Mark anthony t.

Conda
Managerial economics midterm exam 11-15-2023
1.The correct answer is B. Fixed costs dominate the cost structure. A high Degree of
Operating Leverage (DOL) means that a small change in sales will result in a large
change in operating income. This implies that the company has a high proportion of fixed
costs relative to variable costs.
2.The correct answer is C. CMU = 1.32: TSU = P42,552.63. To find the Total Sales Units (TSU)
needed to earn an after-tax net income, we can use the following formula:
TSU = (Total fixed costs + Desired profit before tax) / Contribution margin per unit.
Contribution margin per unit (CMU) is the difference between selling price per unit and variable
cost per unit. Desired profit before tax is the desired profit after tax divided by (1 - Income tax
rate).
CMU = 6.60 - 5.28 = 1.32 Desired profit before tax = 18,480 / (1 - 0.30) = 26,400 TSU =
(46,200 + 26,400) / 1.32 = 42,552.63
3. The correct answer is C. Quality assurance worker compensation in assembly. A step
variable cost is a cost that remains constant within a certain range of activity, but changes
by a lump sum when the activity changes outside that range. For example, if a quality
assurance worker can inspect up to 500 units per day, the worker’s compensation is a
fixed cost within that range. However, if the production increases to 600 units per day,
another worker needs to be hired, and the total compensation cost will increase by a lump
sum.
4. The correct answer is C. 40%. The Margin of Safety ratio is the percentage by which the
actual sales exceed the breakeven sales. It can be calculated by dividing the margin of
safety in dollars by the total sales. The margin of safety in dollars is the difference
between the total sales and the breakeven sales.
Margin of Safety ratio = (Total sales - Breakeven sales) / Total sales Margin of Safety ratio =
(200,000 - 120,000) / 200,000 Margin of Safety ratio = 0.40 or 40%
5. The correct answer is C. Linear Relationship Assumption. This assumption states that the
total variable costs change proportionally with the level of activity, and the total fixed
costs remain constant regardless of the level of activity. This implies a linear relationship
between the total costs and the activity level.
6. The correct answer is C. The company can withstand a 25% decrease in sales before
incurring a loss. The Margin of Safety ratio indicates how much sales can drop before the
company reaches the breakeven point, where the total revenue equals the total cost. A
higher ratio means that the company has a lower risk of operating at a loss.
7. The correct answer is B. The proportion of two or more products sold. The sales mix is
the relative proportion of each product sold by a company. For example, if a company
sells two products, A and B, and the sales mix is 2:3, it means that for every two units of
product A sold, three units of product B are sold. The sales mix affects the overall
contribution margin and the break-even point of a company.
8. The correct answer is D. Changes in income tax rates. The Break-Even Point (BEP) is the
level of sales where the total revenue equals the total cost. The BEP is affected by the
selling price per unit, the variable cost per unit, and the total fixed costs. Changes in any
 of these factors will change the BEP. However, changes in income tax rates do not affect
the BEP, because income tax is calculated after deducting the total cost from the total
revenue.
9. The correct answer is C. Skewed to the right with an upward slope. The total costs are
graphically depicted as a line that starts from the total fixed costs and slopes upward as
the activity level increases. The slope of the line is equal to the variable cost per unit. The
total costs are skewed to the right because they increase with the activity level.
10. The correct answer is B. Allocated cost per unit decreases until a new step is reached. A
step variable cost impacts the allocated cost per unit by making it decrease as the
production volume increases within a certain range. For example, if a quality assurance
worker can inspect up to 500 units per day, and the worker’s compensation is P1,000 per
day, the allocated cost per unit is P2 when 500 units are produced, but P1.67 when 600
units are produced. However, when the production volume exceeds the range, a new step
is reached, and the allocated cost per unit increases by a lump sum. For example, if
another worker is hired for P1,000 per day, the allocated cost per unit becomes P3.33
when 600 units are produced.
11. The correct answer is B. Variable. A company’s variable costs are the costs that change
in direct proportion to the changes in the production volume. For example, if the variable
cost per unit is P10, and the production volume increases from 100 units to 200 units, the
total variable cost will increase from P1,000 to P2,000.
