Multiple Choice.

11. The distinction between direct and indirect costs

1. Which of the following defines variable cost depends on whether a cost
behavior? a. is controllable or non-controllable.
Total cost reaction Cost per unit reaction b. is variable or fixed.
to increase in activity to increase in activity c. can be conveniently and physically traced to a cost
a. remains constant remains constant object under consideration.
b. remains constant increases d. will increase with changes in levels of activity.
c. increases increases
d. increases remains constant 12. Which of the following costs would be considered
ANS: D overhead in the production of chocolate chip cookies?
2. The cost estimation method that gives the most a. flour b. chocolate chips c. sugar d. oven electricity
mathematically precise cost prediction equation is ANS: D
a. the high-low method. 13. Plastic used to manufacture dolls is a
b. the scatter-diagram method. prime cost product cost direct cost fixed cost
c. the contribution margin method. a. no yes yes yes
d. regression analysis b. yes no yes no
c. yes yes no yes
3. Which of the following would generally be d. yes yes yes no
considered a fixed factory overhead cost? ANS: D
Straight-line Factory Units-of-production 14. CVP analysis relies on the assumptions that costs
depreciation insurance depreciation are either strictly fixed or strictly variable. Consistent
a. no no no with these assumptions, as volume decreases total
b. yes no yes a. fixed costs decrease.
c. yes yes no b. variable costs remain constant.
d. no yes no c. costs decrease.
ANS: C d. costs remain constant.
4. A(n) ____ cost increases or decreases in intervals ANS: C
as activity changes. 15. CVP analysis is based on concepts from
a. historical cost c. step cost a. standard costing c. job order costing
b. fixed cost d. budgeted cost b. variable costing d. process costing
ANS: C ANS: B
5. When the number of units manufactured increases, 16.Cost-volume-profit analysis is a technique available
the most significant change in unit cost will be reflected to management to understand better the
as a(n) interrelationships of several factors that affect a firm's
a. increase in the fixed element. profit. As with many such techniques, the accountant
b. decrease in the variable element. oversimplifies the real world by making assumptions.
c. increase in the mixed element. Which of the following is not a major assumption
d. decrease in the fixed element. underlying CVP analysis?
ANS: D a. All costs incurred by a firm can be separated into
6. Which of the following is not a product cost their fixed and variable components.
component? b. The product selling price per unit is constant at all
a. rent on a factory building volume levels.
b. indirect production labor wages c. Operating efficiency and employee productivity are
c. janitorial supplies used in a factory constant at all volume levels.
d. commission on the sale of a product d. For multi-product situations, the sales mix can vary
ANS: D at all volume levels.
7. Period costs ANS: D
a. are expensed in the same period in which they are 17. Which of the following will decrease the break-
incurred. even point?
b. are always variable costs. Decrease in Increase in direct Increase in
c. remain unchanged over a given period of time. fixed cost labor cost selling price
d. are associated with the periodic inventory method. a. yes yes yes
ANS: A b. yes no yes
8. Period costs include c. yes no no
distribution outside sales d. no yes no
costs processing costs commissions ANS: B
a. yes no yes 18. At the break-even point, fixed costs are always
b. no yes yes a. less than the contribution margin.
c. no no no b. equal to the contribution margin.
d. yes yes yes c. more than the contribution margin.
ANS: A d. more than the variable cost.
9. Which of the following would need to be allocated to ANS: B
a cost object? 19. Break-even analysis assumes over the relevant
a. direct material c. direct production costs range that
b. direct labor d. indirect production costs a. total variable costs are linear.
ANS: D b. fixed costs per unit are constant.
10. Conversion cost does not include c. total variable costs are nonlinear.
a. direct labor. c. factory depreciation d. total revenue is nonlinear.
b. direct material. d. supervisors' salaries ANS: A
ANS: B
20. In a multiple-product firm, the product that has the c. inappropriate if a company has already
highest contribution margin per unit will established a target profit.
a. generate more profit for each P1 of sales than the d. used in decisions to offer a new product or enter
other products. a new market.
b. have the highest contribution margin ratio.
c. generate the most profit for each unit sold. 29. The following data have been collected for four
d. have the lowest variable costs per unit. different cost items.
