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CHAPTER 10: COST ANALYSIS FOR MANAGEMENT

DECISION MAKING

Student: ___________________________________________________________________________

1. Which of the following is a more descriptive term of the type of cost accounting often called "direct
costing"? 
A. Prime costing
B. Out-of-pocket costing
C. Variable costing
D. Relevant costing

2. What costs are treated as product costs under direct costing? 

A. Only direct costs
B. Only variable manufacturing costs
C. All variable costs
D. All variable and fixed manufacturing costs

3. The basic assumption made in a variable costing system with respect to fixed costs is that all fixed costs are: 
A. Sunk costs.
B. Product costs.
C. Fixed as to the total cost.
D. Period costs.

4. Fortran Industries produces burner elements for stoves.  Each element sells for $20, and the company sells
approximately 2,000,000 gears each year.  Unit cost data for the year follows:

Direct material   $4.00

Direct labor   3.00
     
Other costs: Variable Fixed
   Manufacturing $2.50  $5.00
   Distribution 1.50 1.00

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The unit cost of gears for variable costing inventory purposes is: 
A. $14.50
B. $11.00
C. $9.50
D. $7.00
 

5. Mobile, Inc., manufactured 700 units of Product A, a new product, during the year.  Product A's variable and
fixed manufacturing costs per unit were $5.00 and $2.00, respectively.  The inventory of Product A on
December 31 of the year consisted of 100 units.  There was no inventory of Product A on January 1 of the year. 
What would be the change in the dollar amount of inventory on December 31 if the variable costing method
was used instead of the absorption costing method? 
A. $800 decrease
B. $200 decrease
C. $500 decrease
D. $200 increase

6. Which of the following is true about absorption costing? 

A. No fixed factory overhead is charged to production.
B. It is also known as direct costing.
C. The term used to designate the difference between sales and cost of goods sold is the “manufacturing
margin.”
D. Over-applied factory overhead is reflected in the income statement as a reduction cost of goods sold.

7. Which of the following does not appear on an income statement prepared using variable costing? 
A. Gross margin/profit.
B. Manufacturing margin
C. Fixed production costs.
D. Variable production costs.

8. On a variable costing income statement, the difference between sales and variable cost of goods sold is
called: 
A. gross margin.
B. contribution margin.
C. profit margin.
D. manufacturing margin.

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9. What factor related to manufacturing costs causes the difference in net earnings computed using absorption
costing and net earnings computed using variable costing? 
A. Absorption costing considers all costs in the determination of net earnings, whereas variable costing
considers only direct costs.
B. Absorption costing "inventories" all direct costs, but variable costing considers direct costs to be period
costs.
C. Absorption costing "inventories" all fixed manufacturing costs for the period in ending finished goods
inventory, but variable costing expenses all fixed costs.
D. Absorption costing allocates fixed manufacturing costs between cost of goods sold and inventories, and
variable costing considers all fixed costs to be period costs.

10. Net income reported under variable costing will exceed net income reported under absorption costing for a
given period if: 
A. Production equals sales for that period.
B. Production exceeds sales for that period.
C. Sales exceed production for that period.
D. The variable overhead exceeds the fixed overhead.

11. A manager can increase income under absorption costing by 

A. increasing variable costs.
B. increasing production.
C. increasing fixed costs.
D. increasing leased assets.

12. The use of either absorption or variable costing will make little difference in companies 
A. with large inventories.
B. using JIT.
C. with high fixed costs.
D. with high variable costs.

13. A basic tenet of variable costing is that fixed overhead costs should be currently expensed.  What is the
basic rationale behind this procedure? 
A. Fixed overhead costs will occur whether or not production occurs and so it presents a clearer picture of how
changes in production volume affect costs and income.
B. Fixed overhead costs are generally immaterial in amount and the cost of assigning the amounts to specific
products would outweigh the benefits.
C. Allocation of fixed overhead costs is arbitrary at best and could lead to erroneous decisions by management.
D. Fixed overhead costs are uncontrollable and should not be charged to a specific product.

 
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14. Absorption cost is required for: 
A. income tax purposes.
B. external financial reporting but not income tax purposes.
C. both external financial reporting and income tax purposes.
D. neither external financial reporting nor income tax purposes.

15. Segment profitability analysis may be used to evaluate the profitability of: 

A. Divisions.
B. Sales territories.
C. Product lines.
D. All of these are correct.

16. When evaluating profitability of a segment, costs that are directly identifiable with a specific segment are
called: 
A. Direct costs.
B. Common costs.
C. Indirect costs.
D. Fixed costs.

17. When evaluating profitability of a segment, costs that would disappear if the company eliminated the
segment are called: 
A. Direct costs.
B. Common costs.
C. Indirect costs.
D. Fixed costs.

18. The excess of revenue over variable costs, including manufacturing, selling and administrative, is called: 
A. Gross margin.
B. Manufacturing margin.
C. Contribution margin.
D. Segment margin.

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19. Johns Company operates in three different industries each of which is appropriately regarded as a reportable
segment.  Segment No. 1 contributed 60 percent of Johns Company's total sales.  Sales for Segment No. 1 were
$600,000 and total variable costs were $400,000.  Total common costs for all segments were $320,000.  Johns
allocates common costs based on the ratio of each segment's sales to the total sales. What should be the
contribution margin presented for Segment No. 1? 
A. $(100,000)
B. $8,000
C. $20,000
D. $200,000

20. Nolan Company has two segments:  Audio and Video.  Sales for the Audio Segment were $500,000, and
variable costs were 40% of sales.  The Video Segment also had sales of $500,000, but variable costs were 60%
of sales.  Fixed costs directly traceable to the Audio and Video segments were $150,000 and $120,000,
respectively.  Common fixed costs of $200,000 were arbitrarily allocated equally to each segment.

What was the contribution margin of the Audio Segment. 

A. $50,000
B. $300,000
C. $200,000
D. $150,000

21. Nolan Company has two segments:  Audio and Video.  Sales for the Audio Segment were $500,000, and
variable costs were 40% of sales.  The Video Segment also had sales of $500,000, but variable costs were 60%
of sales.  Fixed costs directly traceable to the Audio and Video segments were $150,000 and $120,000,
respectively.  Common fixed costs of $200,000 were arbitrarily allocated equally to each segment.

What was the segment margin of the Video Segment. 

A. $200,000
B. $80,000
C. $(20,000)
D. $150,000

22. Consider the Marshall Company’s segment analysis:

  Division A Division B Total Company

Sales $300,000 $200,000 $500,000
Variable costs 150,000 150,000 300,000
Contribution margin 150,000 50,000 200,000
Direct fixed costs 50,000 30,000 80,000
Segment margin 100,000 20,000 120,000
Allocated common fixed costs 90,000 60,000 150,000
Operating income (loss) $ 10,000 $(40,000) $(30,000)

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Common costs are allocated arbitrarily based on sales dollars.  If Marshall eliminates Segment B, what is the impact on the operating loss of the
company? 
A. The loss decreases by $40,000.
B. The loss increases by $20,000.
C. The loss decreases by $60,000.
D. The loss increases by $40,000.
 

23. A technique that uses the degrees of cost variability to measure the effect of changes in volume on resulting
profits is: 
A. Standard costing.
B. Variance analysis.
C. Cost-volume-profit analysis.
D. Segment profitability analysis.

24. If the selling price and the variable cost per unit both increase 10 percent and fixed costs do not change,
what is the effect on the contribution margin per unit and the contribution margin ratio? 
A. Contribution margin per unit and the contribution margin ratio both remain unchanged.
B. Contribution margin per unit and the contribution margin ratio both increase.
C. Contribution margin per unit increases and the contribution margin ratio decreases.
D. Contribution margin per unit increases and the contribution ratio remains unchanged.

25. The  Company is planning to sell Product Z for $10 a unit.  Variable costs are $6 a unit and fixed costs are
$100,000.  What must total sales be to break even? 
A. $266,667
B. $250,000
C. $200,000
D. $166,667

26. Consider the income statement for Bayless Company:

Sales $400,000
Variable costs 325,000
Contribution margin 75,000
Fixed costs 30,000
Net income $ 45,000

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What is the break-even point in sales dollars (rounded to the nearest dollar)? 
A. $264,063
B. $92,308
C. $160,000
D. $240,000
 

27. Chase Company’s new product is expected to have a sales price of $15 and variable unit price of $7.  Fixed
costs are expected to be $560,000.  What is the break-even point in sales dollars? 
A. $840,000
B. $1,050,000
C. $560,000
D. $1,200,000

28. Break-even sales volume in units is determined by: 

A. Dividing the fixed cost by the difference between the unit selling price and unit variable costs.
B. Subtracting the fixed cost from the contribution margin.
C. Dividing the fixed cost by the unit selling price.
D. Subtracting the variable cost per unit from the unit selling price.

