00.
POINTS: 1
62. The practice of accepting a selling price when there is excess capacity, as long as it exceeds variable cost is called:
a. Contribution pricing.
b. Differential pricing.
c. Capacity pricing.
d. Special pricing.
ANSWER: a
RATIONALE: 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.
POINTS: 1
DIFFICULTY: Easy
63. 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:

Direct labor 1.75
Factory overhead (70% fixed) 2.50
Total $6.50
The decision Chapman should make and the related differential income is:
Decision Differential Income
a. Buy from Graham $10,000
b. Make the assembly $10,000
c. Make the assembly $25,000
d. Buy from Graham $25,000
ANSWER: b
RATIONALE: The relevant cost of manufacturing the cord assembly:
Direct labor 1.75
Variable factory overhead (2.50
.75
x 30%)
Total $4.75
Number of assemblies 20,000
Cost to make assemblies $ 95,000
Cost to purchase assemblies

$105,000
(5.25 x 20,000)
Chapman should made the cord assembly. The differential income in making the
assemblies is $10,000 ($105,000 - $95,000).
POINTS: 1
64. 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:
Total Per Hour
Fixed factory overhead $40,000 $2.00
Variable factory overhead 50,000 2.50
$90,000 $4.50
Direct costs to manufacture 1,000 parts in-house would be:
Materials $ 6,000
Direct labor (2,000 @ $8 per hour) 16,000
$22,000
Factory overhead is applied on the basis
of direct labor hours.
The relevant unit cost Cleese should use to decide whether to make or buy the part is:
a. $31.00
b. $24.50
c. $27.00
d. $26.00
ANSWER: c
RATIONALE: Direct material ($6,000 / 1,000) $ 6.00
Direct labor (2* hours @ 8.00) 16.00
Variable factory overhead (2 hours @
5.00
2.50)
Total $27.00
* 2,000 hours / 1,000 units = 2 hours per unit.
POINTS: 1
65. Another term for cost incurred to sell and deliver products is:
a. Differential costs.
b. Administrative costs.
c. General costs.
d. Distribution costs.
ANSWER: d
RATIONALE: Another term for selling and delivery costs is distribution costs.
POINTS: 1
DIFFICULTY: Easy
IMA-Cost Management
66. Activity-based costing may be used to charge selling and administrative expenses to:
a. types of products sold.
b. sales offices.
c. sales persons.
d. All of the above.
ANSWER: d
RATIONALE: Activity-based costing may be used to charge selling and administrative expenses to
types of products sold, sales offices, sales persons or sales orders.
POINTS: 1
IMA-Cost Management
67. An example of a distribution cost that can be directly assigned to selling activity would be:
a. Advertising costs.
b. Commissions.
c. Sales manager’s salary.
d. Telephone expenses.
ANSWER: b
RATIONALE: Commissions would be directly linked to specific sales. The other costs are indirect costs
of selling.
POINTS: 1
IMA-Cost Management
68. 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:
a. Number of orders shipped.
b. Time spent packing orders.
c. Time devoted to selling each product.
d. Number of items per order.
ANSWER: c
RATIONALE: The time devoted to selling each product would not impact the cost for preparing the
orders for shipping.
POINTS: 1
IMA-Cost Management
69. Norman Industries began operations on January 1 and produces a single product that sells for $15.00 per
unit. Standard capacity is 50,000 units per year. During the year, 50,000 units were produced and 40,000 units were
sold. There was no inventory at the beginning of the year. Manufacturing costs and selling and administrative expenses
follow:
Fixed Costs Variable Costs
Raw materials -- $3.75 per unit produced
Direct labor -- 2.25 per unit produced
Factory overhead $120,000 2.00 per unit produced
Selling and administrative 80,000 1.00 per unit sold
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.
a. In presenting inventory on the balance sheet at December 31, what is the unit cost
under absorption costing?
b. In presenting inventory on the balance sheet at December 31, what is the unit cost
under variable costing?
c. What is the net income for the year under absorption costing?
d. What is the net income for the year under direct costing?
e. What is the cost of the ending inventory under absorption costing?
f. What is the cost of the ending inventory under variable costing?
ANSWER:
(a) Materials $ 3.75
Labor 2.25
Overhead--Fixed ($120,000 / 50,000) 2.40
Overhead--Variable 2.00
$10.40
(b) Materials $3.75

Direct labor 2.25
Overhead--Variable 2.00
$8.00
(c) Sales (40,000 × $15) $600,000