Cost Item Cost at 100 units Cost at 140 units
21. On a break-even chart, the break-even point is W P8,000 P10,560
located at the point where the total X P5,000 P5,000
a. revenue line crosses the total fixed cost line. Y P6,500 P9,100
b. revenue line crosses the total contribution margin Z P6,700 P8,580
line. Which of the following classifications of these cost
c. fixed cost line intersects the total variable cost line. items by cost behavior is correct?
d. revenue line crosses the total cost line. Cost W Cost X Cost Y Cost Z
ANS: D a. variable fixed mixed variable
22. The most useful information derived from a cost- b. mixed fixed variable mixed
volume-profit chart is the c. variable fixed variable variable
a. amount of sales revenue needed to cover d. mixed fixed mixed mixed
enterprise variable costs. Answer: B
b. amount of sales revenue needed to cover 30.Which of the following methods of analyzing mixed
enterprise fixed costs. costs can be used to estimate an equation for the
c. relationship among revenues, variable costs, and mixed cost?
fixed costs at various levels of activity. High-Low Least- Squares
d. volume or output level at which the enterprise a. Yes Yes
breaks even. b. Yes No
ANS: C c. No Yes
23. The margin of safety would be negative if a d. No No
company('s) Answer: A Level: Easy LO: 2,5
a. was presently operating at a volume that is below 31. A multiple regression equation has:
the break-even point. a. more than one dependent variable.
b. present fixed costs were less than its contribution b. more than one independent variable.
margin. c. more than one amount for total fixed cost.
c. variable costs exceeded its fixed costs. d. both A and B above.
d. degree of operating leverage is greater than 100. Answer: B Level: Medium LO: 2,5
ANS: A 32. Monaco Corporation has provided the following
24. Management is considering replacing an existing production and average cost data for two levels of
sales commission compensation plan with a fixed monthly production volume. The company produces a
salary plan. If the change is adopted, the company's single product.
a. break-even point must increase. Production volume 7,000 units 8,000 units
b. margin of safety must decrease. Direct materials P87.40/unit P87.40 /unit
c. operating leverage must increase. Direct labor P20.20/ unit P20.20 / unit
d. profit must increase. Manufacturing overhead P101.50/ unit P90.80 /unit
ANS: C The best estimate of the total cost to manufacture
25. As projected net income increases the 7,300 units is closest to:
a. degree of operating leverage declines. a. P1,487,375 c. P1,500,750
b. margin of safety stays constant. b. P1,448,320 d. P1,526,430
c. break-even point goes down. Answer: C Level: Hard LO: 1,3
d. contribution margin ratio goes up. 33– 36 Below is an income statement for Calmer Co.:
ANS: A Sales P400,000
26.A managerial preference for a very low degree of Variable costs (125,000)
operating leverage might indicate that Contribution margin P275,000
a. an increase in sales volume is expected. Fixed costs (200,000)
b. a decrease in sales volume is expected. Profit before taxes P 75,000
c. the firm is very unprofitable. 33. What is Palmer’s degree of operating leverage?
d. the firm has very high fixed costs. a. 3.67 b. 5.33 c. 1.45 d. 2.67
ANS: B ANS: A $(275,000/75,000) = 3.67
c 27. Company A has a lower variable cost per unit 34. Based on the cost and revenue structure on the
and higher total fixed costs than Company B. The income statement, what was Palmer’s break-even
selling prices of their products are the same. Sales point in pesos?
fluctuate considerably for both companies. Therefore, a. P200,000 b. P325,000 c. P300,000 d. P290,909
a. Company A has a lower break-even point than ANS: D
Company B. CM Percentage = $(275/400) = .6875
b. Company A earns more profit than Company B. .6875x - $200,000 = 0 x = $290,909
c. Company A is more risky than Company B. 35. What was Palmer’s margin of safety?
d. Company A has a lower contribution margin P200,000 P75,000 P100,000 P109,091
percentage than Company B ANS: D
d 28. Target costing is Margin of Safety = $(400,000 - 290,909)
a. a substitute for CVP analysis. = $109,091
b. used by companies that cannot classify their
costs by behavior.