12. The correct answer is D. Range Assumption. This assumption states that cost behavior
patterns are true only over a specified range of activity, called the relevant range. Within
the relevant range, the total variable costs change proportionally with the activity level,
and the total fixed costs remain constant. However, outside the relevant range, the cost
behavior patterns may change. For example, the variable cost per unit may increase due
to higher material prices, or the total fixed costs may increase due to additional capacity.
13. The correct answer is C. 6%. To calculate the expected change in profit, we can use the
Degree of Operating Leverage (DOL), which measures the sensitivity of operating
income to changes in sales. The DOL is calculated by dividing the contribution margin
by the operating income. The change in profit is equal to the DOL multiplied by the
percentage change in sales.
DOL = Contribution margin / Operating income Contribution margin = Total sales - Total
variable costs Operating income = Contribution margin - Total fixed costs DOL = (200,000 -
Total variable costs) / (200,000 - Total variable costs - 50,000)
We do not know the total variable costs, but we can use the contribution margin ratio, which is
the contribution margin divided by the total sales, to find the DOL. The contribution margin ratio
is given as 30%.
DOL = 0.30 / (0.30 - 50,000 / 200,000) DOL = 0.30 / 0.05 DOL = 6
Change in profit = DOL x Percentage change in sales Change in profit = 6 x 10% Change in
profit = 60%
The expected change in profit is 60%, which means that the profit will increase by 60% if the
sales increase by 10%.
 14. The correct answer is A. Weighted CM = 0.45: BEP in peso = P172,212.77. To find the break-even
point in peso for a company that sells two or more products, we can use the following formula:

BEP in peso = Total fixed costs / Weighted contribution margin ratio

The weighted contribution margin ratio is the weighted average of the contribution margin ratios
of each product, based on the sales mix. The contribution margin ratio of a product is the
contribution margin per unit divided by the selling price per unit.
Contribution margin ratio of product A = (Selling price per unit - Variable cost per unit) / Selling
price per unit Contribution margin ratio of product A = (6.60 - 5.28) / 6.60 Contribution margin
ratio of product A = 0.20
Contribution margin ratio of product B = (Selling price per unit - Variable cost per unit) / Selling
price per unit Contribution margin ratio of product B = (6.60 - 4.95) / 6.60 Contribution margin
ratio of product B = 0.25
Weighted contribution margin ratio = (Sales mix of product A x Contribution margin ratio of
product A) + (Sales mix of product B x Contribution margin ratio of product B) Weighted
contribution margin ratio = (2/5 x 0.20) + (3/5 x 0.25) Weighted contribution margin ratio = 0.08
+ 0.15 Weighted contribution margin ratio = 0.23
BEP in peso = Total fixed costs / Weighted contribution margin ratio BEP in peso = 80,000 /
0.23 BEP in peso = P347,826.09

15.The primary purpose of classifying costs according to function (manufacturing,

selling, and administrative) in the context of CVP-BEP analysis is d. To
identify variable and fixed costs. This is because CVP-BEP analysis requires
separating costs into variable and fixed components to calculate the
contribution margin, the break-even point, and the margin of safety.
16.The primary goal of sensitivity analysis in determining factors affecting profits
is b. Identify factors for improved overall company profitability. This is
because sensitivity analysis allows managers to examine how changes in
various factors, such as sales volume, price, costs, and product mix, affect the
profit level and identify the most critical and influential factors for improving
profitability.
17.A step variable cost is characterized by c. It only changes at discrete points
and involves large changes. This is because a step variable cost is a cost that
remains constant within a certain range of activity, but increases or decreases
by a large amount once the activity level exceeds or falls below a certain
threshold.
18.The concept of Economies of Scale relates to fixed costs per unit as follows: c.
Fixed costs per unit decrease as quantity increases. This is because
economies of scale refer to the cost advantages that a firm can achieve by
 increasing its scale of production, which allows it to spread its fixed costs over
a larger number of units, resulting in lower fixed costs per unit.
19.A company might choose to maintain a step fixed cost even when the activity
level declines below the lower threshold b. To preserve the associated
capacity for potential future increases in activity. This is because a step
fixed cost is a cost that does not change within a certain range of activity, but
will change when the activity level falls or rises beyond that range. By keeping
the step fixed cost, the company can avoid the cost and time of re-establishing
the capacity if the activity level rebounds in the future.