29. Consider the following information for the Cornwall Company:

Sales price per unit $        120

Variable cost per unit 70
Total fixed costs 840,000

How many units must Cornwall sell to break even?

 
A. 7,000
B. 16,800
C. 12,000
D. 8,400
 

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30. The Blue Saints Band is holding a concert in Toronto.  Fixed costs relating to staging a concert are
$350,000.  Variable costs per patron are $5.00.  The selling price for a tickets $25.00.  The Blue Saints Band
has sold 23,000 tickets so far.

How many tickets does the Blue Saints Band need to sell to break even? 
A. 23,000
B. 20,000
C. 14,000
D. 17,500

31. Chase Company’s new product is expected to have a sales price of $15 and variable unit price of $7.  Fixed
costs are expected to be $560,000.  What is the break-even point in units? 
A. 56,000
B. 70,000
C. 37,333
D. 80,000

32. Consider the following information for the Cornwall Company:

Sales price per unit $        120

Variable cost per unit 70
Total fixed costs 840,000

What are Cornwall’s variable costs at the break-even point?

 
A. $490,000
B. $1,176,000
C. $840,000
D. $588,000
 

33. Queen, Ltd. has one product.  Its sales price and variable cost per unit are $20 and $15, respectively.  Last
year, Queen sold 25,000 units, which was 5,000 more than the break-even point.  What were Queen’s fixed
expenses? 
A. $100,000
B. $125,000
C. $300,000
D. There is not enough information to answer the question.

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34. Each of the following would affect the break-even point except a change in the: 
A. Variable cost per unit.
B. Total fixed costs.
C. Sales price per unit.
D. Number of units sold.

35. Tennenholtz Company’s break-even graph is depicted below.  The line labeled “D” is:

 
A. The sales line.
B. The contribution margin line.
C. The total cost line.
D. The variable cost line.

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36. Tennenholtz Company’s break-even graph is depicted below.  Which area indicates the profitability of the
company’s product?

 
A. E.
B. G.
C. B.
D. H.

37. Franklin Company is a medium-sized manufacturer of bicycles. During the year a new line called "Radical"
was made available to Franklin's customers.  The break-even point for sales of Radical is $250,000 with a
contribution margin ratio of 40 percent.  Assuming that the profit for the Radical line during the year amounted
to $80,000, total sales during the year would have amounted to: 
A. $450,000.
B. $420,000.
C. $400,000.
D. $475,000.

38. Kehler Corporation wished to market a new product for $2.00 a unit.  Fixed costs to manufacture this
product are $100,000.  The contribution margin is 40 percent.  How many units must be sold to realize net
income of $100,000 from this product? 
A. 200,000
B. 250,000
C. 300,000
D. 350,000

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39. The Blue Saints Band is holding a concert in Toronto.  Fixed costs relating to staging a concert are
$350,000.  Variable costs per patron are $5.00.  The selling price for a tickets $25.00.  The Blue Saints Band
has sold 23,000 tickets so far.

How many tickets does the Blue Saints Band need to sell to achieve net income of $75,000.  
A. 21,250
B. 14,000
C. 17,500
D. 17,000

40. Consider the income statement for Pickbury Farm:

Sales $500,000
Variable costs 350,000
Contribution margin 150,000
Fixed costs 80,000
Net income $ 70,000

At what sales level does Pickbury achieve net income of $100,000? 

A. $700,000
B. $600,000
C. $300,000
D. $530,000
 

41. If the fixed costs related to a product increase while variable costs and sales price remain constant, what will
happen to (1) contribution margin and (2) break-even point?

Contribution Break-even
Margin Point

 
A. Unchanged        Unchanged
B. Unchanged        Increase
C. Increase         Decrease
D. Decrease         Increase
 

42. Which of the following would cause the break-even point to change? 

A. Sales volume increased.
B. Fixed costs increased due to addition to physical plant.
C. Total variable costs increased as a function of higher production.
D. Total production decreased.

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43. A company increased the selling price for its product from $1.00 to $1.20 a unit when total fixed costs
increased from $400,000 to $450,000 and variable cost per unit remained unchanged.  How would these
changes affect the break-even point? 
A. The break-even point in units would be increased.
B. The break-even point in units would be decreased.
C. The break-even point in units would remain unchanged.
D. The effect cannot be determined from the information given.

44. The relative percentage of unit sales among the various products made by a firm is the: 
A. sales volume.
B. sales margin.
C. sales mix.
D. sales ratio.

45. Consider the following information about the Gumm Company:

  Unit Sales Unit Variable

Budgeted Sales Price Cost
Mint gum 6,000 cases $5.00 $3.00
Bubble gum 4,000 cases $6.00 $3.50

Budgeted fixed costs are $550,000.  The weighted-average unit contribution margin is: 
A. $2.25
B. $3.25
C. $2.20
D. $2.30
 

46. Calico Corporation makes the following products:

  Unit Contribution Margin

Budgeted Sales
Cotton cloth 1,500,000 yds. $.80
Wool cloth 1,000,000 yds. $.75

Budgeted fixed costs are $1,560,000.  The break-even point in total yards is: 
A. 2,000,000
B. 2,500,000
C. 1,950,000
D. 2,080,000
 

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47. Consider the following information about the Gumm Company:

  Unit Contribution Margin

Budgeted Sales
Mint gum 6,000 cases $2.00
Bubble gum 4,000 cases $2.50

Budgeted fixed costs are $550,000.  The break-even number of cases for the mint gum is: 
A. 250,000
B. 100,000
C. 132,000
D. 150,000
 

48. The margin of safety is the amount: 

A. by which the sales price per unit exceeds the variable cost per unit.
B. that the contribution margin exceeds fixed cost.
C. by which the profit calculated under absorption costing exceeds the profit calculated under variable costing.
D. that sales can decrease before the company will suffer a loss.

49. A  Company is planning to sell Product Z for $10 a unit.  Variable costs are $6 a unit and fixed costs are
$100,000.  If the company is currently selling 30,000 units, what is the margin of safety in units? 
A. 5,000
B. 10,000
C. 25,000
D. 20,000

50. The Blue Saints Band is holding a concert in Toronto.  Fixed costs relating to staging a concert are
$350,000.  Variable costs per patron are $5.00.  The selling price for a tickets $25.00.  The Blue Saints Band
has sold 23,000 tickets so far.

At the current level of sales, what is the margin of safety in dollars? 

A. $137,500
B. $87,500
C. $180,000
D. $115,000

51. Consider the income statement for Pickbury Farm:

Sales $500,000
Variable costs 350,000

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Contribution margin 150,000
Fixed costs 80,000
Net income $ 70,000

What is the margin of safety ratio (to the nearest percentage point)? 
A. 47%
B. 70%
C. 30%
D. 88%
 

52. Spire Ridge Company produces bells.  Fixed costs are $800,000.  Variable costs per bell are $60.00, and
each bell sells for $100.00.  The company’ sales budget calls for sales of 24,000 units.

At the budgeted level of sales, what is the margin of safety ratio? 

A. 20.0%
B. 16.7%
C. 44.4%
D. 33.3%

53. The margin of safety ratio is equal to: 

A. Net operating income percentage / Contribution margin ratio.
B. Contribution margin / Sales.
C. Contribution margin / Net operating income.
D. Margin of safety / Fixed cost.

54. Income taxes 
A. will increase the break-even point.
B. will decrease the break-even point.
C. have no impact on the break-even point.
D. may increase or decrease the break-even point depending upon the income tax rate.

55. If a company has an income tax rate of 40% and fixed costs of $105,000, and wishes to earn an after-tax
profit of $150,000, what must its pre-tax income be? 
A. $375,000
B. $425,000
C. $250,000
D. $175,000

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56. A company has fixed costs of $700,000.  The selling price and variable cost per unit are $50.00, and $10.00,
respectively.

How many units does the company need to sell to achieve net income of $100,000 after income tax, assuming
the income tax rate is 50%? 
A. 2,500
B. 18,000
C. 22,500
D. 17,500

57. A study that highlights the significant cost and revenue data between two alternatives is a(n): 
A. cost analysis.
B. income analysis.
C. differential analysis.
D. distribution analysis.

58. The difference in cost between two alternatives, such as to make a component part of a final product versus
buying the part from an outside supplier is called: 
A. Variable cost.
B. Differential cost.
C. Product cost.
D. Indirect cost.