Cost of goods sold (40,000 × $10.40) $416,000
Under- or overapplied factory overhead* - 416,000
Gross profit $184,000
Selling and administrative [$80,000 + (40,000 x 120,000
$1.00)]
Net income $ 64,000
There is no under- or overapplied fixed factory

*
overhead
since actual the production level was equal to the
expected production level of standard capacity
(d) Sales $600,000

Cost of goods sold ($8.00 × 40,000) 320,000
Manufacturing margin $280,000
Fixed factory overhead $120,000
Selling and administrative 120,000 240,000
Net income $ 40,000
(e) Ending inventory is 10,000 units (50,000 - 40,000)

Inventory under absorption costing (10,000 x $10.40) $104,000
Inventory under variable costing (10,000 x $8.00) $ 80,000
POINTS: 1
ACCT.AICPA.FN.04 - Reporting
IMA-Cost Management
70. 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:

Direct labor 15.00
Variable factory overhead 10.00 $45.00
$57.00
Operating statistics for the month of August and September include:

August September
Units produced 4,200 4,000
Units sold 3,500 4,200
Selling and administrative expenses $25,000 $35,000
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
ANSWER:
The Tijama Manufacturing Co.
Income Statement
For the Month Ended August 31, 20--
(a) (b)
Absorption Direct
Costing Costing
Sales (3,500 units × $70) $245,000 $245,000
Cost of goods sold
(3,500 × $57; $199,500
3,500 × $45) 157,500
Subtract overapplied
fixed overhead 400* 199,100
Gross margin $ 45,900
Manufacturing margin $ 87,500
Fixed factory overhead $50,000
Selling & administrative
expenses 25,000 25,000 75,000
Net income (loss) $ 20,900 $ 12,500
* Calculation of underapplied fixed factory overhead:

Fixed overhead per year:
$12 per unit × 50,000 units = $600,000
Fixed overhead per month:
$600,000 / 12 months = 50,000
Fixed factory overhead applied to production:

4,200 units × $12 $50,400
Fixed overhead per month 50,000
Fixed factory overhead overapplied $ 400
The Tijama Manufacturing Co.

Income Statement
For the Month Ended September 30, 20--
(a) (b)
Absorption Direct
Costing Costing
Sales (4,200 $294,000 $294,000
units × $70)
Cost of goods
sold
(4,200 × $57) $239,400
(4,200 × $45) 189,000
Add
underapplied
fixed
overhead 2,000** 241,400
Gross margin $ 52,600
Contribution $105,000
margin
Fixed factory
$50,000
overhead
Selling &
administrative
expenses 35,000 35,000 85,000
Net income
$ 17,600 $ 20,000
(loss)
** Calculation of
underapplied fixed $48,000
factory overhead:
Fixed factory overhead
Fixed factory
applied to
overhead per 50,000
production (4,000 ×
month
$12)
Fixed factory overhead
$ 2,000
underapplied
POINTS: 1
ACCT.AICPA.FN.04 - Reporting
IMA-Cost Management
71. 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.

ANSWER:
Jasper Company
Segmented Income Statement
For the Month ended November 30, 20--
Standard Deluxe Total
Sales revenue $680,000 $520,000 $1,200,000
Less variable costs 476,000 312,000 788,000
Less direct fixed costs 125,000 160,000 285,000
Segment margin $ 79,000 $ 48,000 127,000
Less common fixed costs 100,000
Net income $ 27,000
POINTS: 1
72. The following data relate to a year's budgeted activity for Palisades Company, a single product company:
Per Unit
Selling price $16.00
Variable manufacturing costs 6.00
Variable selling costs 4.00
Fixed manufacturing costs (based on 120,000 units) 1.50
Fixed selling costs (based on 120,000 units) .50
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
$50,000?
c. If fixed costs increased $15,000, how many more units must be sold to break even?
ANSWER:
(a) Selling price per unit $ 16.00
Less variable cost per unit 10.00
Contribution margin $ 6.00
Fixed cost--manufacturing ($1.50 × 120,000 units) $180,000

Fixed cost--selling ($.50 × 120,000 units) 60,000
Total fixed costs $240,000
Fixed Costs $240,000

BE = = = 40,000 units
Contribution Margin $6
(b) Contribution margin ratio = $6 / $15 = 40%

Fixed Costs + Desired Income $240,000 + $50,000
= = $725,000
Contribution Margin Ratio .40
(c) $15,000 / $6.00 (contribution margin per unit) = 2,500 units