20.In the equation method for computing the Break-Even Point (BEP), “TR”
stands for a. Total Revenue. This is because the equation method for
computing the BEP is based on the equation TR = TC, where TR is the total
revenue, TC is the total cost, and both are expressed as functions of the quantity
sold. Solving for the quantity that makes TR equal to TC gives the BEP in
units.
21.If a company produces 5,000 smartphones at P22 per unit and incurs P12,000
in labor costs, the total variable costs are b. P125,000. This is because the total
variable costs are the sum of the variable costs per unit multiplied by the
number of units produced, plus any other variable costs that are not related to
the units produced. In this case, the variable cost per unit is P22, and the other
variable cost is P12,000 in labor costs. Therefore, the total variable costs are
(P22 x 5,000) + P12,000 = P125,000.
22.The Degree of Operating Leverage (DOL) measures a. The sensitivity of net
income to changes in sales. This is because the DOL is the ratio of the
percentage change in net income to the percentage change in sales, which
indicates how a given change in sales affects the net income. A higher DOL
means that a small change in sales will result in a large change in net income,
and vice versa.
23.Using the equation method, the Break-Even Point (BEP) in units for Latin
Company is d. 3,000 units. This is because the equation method for computing
the BEP is based on the equation TR = TC, where TR is the total revenue, TC
is the total cost, and both are expressed as functions of the quantity sold. In this
case, the selling price per unit is P40, the variable cost per unit is P4 + P1.6 +
P0.4 + P2 = P8, and the annual fixed cost is P96,000. Therefore, the equation
is:
TR = TC P40Q = P8Q + P96,000 P32Q = P96,000 Q = P96,000 / P32 Q = 3,000 units
24.According to the behavioral classification of costs, a mixed cost is c. A
combination of variable and fixed costs. This is because a mixed cost is a
cost that contains both a variable and a fixed component, which means that it
changes with the level of activity, but not in direct proportion. For example, a
 mixed cost could be the electricity bill for a factory, which consists of a fixed
monthly charge plus a variable charge based on the usage.
25.If a semi-variable cost has a fixed component of P3,000 and a variable
component of P2 per unit, the total cost for 10,000 units produced is c.
P25,000. This is because the total semi-variable cost is the sum of the fixed
component and the variable component multiplied by the number of units
produced. In this case, the total semi-variable cost is P3,000 + (P2 x 10,000) =
P25,000.
26.In a sensitivity analysis for a product, if the percentage change in output is 5%
and the percentage change in profit is 15%, the sensitivity measure is b. 3.0.
This is because the sensitivity measure is the ratio of the percentage change in
profit to the percentage change in output, which indicates how responsive the
profit is to changes in output. In this case, the sensitivity measure is 15% / 5%
= 3.0
27.The Degree of Operating Leverage (DOL) for Company ABC is c. 1.67. This is
because the DOL is the ratio of the contribution margin to the operating
income, which indicates how a given change in sales affects the operating
income. In this case, the contribution margin is P50,000, the operating income
is P30,000, and the DOL is P50,000 / P30,000 = 1.67.
28.The contribution margin for Bloom Company is a. P2,790. This is because the
contribution margin is the difference between the revenues and the variable
costs, which indicates how much each unit of sales contributes to covering the
fixed costs and generating profit. In this case, the revenues are P4,500, the
variable manufacturing costs are P900, the variable nonmanufacturing costs are
P810, and the contribution margin is P4,500 - P900 - P810 = P2,790.
29.A company can avoid incurring the large incremental cost of an additional
person in a step variable cost scenario by c. Offering overtime to existing
staff. This is because a step variable cost is a cost that remains constant within
a certain range of activity, but increases or decreases by a large amount once
the activity level exceeds or falls below a certain threshold. By offering
overtime to existing staff, the company can increase the output without hiring a
new person, which would result in a large increase in the step variable cost.
