MSQ-01 - Activity Cost & CVP Analysis (Final) PDF

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CPA REVIEW SCHOOL OF THE PHILIPPINES Manila MANAGEMENT ADVISORY SERVICES ACTIVITY COST AND CVP ANALYSIS THEORY 1 Which of the following statements is false? A. At zero production level, variable costs are usually zero. B. At zero production level, total costs equal total fixed costs. C. At zero prod...

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CPA REVIEW SCHOOL OF THE PHILIPPINES Manila MANAGEMENT ADVISORY SERVICES ACTIVITY COST AND CVP ANALYSIS THEORY 1 Which of the following statements is false? A. At zero production level, variable costs are usually zero. B. At zero production level, total costs equal total fixed costs. C. At zero production level, fixed costs are positive. D. At zero production level, fixed costs is also zero. 2. Variable costs are all costs A. That are associated with marketing, shipping, warehousing, and billing activities. B. That do not change in total for a given period and relevant range but become progressively smaller on a per unit basis as volume increases. C. Of manufacturing incurred to produce units of output. D. That fluctuate in total in response to small changes in the rate of utilization of capacity. 3. NTQ, Inc.’s net sales in 1996 were 15% below the 1995 level. NTQ’s semi-variable costs would A. Increase in total and increase as a percentage of net sales. B. Decrease in total and decrease as a percentage of net sales. C. Increase in total, but decrease as a percentage of net sales. D. Decrease in total, but increase as a percentage of net sales. 4. RST’s average cost per unit is the same at all levels of volume. Which of the following is true? A. RST must have only variable costs. B. RST must have only fixed costs. C. RST must have some fixed costs and some variable costs. D. RST’s cost structure cannot be determined from this information. 5. Which of the following decision-making tools would NOT be useful in determining the slope and intercept of a mixed cost? A. linear programming C. high-low method B. least-squares method D. scatter diagrams 6. A cost that bears an observable and known relationship to a quantifiable activity base is a(n) A. Engineered cost. B. Indirect cost. C. Target cost. D. Fixed cost. 7. Costs that increase as the volume of activity decreases within the relevant range are A. Average costs per unit. C. Total fixed costs. B. Average variable costs per unit. D. Total variable costs. 8. When production levels are expected to increase within a relevant range and a flexible budget is used. What effect would be anticipated with respect to each of the following costs? A. B. C. D. Fixed Costs per Unit Increase Increase Decrease Decrease Variable Costs per Unit Increase No change Decrease No change 9. Weaknesses of the high-low method include all of the following except A. only two observations are used to develop the cost function. B. the high and low activity levels may not be representative. C. the method does not detect if the cost behavior is nonlinear. D. the mathematical calculations are relatively complex.

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10. The scatter diagram method of cost estimation A. is influenced by extreme observations B. requires the use of judgment C. uses the least-squares method D. is superior to other methods in its ability to distinguish between discretionary and committed fixed costs 11. The number of variables used in simple regression analysis is: A. two B. three C. one