59. Donellan Company produces a special gear used in automatic transmissions.  Each gear sells for $30, and
the company sells approximately 500,000 gears each year.  Unit cost data for the year follows:

Direct material   $9.00

Direct labor   8.00
     
Other costs: Variable Fixed
   Manufacturing $3.00  $7.00
   Distribution 5.00 3.00

Donellan has received an offer from a foreign manufacturer to purchase 25,000 gears.  Domestic sales would be unaffected by this transaction.  If the
offer is accepted, variable distribution costs will increase $1.00 per gear for insurance, shipping, and import duties.  The relevant unit cost to a pricing
decision on this offer is: 
A. $18.00.
B. $20.00.
C. $24.00.
D. $26.00.
 

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60. Bradley Inc. has the capacity to make 100,000 windows.  Bradley is currently operating at 80% capacity. 
The windows usually sell for $20.00 each.  Costs for each window follow:

Direct materials $ 5.00

Direct labor 3.00
Variable factory overhead 2.00
Fixed factory overhead 4.00
Total $14.00

The Army has offered to buy 10,000 windows for $12.00 each for barracks.  Bradley should: 
A. Reject the offer because it currently does not have enough capacity to accept the order.
B. Reject the order because the company will lose $20,000 on the order.
C. Accept the offer because the company will realize $20,000 in additional contribution margin.
D. Accept the offer because the company will realize $40,000 in additional contribution margin.
 

61. Bradley Inc. has the capacity to make 100,000 windows.  Bradley is currently operating at 100% capacity. 
The windows usually sell for $20.00 each.  Costs for each window follow:

Direct materials $ 5.00

Direct labor 3.00
Variable factory overhead 2.00
Fixed factory overhead 4.00
Total $14.00

The Army has offered to buy 10,000 windows for $12.00 each for barracks.  Bradley should: 
A. Reject the offer because it currently does not have enough capacity to accept the order.
B. Reject the order because the company will lose $20,000 on the order.
C. Accept the offer because the company will realize $20,000 in additional contribution margin.
D. Accept the offer because the company will realize $40,000 in additional contribution margin.
 

62. The practice of accepting a selling price when there is excess capacity, as long as it exceeds variable cost is
called: 
A. Contribution pricing.
B. Differential pricing.
C. Capacity pricing.
D. Special pricing.

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63. Chapman Corporation manufactures lamps.  Management is currently studying whether the company should
continue to make the cord assembly or purchase them from Graham Company for $5.25.  Chapman needs
20,000 cord assemblies a year.  If the part is purchased, the company can not use the released facilities for
another manufacturing activity.

Chapman’s unit cost to manufacture the cord assembly is:

   Direct materials $2.25

   Direct labor 1.75
   Factory overhead (70% fixed) 2.50
   Total $6.50

The decision Chapman should make and the related differential income is:
               Decision                           Differential Income 
A. Buy from Graham                      $10,000
B. Make the assembly                     $10,000
C. Make the assembly                     $25,000
D. Buy from Graham                      $25,000
 

64. Cleese Company currently purchases a finished part from Idle Company, but is considering using it excess
capacity to make the part.  Normal capacity is 20,000 hours, but Cleese is currently running at 17,000 hours. 
Details about budgeted factory overhead follow:

  Total Per Hour

Fixed factory overhead $40,000 $2.00
Variable factory overhead 50,000 2.50
  $90,000 $4.50

Direct costs to manufacture 1,000 parts in-house would be:

Materials $  6,000
Direct labor (2,000 @ $8 per hour) 16,000
  $22,000

The relevant unit cost Cleese should use to decide whether to make or buy the part is: 
A. $31.00
B. $24.50
C. $27.00
D. $26.00
 

65. Another term for cost incurred to sell and deliver products is: 
A. Differential costs.
B. Administrative costs.
C. General costs.
D. Distribution costs.

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66. Activity-based costing may be used to charge selling and administrative expenses to: 
A. types of products sold.
B. sales offices.
C. sales persons.
D. All of the above.

67. An example of a distribution cost that can be directly assigned to selling activity would be: 
A. Advertising costs.
B. Commissions.
C. Sales manager’s salary.
D. Telephone expenses.

68. In performing an activity-based costing study for distribution costs, appropriate cost drivers for preparing
orders for shipment would include all of the following except the: 
A. Number of orders shipped.
B. Time spent packing orders.
C. Time devoted to selling each product.
D. Number of items per order.

69. Norman Industries began operations on January 1 and produces a single product that sells for $15.00 per
unit.  Standard capacity is 50,000 units per year.  During the year, 50,000 units were produced and 40,000 units
were sold.  There was no inventory at the beginning of the year.  Manufacturing costs and selling and
administrative expenses follow:

  Fixed Costs Variable Costs

Raw materials -- $3.75 per unit produced
Direct labor --  2.25 per unit produced
Factory overhead $120,000  2.00 per unit produced
Selling and administrative   80,000  1.00 per unit sold

There were no variances from the standard variable costs.  Any under- or overapplied overhead is written off directly at year end as an adjustment to
cost of goods sold.

a. In presenting inventory on the balance sheet at December 31, what is the unit cost under absorption costing?
b. In presenting inventory on the balance sheet at December 31, what is the unit cost under variable costing?
c. What is the net income for the year under absorption costing?
d. What is the net income for the year under direct costing?
e. What is the cost of the ending inventory under absorption costing?
f. What is the cost of the ending inventory under variable costing?

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70. The Tijama Manufacturing Company has determined the cost of manufacturing a unit of product to be as
follows, based on normal production of 50,000 units per year:

Direct materials $20.00  

Direct labor 15.00  
Variable factory overhead  10.00 $45.00
Fixed factory overhead    12.00
    $57.00

Operating statistics for the month of August and September include:

  August September
Units produced   4,200  4,000
Units sold   3,500  4,200
Selling and administrative expenses $25,000 $35,000

The selling price is $70 per unit.  There were no inventories on August 1, and there is no work in process at September 30.

Prepare comparative income statements for each month under the following methods:
a. Absorption costing method
b. Direct costing method

 
 

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71. Jasper Company makes two versions of one product, Standard and Deluxe.  In November, sales of standard
and Deluxe amount to $680,000 and $520,000, respectively.  The contribution margin ratio for Standard is 30%
and Standard had direct fixed production and administrative costs of $125,000.  The contribution margin ratio
for Deluxe was 40% and direct fixed costs were $160,000.  Common costs that couldn’t be allocated in a
meaningful way were $100,000. 

Prepare a segmented income statement for the month of November. 

 
 

72. The following data relate to a year's budgeted activity for Palisades Company, a single product company:

  Per Unit
Selling price $16.00 
Variable manufacturing costs 6.00
Variable selling costs 4.00
Fixed manufacturing costs (based on 120,000 units)  1.50
Fixed selling costs (based on 120,000 units)   .50

Total fixed costs remain unchanged within the relevant range in which the company is currently operating.

a. What is the projected annual break-even sales in units?

b. What dollar amount of sales would Jorgenson need to achieve operating income of $50,000?
c. If fixed costs increased $15,000, how many more units must be sold to break even?

 
 

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73. A traditional break-even chart is illustrated below:

Identify each letter on the above chart, using the proper terminology. 

 
 

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74. Tress Enterprises manufactures shampoo and conditioner.  Last year, Tress sold 120,000 bottles of product. 
Unit sales of conditioner amounted to 60% of the number of units of shampoo.  This trend is expected to
continue.  The selling price for both products is $12.00, however, the variable cost of a unit of shampoo is
$6.00, while the variable cost of a unit of conditioner is $8.00.  Fixed costs are expected to be $420,000.

(a)   Compute the number of each product sold.

(b)   Compute the weighted-average contribution margin per unit.
(c)   Compute the overall break-even point in units.
(d)   Compute the unit sales of shampoo and conditioner at the break-even point.
(e)   Compute the dollar sales of shampoo and conditioner at the break-even point. 

 
 

75. The Gaylord Company has sales of $800,000, variable costs of $400,000, and fixed costs of $250,000.

Compute the following:

a. Contribution margin ratio

b. Break-even sales volume
c. Margin of safety ratio
d. Net income as a percentage of sales

 
 

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76. Fischer Company desires and after-tax income of $975,000.  It has fixed costs of $480,000.  Its only product
sells for $40 and has a variable cost per unit of $28.  Fischer’s effective tax rate is 35%. 

1.  What amount of pre-tax income is needed to earn an after tax income of $975,000?

2.  What target volume of sales revenue must be reached to earn $975,000 in after tax income?

3.  How many units must be sold to earn after-tax income of $975,000?

4.  What target volume of sales revenue would have been needed to achieve the $975,000 of income had no
income tax existed? 

 
 

77. Sherpa Manufacturing has the following income statement for 6,000 units:

Sales $600,000
Variable costs 360,000
Contribution margin 240,000
Fixed costs 80,000
Net income $160,000

(a) At what sales volume (in sales dollars) does Sherpa break even?
(b) At what sales volume (in units) does Sherpa break even?
(c) Given the income statement above, compute the margin of safety.
(d) What level of sales volume must be attained to reach net income of $200,000?
(e) What level of sales volume must be attained to reach net income of $180,000, assuming Sherpa had to pay income taxes at a rate of 40%? 

