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Ch. 2 Directed Reading Guide

This document provides a chapter review guide for a chapter on cost behavior and cost-volume relationships. It includes 17 multiple choice questions assessing learning objectives related to: 1) how cost drivers affect cost behavior, 2) how variable and fixed costs are affected by changes in cost drivers, 3) step- and mixed-cost behavior, 4) assumptions of cost-volume-profit analysis, 5) calculating break-even points, 6) using contribution margin to determine sales needed for a target profit, 7) the difference between contribution margin and gross margin, 8) effects of sales mix on profits, and 9) computing cost-volume-profit relationships on an after-tax basis.

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Otabek Khamidov
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177 views

Ch. 2 Directed Reading Guide

This document provides a chapter review guide for a chapter on cost behavior and cost-volume relationships. It includes 17 multiple choice questions assessing learning objectives related to: 1) how cost drivers affect cost behavior, 2) how variable and fixed costs are affected by changes in cost drivers, 3) step- and mixed-cost behavior, 4) assumptions of cost-volume-profit analysis, 5) calculating break-even points, 6) using contribution margin to determine sales needed for a target profit, 7) the difference between contribution margin and gross margin, 8) effects of sales mix on profits, and 9) computing cost-volume-profit relationships on an after-tax basis.

Uploaded by

Otabek Khamidov
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 2

Introduction to Cost Behavior


and Cost—Volume Relationships
2-B4, 2-28(86), 2-52 (92), 2-55(), 2-64, 2-69
LEARNING OBJECTIVES:
When you have finished studying this chapter, you should be able to:

1. Explain how cost drivers affect cost behavior.

2. Show how changes in cost-driver levels affect variable and fixed costs.

3. Explain step- and mixed-cost behavior.

4. Create a cost-volume-profit (CVP) graph and understand the assumptions behind it.

5. Calculate break-even sales volume in total dollars and total units.

6. Calculate sales volume in total dollars and total units to reach a target profit.

7. Differentiate between contribution margin and gross margin.

8. Explain the effects of sales mix on profits (APPENDIX 2A).

9. Compute cost-volume-profit relationships on an after-tax basis (APPENDIX 2B).

1
CHAPTER 2: Chapter Review Guide
Learning Objective 1

1. Cost drivers . A measure of activities that requires the use of recources


and thereby cause costs.

a. can be volume based


b. affect the total level of costs incurred by companies
c. all of these
d. are activities that cause costs to be incurred

2. Production is one of the value-chain functions. Which one of the following is not
an example of a cost driver for production costs?

a. number of people supervised – supervisory salaries


b. labor hours Labour wages - production
c. machine hours
d. sales dollars

Marketing

Learning Objective 2

3. Which of the following will not remain constant, if the level of cost-driver
activity increases within the relevant range?

a. variable cost per unit


b. total variable costs
c. total fixed costs
d. A and C
e. total costs
f. B, C, and E

4. The limits of cost-driver activity within which a specific relationship between


costs and the cost driver is valid is called .

a. relevant range
b. variable range
c. total range
d. valid
range
e. Learning

Objective 3

A cost that changes abruptly at intesrval of activity because the resources and the costs in
indivisible chunks is called a(n) cost
f. indivisible
g. mixed
h. activity
i. step

5. The portion of mixed cost that remains constant per unit with activity
within the relevant range.

a. indivisible
b. fixed
c. variable
d. step

Learning Objective

Items 5 and 6 are based on the following data:

Diablo, Inc., produces and sells the finest quality pool tables in all of Contra
Costa County, California. The company expects the following sales and expenses
in 2011 for its tables:

Sales (1,000 tables @ $400 per table) $ 400,000


Variable expenses 200,000
Fixed expenses 120,000

6. How many tables must be sold in order for Diablo, Inc., to break

even? a.800
b. 600
c. 400
d. 200

7. What dollar amount of sales of tables is necessary to break

even? a. $120,000
b. $ 60,000
c. $240,000
d. $150,000

Learning Objective 4
8. Which of the following is not an assumption of cost-volume-profit analysis?

a. The behavior of revenues and expenses is accurately portrayed and is linear


over the relevant range.
b. Efficiency and productivity will both increase.
c. Sales mix will be constant.
d. Expenses can be classified into variable and fixed categories.
e. The inventory level at the end of the period will be insignificantly different
from that at the beginning.

9. Increase in contribution margin per unit .

a. decreases break-even point


b. increases break-even point
c. does not change break-even point
d. means there is a change in fixed cost per

unit Learning Objective 6

Items 11 and 12 are based on the following data (ignore income taxes):

Moto, Inc., manufactures and sells scooters. A projected income statement for the
expected sales volume of 100,000 scooters is as follows:

Sales $7,500,000
Variable expenses 3,000,000
Contribution margin $4,500,000
Fixed expenses 2,500,000
Before-tax profit $2,000,000

10. How many scooters would need to be sold to have a before-tax profit of

$2,900,000? a. 130,000
b. 110,000
c. 120,000
d. 100,000
e. 140,000
f. none of the above

11. What dollar sales volume would be required to achieve $3,500,000 of before-tax
profit?

a. $7,000,000
b. $10,000,000
c. $9,500,000
d. $7,500,000
e. some other amount

Learning Objective 7

12. The difference between sales and cost of goods sold is commonly called .

a. gross profit
b. operating income
c. contribution margin
d. net income

13. If variable selling expenses increase, then contribution margin (assuming all else
constant) must .

a. increase
b. need more information
c. stayed the same
d. decrease

Learning Objective 8

14. Dual Co produces and sells two products. Product A sells for $8 and has variable
expenses of $3. Product B sells for $18 and has variable expenses of $10. It predicts
sales of 20,000 units of A and 10,000 units of B. Fixed expenses are $100,000 per
month. Assume that Dual Co. hits its sales goal for February of $600,000, and
exceeds its expected before-tax profit of $70,000. What has happened?

a. TwinCo sold 40,000 units of product A and no product B.


b. TwinCo sold more of both products A and B than expected.
c. TwinCo sold more of product B and less of product A than expected.
d. TwinCo sold more of product A and less of product B than expected.

15. Breakeven in units for a multi-product firm is calculated as fixed costs divided by
.

a. the sum of the contribution margin percentages for each product


b. the sum of the individual product contribution margins
c. the weighted average contribution margin of all the products
d. it is not possible to calculate breakeven in units for a multi-product firm
Learning Objective 9

16. Refer to the data provided for Moto, Inc., in problems 11 and 12. Now assume
that Moto, Inc., is subject to a 40% tax. How many scooters must it sell to achieve
an after- tax income of $1,500,000?

a. 66,666
b. 333,333
c. 111,111
d. 142,857

17. After-tax profit equals before-tax profit .

a. multiplied by the tax rate


b. divided by 1 minus the tax rate
c. divided by the tax rate
d. multiplied by 1 minus the tax ra

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