Palisades would have to sell 2,500 additional units to cover the additional
fixed cost.
POINTS: 1
73. A traditional break-even chart is illustrated below:
Identify each letter on the above chart, using the proper terminology.
ANSWER:
Lettered Lettered
Item in Item in
Break-even Break-even
Chart Terminology Chart Terminology
A Break-even point F Fixed cost line
B Net income area G Fixed cost area
C Sales line H Variable cost area
D Total cost line I x-axis (units)
E Net loss area J y-axis (dollars)
POINTS: 1
74. Tress Enterprises manufactures shampoo and conditioner. Last year, Tress sold 120,000 bottles of product. Unit sales
of conditioner amounted to 60% of the number of units of shampoo. This trend is expected to continue. The selling price
for both products is $12.00, however, the variable cost of a unit of shampoo is $6.00, while the variable cost of a unit of
conditioner is $8.00. Fixed costs are expected to be $420,000.

(a) Compute the quantity of each product sold.
(b) Compute the weighted-average contribution margin per unit.
(c) Compute the overall break-even point in units.
(d) Compute the unit sales of shampoo and conditioner at the break-even point.
(e) Compute the dollar sales of shampoo and conditioner at the break-even point.
ANSWER: (a) Total sales = shampoo sales + conditioner sales
120,000 = x + .6x
120,000 = 1.6x
x = 75,000 (shampoo sales)
Conditioner sales = .6 x 75,000 = 45,000
(b)
Contribution
Unit variable margin per Number of
Product Sales Price cost unit units Total
Shampoo $12.00 $6.00 $6.00 75,000 $450,000
Conditioner 12.00 8.00 4.00 45,000 180,000
120,000 $630,000
Weighted-average unit contribution margin = $630,000 / 120,000 = $5.25
(c) Break-even point in units $420,000 / $5.25 = 80,000 units.
(d) and (e)

Shampoo sales in units = 80,000 x (75,000 / 120,000) = 50,000 x $12 = $600,000
Conditioner sales = 80,000 x (45,000 / 120,000) = 30,000 x $12 = $360,000
POINTS: 1
75. The Gaylord Company has sales of $800,000, variable costs of $400,000, and fixed costs of $250,000.
Compute the following:

a. Contribution margin ratio
b. Break-even sales volume
c. Margin of safety ratio
d. Net income as a percentage of sales
ANSWER:
$800,000 -
Contribution margin
(a) = $400,000 = 50.0%
ratio
$800,000
Break-even sales $250,000

(b) = = $500,000
volume .50

$800,000 -
(c) Margin of safety ratio = $500,000 = 37.5%
$800,000
(d) Net income percentage = 50.0% × 37.5% = 18.75%

POINTS: 1
PRIN.EDWA.16.79 - 10-5
76. Fischer Company desires an after-tax income of $975,000. It has fixed costs of $480,000. Its only product sells for
$40 and has a variable cost per unit of $28. Fischer’s effective tax rate is 35%.
1. What amount of pre-tax income is needed to earn an after tax income of $975,000?
2. What target volume of sales revenue must be reached to earn $975,000 in after tax income?
3. How many units must be sold to earn after-tax income of $975,000?
4. What target volume of sales revenue would have been needed to achieve the $975,000 of income had no income tax
existed?
ANSWER: 1. $975,000 / (1 - .35) = $1,500,000
2.
Sales price per unit $40
Contribution margin ratio = $12 / $40 = 30%
Break-even sales volume = ($480,000 + $1,500,000) / 30% = $6,600,000
3. Break-even in units = ($480,000 + $1,500,000) / $12 = 165,000 or

Break-even sales volume = $6,600,000 / $40 = 165,000
4. ($480,000 + $975,000) / 30% = $4,850,000

POINTS: 1
PRIN.EDWA.16.80 - 10-6

77. Sherpa Manufacturing has the following income statement for 6,000 units:
Sales $600,000
Fixed costs 80,000
Net income $160,000
(a) At what sales volume (in sales dollars) does Sherpa break even?
(b) At what sales volume (in units) does Sherpa break even?
(c) Given the income statement above, compute the margin of safety.
(d) What level of sales volume must be attained to reach net income of $200,000?
(e) What level of sales volume must be attained to reach net income of $180,000, assuming Sherpa had to pay income
taxes at a rate of 40%?
ANSWER: (a) Contribution margin ratio = contribution margin / sales
Contribution margin ratio = $240,000 / $600,000 = 40%
Break-even point in sales dollars = fixed costs / contribution margin ratio

Break-even point in sales dollars = $80,000 / 40% = $200,000.
(b) Unit contribution margin = contribution margin / number of units