 
 

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78. Westwood Gear, Inc., recently received a special order to manufacture 10,000 units for a Canadian
company.  This order specified that the selling price per unit should not exceed $50.  Since the order was
received without the effort of the sales department, no commission would be paid.  However, an export
handling charge of $5 per unit would be incurred.  Management anticipates that acceptance of the order will
have no effect on other sales.

The company is now operating at 80 percent of capacity, or 80,000 units, and expects to continue at this level
for the coming year without the Canadian order.  Unit costs based on estimated actual capacity for the coming
year include:

Selling price $65.00

Expenses:  
   Direct materials $18.00
   Direct labor 16.00
   Variable factory overhead 10.00
   Fixed factory overhead 3.00
   Sales commissions 5.00
   Other marketing expenses (two-thirds variable) 3.00
   General expenses (60% fixed)   5.00
      Total $60.00

Prepare an analysis showing the effect on profits if the special order is accepted by the company.  Based on your analysis, should the order be filled,
and why? 

 
 

79. Charleston Ltd. manufactures school desks.  The company’s forecasted income statement for the year,
before any special orders, is as follows:

  Amount Per Unit

Sales $30,000 $20
Cost of goods sold 24,000 16
Gross profit 6,000 4
Selling expenses 4,500 3
Net operating income $ 1,500 $1

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Fixed costs in the forecasted income statement are $13,500 in manufacturing and $2,700 in selling.  The company has capacity to produce 2,000
units, but has received a special order for 800 units at $15 from an overseas company, and would have to replace some of its regular business to
accept it.  Charleston will incur an additional $3 per unit in shipping should they accept the offer.

1.  Calculate Charleston’s current contribution margin per unit.

2.  Should Charleston accept the special order for 800 units?

3.  Assume the special order had the same terms, but was for 300 units.  Should Charleston accept it? 

 
 

80. Busby Company needs 10,000 units of a certain part to use in its production cycle.  The following
information is available:

Costs incurred by Busby to make the part:

Direct materials                                                $15
Direct labor                                                        12
Variale factory overhead                                     13
Fixed factory overhead                                        10
Total                                                                 $50

Costs to buy the part from Thurco:                     $45

If Busby buys the part from Thurco instead of making it, Busby could not use the released facilities in another
manufacturing activity.  However, twenty percent of the fixed overhead would be avoided because one of the
supervisors could be let go.

(a)In deciding whether to make or buy the part, what are the relevant costs that Busby must consider.

(b) What decision should Busby make? 

 
 

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81. Hoctor Industries wishes to determine the profitability of its products and asks the cost accountant to make a
comparative analysis of sales, cost of sales and distribution costs of each product for the year.  The accountant
gathers the following information which will be useful in preparing the analysis:

  Standard Deluxe
Number of units sold 500,000 350,000
Number of orders received 15,000 4,000
Selling price per unit $10 $20
Cost per unit $4 $12

Advertising expenses total $100,000, with 60% being expended to advertise the Deluxe model.  The representatives commissions are 5% and 7% for
the standard and deluxe models, respectively.  The sales manager’s salary of $50,000 is allocated evenly between products.  Other miscellaneous
selling costs are estimated to be $6 per order received.

(a) Compute the selling cost per unit.

(b) Prepare an analysis for Hoctor Industries that will show in comparative form the income derived from the sale of each unit for the year. 

 
 

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CHAPTER 10: COST ANALYSIS FOR MANAGEMENT

DECISION MAKING Key
 

1. Which of the following is a more descriptive term of the type of cost accounting often called "direct
costing"? 
A. Prime costing
B. Out-of-pocket costing
C. Variable costing
D. Relevant costing

2. What costs are treated as product costs under direct costing? 

A. Only direct costs
B. Only variable manufacturing costs
C. All variable costs
D. All variable and fixed manufacturing costs

3. The basic assumption made in a variable costing system with respect to fixed costs is that all fixed costs are: 
A. Sunk costs.
B. Product costs.
C. Fixed as to the total cost.
D. Period costs.

4. Fortran Industries produces burner elements for stoves.  Each element sells for $20, and the company sells
approximately 2,000,000 gears each year.  Unit cost data for the year follows:

Direct material   $4.00

Direct labor   3.00
     
Other costs: Variable Fixed
   Manufacturing $2.50  $5.00
   Distribution 1.50 1.00

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The unit cost of gears for variable costing inventory purposes is: 
A. $14.50
B. $11.00
C. $9.50
D. $7.00
 

5. Mobile, Inc., manufactured 700 units of Product A, a new product, during the year.  Product A's variable and
fixed manufacturing costs per unit were $5.00 and $2.00, respectively.  The inventory of Product A on
December 31 of the year consisted of 100 units.  There was no inventory of Product A on January 1 of the year. 
What would be the change in the dollar amount of inventory on December 31 if the variable costing method
was used instead of the absorption costing method? 
A. $800 decrease
B. $200 decrease
C. $500 decrease
D. $200 increase

6. Which of the following is true about absorption costing? 

A. No fixed factory overhead is charged to production.
B. It is also known as direct costing.
C. The term used to designate the difference between sales and cost of goods sold is the “manufacturing
margin.”
D. Over-applied factory overhead is reflected in the income statement as a reduction cost of goods sold.

7. Which of the following does not appear on an income statement prepared using variable costing? 
A. Gross margin/profit.
B. Manufacturing margin
C. Fixed production costs.
D. Variable production costs.

8. On a variable costing income statement, the difference between sales and variable cost of goods sold is
called: 
A. gross margin.
B. contribution margin.
C. profit margin.
D. manufacturing margin.

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9. What factor related to manufacturing costs causes the difference in net earnings computed using absorption
costing and net earnings computed using variable costing? 
A. Absorption costing considers all costs in the determination of net earnings, whereas variable costing
considers only direct costs.
B. Absorption costing "inventories" all direct costs, but variable costing considers direct costs to be period
costs.
C. Absorption costing "inventories" all fixed manufacturing costs for the period in ending finished goods
inventory, but variable costing expenses all fixed costs.
D. Absorption costing allocates fixed manufacturing costs between cost of goods sold and inventories, and
variable costing considers all fixed costs to be period costs.

10. Net income reported under variable costing will exceed net income reported under absorption costing for a
given period if: 
A. Production equals sales for that period.
B. Production exceeds sales for that period.
C. Sales exceed production for that period.
D. The variable overhead exceeds the fixed overhead.

11. A manager can increase income under absorption costing by 

A. increasing variable costs.
B. increasing production.
C. increasing fixed costs.
D. increasing leased assets.

12. The use of either absorption or variable costing will make little difference in companies 
A. with large inventories.
B. using JIT.
C. with high fixed costs.
D. with high variable costs.

13. A basic tenet of variable costing is that fixed overhead costs should be currently expensed.  What is the
basic rationale behind this procedure? 
A. Fixed overhead costs will occur whether or not production occurs and so it presents a clearer picture of how
changes in production volume affect costs and income.
B. Fixed overhead costs are generally immaterial in amount and the cost of assigning the amounts to specific
products would outweigh the benefits.
C. Allocation of fixed overhead costs is arbitrary at best and could lead to erroneous decisions by management.
D. Fixed overhead costs are uncontrollable and should not be charged to a specific product.

 
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14. Absorption cost is required for: 
A. income tax purposes.
B. external financial reporting but not income tax purposes.
C. both external financial reporting and income tax purposes.
D. neither external financial reporting nor income tax purposes.

15. Segment profitability analysis may be used to evaluate the profitability of: 

A. Divisions.
B. Sales territories.
C. Product lines.
D. All of these are correct.

16. When evaluating profitability of a segment, costs that are directly identifiable with a specific segment are
called: 
A. Direct costs.
B. Common costs.
C. Indirect costs.
D. Fixed costs.

17. When evaluating profitability of a segment, costs that would disappear if the company eliminated the
segment are called: 
A. Direct costs.
B. Common costs.
C. Indirect costs.
D. Fixed costs.

18. The excess of revenue over variable costs, including manufacturing, selling and administrative, is called: 
A. Gross margin.
B. Manufacturing margin.
C. Contribution margin.
D. Segment margin.

