Question 1 If Activity Level Increases 10 Total Variable Costs Will
1. If the activity level increases 10%, total variable costs will
A. remain the same.
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B. decrease by less than 10%.
C. increase 10%.
D. increase by more than 10%.
Answer: increase 10%.
2. Portman Company’s activity for the first three months of 2013 are as follows:
Machine HoursElectrical Cost
Using the high-low method, how much is the cost per machine hour?
3. Gribble Company’s high and low level of activity last year was 60,000 units of product produced in May and 20,000 units produced in November. Machine maintenance costs were $104,000 in May and $40,000 in November. Using the high-low method, determine an estimate of total maintenance cost for a month in which production is expected to be 45,000 units.
4. The break-even point is where
A. total sales equal total fixed costs.
B. total variable costs equal total fixed costs.
C. contribution margin equals total fixed costs.
D. total sales equal total variable costs.
Answer: contribution margin equals total fixed costs.
5. Armstrong Industries has a contribution margin of $300,000 and a contribution margin ratio of 30%. How much are total variable costs?
6. Farmers’ Industries has fixed costs of $400,000 and variable costs are 60% of sales. How much will Farmers report as sales when its net income equals $40,000?
7. A cost which remains constant per unit at various levels of activity is a
A. variable cost.
B. fixed cost.
C. manufacturing cost.
D. mixed cost.
Answer: variable cost.
8. Wendy Industries produces only one product. Monthly fixed expenses are $12,000, monthly unit sales are 2,500, and the unit contribution margin is $10. How much is monthly net income?
9. The increased use of automation and less use of the work force in companies has caused a trend towards an increase in
A. both variable and fixed costs.
B. variable costs and no change in fixed costs.
C. fixed costs and a decrease in variable costs.
D. variable costs and a decrease in fixed costs.
Answer: fixed costs and a decrease in variable costs.
10. For an activity base to be useful in cost behavior analysis,
A. the activity level should be constant over a period of time.
B. the activity should always be stated in dollars.
C. there should be a correlation between changes in the level of activity and changes in costs.
D. the activity should always be stated in terms of units
Answer: there should be a correlation between changes in the level of activity and changes in costs
11. Which one of the following is not an assumption of CVP analysis?
A. All units produced are sold.
B. The behavior of costs and revenues are linear within the relevant range.
C. Sales mix remains constant.
D. All costs are variable costs.
Answer: All costs are variable costs.
12. How much sales are required to earn a target income of $160,000 if total fixed costs are $200,000 and the contribution margin ratio is 40%?
13. Greg’s Golf Carts produces two models: Model 24 has sales of 500 units with a contribution margin of $40 each; Model 26 has sales of 350 units with a contribution margin of $50 each. If sales of Model 26 increase by 100 units, how much will profit change?
A. $17,500 increase
B. $22,500 increase
C. $5,000 increase
D. $35,000 increase
Answer: $5,000 increase
14. At the high level of activity in November, 7,000 machine hours were run and power costs were $16,000. In April, a month of low activity, 2,000 machine hours were run and power costs amounted to $8,000. Using the high-low method, the estimated fixed cost element of power costs is
15. The CVP income statement
a. is distributed internally and externally.
b. discloses contribution margin in the body of the statement.
c. classifies costs by functions.
d. will reflect a different net income than the traditional income statement
Answer: discloses contribution margin in the body of the statement.
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