Unit contribution margin = $240,000 / 6,000 = $40 per unit
Break-even point in units = fixed costs / unit contribution margin

Break-even point in units = $80,000 / $40 = 2,000 units
(c) Margin of safety = sales revenues - break-even sales volume

Margin of safety = $600,000 - $200,000 = $400,000
(d) Target volume of sales = (target profit + fixed costs) / contribution margin ratio
Target volume of sales = ($200,000 + $80,000) / 40% = $700,000
(e) Target volume of sales = (fixed costs + (target after-tax income/(1 - tax rate))/
contribution margin ratio
Target volume of sales = ($80,000 + ($180,000/(1 - 40%) / 40%

Target volume of sales = (80,000 + 300,000) / 40% = $950,000
POINTS: 1
PRIN.EDWA.16.79 - 10-5
PRIN.EDWA.16.80 - 10-6
78. Westwood Gear, Inc., recently received a special order to manufacture 10,000 units for a Canadian company. This
order specified that the selling price per unit should not exceed $50. Since the order was received without the effort of the
sales department, no commission would be paid. However, an export handling charge of $5 per unit would be
incurred. Management anticipates that acceptance of the order will have no effect on other sales.
The company is now operating at 80 percent of capacity, or 80,000 units, and expects to continue at this level for the
coming year without the Canadian order. Unit costs based on estimated actual capacity for the coming year include:
Selling price $65.00
Expenses:
Direct labor 16.00
Sales commissions 5.00
Other marketing expenses (two-thirds variable) 3.00
General expenses (60% fixed) 5.00
Total $60.00
Prepare an analysis showing the effect on profits if the special order is accepted by the company. Based on your analysis,
should the order be filled, and why?
ANSWER:
Westwood Gear, Inc.
Effect of Special Order on Profits
Differential costs: Per Unit
Direct labor 16.00
Other marketing expenses 2.00
Export-handling charge 5.00
General expenses (40% variable) 2.00
Total $53.00
Differential selling price 50.00
Loss $ 3.00
Loss per unit × units sold = $3 × 10,000
= $30,000 decrease in profit
The order would be likely turned down if it affected normal customers, or it generated a
loss. In this case a loss was created. On the other hand, if this is a new market, and the
company can justify using this special order as a means to enter a new potentially
profitable market they may undertake the venture even if money is lost on the one order.
POINTS: 1
79. Charleston Ltd. manufactures school desks. The company’s forecasted income statement for the year, before any
special orders, is as follows:
Amount Per Unit
Sales $30,000 $20
Cost of goods sold 24,000 16
Gross profit 6,000 4
Selling expenses 4,500 3
Net operating income $ 1,500 $1
Fixed costs in the forecasted income statement are $13,500 in manufacturing and $2,700 in selling. The company has
capacity to produce 2,000 units, but has received a special order for 800 units at $15 from an overseas company, and
would have to replace some of its regular business to accept it. Charleston will incur an additional $3 per unit in shipping
should they accept the offer.
1. Calculate Charleston’s current contribution margin per unit.
2. Should Charleston accept the special order for 800 units?
3. Assume the special order had the same terms, but was for 300 units. Should Charleston accept it?
ANSWER: 1. The number of units per the forecasted income statement is $30,000 / $20 = 1,500.
Variable manufacturing costs = $24,000 - $13,500 = $10,500 / 1,500 units = $7.00 per
unit
Variable selling costs = $4,500 - $2,700 = $1,800 / 1,500 units = $1.20 per unit
Total variable cost per unit = $7.00 + $1.20 = $8.20

Contribution margin per unit = $20.00 - $8.20 = $11.80
2. Charleston should not accept the offer for 800 units if it must replace existing
business. The contribution margin for the special offer is $3.80. ($15.00 - ($8.20 +
$3.00)) Since Charleston is producing 1,500 and has capacity for 2,000, it would have to
replace 300 units of regular business, so it would give up contribution margin of $3,540
(300 x $11.80) on those sales to accommodate the order for 800 which would return
contribution margin of only $3,040 (800 x $3.80).
3. If Charleston does not have to replace existing business to fill the special order for 300
desks, it should do so as those desks would provide additional contribution margin of
$1,140 (300 x $3.80).
POINTS: 1
80. Busby Company needs 10,000 units of a certain part to use in its production cycle. The following information is
available:
Costs incurred by Busby to make the part:

Direct materials $15
Direct labor 12
Variable factory overhead 13
Fixed factory overhead 10
Total $50
Costs to buy the part from Thurco: $45

If Busby buys the part from Thurco instead of making it, Busby could not use the released facilities in another
manufacturing activity. However, twenty percent of the fixed overhead would be avoided because one of the supervisors
could be let go.
(a) In deciding whether to make or buy the part, what are the relevant costs that Busby must consider.
(b) What decision should Busby make?