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19. Johns Company operates in three different industries each of which is appropriately regarded as a reportable
segment.  Segment No. 1 contributed 60 percent of Johns Company's total sales.  Sales for Segment No. 1 were
$600,000 and total variable costs were $400,000.  Total common costs for all segments were $320,000.  Johns
allocates common costs based on the ratio of each segment's sales to the total sales. What should be the
contribution margin presented for Segment No. 1? 
A. $(100,000)
B. $8,000
C. $20,000
D. $200,000

20. Nolan Company has two segments:  Audio and Video.  Sales for the Audio Segment were $500,000, and
variable costs were 40% of sales.  The Video Segment also had sales of $500,000, but variable costs were 60%
of sales.  Fixed costs directly traceable to the Audio and Video segments were $150,000 and $120,000,
respectively.  Common fixed costs of $200,000 were arbitrarily allocated equally to each segment.

What was the contribution margin of the Audio Segment. 

A. $50,000
B. $300,000
C. $200,000
D. $150,000

21. Nolan Company has two segments:  Audio and Video.  Sales for the Audio Segment were $500,000, and
variable costs were 40% of sales.  The Video Segment also had sales of $500,000, but variable costs were 60%
of sales.  Fixed costs directly traceable to the Audio and Video segments were $150,000 and $120,000,
respectively.  Common fixed costs of $200,000 were arbitrarily allocated equally to each segment.

What was the segment margin of the Video Segment. 

A. $200,000
B. $80,000
C. $(20,000)
D. $150,000

22. Consider the Marshall Company’s segment analysis:

  Division A Division B Total Company

Sales $300,000 $200,000 $500,000
Variable costs 150,000 150,000 300,000
Contribution margin 150,000 50,000 200,000
Direct fixed costs 50,000 30,000 80,000
Segment margin 100,000 20,000 120,000
Allocated common fixed costs 90,000 60,000 150,000
Operating income (loss) $ 10,000 $(40,000) $(30,000)

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Common costs are allocated arbitrarily based on sales dollars.  If Marshall eliminates Segment B, what is the impact on the operating loss of the
company? 
A. The loss decreases by $40,000.
B. The loss increases by $20,000.
C. The loss decreases by $60,000.
D. The loss increases by $40,000.
 

23. A technique that uses the degrees of cost variability to measure the effect of changes in volume on resulting
profits is: 
A. Standard costing.
B. Variance analysis.
C. Cost-volume-profit analysis.
D. Segment profitability analysis.

24. If the selling price and the variable cost per unit both increase 10 percent and fixed costs do not change,
what is the effect on the contribution margin per unit and the contribution margin ratio? 
A. Contribution margin per unit and the contribution margin ratio both remain unchanged.
B. Contribution margin per unit and the contribution margin ratio both increase.
C. Contribution margin per unit increases and the contribution margin ratio decreases.
D. Contribution margin per unit increases and the contribution ratio remains unchanged.

25. The  Company is planning to sell Product Z for $10 a unit.  Variable costs are $6 a unit and fixed costs are
$100,000.  What must total sales be to break even? 
A. $266,667
B. $250,000
C. $200,000
D. $166,667

26. Consider the income statement for Bayless Company:

Sales $400,000
Variable costs 325,000
Contribution margin 75,000
Fixed costs 30,000
Net income $ 45,000

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What is the break-even point in sales dollars (rounded to the nearest dollar)? 
A. $264,063
B. $92,308
C. $160,000
D. $240,000
 

27. Chase Company’s new product is expected to have a sales price of $15 and variable unit price of $7.  Fixed
costs are expected to be $560,000.  What is the break-even point in sales dollars? 
A. $840,000
B. $1,050,000
C. $560,000
D. $1,200,000

28. Break-even sales volume in units is determined by: 

A. Dividing the fixed cost by the difference between the unit selling price and unit variable costs.
B. Subtracting the fixed cost from the contribution margin.
C. Dividing the fixed cost by the unit selling price.
D. Subtracting the variable cost per unit from the unit selling price.

29. Consider the following information for the Cornwall Company:

Sales price per unit $        120

Variable cost per unit 70
Total fixed costs 840,000

How many units must Cornwall sell to break even?

 
A. 7,000
B. 16,800
C. 12,000
D. 8,400
 

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30. The Blue Saints Band is holding a concert in Toronto.  Fixed costs relating to staging a concert are
$350,000.  Variable costs per patron are $5.00.  The selling price for a tickets $25.00.  The Blue Saints Band
has sold 23,000 tickets so far.

How many tickets does the Blue Saints Band need to sell to break even? 
A. 23,000
B. 20,000
C. 14,000
D. 17,500

31. Chase Company’s new product is expected to have a sales price of $15 and variable unit price of $7.  Fixed
costs are expected to be $560,000.  What is the break-even point in units? 
A. 56,000
B. 70,000
C. 37,333
D. 80,000

32. Consider the following information for the Cornwall Company:

Sales price per unit $        120

Variable cost per unit 70
Total fixed costs 840,000

What are Cornwall’s variable costs at the break-even point?

 
A. $490,000
B. $1,176,000
C. $840,000
D. $588,000
 

33. Queen, Ltd. has one product.  Its sales price and variable cost per unit are $20 and $15, respectively.  Last
year, Queen sold 25,000 units, which was 5,000 more than the break-even point.  What were Queen’s fixed
expenses? 
A. $100,000
B. $125,000
C. $300,000
D. There is not enough information to answer the question.

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34. Each of the following would affect the break-even point except a change in the: 
A. Variable cost per unit.
B. Total fixed costs.
C. Sales price per unit.
D. Number of units sold.

35. Tennenholtz Company’s break-even graph is depicted below.  The line labeled “D” is:

 
A. The sales line.
B. The contribution margin line.
C. The total cost line.
D. The variable cost line.

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36. Tennenholtz Company’s break-even graph is depicted below.  Which area indicates the profitability of the
company’s product?

 
A. E.
B. G.
C. B.
D. H.

37. Franklin Company is a medium-sized manufacturer of bicycles. During the year a new line called "Radical"
was made available to Franklin's customers.  The break-even point for sales of Radical is $250,000 with a
contribution margin ratio of 40 percent.  Assuming that the profit for the Radical line during the year amounted
to $80,000, total sales during the year would have amounted to: 
A. $450,000.
B. $420,000.
C. $400,000.
D. $475,000.

38. Kehler Corporation wished to market a new product for $2.00 a unit.  Fixed costs to manufacture this
product are $100,000.  The contribution margin is 40 percent.  How many units must be sold to realize net
income of $100,000 from this product? 
A. 200,000
B. 250,000
C. 300,000
D. 350,000

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39. The Blue Saints Band is holding a concert in Toronto.  Fixed costs relating to staging a concert are
$350,000.  Variable costs per patron are $5.00.  The selling price for a tickets $25.00.  The Blue Saints Band
has sold 23,000 tickets so far.

How many tickets does the Blue Saints Band need to sell to achieve net income of $75,000.  
A. 21,250
B. 14,000
C. 17,500
D. 17,000

40. Consider the income statement for Pickbury Farm:

Sales $500,000
Variable costs 350,000
Contribution margin 150,000
Fixed costs 80,000
Net income $ 70,000

At what sales level does Pickbury achieve net income of $100,000? 

A. $700,000
B. $600,000
C. $300,000
D. $530,000
 

41. If the fixed costs related to a product increase while variable costs and sales price remain constant, what will
happen to (1) contribution margin and (2) break-even point?

Contribution Break-even
Margin Point

 
A. Unchanged        Unchanged
B. Unchanged        Increase
C. Increase         Decrease
D. Decrease         Increase
 

42. Which of the following would cause the break-even point to change? 

A. Sales volume increased.
B. Fixed costs increased due to addition to physical plant.
C. Total variable costs increased as a function of higher production.
D. Total production decreased.

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43. A company increased the selling price for its product from $1.00 to $1.20 a unit when total fixed costs
increased from $400,000 to $450,000 and variable cost per unit remained unchanged.  How would these
changes affect the break-even point? 
A. The break-even point in units would be increased.
B. The break-even point in units would be decreased.
C. The break-even point in units would remain unchanged.
D. The effect cannot be determined from the information given.

44. The relative percentage of unit sales among the various products made by a firm is the: 
A. sales volume.
B. sales margin.
C. sales mix.
D. sales ratio.

45. Consider the following information about the Gumm Company:

  Unit Sales Unit Variable

Budgeted Sales Price Cost
Mint gum 6,000 cases $5.00 $3.00
Bubble gum 4,000 cases $6.00 $3.50

Budgeted fixed costs are $550,000.  The weighted-average unit contribution margin is: 
A. $2.25
B. $3.25
C. $2.20
D. $2.30
 

46. Calico Corporation makes the following products:

  Unit Contribution Margin

Budgeted Sales
Cotton cloth 1,500,000 yds. $.80
Wool cloth 1,000,000 yds. $.75

Budgeted fixed costs are $1,560,000.  The break-even point in total yards is: 
A. 2,000,000
B. 2,500,000
C. 1,950,000
D. 2,080,000
 

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47. Consider the following information about the Gumm Company:

  Unit Contribution Margin

Budgeted Sales
Mint gum 6,000 cases $2.00
Bubble gum 4,000 cases $2.50

Budgeted fixed costs are $550,000.  The break-even number of cases for the mint gum is: 
A. 250,000
B. 100,000
C. 132,000
D. 150,000
 

48. The margin of safety is the amount: 

A. by which the sales price per unit exceeds the variable cost per unit.
B. that the contribution margin exceeds fixed cost.
C. by which the profit calculated under absorption costing exceeds the profit calculated under variable costing.
D. that sales can decrease before the company will suffer a loss.

