Chapter 20

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Apr 3, 2024

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Chapter 20 Assignments: 1. Which of the following questions is well suited for cost-volume-profit analysis? How many units must be sold to achieve a target level of operating income?; What will happen to profitability if capacity is expanded?; What level of sale must be generated to break even? 2. In cost-volume-profit (CVP) analysis, managers identify ___ that cause increases or decrease in various ___. Activities; cost 3. Costs that do not change significantly in response to changes in an activity base are referred to as ___ costs. Fixed 4. Which of the following are examples of variable costs? Sales commissions; weekly fuel costs for delivery trucks; overtime wages paid to production workers 5. Mixed costs composed of both fixed and variable elements are often referred to as ___ costs. Semivariable 6. Which of the following statements is/are true about cost-volume-profit (CVP) analysis? CVP analysis can be applied to a department within a company; CVP analysis can be applied to a particular product line of a company 7. Rommel Trucking uses cargo miles driven (CMD) as an activity base. The company reports the following breakdown of cost behaviors: Purely fixed costs = $900,000/year; Purely variable costs = $2.50/CMD; and Semivariable (mixed) costs = $100,000/year + $0.50/CMD. Compute the company's estimated total cost per CMD if the following miles are logged by drivers during the year: 1. The estimated total cost per CMD at 400,000 miles logged is $___. 2. The estimated total cost per CMD at 800,000 miles logged is $___. 3. The estimated total cost per CMD at 1 million miles logged is $___. $5.50; $4.25; $4 8. Which of the following is the most appropriate activity base for a retail company to use for cost-volume-profit analysis? Sales revenue generated 9. True or false: Changes in the average total cost per unit of an activity base result solely from changes in the average fixed costs associated with an activity base. TRUE 10. Which of the following is an example of a fixed cost? Annual property tax 11. As activity base volume increases, total variable costs: increase 12. Which of the following is an example of a variable cost? annual cost of goods sold

13. The economies of scale achieved by increasing production output cause which of the following to decrease? average total cost per unit; average fixed cost per unit 14. Semivariable costs are sometimes called mixed costs because they contain both a ___ and a ___ component. Fixed; variable 15. Donaldson Trucking uses cargo miles driven (CMD) as an activity base. The company reports the following breakdown of cost behaviors: Fixed Costs per Year License fees = $12,000 Insurance = $28,000 Depreciation = $160,000 Office & Clerical = $190,000 Variable Costs per CMD Driver wages = $0.40/CMD Fuel = $1.25/CMD Semivariable Costs/CMD Maintenance & Service Costs = $10,000 + $0.35/CMD The intercept of the company's total cost graph is $___. $400,000 The slope of the company's total cost line is $___. $2 The company's estimated total cost at 1 million CMD is $___. $2,400,000 16. Changes in the average total cost per unit of an activity base result solely from changes in the average ___ cost per unit associated with an activity base. Fixed 17. As activity base volume increases, variable costs per unit of activity: stay the same 18. The unit cost savings that result from increasing output by using production facilities more intensively are referred to as ___ ___ ___. Economies of scale 19. Which of the following might cause total variable cost behavior to appear as a curvilinear function? Receiving price discounts on larger and larger purchases of direct materials as output volume increases to higher and higher levels; Paying overtime wages to direct labor workers as output volume increases to higher and higher levels

20. Which of the following would most likely exhibit semivariable behaviors? selling, general, and administrative costs; factory overhead costs 21. True or false: Businesses tend to operate somewhere between 45% and 80% of full capacity to avoid large fluctuations in volume that can cause irregular cost behavior patterns. TRUE 22. What happens as input units of a particular activity base increase? The average total cost per unit of that activity base decreases; The average fixed cost per unit of that activity base decreases 23. True or false: Changes in the average total cost per unit of an activity base result solely from changes in the average fixed costs associated with an activity base. TRUE 24. Complete the following formula: Revenue – Variable Costs – Fixed Costs = ___ ___. Operating income 25. As activity base volume increases, the average fixed cost per unit of activity: decrease 26. The fixed cost line of a cost-volume-profit graph: has a slope of 0; is horizontal throughout a company's relevant range of activity 27. Which of the following might cause fixed cost behavior to appear as a stair-step function? Adding additional supervisors as output volume increases to higher and higher levels; Renting additional storage warehouse space as output volume increases to higher and higher levels 28. Prior to reaching the break-even point, each dollar of contribution margin contributes to the coverage of a company's ___ costs. Fixed 29. For most companies, it is reasonable to assume that total costs tend to vary with volume in a straight-line pattern within a ___ ___ of output. Relevant range 30. If a company has a contribution margin ratio of 75%, which of the following statements is/are true? Up to the break-even point, each dollar of sales will contribute 75 cents to the coverage of fixed costs; After the break-even point, each dollar of sales will contribute 75 cents to operating income

31. Medford sells muffler bearings. Medford's sales price per unit is $150, and its variable cost per unit is $50. The company's fixed costs total $800,000. The company's break-even point is ___ units . 8,000 32. The level of activity at which a company's ___ income equals ___ is referred to as its break-even point. Operating zero 33. The cost-volume-profit graph reveals that for every additional unit of product that a company sells: total costs will increase by the slope of the total cost line; the distance from the fixed cost line to the total cost line will increase by the variable cost per unit; total costs will increase by the variable cost per unit 34. Wilson sells industrial benders. Wilson's sales price per bender is $500, and its variable cost per bender is $300. The company's fixed costs currently total $900,000. Wilson expects to generate revenue of $4 million in the upcoming period. The company must reduce its current level of fixed costs (FC) by $___ in order to achieve a target operating income of $850,000. $150,000 35. After the break-even point has been reached, each dollar of contribution margin contributes directly to a company's___ ___. Operating income 36. A company's margin of safety multiplied by its contribution margin ratio equals its ___ ___. Operating income 37. A company has a contribution margin ratio of 40%. After the break-even point, each dollar of sales will contribute___ cents to the company’s ___ income. 40; operating 38. Medford sells muffler bearings. Medford's sales price per unit is $150, and its variable cost per unit is $50. The company's fixed costs total $800,000. The company must sell ___ units to achieve a target operating income of $1.5 million. 23,000 ( $150 - $50 = $100 then ($800,000 + $1,500,000)/ $100 = 23,000) 39. The term profit in cost-volume-profit analysis refers to operating income because: taxes and nonoperating gains and losses do not possess the characteristics of variable or fixed costs 40. A company's expected dollar change in ___ volume multiplied by its ___ ___ ___ equals its estimated change in operating income. Sales; contribution margin ratio 41. Wilson sells industrial benders. Wilson's sales price per bender is $500, and its variable cost per bender is $300. The company's fixed

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