ANSWER: (a) Variable costs to manufacture the product:
Direct materials $15
Direct labor 12
Variable factory overhead 13
$40
Cost to buy the part from Thurco $45

Savings from releasing the supervisor ( 2)
$43
(b) Based on the above analysis, Busby should continue to make the part.
POINTS: 1
81. Hoctor Industries wishes to determine the profitability of its products and asks the cost accountant to make a
comparative analysis of sales, cost of sales and distribution costs of each product for the year. The accountant gathers the
following information which will be useful in preparing the analysis:
Standard Deluxe
Number of units sold 500,000 350,000
Number of orders received 15,000 4,000
Selling price per unit $10 $20
Cost per unit $4 $12
Advertising expenses total $100,000, with 60% being expended to advertise the Deluxe model. The representatives
commissions are 5% and 7% for the standard and deluxe models, respectively. The sales manager’s salary of $50,000 is
allocated evenly between products. Other miscellaneous selling costs are estimated to be $6 per order received.
(a) Compute the selling cost per unit.

(b) Prepare an analysis for Hoctor Industries that will show in comparative form the income derived from the sale of each
unit for the year.
ANSWER: (a)
Expense Standard Deluxe Total
Selling expenses:
Advertising
$100,000 x 40% $ 40,000
$100,000 x 60% $ 60,000 $ 100,000
Commissions
500,000 x $10 x 5% 250,000
350,000 x $20 x 7% 490,000 740,000

Sales manager salary
$50,000 x 1/2 25,000
$50,000 x 1/2 25,000 50,000
Miscellaneous selling costs
15,000 x $6 90,000
4,000 x $6 24,000 114,000
Total selling costs $405,000 $599,000 $1,004,000
Number of units 500,000 350,000
Selling cost per unit $ .81 $1.71
(b)
Hoctor Industries
Comparative Income Analysis
For the Year Ended December 31, 20--
Standard Deluxe Total
Sales
500,000 x $10 $5,000,000
350,000 x $20 $7,000,000 $12,000,000
Manufacturing cost
500,000 x $4 2,000,000
350,000 x $12 4,200,000 6,200,000
Selling cost 405,000 599,000 1,004,000
Operating profit $2,595,000 $2,201,000 $4,796,000

POINTS: 1
IMA-Cost Management

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CHAPTER 10: COST ANALYSIS FOR MANAGEMENT DECISION MAKING

2. What costs are treated as product costs under direct costing?

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Other costs: Variable Fixed

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6. Which of the following is true about absorption costing?

11. A manager can increase income under absorption costing by

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14. Absorption cost is required for:

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22. Consider the Marshall Company’s segment analysis:

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26. Consider the income statement for Bayless Company:

28. Break-even sales volume in units is determined by:

29. Consider the following information for the Cornwall Company:

32. Consider the following information for the Dehning Company:

a. The sales line.

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.40S = $100,000 + $80,000

Fixed cost $100,000

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40. Consider the income statement for Pickbury Farm:

At what sales level does Pickbury achieve net income of $200,000?

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45. Consider the following information about the Gumm Company:

46. Calico Corporation makes the following products:

47. Consider the following information about the Gumm Company:

48. The margin of safety is the amount:

51. Consider the income statement for Pickbury Farm:

At the budgeted level of sales, what is the margin of safety ratio?

53. The margin of safety ratio is equal to:

54. Income taxes

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Other costs: Variable Fixed

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Chapman’s unit cost to manufacture the cord assembly is:

Cost to purchase assemblies

(b) Materials $3.75

(c) Sales (40,000 × $15) $600,000

There is no under- or overapplied fixed factory

(d) Sales $600,000

(e) Ending inventory is 10,000 units (50,000 - 40,000)

Inventory under variable costing (10,000 x $8.00) $ 80,000

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Operating statistics for the month of August and September include:

* Calculation of underapplied fixed factory overhead:

Fixed factory overhead applied to production:

The Tijama Manufacturing Co.

Prepare a segmented income statement for the month of November.

Fixed cost--manufacturing ($1.50 × 120,000 units) $180,000

Fixed Costs $240,000

(b) Contribution margin ratio = $6 / $15 = 40%

(c) $15,000 / $6.00 (contribution margin per unit) = 2,500 units

73. A traditional break-even chart is illustrated below:

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