36. Assuming that the fixed costs are expected to = $72,000
remain at P200,000 for the coming year and the sales Contribution margin - fixed costs = Profit
price per unit and variable costs per unit are also $(72,000 - 40,000) = $32,000
expected to remain constant, how much profit before
taxes will be produced if the company anticipates sales 42. Ideal Company produces and sells a single
for the coming year rising to 130 percent of the current product. Information on its costs follow:
year’s level? Variable costs:
a. P97,500 b. P195,000 c. P157,500 SG&A P2 per unit
D A prediction cannot be made from the information Production P4 per unit
given. Fixed costs:
ANS: C SG&A P12,000 per year
Contribution Margin * 1.30 = New Contribution Margin Production P15,000 per year
$275,000 * 1.30 = $357,500 Assume Ideal Company produced and sold 5,000
Contribution Margin - Fixed Costs = Profit units. At this level of activity, it produced a profit of
$(357,500 - 200,000) = $157,500 P18,000. What was Ideal Company's sales price per
37. The following information relates to financial unit? a. P15.00 b. P11.40 c. P9.60 d. P10.00
projections of Ford Company: ANS: A
Projected sales 75,000 units Profit + Fixed Costs = Contribution Margin
Projected variable costs P3.00 per unit $18,000 + $27,000 = $45,000
Projected fixed costs P60,000 per year $45,000 / 5,000 units = $9 contribution margin per unit
Projected unit sales price P8.00 Contribution Margin + Variable Costs = Sales
38. How many units would Ford Company need to sell Price/Unit = $(9 + (4 + 2)) = $15/Unit
to earn a profit before taxes of P15,000? 43. Simmons Corporation's Product A follows:
a. 9,375 b. 12,000 c. 15,000 d. 37,500 Sales P400,000
ANS: C Variable costs 300,000
Contribution Margin per Unit: $5 Fixed costs 50,000
$5x = $60,000 + $15,000 Assuming that Simmons increased sales of Product A
$5x = $75,000 by 25 percent, what should the profit from Product A
x = 15,000 units be? a. P 50,000 b. P 62,500 c. P 75,000 d. P170,000
39. Andrew is interested in entering the catfish farming ANS: C
business. He estimates if he enters this business, his Contribution margin at $400,000 in sales = $100,000
fixed costs would be P50,000 per year and his variable Increase contribution margin by 25% = $100,000 *
costs would equal 30 percent of sales. If each catfish 1.25 = $125,000
sells for P2, how many catfish would Andrew need to Contribution margin - fixed costs = Profit
sell to generate a profit that is equal to 10 percent of $(125,000 - 50,000) = $75,000
sales? a. 40,000 b. 41,667 c. 35,000 44. Campbell Manufacturing incurs annual fixed costs
d. No level of sales can generate a 10 percent net of P250,000 in producing and selling a single product.
return on sales. Estimated unit sales are 125,000. An after-tax income
ANS: B of P75,000 is desired by management. The company
Let x = sales in dollars projects its income tax rate at 40 percent. What is the
x - .30x - $50,000 = .10x maximum amount that Campbell can expend for
.60x = $50,000 variable costs per unit and still meet its profit objective
x = $83,333 Units = $83,333/$2 per unit = 41,667 if the sales price per unit is estimated at P6?
units a. P3.37 b. P3.59 c. P3.00 d. P3.70
ANS: C
40. The following information pertains to Mercury Before Tax Income: $75,000 / 0.60 = $125,000
Company’s cost-volume-profit relationships: Fixed Costs: 250,000
Break-even point in units sold 1,000 Contribution Margin: $375,000
Variable costs per unit P500
Total fixed costs P150,000 Projected Sales $750,000
How much will be contributed to profit before taxes by less: Contribution Margin 375,000
the 1,001st unit sold? Variable Costs $375,000
a. P650 b. P500 c. P150 d. P0
ANS: C $375,000 / 125,000 units $3/unit
Fixed Cost = Contribution Margin 45. Sunshine Company manufactures a single product.
= $150,000 In the prior year, the company had sales of P90,000,
Contribution Margin/Unit = Contribution Margin/Units variable costs of P50,000, and fixed costs of P30,000.