49. A  Company is planning to sell Product Z for $10 a unit.  Variable costs are $6 a unit and fixed costs are
$100,000.  If the company is currently selling 30,000 units, what is the margin of safety in units? 
A. 5,000
B. 10,000
C. 25,000
D. 20,000

50. The Blue Saints Band is holding a concert in Toronto.  Fixed costs relating to staging a concert are
$350,000.  Variable costs per patron are $5.00.  The selling price for a tickets $25.00.  The Blue Saints Band
has sold 23,000 tickets so far.

At the current level of sales, what is the margin of safety in dollars? 

A. $137,500
B. $87,500
C. $180,000
D. $115,000

51. Consider the income statement for Pickbury Farm:

Sales $500,000
Variable costs 350,000

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Contribution margin 150,000
Fixed costs 80,000
Net income $ 70,000

What is the margin of safety ratio (to the nearest percentage point)? 
A. 47%
B. 70%
C. 30%
D. 88%
 

52. Spire Ridge Company produces bells.  Fixed costs are $800,000.  Variable costs per bell are $60.00, and
each bell sells for $100.00.  The company’ sales budget calls for sales of 24,000 units.

At the budgeted level of sales, what is the margin of safety ratio? 

A. 20.0%
B. 16.7%
C. 44.4%
D. 33.3%

53. The margin of safety ratio is equal to: 

A. Net operating income percentage / Contribution margin ratio.
B. Contribution margin / Sales.
C. Contribution margin / Net operating income.
D. Margin of safety / Fixed cost.

54. Income taxes 
A. will increase the break-even point.
B. will decrease the break-even point.
C. have no impact on the break-even point.
D. may increase or decrease the break-even point depending upon the income tax rate.

55. If a company has an income tax rate of 40% and fixed costs of $105,000, and wishes to earn an after-tax
profit of $150,000, what must its pre-tax income be? 
A. $375,000
B. $425,000
C. $250,000
D. $175,000

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56. A company has fixed costs of $700,000.  The selling price and variable cost per unit are $50.00, and $10.00,
respectively.

How many units does the company need to sell to achieve net income of $100,000 after income tax, assuming
the income tax rate is 50%? 
A. 2,500
B. 18,000
C. 22,500
D. 17,500

57. A study that highlights the significant cost and revenue data between two alternatives is a(n): 
A. cost analysis.
B. income analysis.
C. differential analysis.
D. distribution analysis.

58. The difference in cost between two alternatives, such as to make a component part of a final product versus
buying the part from an outside supplier is called: 
A. Variable cost.
B. Differential cost.
C. Product cost.
D. Indirect cost.

59. Donellan Company produces a special gear used in automatic transmissions.  Each gear sells for $30, and
the company sells approximately 500,000 gears each year.  Unit cost data for the year follows:

Direct material   $9.00

Direct labor   8.00
     
Other costs: Variable Fixed
   Manufacturing $3.00  $7.00
   Distribution 5.00 3.00

Donellan has received an offer from a foreign manufacturer to purchase 25,000 gears.  Domestic sales would be unaffected by this transaction.  If the
offer is accepted, variable distribution costs will increase $1.00 per gear for insurance, shipping, and import duties.  The relevant unit cost to a pricing
decision on this offer is: 
A. $18.00.
B. $20.00.
C. $24.00.
D. $26.00.
 

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60. Bradley Inc. has the capacity to make 100,000 windows.  Bradley is currently operating at 80% capacity. 
The windows usually sell for $20.00 each.  Costs for each window follow:

Direct materials $ 5.00

Direct labor 3.00
Variable factory overhead 2.00
Fixed factory overhead 4.00
Total $14.00

The Army has offered to buy 10,000 windows for $12.00 each for barracks.  Bradley should: 
A. Reject the offer because it currently does not have enough capacity to accept the order.
B. Reject the order because the company will lose $20,000 on the order.
C. Accept the offer because the company will realize $20,000 in additional contribution margin.
D. Accept the offer because the company will realize $40,000 in additional contribution margin.
 

61. Bradley Inc. has the capacity to make 100,000 windows.  Bradley is currently operating at 100% capacity. 
The windows usually sell for $20.00 each.  Costs for each window follow:

Direct materials $ 5.00

Direct labor 3.00
Variable factory overhead 2.00
Fixed factory overhead 4.00
Total $14.00

The Army has offered to buy 10,000 windows for $12.00 each for barracks.  Bradley should: 
A. Reject the offer because it currently does not have enough capacity to accept the order.
B. Reject the order because the company will lose $20,000 on the order.
C. Accept the offer because the company will realize $20,000 in additional contribution margin.
D. Accept the offer because the company will realize $40,000 in additional contribution margin.
 

62. The practice of accepting a selling price when there is excess capacity, as long as it exceeds variable cost is
called: 
A. Contribution pricing.
B. Differential pricing.
C. Capacity pricing.
D. Special pricing.

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63. Chapman Corporation manufactures lamps.  Management is currently studying whether the company should
continue to make the cord assembly or purchase them from Graham Company for $5.25.  Chapman needs
20,000 cord assemblies a year.  If the part is purchased, the company can not use the released facilities for
another manufacturing activity.

Chapman’s unit cost to manufacture the cord assembly is:

   Direct materials $2.25

   Direct labor 1.75
   Factory overhead (70% fixed) 2.50
   Total $6.50

The decision Chapman should make and the related differential income is:
               Decision                           Differential Income 
A. Buy from Graham                      $10,000
B. Make the assembly                     $10,000
C. Make the assembly                     $25,000
D. Buy from Graham                      $25,000
 

64. Cleese Company currently purchases a finished part from Idle Company, but is considering using it excess
capacity to make the part.  Normal capacity is 20,000 hours, but Cleese is currently running at 17,000 hours. 
Details about budgeted factory overhead follow:

  Total Per Hour

Fixed factory overhead $40,000 $2.00
Variable factory overhead 50,000 2.50
  $90,000 $4.50

Direct costs to manufacture 1,000 parts in-house would be:

Materials $  6,000
Direct labor (2,000 @ $8 per hour) 16,000
  $22,000

The relevant unit cost Cleese should use to decide whether to make or buy the part is: 
A. $31.00
B. $24.50
C. $27.00
D. $26.00
 

65. Another term for cost incurred to sell and deliver products is: 
A. Differential costs.
B. Administrative costs.
C. General costs.
D. Distribution costs.

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66. Activity-based costing may be used to charge selling and administrative expenses to: 
A. types of products sold.
B. sales offices.
C. sales persons.
D. All of the above.

67. An example of a distribution cost that can be directly assigned to selling activity would be: 
A. Advertising costs.
B. Commissions.
C. Sales manager’s salary.
D. Telephone expenses.

68. In performing an activity-based costing study for distribution costs, appropriate cost drivers for preparing
orders for shipment would include all of the following except the: 
A. Number of orders shipped.
B. Time spent packing orders.
C. Time devoted to selling each product.
D. Number of items per order.

69. Norman Industries began operations on January 1 and produces a single product that sells for $15.00 per
unit.  Standard capacity is 50,000 units per year.  During the year, 50,000 units were produced and 40,000 units
were sold.  There was no inventory at the beginning of the year.  Manufacturing costs and selling and
administrative expenses follow:

  Fixed Costs Variable Costs

Raw materials -- $3.75 per unit produced
Direct labor --  2.25 per unit produced
Factory overhead $120,000  2.00 per unit produced
Selling and administrative   80,000  1.00 per unit sold

There were no variances from the standard variable costs.  Any under- or overapplied overhead is written off directly at year end as an adjustment to
cost of goods sold.

a. In presenting inventory on the balance sheet at December 31, what is the unit cost under absorption costing?
b. In presenting inventory on the balance sheet at December 31, what is the unit cost under variable costing?
c. What is the net income for the year under absorption costing?
d. What is the net income for the year under direct costing?
e. What is the cost of the ending inventory under absorption costing?
f. What is the cost of the ending inventory under variable costing?