D. more than three

12. Regression analysis is superior to other cost behavior techniques because it A. Examines only one variable. C. Proves a cause and effect relationship. B. Produces measures of probable error. D. Is not a sampling technique. 13. The first to be undertaken in a simple regression analysis approach is A. To calculate the coefficient correlation. B. To make the least squares computation. C. To plot two variables in a scatter diagram. D. To find the standard error of estimate. 14. If the coefficient of correlation between two variables is zero, how might a scatter diagram of these variables appear? A. Random points. B. A least squares line that slopes up to the right. C. A least squares line that slopes down to the right. D. Under this condition a scatter diagram could not be plotted on a graph. 15. The relevant range is A. a relatively wide range of sales where total variable costs remain the same B. a relatively wide range of sales where all costs remain the same C. a relatively narrow range of production where total variable costs remain the same D. a relatively wide span of production where total fixed costs are expected to remain the same 16. Cost-volume-profit analysis is most important for the determination of the A. Volume of operation necessary to break-even B. Relationship between revenues and costs at various levels of operations C. Variable revenues necessary to equal fixed costs D. Sales revenue necessary to equal variable costs. 17. The sum of the costs necessary to effect a one-unit increase in the activity level is a(n) A. Margin of safety. C. Marginal cost. B. Opportunity cost. D. Incremental cost. 18. Which of the following assumptions does NOT pertain to cost-volume-profit analysis? A. The units produced will equal the units sold B. Inventories are constant C. All costs are classified as fixed or variable D. Sales mix may vary during the related period E. The total revenues function is linear. 19. In a cost-volume-profit graph A. the total revenue line crosses the horizontal axis at the breakeven point. B. beyond the breakeven sales volume, profits are maximized at the sales volume where total revenues equal total costs. C. an increase in unit variable costs would decrease the slope of the total cost line. D. an increase in the unit selling price would shift the breakeven point in units to the left. E. an increase in the unit selling price would shift the breakeven point in units to the right.

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20. As an accountant, the most useful information you can get from break-even chart is the A. Relationship among revenues, variable costs, and fixed costs at various levels of activity. B. Volume or output level at which the enterprise breaks even. C. Amount of sales revenue needed to cover enterprise fixed costs. D. Amount of sales revenue needed to cover enterprise variable costs. 21. In a cost-volume-profit graph, the slope of the total revenue curve represents A. the selling price per unit. D. total contribution margin B. the contribution margin per unit E. total revenues. C. the variable cost per unit 22. In a profit-volume graph, the slope of the profit curve represents A. the selling price per unit D. total contribution margin B. the contribution margin per unit E. total revenues. C. the variable cost per unit 23. If a company’s variable costs are 70% of sales, which formula represents the computation of dollar sales that will yield a profit equal to 10% of the contribution margin when S equals sales in dollars for the period and FC equals total fixed costs from the period? A. S = 0.2  FC C. S = 0.27  FC B. S = FC  0.2 D. S = FC  0.27 24. Cost-volume-profit analysis is a key factor in many decisions, including choice of product lines, pricing of products, marketing strategy, and utilization of productive facilities. A calculation used in CVP analysis is the break-even point. Once the break-even point has been reached operating income will increase by the A. Sales price per unit for each additional unit sold. B. Contribution margin per unit for each additional unit sold. C. Fixed cost per unit for each additional unit sold. D. Gross margin per unit for each additional unit sold. 25. When used in cost-volume-profit analysis, sensitivity analysis A. Determines the most profitable mix of products to be sold. B. Allows the decision maker to introduce probabilities in the evaluation of decision alternatives. C. Is done through various possible scenarios and computes the impact on profit of various predictions of future events. D. Is limited because in cost-volume-profit analysis, costs are not separated into fixed and variable components. 26. At its present level of operations, a small manufacturing firm has total variable costs equal to 75 percent of sales and total fixed costs equal to 15 percent of sales. Based on variable costing, if sales change by $1.00, income will change by A. $0.25. B. $0.10. C. $0.75. D. can't be determined from the information given. 27. A company’s breakeven point in sales dollars may be affected by equal percentage increases in both selling price and variable costs per unit (assume all other factors are constant within the relevant range.) The equal percentage changes in selling price and variable cost per unit will cause the breakeven point in sales dollars to A. Decrease by less than the percentage increase in selling price. B. Decrease by more than the percentage increase in the selling price. C. Increase by the percentage change in variable cost per unit. D. Remain unchanged. 28. The most likely strategy to reduce the breakeven point would be to

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A. B. C. D.

Increase both the fixed costs and the contribution margin. Decrease both the fixed cost and the contribution margin. Decrease the fixed costs and increase the contribution margin. Increase the fixed costs and decrease the contribution margin.

