Key Multiplechoice Chapter 3 PDF

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Key Multiplechoice Chapter 3...

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1

The contribution margin increases when sales volume and price remain the same and: A) Variable cost per unit decreases B)

Variable cost per unit increases

C) Fixed costs decrease D)

Fixed costs increase

E) None of the above Feedback: Contribution margin = (SP/unit x units sold) – (VC/unit x units sold). If the selling price and the volume remain the same, an increase in contribution margin will result from a decrease in variable cost per unit.

2 If a company increases its selling price by $4 per unit due to an increase in its variable labor cost of $4 per unit, the break-even point in units will: A) Decrease B) Increase C) Not change D) Change, but the direction cannot be determined with the information given E) None of the above Feedback: SP – VC = CM; if both the selling price and the variable cost increase by the same amount, the CM will not be affected. Since the breakeven point in units is calculated by Fixed Costs/CM, then the breakeven point will not change.

3 Mosquito Mafia manufactures an electric trap to kill mosquitoes. The trap sells for $350. At a production level of 10,000 units, the total variable manufacturing cost is $1,200,000 and the fixed manufacturing cost in total is $420,000. At this level of activity Mafia will incur variable and fixed selling and administrative costs of $900,000 and $770,000 respectively. How many traps have to be sold to breakeven? A) 5,100 B) 6,700 C)

8,500

D) 10,000 E)

None of the above

Feedback: Unit variable cost = Total variable cost ($2,100,000) divided by units produced (10,000) = $210. CM = SP($350) – VC ($210) = $140. Fixed costs ($1,190,000)/CM ($140) = BEunits (8,500)

4 A textbook publisher sells a textbook for $75. The variable cost per book is $40 at

the current annual sales volume of 50,000 books. At this volume the publisher is just breaking even. What are the fixed costs? A) $1,000,000 B) $1,750,000 C) $2,000,000 D) $3,750,000 E) None of the above Feedback: Contribution margin = $35 X 50,000 = $1,750,000. Contribution margin = fixed costs at the breakeven point. Therefore, fixed costs = $1,750,000.

5 Toy Queen sells video games. The games have been selling for $40 each. The variable costs consist of a $20 purchase price per game. Toy Queen's annual fixed costs are $250,000 and the company's income tax rate is 40%. The revenue needed to earn an after-tax net income of $120,000 is: A) $ 500,000 B) $ 740,000 C) $ 900,000 D)

$1,100,000

E) None of the above Feedback: Before tax income = $120,000/.60 = $200,000. (Fixed costs + target income before tax)/CM ratio = Revenue needed to earn target income. ($250,000 + $200,000)/.50 = $900,000

6 Apex manufactures and sells three products; X, Y, and Z. Last year sales of these products were 20,000 units of X, 30,000 units of Y and 50,000 units of Z. The unit contribution margins of X, Y, and Z are $5, $4 and $3, respectively. Assuming the product mix remains the same, how many units of X must be sold for Apex to breakeven if fixed costs are $222,000? A)

10,000

B) 12,000 C) 22,200 D)

44,400

E) None of the above Feedback: Average contribution margin = .2($5) + .3($4) + .5($3) = $3.7. Fixed costs/avg. CM = breakeven units. $222,000/3.7 = 60,000 units. 60,000 x 20% = 12,000

7 Based on a market study, Temple Corporation estimated that it could sell a CB radio for $60. Temple wants to make a profit of 25 percent after taxes. The company is

subject to a tax rate of 40%. What is the highest manufacturing cost Temple will accept? A)

$10

B) $20 C)

$25

D) $35 E) None of the above Feedback: Price – cost = income before tax – tax = profit; let x = cost, then: $60 – x – [.4($60 – x)] = .25($60); solving for x: 60 – x – 24 + .4x = 15; and x = $35

8 Factory Fitness currently is selling 10,000 treadmills for $520 each. Variable costs on this product are $320 and fixed costs are $1,200,000. What is the company's margin of safety? A) 2,000 units B) 4,000 units C)

6,000 units

D) 8,000 units E)

None of the above

Feedback: CM/unit = $200. $1,200,000/$200 = 6,000 units to breakeven. Margin of safety = current sales (10,000 units) – breakeven (6,000 units) = 4,000 units

9 Currently BartCo is manufacturing a product with the following total costs at a production level of 20,000 units: variable costs, $300,000; fixed costs, $400,000. The product sells for $50. BartCo is currently able to sell all it produces and is considering reducing the selling price by $12. This is expected to result in an increase in sales of 10,000 units. What would be the result of this change? A) $14,000 increase in operating profit B)

$10,000 decrease in operating profit

C) $20,000 increase in operating profit D) There would be no change in operating profit E) None of the above Feedback:

10 A company sells a product for $50 and incurs the following costs: variable manufacturing cost, $15 per unit; variable selling and administrative cost, $5 per unit; fixed manufacturing cost, $35,000; and fixed selling and administrative cost, $25,000. The breakeven revenue is: A) $ 50,000 B)