30.Scenario analysis differs from sensitivity analysis in that b. Scenario analysis
considers the impact of changing all variables simultaneously. This is
because scenario analysis is a technique that evaluates the effect of different
scenarios or situations on the outcome of a decision or a project, by changing
multiple variables at the same time and assessing the resulting changes in the
outcome. Sensitivity analysis, on the other hand, is a technique that measures
how sensitive the outcome is to changes in one variable at a time, while holding
all other variables constant.
31.The break-even point (BEP) in phones for Nokia Cellular is 105 phones. The
computation is as follows:
 Selling price per phone = P500
 Unit variable cost per phone = P150 + 14% of P500 = P220
 Contribution margin per phone = P500 - P220 = P280
 Fixed costs = P10,250 + P25,000 = P35,250
 BEP = Fixed costs / Contribution margin per phone
 BEP = P35,250 / P280
 BEP = 105.89 (rounded up to 105 phones)
32.The margin of safety indicates the reduction in sales before incurring a loss.
It is the difference between the actual sales and the break-even sales. A higher
margin of safety means that the company has more cushion to withstand a drop
in sales.
33.The factor affecting profit that refers to the combination of products a company
sells is sales mix. Sales mix is the proportion of each product line in the total
sales of the company. It affects the overall contribution margin and break-even
point of the company.
34.Total costs in a business are made up of both fixed and variable costs. Fixed
costs are costs that do not change with the level of output, such as rent, salaries,
and depreciation. Variable costs are costs that change with the level of output,
such as raw materials, labor, and commissions.
35.If a company’s margin of safety is negative, it indicates that sales are below
the break-even point. This means that the company is operating at a loss and
cannot cover its fixed costs.
36.The break-even point in cost-volume-profit (CVP) analysis is the point where
total revenues equal total costs. At this point, the company is neither making
a profit nor a loss. It is the minimum level of sales that the company needs to
achieve to avoid losses.
37.If the variable cost per unit is constant in the relevant range, its graph looks like
a horizontal line. This means that the variable cost per unit does not change
with the level of output within the range of normal operations.
38.The break-even point if a company has fixed costs of P345,420, variable costs
per unit of P27, and sells each unit for P53 is 13,285 units. The computation is
as follows:
 Contribution margin per unit = P53 - P27 = P26
 BEP = Fixed costs / Contribution margin per unit
 BEP = P345,420 / P26
 BEP = 13,285.38 (rounded up to 13,285 units)
39.A semi-variable cost is a cost that has both fixed and variable components.
For example, a telephone bill may have a fixed monthly charge plus a variable
 charge based on the number of calls made. Semi-variable costs can be split into
fixed and variable portions for CVP analysis.
40.The relevant range in cost behavior assumptions is the range within which
identified cost behavior patterns are valid. For example, if a company
assumes that its variable cost per unit is P10 within a range of output from
1,000 to 10,000 units, then the assumption is valid only within that range. If the
output goes beyond that range, the variable cost per unit may change due to
factors such as economies of scale, discounts, or inflation.
41.b. Accept the activity and incur the additional step fixed cost. This is
because the additional activity will generate more revenue than the
additional cost, and thus increase the profit margin.
42.c. It increases. This is because the total variable cost will increase by
more than the total revenue, and thus decrease the contribution margin
per unit.
43.b. The point where total revenues equal total costs This is the point where
the company neither makes a profit nor incurs a loss, and thus covers all
its expenses.
44.c. Fixed costs decrease per unit This is because the total fixed costs are
spread over more units of output, and thus reduce the average fixed cost
per unit.
45.a. Increase This is because product Y has a lower contribution margin per
unit than product X, and thus requires more sales to cover the fixed costs.
46.a. It simplifies calculations This is because it allows the use of a single
equation to estimate the profit or loss at different levels of activity,
without considering the changes in cost behavior.
47.b. Percentage change in output This is because sensitivity analysis
measures how the profit or loss changes when the output changes by a
certain percentage, holding other factors constant.
48.c. Horizontal line This is because the total fixed cost does not change
with the level of activity, and thus remains constant at any output.
49.d. P754,000 This is because the total costs are the sum of the fixed costs
and the variable costs, and thus equal to P500,000 + P254,000 =
P754,000.
50.c. Rent for the production facility This is because the rent for the
production facility does not vary with the level of activity, and thus is a
fixed cost.