29. A company increased the selling price of its product from $1.00 to $1.10 a unit when total fixed costs increased from $400,000 to $480,000 and variable cost per unit remained unchanged. How will these changes affect the breakeven point? A. The breakeven point in units will be increased. B. The breakeven point in units will be decreased. C. The breakeven point in units will remain unchanged. D. The effect cannot be determined from the information given. 30. According to CVP analysis, a company could never incur a loss that exceeded its total A. variable costs. B. fixed costs. C. costs. D. contribution margin. 31. Two companies produce and sell the same product in a competitive industry. Thus, the selling price of the product for each company is the same. Company 1 has a contribution margin ratio of 40% and fixed costs of $25 million. Company 2 is more automated, making its fixed costs 40% higher than those of Company 1. Company 2 also has a contribution margin ratio that is 30% greater than that of Company 1. By comparison, Company 1 will have the breakeven point in terms of dollar sales volume and will have the dollar profit potential once the indifference point in dollar sales volume is exceeded. A. B. C. D. List A Lower Lower Higher Higher List B Lesser Greater Lesser Greater 32. Which of the following is a true statement about sales mix? A. Profits may decline with an increase in total dollars of sales if the sales mix shifts to sell more of the high contribution margin product. B. Profits may decline with an increase in total dollars of sales if the sales mix shifts to sell more of the lower contribution margin product. C. Profits will remain constant with an increase in total dollars of sales if the total sales in units remains constant. D. Profits will remain constant with a decrease in total dollars of sales if the sales mix also remains constant. 33. Saints Co. sells three chemicals: Simpol, Plutex, and Coplex. Simpol is the most profitable product while Coplex is the least profitable. Which one of the following events will definitely decrease the firm’s overall B.E.P. for the upcoming accounting period? A. An increase in the overall market of Plutex. B. A decrease in Coplex’s selling price. C. An increase in anticipated sales of Simpol relative to the sales of Plutex and Coplex. D. An increase in Simpol raw materials cost. 34. A very high degree of operating leverage indicates a firm A. has high fixed costs B. has a high net income C. has high variable costs D. is operating close to its breakeven point 35. Love Corp. is operationally a highly leveraged company, that is, it has high fixed costs and low variable costs. As such, small changes in sales volume result in A. Proportionate change in net income. C. Negligible change in net income. B. Large changes in net income. D. No change in net income.

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PROBLEMS 1. Bradley Co. budgets its total production costs at $220,000 for 75,000 units of output and $275,000 for 100,000 units of output. Since additional facilities are needed to produce 100,000 units, fixed costs are budgeted at 20% more than for 75,000 units. What is Bradley's budgeted fixed cost at 100,000 units? A. 165,000 B. 156,000 C. 66,000 D. 16,500 2. Smart Company is relocating its facilities. The company estimates that it will take three trucks to move office contents. If the per truck rental charge is $1,000 plus 25 cents per mile, what is the expected cost to move 800 miles? A. $1,000 B. $1,200 C. $2,400 D. $3,600 3. The following cost functions were developed for manufacturing overhead costs: Manufacturing Overhead Cost Cost Function Electricity $100 + $20 per direct labor hour Maintenance $200 + $30 per direct labor hour Supervisors’ salaries $10,000 per month Indirect materials $16 per direct labor hour If July production is expected to be 1,000 units requiring 1,500 direct labor hours, estimated manufacturing overhead costs would be A. $109,300 B. $99,000 C. $76,300 D. $10,366 4. The Austin Manufacturing Company wants to develop a cost estimating equation for its monthly cost of electricity. It has the following data: Month Cost of Electricity Direct Labor Hours January $6,750 1,500 April 7,500 1,700 July 8,500 2,000 October 7,250 1,600 Using the high-low method, what is the best equation? A. Y = $750 + $5.00X D. Y = $2,000 + $3.50X B. Y = $750 + $3.50X E. Y = $1,500 + $5.00X C. Y = $1,500 + $3.50X 5. Matias Corporation wishes to market a new product for P12.00 a unit. Fixed costs to manufacture this product are P800,000 for less than 500,000 units and P1,200,000 for 500,000 or more units. Contribution margin is 20%. How many units must be sold to realize a net income from this product of P500,000? A. 433,333 B. 500,000 C. 666,667 D. 708,333 6. Total production costs of prior periods for a company are listed as follows. Assume that the same cost behavior patterns can be extended linearly over the range of 3,000 to 35,000 units and that the cost driver for each cost is the number of units produced. Production in units per month 3,000 9,000 16,000 35,000 Cost X $23,700 $52,680 $86,490 $178,260 Cost Y 47,280 141,840 252,160 551,600 What is the average cost per unit at a production level of 8,000 units for cost X? A. $5.98 B. $5.85 C. $7.90 D. $4.83 7. Ultra Vogue Co. sells 50,000 units of “yo” a top-of-the-line garden sprinkler. These were taken from the company’s records: Accounts receivable, P129,000. Contribution margin ratio, 49%. Days sales outstanding, 15 days. Profit for the period was P485,040. The ending receivables balance is the average balance during the year. Assume a 360-day year. All sales are on credit. Determine the company’s break-even revenue. A. P2,106,122 B. P1,032,000 C. P3,096,000 D. P1,517,040