(a) Materials   $ 3.75

  Labor   2.25
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  Overhead--Fixed ($120,000 / 50,000)   2.40
  Overhead--Variable     2.00
      $10.40
       
(b) Materials   $3.75
  Direct labor   2.25
  Overhead--Variable    2.00
      $8.00
       
(c) Sales (40,000 ´ $15)   $600,000
  Cost of goods sold (40,000 ´ $10.40) $416,000  
  Under- or overapplied factory overhead*    -   416,000
  Gross profit   $184,000
  Selling and administrative [$80,000 + (40,000 x $1.00)]  120,000
  Net income   $ 64,000
       
* There is no under- or overapplied fixed factory overhead    
  since actual the production level was equal to the    
  expected production level of standard capacity    
       
(d) Sales   $600,000
  Cost of goods sold ($8.00 ´ 40,000)    320,000
  Manufacturing margin   $280,000
  Fixed factory overhead $120,000  
  Selling and administrative  120,000  240,000
  Net income   $ 40,000

(e)      Ending inventory is 10,000 units (50,000 - 40,000)  

           Inventory under absorption costing (10,000 x $10.40) $104,000
   
           Inventory under variable costing (10,000 x $8.00) $ 80,000
   

70. The Tijama Manufacturing Company has determined the cost of manufacturing a unit of product to be as
follows, based on normal production of 50,000 units per year:

Direct materials $20.00  

Direct labor 15.00  
Variable factory overhead  10.00 $45.00
Fixed factory overhead    12.00
    $57.00

Operating statistics for the month of August and September include:

  August September
Units produced   4,200  4,000
Units sold   3,500  4,200
Selling and administrative expenses $25,000 $35,000

The selling price is $70 per unit.  There were no inventories on August 1, and there is no work in process at September 30.

Prepare comparative income statements for each month under the following methods:
a. Absorption costing method
b. Direct costing method
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The Tijama Manufacturing Co.

Income Statement
For the Month Ended August 31, 20--
  (a) (b)
Absorption Direct
Costing Costing
Sales (3,500 units ´ $70)   $245,000   $245,000
Cost of goods sold        
   (3,500 ´ $57; $199,500       
   3,500 ´ $45)        157,500
Subtract overapplied fixed overhead    
    400*  199,100
Gross margin   $ 45,900    
Manufacturing margin       $ 87,500
Fixed factory overhead     $50,000  
Selling & administrative expenses  
  25,000  25,000   75,000
Net income (loss)   $ 20,900   $ 12,500

* Calculation of underapplied fixed factory overhead:  

  Fixed overhead per year:  
  $12 per unit ´ 50,000 units = $600,000  
  Fixed overhead per month:  
  $600,000 / 12 months = 50,000  
     
  Fixed factory overhead applied to production:  
  4,200 units ´ $12 $50,400
  Fixed overhead per month  50,000
  Fixed factory overhead overapplied $   400

The Tijama Manufacturing Co.

Income Statement
For the Month Ended September 30, 20--
  (a) (b)
Absorption Direct
Costing Costing
Sales (4,200   $294,0   $294,000
units ´ $70) 00
Cost of        
goods sold
   (4,200 ´ $239,400        
$57)
   (4,200 ´        189,000
$45)
Add        
underapplied
fixed
overhead    2,000**  241,4    
00
Gross   $    
margin 52,600
Contribution       $105,000
margin

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Fixed factory     $50,000  
overhead
Selling &        
administrativ
e
expenses     35,00  35,000   85,000
0
Net income   $   $ 20,000
(loss) 17,600
     
** Calculation of underapplied fixed factory overhead:
Fixed factory overhead applied to production (4,000 ´ $48,000
$12)
 
         
  Fixed factory overhead per month      50,000
  Fixed factory overhead underapplied     $ 2,000

71. Jasper Company makes two versions of one product, Standard and Deluxe.  In November, sales of standard
and Deluxe amount to $680,000 and $520,000, respectively.  The contribution margin ratio for Standard is 30%
and Standard had direct fixed production and administrative costs of $125,000.  The contribution margin ratio
for Deluxe was 40% and direct fixed costs were $160,000.  Common costs that couldn’t be allocated in a
meaningful way were $100,000. 

Prepare a segmented income statement for the month of November. 

Jasper Company
Segmented Income Statement
For the Month ended November 30, 20--
  Standard Deluxe Total
Sales revenue $680,000 $520,000 $1,200,000
Less variable costs 476,000 312,000   788,000
Contribution margin 204,000 208,000 412,000
Less direct fixed costs 125,000 160,000   285,000
Segment margin $ 79,000 $ 48,000 127,000
Less common fixed costs       100,000
Net income     $   27,000

72. The following data relate to a year's budgeted activity for Palisades Company, a single product company:

  Per Unit
Selling price $16.00 
Variable manufacturing costs 6.00
Variable selling costs 4.00
Fixed manufacturing costs (based on 120,000 units)  1.50
Fixed selling costs (based on 120,000 units)   .50

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Total fixed costs remain unchanged within the relevant range in which the company is currently operating.

a. What is the projected annual break-even sales in units?

b. What dollar amount of sales would Jorgenson need to achieve operating income of $50,000?
c. If fixed costs increased $15,000, how many more units must be sold to break even?

(a) Selling price per unit $  16.00

     Less variable cost per unit    10.00
  Contribution margin $   6.00
     
  Fixed cost--manufacturing ($1.50 ´ 120,000 units) $180,000
  Fixed cost--selling ($.50 ´ 120,000 units)   60,000
     Total fixed costs $240,000

  BE =        Fixed Costs       = $240,000 = 40,000 units

Contributi $6
on
Margin

(b) Contribution margin ratio = $6 / $15 = 40%  

  Fixed Costs + Desired Income  = $240,000 + $50,000 = $725,000  

Contribution Margin Ratio .40

(c)    $15,000 / $6.00 (contribution margin per unit) = 2,500 units  

Palisades would have to sell 2,500 additional units to cover the additional fixed cost.        
   

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73. A traditional break-even chart is illustrated below:

Identify each letter on the above chart, using the proper terminology. 

Lettered Lettered
Item in Item in
Break-even Break-even
Chart Chart
Terminology Terminology
A Break-even point F Fixed cost line
B Net income area G Fixed cost area
C Sales line H Variable cost area
D Total cost line I x-axis (units)
E Net loss area J y-axis (dollars)

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74. Tress Enterprises manufactures shampoo and conditioner.  Last year, Tress sold 120,000 bottles of product. 
Unit sales of conditioner amounted to 60% of the number of units of shampoo.  This trend is expected to
continue.  The selling price for both products is $12.00, however, the variable cost of a unit of shampoo is
$6.00, while the variable cost of a unit of conditioner is $8.00.  Fixed costs are expected to be $420,000.

(a)   Compute the number of each product sold.

(b)   Compute the weighted-average contribution margin per unit.
(c)   Compute the overall break-even point in units.
(d)   Compute the unit sales of shampoo and conditioner at the break-even point.
(e)   Compute the dollar sales of shampoo and conditioner at the break-even point. 

(a)   Total sales = shampoo sales + conditioner sales

        120,000 = x + .6x
        120,000 = 1.6x
        x = 75,000 (shampoo sales)
        Conditioner sales = .6 x 75,000 = 45,000

(b)

Contribution margin
Unit variable cost per unit Number of units
Product Sales Price Total
Shampoo $12.00 $6.00 $6.00 75,000 $450,000
Conditioner 12.00 8.00 4.00 45,000 180,000
        120,000 $630,000

Weighted-average unit contribution margin = $630,000 / 120,000 = $5.25

(c)  Break-even point in units $420,000 / $5.25 = 80,000 units.

(d) and (e)

      Shampoo sales in units = 80,000 x (75,000 / 120,000) = 50,000 x $12 = $600,000
      Conditioner sales = 80,000 x (45,000 / 120,000) = 30,000 x $12 = $360,000
 

75. The Gaylord Company has sales of $800,000, variable costs of $400,000, and fixed costs of $250,000.

Compute the following:

a. Contribution margin ratio

b. Break-even sales volume
c. Margin of safety ratio
d. Net income as a percentage of sales

(a) Contribution margin ratio = $800,000 - $400,000 = 50.0%

$800,000
         
         
(b) Break-even sales volume = $250,000 = $500,000
.50

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(c) Margin of safety ratio = $800,000 - $500,000 = 37.5%
$800,000
         
         
(d) Net income percentage = 50.0% ´ 37.5% = 18.75%

76. Fischer Company desires and after-tax income of $975,000.  It has fixed costs of $480,000.  Its only product
sells for $40 and has a variable cost per unit of $28.  Fischer’s effective tax rate is 35%. 