$150,000/1,000 units = $150/unit Sunshine expects its cost structure and sales price per
unit to remain the same in the current year, however
41. Information concerning Clarkson Corporation's total sales are expected to increase by 20 percent. If
Product A follows: the current year projections are realized, net income
Sales P300,000 should exceed the prior year’s net income by:
Variable costs 240,000 a. 100 % b. 80 % c. 20 % d. 50 %
Fixed costs 40,000 ANS: B
Assuming that Clarkson increased sales of Product A Contribution margin: $40,000
by 20 %, what should the profit from Product A be? Net profit: $(40,000 - 30,000) = $10,000
a. P20,000 b. P24,000 c. P32,000 d. P80,000 20% CM increase: $40,000 * 1.20 = $48,000
ANS: C Net profit: $(48,000 - 30,000) = $18,000
Contribution margin at $300,000 in sales = $60,000 Increase in profit $8,000
Increase contribution margin by 20% = $60,000 * 1.20 $8,000/$10,000=80%
46. Smith Company reported the following results from 52. Machine A has fixed costs of P450,000 and a
sales of 5,000 units of Product A for June: variable cost of P20. Machine B has fixed costs of
Sales P200,000 P600,000 and a variable cost of P14. What is the
Variable costs (120,000) indifference point, in units?
Fixed costs (60,000) a. 22,500 b. 25,000 c. 42,858 d. none of these
Operating income P 20,000
Assume that Smith increases the selling price of 53. Osceola Company earned P50,000 on sales of
Product A by 10 percent in July. How many units of P400,000. It earned P70,000 on sales of P450,000.
Product A would have to be sold in July to generate an Total fixed costs are
operating income of P20,000? a. P 0 b. P 50,000 c. P110,000 d. P180,000
a. 4,000 b. 4,300 c. 4,545 d. 5,000
ANS: C 54 - 56 Sunglo Corporation manufactures and
If sales price per unit is increased by 10 percent, less sells two products: A and B. The operating results of
units will have to be sold to generate gross revenues the company are as follows:
of $200,000. Product A Product B
Sales price per unit = $200,000/5,000 units = $40/unit Sales in units 3,000 4,000
$40/unit * 1.10 = $44/unit Sales price per unit P12 P7
$(200,000 / 44/unit) = 4,545 units Variable costs per unit 6 4
In addition, the company incurred total fixed costs
47 - 48 Buhay Company manufactures and sells Batik in the amount of P10,000.
handbags in assorted prints. Data of the previous year 54. How many total units would the company have
were as follows : needed to sell to break even?
Selling price P 8.00 Variable cost P 2.00/piece a. 333 b. 1,111 c. 2,333 d. 3,332
Net income P 5,850 Breakeven 25,000 pieces ANS: C
For the coming year, the company estimates the Let B = 1.33A
selling price will be P 9.50 per piece, variable costs to 6A + 3(1.33A) - $10,000 = $0
manufacture will increase by 25 % and fixed cost will 10A - $10,000 = $0
increase by 10 % . Income tax of 35 % will not change A = 1,000 units
47. What is the selling price per piece that would give B = 1,333 units
the same contribution margin rate as previous year ? Total units = 2,333
a. P 10.00 b. P 8.00 c. P 9.50 d. P 10.50 55. If the company had sold a total of 10,500 units,
consistent with CVP assumptions, how many of those
48. If the sales for the coming year are expected to units would be Product B?
exceed last year by 1,800 pieces. What is the a. 5,250 b. 6,000 c. 7,000 d. 7,875
expected sales volume for the coming year ? ANS: B
a. 28,300 b. 27,225 c. 26,500 d. none of these A + 1.33A = 10,500 units
2.33A = 10,500 units
49 A manufacturer produces a product that sells for A = 4,500 units
P 10 per unit . Variable costs per unit are P 6 and B = 6,000 units
total fixed costs are 12,000 . at this selling price , the
company earns a profit equal to 10% of total dollar 56. How many units would the company need to sell to
sales . By reducing its selling price to P 9.00 per unit , produce a before-tax profit of P20,000?
