Achievement Test 3: Chapters 5-6 Name ___________________________

Managerial Accounting, 6e Instructor ________________________

Section # _________ Date __________

Part I II III IV V VI Total

Points 28 10 12 14 24 12 100

Score

PART I MULTIPLE CHOICE (28 points)

Instructions: Designate the best answer for each of the following questions.

____ 1. Given the following costs for Abay Liquidators, select the answer choice that correctly
classifies each costs behavior.
Total Cost at
1,500 Units 1,800 Units
Cost A $4,650 $5,580
Cost B 8,600 9,400
a. Cost A and Cost B are both variable
b. Cost A is variable; Cost B is mixed
c. Cost A is variable; Cost B is fixed
d. Cost A and Cost B are both mixed
e. There is not enough information provided to determine the answer.

____ 2. Which one of the following is not one of the assumptions that underlie basic CVP
analysis?
a. When more than one product is sold, total sales will be in a constant sales mix.
b. All costs can be classified as variable or fixed with reasonable accuracy.
c. The behavior of both costs and revenues is linear throughout the relevant range.
d. The breakeven point changes when the number of units sold changes.

____ 3. Candial Enterprises can produce and sell only one of the following two products:
Machine Hours Contribution
Required Margin Per Unit
Product A 0.6 $4.50
Product B 0.4 $3.20
The company has machine capacity of 1,496 hours. How much will contribution
margin be if Candial produces only the most profitable product?
a. $3,740
b. $11,968
c. $2,493
d. $11,220
AT3- 2 Test Bank for Managerial Accounting, Sixth Edition

____ 4. Nova Supreme has a weighted-average unit contribution margin of $12 for its two
products, Standard and Premium. Expected sales for Nova are 30,000 for Standard
and 10,000 for Premium. Fixed expenses are $840,000. How many Standards will
Nova Supreme sell at the break-even point?
a. 70,000
b. 50,000
c. 30,000
d. 52,500

____ 5. Winners Games reported sales of $72,000 and net income totaling $12,000 during the
year. Its selling price is $6 per unit, its variable cost is $2 per unit, and its total fixed
costs are $36,000. How much is the projected margin of safety?
a. $54,000
b. $66,000
c. $12,000
d. $18,000

____ 6. Hanleys Carwash has $80,000 of fixed costs and variable costs of 60% of sales. How
much is total sales to achieve a net income of $140,000?
a. $550,000
b. $220,000
c. $150,000.
d. $366,667

____ 7. In order to decrease a company's break-even point, which of the following should be
decreased?
a. The contribution margin ratio
b. The contribution margin
c. The selling price
d. Variable costs per unit

____ 8. Little Tykes Day Care desires net income of $84,000. It has $28,000 of fixed costs and
variable costs of 60% of sales. How much is contribution margin?
a. $280,000
b. $112,000
c. $186,667
d. $75,000

____ 9. Assume October is the high-volume month for a toy manufacturer and July is the low-
volume month. The following total production costs and volume levels have been
recorded:
Total Costs Volume
October $72,000 4,000
July $60,000 1,500
How much are total fixed costs?
a. $12,000
b. $52,800
c. $132,000
d. $60,010
 Achievement Test 3 AT3- 3

____ 10. Fixed costs

a. increase in total as total production increases.
b. decrease in total as total production decreases.
c. decrease per unit as total production decreases.
d. increase per unit as total production decreases.

____ 11. Variable costs, as activity increases, will

a. will stay the same in total.
b. increase per unit.
c. remain constant per unit.
d. decrease in total.

____ 12. A cost that increases in total, but not proportionately with increases in the activity level,
is a(n)
a. mixed cost.
b. variable cost.
c. fixed cost.
d. unusual fixed cost.

____ *13. Which of the following is included in the cost of goods manufactured under absorption
costing but not under variable costing?
a. Direct materials
b. Variable factory overhead
c. Fixed factory overhead
d. Direct labor

____ *14. Which of the following would not be deducted in determining the contribution margin
under variable costing?
a. Direct labor
b. Sales commissions
c. Sales office depreciation using the straight line method
d. Variable factory overhead

PART II TRUE/FALSE (10 points)

Instructions: Designate whether each of the following statements is true or false by circling the T
or F.

F 1. Contribution margin is the amount of revenue left over to cover selling and
administrative costs after manufacturing costs have been deducted.

F 2. The margin of safety is the difference between actual profit and target net income.

T 3. At the break-even point, total contribution margin is equal to total fixed costs.

T 4. A companys break-even point can be decreased by increasing the contribution

margin ratio.

F 5. A CVP income statement classifies costs by function, but a traditional income

statement classifies costs by cost behavior (variable or fixed).
AT3- 4 Test Bank for Managerial Accounting, Sixth Edition

PART III SCARCE RESOURCE ALLOCATION (12 points)

Genavine manufactures and sells two products. Relevant per unit data concerning each product
are given below:
Product
X21 R45
Selling price $55 $88
Variable costs $30 $48
Machine hours 2.5 4.2

Instructions
(a) Compute the contribution margin per unit of limited resource for each product.