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8. Sago Co. uses regression analysis to develop a model for predicting overhead costs. Two different cost drivers (machine hours and direct materials weight) are under consideration as the independent variable. Relevant data were run on a computer using one of the standard regression programs, with the following results: Coefficient Machine hours Direct materials weight Y intercept 2,500 4,600 B 5.00 2.60 R2 0.70 0.50 What regression equation should be used? A. Y = 2,500 + 5.0X C. Y = 4,600 + 2.6X B. Y = 2,500 + 3.5X D. Y = 4,600 +1.3X 9. Y = P575,000 + P8.50X represents the behavior of maintenance costs (Y) as a function of machine hours (X). Thirty (30) monthly observations were used to develop the foregoing regression equation. The related coefficient of determination was 0.90. If 2,500 machine hours are worked in one month, the related point estimate of total variable maintenance costs would be A. P23,000 B. P21,250 C. P25,250 D. P19,125 10. Tonykinn Company is contemplating of marketing a new product. Fixed costs will be $800,000 for production of 75,000 units or less and $1,200,000 if production exceeds 75,000 units The variable cost ratio is 60% for the first 75,000. Contribution margin percentage will increase to 50% for units in excess of 75,000. If the product is expected to sell for $25 per unit, how many units must Tonykinn sell to breakeven? A. 120,000 B. 111,000 C. 96,000 D. 80,000 11. A company manufactures a single product. Estimated cost data regarding this product and other information for the product and the company are as follows: Sales price per unit $40 Total variable production cost per unit $22 Sales commission (on sales) 5% Fixed costs and expenses Manufacturing overhead $5,598,720 General and administrative $3,732,480 Effective income tax rate 40% The number of units the company must sell in the coming year in order to reach its breakeven point is A. 388,800 units B. 518,400 units C. 583,200 units D. 972,000 units 12. A company is concerned about its operating performance, as summarized below: Sales ($12.50 per unit) $300,000 Variable costs 180,000 Net operating loss (40,000) How many additional units should have been sold in order for the company to break even in 1992? A. 32,000 B. 16,000 C. 12,800 D. 8,000 13. Scottso Enterprises has fixed costs of $120,000. At a sales volume of $400,000, return on sales is 10%. At a $600,000 volume, return on sales is 20%. What is the break-even volume? A. $160,000 B. $210,000 C. $300,000 D. $420,000 14. A retail company determines its selling price by marking up variable costs 60%. In addition, the company uses frequent selling price markdowns to stimulate sales. If the markdowns average 10%, what is the company’s contribution margin ratio? A. 27.5% B. 30.6% C. 37.5% D. 41.7%...