the manufacturer can increase its unit sales volume by a. 6,000 b. 6,250 c. 6,923 d. 7,000
25% . Assume that there are no taxes and that total ANS: D
fixed costs and variable costs per unit remain 6A + 3(1.33A) - $10,000 = $20,000
unchanged. If the selling price is reduced t P 9.00 per 10A = $30,000
unit, the profit will be A = 3,000 units
a. P 3,000 b. P 4,000 c. P 5,000 d. P 6,000 B = 4,000 units
Total = 7,000 units
50. Jones Co. sells widgets . The company breaks
even at an annual sales volume of 75,000 units. 57. The following revenue and costs budgets for the
Actual annual sales volume was 100,000, and the two products. Things Inc. sales are made available:
company reported a profit of P 200,000 The annual Plastic Things Glass Things
fixed costs for Jones Company are Sales Price P 50 P75
a. P800,000 c.P75,000 Direct Materials (10) (15)
b.P600,000 d. none of these Direct Labor 15) (25)
51. Your boss would like you to estimate the fixed and Fixed Overhead (15) (20)
variable components of a particular cost. Actual data Net income per unit 10 15
for this cost over four recent periods appear below. Budgeted Unit Sales 150,000 300,000
The budgeted unit sales equal the current unit
demand, and total fixed overhead for the year is
budgeted at P4,875,000. Assume that the company
plans to maintain the same proportional mix. In
numerical calculations, the company rounds to the
nearest centavos and unit. The total number of units
Using the least-squares regression method, what is things Inc. needs to produce and sell to break-even is:
the cost formula for this cost? a. 102,632 units c. 153,947 units
A. Y = P24.51 + P1.08X C. Y = P0.00 + P2.32X b. 171,958 units d. 418,455 units
B. Y = P10.33 + P1.92X D. Y = P15.80 + P1.70X
58. Mark Corporation produces two models of 62. Two companies produce and sell the same product
calculators. The Business model sells for P60, and the in a competitive industry. Thus, the selling price of the
Math model sells for P40. The variable expenses are product for each company is the same. Company 1
given below: has a contribution margin ratio of 40% and fixed costs
Business Model Math Model of P 25 million . Company 2 is more automated ,
Variable production costs making its fixed costs 40% higher than those of
per unit P15 P16 Company 1. Company 2 also has a contribution
Variable selling and adminis- margin ratio that is 30% greater than that of Company
trative expenses per unit P 9 P 6 1. By comparison, Company 1 will have the < List A >
The fixed expenses are P75,000 per month. The breakeven point in terms of dollar sales volume and
expected monthly sales of each model are: Business, will have the < List B > peso profit potential once the
1,000 units; Math, 500 units. The break-even point for indifference point in peso sales volume is exceeded.
the expected sales mix is List A List B
a. 833 of each a. Lower Lesser
b. 1,667 Business and 833 Math b. Lower Greater
c. 1,667 of each c. Higher Lesser
d. 833 Business and 1,667 Math d. Higher Greater

59 – 60 Benny Corporation produces only two

products, Panel and Lapex, which account for 60%
and 40% of the total sales of the company,
respectively. Variable costs as a percentage of sales
are 60% and 85% for Panel and Lapex. Total fixed
costs are P120,000 and no other costs need be
considered.
57. What is Benny’s breakeven point in sales?
a. P300,000 c. P500,000
b. P400,000 d .None of these

58. Assuming that Benny’s total fixed costs increase

by 25% how much sales would be necessary to
generate a net income of P15,000?
a. P550,000 c. P650,000
b. P465,000 d. None of these

61. Below are income statements that apply to three

companies: Alford, Brooks, and Fitch:
Alford Brooks Fitch
Co. Co. Co.
Sales P100 P100 P100
Variable costs (10) (20) (30)
Contribution
P 90 P 80 P 70
margin
Fixed costs (30) (20) (10)
Profit before taxes P 60 P 60 P 60
59. Within the relevant range, if sales go up by P1 for
each firm, which firm will experience the greatest
increase in profit?
a. Alford Company
b. Brooks Company
c. Fitch Company
d. can't be determined from the information given
ANS: A
Alford Company will have the greatest increase in
profit, because it has the greatest contribution margin
per unit.
d. They all have the same margin of safety.
ANS: C
Fitch Company has the lowest amount of fixed costs to
be covered.
PTS: 1 DIF: Moderate OBJ: 9-3
NAT: AACSB: Analytical Skills