(b) Which product should be manufactured if 1,200 additional machine hours are available?
Explain.

PART IV HIGH-LOW METHOD (14 points)

Nugent Enterprise incurred the following high and low maintenance costs totals during 2014:
$208,000 at 12,000 units of activity during March and $164,000 at 7,000 units during August.

Instructions: Answer parts (a) through (c) below, presenting carefully labeled supporting
calculations in all cases.

(a) Use the high-low method to compute the variable cost per unit and the total fixed cost
element of the mixed cost component.

(b) Based on the above analysis, express the total maintenance cost in formula format.

(c) Compute the total maintenance cost for May when activity is 11,000 units.
 Achievement Test 3 AT3- 5

PART V COST-VOLUME-PROFIT (24 points)

Walton Widgets manufactures a product that sells for $40 per unit. Walton incurs a variable cost
per unit of $24 and $1,400,000 in total fixed costs to produce this product. It is currently selling
92,000 units.

Instructions: Complete each of the following requirements, presenting labeled supporting

computations.

(a) Compute and label the contribution margin per unit and contribution margin ratio.

(b) Using the contribution margin per unit, compute the break-even point in units.

(c) Using the contribution margin ratio, compute the break-even point in dollars.

(d) Compute the margin of safety and margin of safety ratio.

(e) Compute the number of units that must be sold in order to generate net income of $240,000
using the contribution margin per unit.

(f) Should Walton Widgets give a commission to its salesmen based on 8% of sales, if it will
decrease fixed costs by $300,000 and increase sales volume 10%? Support your answer
with labeled computations.
AT3- 6 Test Bank for Managerial Accounting, Sixth Edition

PART VI OPERATING LEVERAGE (12 points)

The following CVP income statements are available for Liu Company and Sadji Company.
Lui Company Sadji Company
Sales revenue $800,000 $800,000
Variable costs 325,000 195,000
Contribution margin 475,000 605,000
Fixed costs 375,000 505,000
Net income $100,000 $100,000

Instructions
(a) Compute the degree of operating leverage for each company.

(b) Prepare a CVP income statement for each company, assuming that sales revenue
decreases by 30%.
 Achievement Test 3 AT3- 7

Solutions Achievement Test 3: Chapters 5-6

PART I MULTIPLE CHOICE (28 points)

1. B 6. A 11. C
2. D 7. D 12. A
3. B 8. B *13. C
4. D 9. B *14. C
5. D 10. D

PART II TRUE/FALSE (10 points)

1. F 4. T
2. F 5. F
3. T

PART III SCARCE RESOURCE ALLOCATION (12 points)

(a) Product
X21 R45
Contribution margin per unit $25 $40
Machine hours required 2.5 4.2
Contribution margin per unit of limited resource $10 $9.52

(b) The X21 product should be manufactured because it results in the highest contribution
margin per machine hour: $10 1,200 = $12,000

PART IV HIGH-LOW METHOD (14 points)

(a) $208,000 - $164,000

= $8.80 per unit
12,000 - 7,000

High Low
Total costs $208,000 $164,000
Less: Variable costs
12,000 $8.80 105,600
7,000 $8.80 61,600
Total fixed costs $102,400 $102,400

(b) Total cost = ($8.80 sales volume) + $102,400

(c) (11,000 $8.80) + $102,400 = $199,200

AT3- 8 Test Bank for Managerial Accounting, Sixth Edition

PART V COST-VOLUME-PROFIT (24 points)

(a) Unit selling price $40 Contribution margin per unit $16
Unit variable costs 24 Unit selling price $40
Contribution margin per unit $16 Contribution margin ratio 40%

(b) $1,400,000 $16 = 87,500 units

(c) $1,400,000 40% = $3,500,000 sales dollars

(d) (92,000 $40) $3,500,000 = $180,000 margin of safety

$180,000 (92,000 $40) = 4.9% margin of safety ratio

(e) ($1,400,000 + $240,000) $16 = 102,500 units

(f) Current expected income New expected income

Sales (92,000 $40) $3,680,000 Sales (101,200 $40) $4,048,000
Variable (92,000 $24) 2,208,000 Variable [(101,200 $24) +
Contribution margin 1,472,000 ($4,048,000 8%)] 2,752,640
Fixed expenses 1,400,000 Contribution margin 1,295,360
Net income $ 72,000 Fixed expenses 1,100,000
Net income $ 195,360
Yes, the change should be made.

PART VI OPERATING LEVERAGE (12 points)

(a) Contribution Margin Net Income = Degree of Operation Leverage
Liu $475,000 $100,000 = 4.75
Sadji $605,000 $100,000 = 6.05

(b) Liu Company Sadji Company

Sales revenue $560,000* $560,000*
Variable costs 227,500** 136,500***
Contribution margin 332,500 423,500
Fixed costs 375,000 505,000
Net loss ($ 42,500) ($ 81,500)

*$800,000 0.7
**$325,000 0.70
***$195,000 0.70