1.  What amount of pre-tax income is needed to earn an after tax income of $975,000?

2.  What target volume of sales revenue must be reached to earn $975,000 in after tax income?

3.  How many units must be sold to earn after-tax income of $975,000?

4.  What target volume of sales revenue would have been needed to achieve the $975,000 of income had no
income tax existed? 

1.  $975,000 / (1 - .35) = $1,500,000

2. 

Sales price per unit $40

Variable cost per unit 28
Contribution margin per unit $12

Contribution margin ratio = $12 / $40 = 30%

Break-even sales volume = ($480,000 + $1,500,000) / 30% = $6,600,000

3.  Break-even in units = ($480,000 + $1,500,000) / $12 = 165,000 or

Break-even sales volume = $6,600,000 / $40 = 165,000

4.  ($480,000 + $975,000) / 30% = $4,850,000

 

77. Sherpa Manufacturing has the following income statement for 6,000 units:

Sales $600,000
Variable costs 360,000
Contribution margin 240,000
Fixed costs 80,000
Net income $160,000

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(a) At what sales volume (in sales dollars) does Sherpa break even?
(b) At what sales volume (in units) does Sherpa break even?
(c) Given the income statement above, compute the margin of safety.
(d) What level of sales volume must be attained to reach net income of $200,000?
(e) What level of sales volume must be attained to reach net income of $180,000, assuming Sherpa had to pay income taxes at a rate of 40%? 

(a)  Contribution margin ratio = contribution margin / sales

Contribution margin ratio = $240,000 / $600,000 = 40%

Break-even point in sales dollars = fixed costs / contribution margin ratio

Break-even point in sales dollars = $80,000 / 40% = $200,000.

(b) Unit contribution margin = contribution margin / number of units

Unit contribution margin = $240,000 / 6,000 = $40 per unit

Break-even point in units = fixed costs / unit contribution margin

Break-even point in units = $80,000 / $40 = 2,000 units

(c) Margin of safety = sales revenues - break-even sales volume

Margin of safety = $600,000 - $200,000 = $400,000

(d) Target volume of sales = (target profit + fixed costs) / contribution margin ratio
Target volume of sales = ($200,000 + $80,000) / 40% = $700,000

(e) Target volume of sales = (fixed costs + (target after-tax income/(1 - tax rate))/ contribution margin ratio

Target volume of sales = ($80,000 + ($180,000/(1 - 40%) / 40%

Target volume of sales = (80,000 + 300,000) / 40% = $950,000

78. Westwood Gear, Inc., recently received a special order to manufacture 10,000 units for a Canadian
company.  This order specified that the selling price per unit should not exceed $50.  Since the order was
received without the effort of the sales department, no commission would be paid.  However, an export
handling charge of $5 per unit would be incurred.  Management anticipates that acceptance of the order will
have no effect on other sales.

The company is now operating at 80 percent of capacity, or 80,000 units, and expects to continue at this level
for the coming year without the Canadian order.  Unit costs based on estimated actual capacity for the coming
year include:

Selling price $65.00

Expenses:  
   Direct materials $18.00
   Direct labor 16.00
   Variable factory overhead 10.00
   Fixed factory overhead 3.00
   Sales commissions 5.00
   Other marketing expenses (two-thirds variable) 3.00
   General expenses (60% fixed)   5.00
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      Total $60.00

Prepare an analysis showing the effect on profits if the special order is accepted by the company.  Based on your analysis, should the order be filled,
and why? 

Westwood Gear, Inc.

Effect of Special Order on Profits
Differential costs: Per Unit
Direct materials $18.00
Direct labor  16.00
Variable factory overhead  10.00
Other marketing expenses   2.00
Export-handling charge   5.00
General expenses (40% variable)   2.00
Total $53.00
Differential selling price  50.00
Loss $ 3.00
Loss per unit ´ units sold = $3 ´ 10,000
  = $30,000 decrease in profit

The order would be likely turned down if it affected normal customers, or it generated a loss.  In this case a loss was created.  On the other hand, if
this is a new market, and the company can justify using this special order as a means to enter a new potentially profitable market they may undertake
the venture even if money is lost on the one order.
 

79. Charleston Ltd. manufactures school desks.  The company’s forecasted income statement for the year,
before any special orders, is as follows:

  Amount Per Unit

Sales $30,000 $20
Cost of goods sold 24,000 16
Gross profit 6,000 4
Selling expenses 4,500 3
Net operating income $ 1,500 $1

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Fixed costs in the forecasted income statement are $13,500 in manufacturing and $2,700 in selling.  The company has capacity to produce 2,000
units, but has received a special order for 800 units at $15 from an overseas company, and would have to replace some of its regular business to
accept it.  Charleston will incur an additional $3 per unit in shipping should they accept the offer.

1.  Calculate Charleston’s current contribution margin per unit.

2.  Should Charleston accept the special order for 800 units?

3.  Assume the special order had the same terms, but was for 300 units.  Should Charleston accept it? 

1.  The number of units per the forecasted income statement is $30,000 / $20 = 1,500.

Variable manufacturing costs = $24,000 - $13,500 = $10,500 / 1,500 units = $7.00 per unit
Variable selling costs = $4,500 - $2,700 = $1,800 / 1,500 units = $1.20 per unit

Total variable cost per unit = $7.00 + $1.20 = $8.20

Contribution margin per unit = $20.00 - $8.20 = $11.80

2.  Charleston should not accept the offer for 800 units if it must replace existing business.  The contribution
margin for the special offer is $3.80.  ($15.00 - ($8.20 + $3.00))  Since Charleston is producing 1,500 and has
capacity for 2,000, it would have to replace 300 units of regular business, so it would give up contribution
margin of $3,540 (300 x $11.80) on those sales to accommodate the order for 800 which would return
contribution margin of only $3,040 (800 x $3.80).

3.  If Charleston does not have to replace existing business to fill the special order for 300 desks, it should do so
as those desks would provide additional contribution margin of $1,140 (300 x $3.80).

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80. Busby Company needs 10,000 units of a certain part to use in its production cycle.  The following
information is available:

Costs incurred by Busby to make the part:

Direct materials                                                $15
Direct labor                                                        12
Variale factory overhead                                     13
Fixed factory overhead                                        10
Total                                                                 $50

Costs to buy the part from Thurco:                     $45

If Busby buys the part from Thurco instead of making it, Busby could not use the released facilities in another
manufacturing activity.  However, twenty percent of the fixed overhead would be avoided because one of the
supervisors could be let go.

(a)In deciding whether to make or buy the part, what are the relevant costs that Busby must consider.

(b) What decision should Busby make? 

(a) Variable costs to manufacture the product:

Direct materials                       $15
Direct labor                               12
Variable factory overhead          13
                                               $40

Cost to buy the part from Thurco                         $45

Savings from releasing the supervisor                   ( 2)
                                                                                     $43

(b) Based on the above analysis, Busby should continue to make the part.

81. Hoctor Industries wishes to determine the profitability of its products and asks the cost accountant to make a
comparative analysis of sales, cost of sales and distribution costs of each product for the year.  The accountant
gathers the following information which will be useful in preparing the analysis:

  Standard Deluxe
Number of units sold 500,000 350,000
Number of orders received 15,000 4,000
Selling price per unit $10 $20
Cost per unit $4 $12

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Advertising expenses total $100,000, with 60% being expended to advertise the Deluxe model.  The representatives commissions are 5% and 7% for
the standard and deluxe models, respectively.  The sales manager’s salary of $50,000 is allocated evenly between products.  Other miscellaneous
selling costs are estimated to be $6 per order received.

(a) Compute the selling cost per unit.

(b) Prepare an analysis for Hoctor Industries that will show in comparative form the income derived from the sale of each unit for the year. 

(a)

Expense Standard Deluxe Total

Selling expenses:      
    Advertising
         $100,000 x 40% $ 40,000
         $100,000 x 60%
$ 60,000 $  100,000
     Commissions
          500,000 x $10 x 5% 250,000
          350,000 x $20 x 7%
490,000 740,000
     Sales manager salary
          $50,000 x 1/2 25,000
          $50,000 x 1/2
25,000 50,000
     Miscellaneous selling costs  
           15,000 x $6 90,000
             4,000 x $6   114,000
24,000
Total selling costs $405,000 $599,000 $1,004,000
Number of units 500,000 350,000  
Selling cost per unit $ .81 $1.71  

(b)
Hoctor Industries
Comparative Income Analysis
For the Year Ended December 31, 20--

  Standard Deluxe Total

Sales
    500,000 x $10 $5,000,000
    350,000 x $20
$7,000,000 $12,000,000
Manufacturing cost
    500,000 x $4 2,000,000
    350,000 x $12
4,200,000 6,200,000
Selling cost   405,000   599,000 1,004,000
       
Operating profit $2,595,000 $2,201,000 $4,796,000

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