$ 65,000

C) $ 75,000 D)

$100,000

E) None of the above Feedback: CM ratio = CM/SP. $30/$50 = .60. Fixed cost/CM ratio = Revenues needed to breakeven. 60,000/.60 = $100,000

11 Cole Corporation makes and sells two models of desk, a standard and a deluxe. The selling prices of the desks are $1,200 and $2,000, respectively. The variable costs per unit are $600 for the standard model and $1,000 for the deluxe model. Last year Cole's sales were $720,000 for the standard model and $800,000 for the deluxe model. Cole's total fixed cost is $532,000. Assuming the sales mix remains the same, how many of the standard model must be sold to breakeven? A) 420 B) 540 C) 640 D) 880 E) None of the above Feedback: Standard CM = $600, Deluxe CM = $1,000. Sales mix is 600 units of standard to 400 units of deluxe. Average CM = .6($600) + .4($1,000) = $760. Fixed costs/Average CM = Breakeven in units. $532,000/$760 = 700 units. For the standard model: 700 x .6 = 420 units.

12 Matrix sells interactive games. The games have been selling for $80 each. The variable costs are $50 per game. Matrix's annual fixed costs are $40,000 and the company's income tax rate is 30%. The number of units needed to be sold to earn an after-tax net income of $35,000 is: A)

2,500

B) 3,000 C)

3,500

D) 4,000 E)

None of the above

Feedback: Target income before tax = $35,000/.7 = $50,000. ($40,000 + $50,000)/$30 = 3,000 units

13 Before-tax operating profits are equal to the after-tax operating profits: A) plus income taxes. B) minus income taxes. C)

multiplied by (1 – tax rate).

D) divided by (1 – tax rate). E)

None of the above.

Feedback: To obtain after-tax operating profits, before-tax profits are divided by (1- tax rate).

14 Magic Music sells MP3 players. The devices have been selling for $150 each. The variable costs are equal to 60% of the selling price. Matrix's annual fixed costs are $60,000 and the company's income tax rate is 30%. The sales revenue needed to earn an after-tax net income of $63,000 is: A) $250,000 B) $375,000 C) $123,000 D) $205,000 E)

None of the above

Feedback: Target income before tax = $63,000/.7 = $90,000. Contribution margin ratio = 100%-60%=40%. Sales revenue needed = ($60,000 + $90,000)/.40 = $375,000

15 If both the variable cost per unit and the selling price per unit increase, the new contribution margin ratio in relation to the old contribution margin ratio will be: A) Lower. B) Higher. C)

Unchanged.

D) Not enough information to tell. Feedback: It is not possible to determine the change in the contribution margin per unit based on the information given. If the selling price per unit increases by more than the increase in the variable cost per unit, then the contribution margin per unit will increase. Conversely, if the variable cost per unit increases by more than the increase in the selling price per unit, then the contribution margin per unit will decrease. If both the selling price and the variable cost per unit increase by the same amount, the contribution margin per unit will remain unchanged.

16 If the fixed costs for a product decrease and the variable costs (as a percentage of sales dollars) decrease, what will be the effect on the contribution margin ratio and

the breakeven point respectively? Contribution Breakeven Margin Ratio Point a. decreased increased b. increased decreased c. decreased decreased d. increased increased A)

A

B) B C)

C

D) D Feedback: Breakeven Point (stated in sales revenue) = Fixed costs/Contribution margin ratio. Therefore, a decrease in fixed costs will lower the breakeven point. A percentage decrease in the variable costs will increase the contribution margin ratio.

17 Operating leverage refers to the extent to which an organization's cost structure is made up of: A)

variable costs.

B) manufacturing costs. C) operating costs. D) fixed costs. E) product costs. Feedback: Operating leverage refers to the extent to which an organization's cost structure is made up of fixed costs.

18 A decrease in the margin of safety would be caused by a(n): A) increase in the total fixed costs. B)

increase in total revenue (sales).

C) decrease in the break-even point. D) decrease in the variable cost per unit. Feedback: Margin of safety is the amount by which sales (budgeted or actual) exceed breakeven sales. The break-even point will rise, resulting in a decrease in margin of safety, if fixed costs increase.

19 The following information pertains to Atlantic Company: Sales price per unit $70.00 Variable cost per unit $32.50 Total fixed costs $250,000 Before-tax income $50,000

Unit sales for the company must have been A)

8,000

B) 7,059 C)

6,667

D) 5,883 Feedback: ($250,000 + $50,000)/($70 - $32.50) = 8,000 units

20 The break-even point in units for a multiple-product firm is calculated as fixed costs divided by A)

the weighted average contribution margin ratio for all of the product

B) the weighted average contribution margin of all the products C) the sum of the individual product contribution margins. It is not possible to calculate the break-even point in units for a multipleD) product firm. Feedback: The break-even point in units for a multiple-product firm is calculated as fixed costs divided by the weighted average contribution margin of all products....