Chapter M5: Business Decisions Using Cost BehaviorMultiple Choice

1.   The functional income statement --

reports gross margin.

categorizes costs by their behavior -- either fixed or variable.

can easily be used as a planning tool to predict future profits at different levels of activity.

* is only used for internal decision-making purposes.Hint for question 1The functional income statement categorizes costs by their function -- either product or period.

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2. The contribution income statement --

lists fixed costs first followed by variable costs.

is allowed for external reporting to shareholders.

categorizes costs as either product or period.

* can easily be used as a planning tool to predict future profits at different levels of activity.

Hint for question 2The contribution income statement categorizes costs by their behavior -- either fixed or variable.

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3. Hindquarter, Inc. sells a single product. In 2007, 7,000 units were sold resulting in $70,000 of sales revenue; $28,000 of variable costs; and $12,000 of fixed costs. Contribution margin per unit is --

$4.00.

$4.29.

* $6.00.

none of the above.Hint for question 3Sales - variable costs = contribution margin. Contribution margin per unit = total contribution margin divided by the number of units sold.

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4. Hindquarter, Inc. sells a single product. In 2007, 7,000 units were sold resulting in $70,000 of sales revenue; $28,000 of variable costs; and $12,000 of fixed costs. The contribution margin ratio is --

17%.

40%.* 60%.

none of the above.Hint for question 4The contribution margin ratio is expressed as a percentage of sales. Contribution margin ratio = (total contribution margin / total sales) or (per unit contribution margin / per unit selling price).

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5. Cost-volume-profit analysis --

can be used to calculate a desired level of profits, but not break-even point.

can easily be applied with the use of the functional income statement.

* requires that mixed costs be separated into their fixed and variable components.

can only be based on units -- not on sales dollars.Hint for question 5Cost-volume-profit analysis examines the relationship between cost and volume, and the effect of that relationship on profits.

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6. Hindquarter, Inc. sells a single product. In 2007, 7,000 units were sold resulting in $70,000 of sales revenue; $28,000 of variable costs (VC); and $12,000 of fixed costs(FC). Break-even (BE) point in units is --

* 2,000 units.

3,000 units.

5,000 units.

none of the above.Hint for question 6Sales - variable costs = total contribution margin (CM). CM per unit = total CM / the number of units sold. Total fixed costs / CM per unit = BE point in units.

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7. Hindquarter, Inc. sells a single product. In 2007, 7,000 units were sold resulting in $70,000 of sales revenue; $28,000 of variable costs; and $12,000 of fixed costs. Break-even point in total sales dollars is --

$12,000.* $20,000.

$30,000.

none of the above.Hint for question 7Sales - variable costs = total CM. CM ratio = total CM / total sales. Total fixed costs / CM ratio = BE point in sales dollars.

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8. Hindquarter, Inc. sells a single product. In 2007, 7,000 units were sold resulting in $70,000 of sales revenue; $28,000 of variable costs; and $12,000 of fixed costs. The number of units that must be sold to double net income is --

10,000 units.

11,666 units.* 12,000 units.

none of the above.Hint for question 8Use the amounts given in the problem to compute net income. 2. Double the net income. 3. (Total fixed costs + target profits) / CM per unit = required unit sales.

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9. Hindquarter, Inc. sells a single product. In 2007, 7,000 units were sold resulting in $70,000 of sales revenue; $28,000 of variable costs; and $12,000 of fixed costs. To achieve $48,000 in profits total sales must be --

$80,000.* $100,000.

$150,000.

none of the above.Hint for question 9(Total fixed costs + target profits) / CM ratio = required total sales dollars.

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10.  

Hindquarter, Inc. sells a single product. In 2007, 7,000 units were sold resulting in $70,000 of sales revenue; $28,000 of variable costs; and $12,000 of fixed costs. If sales increase by $25,000, net income will increase by --

$10,000.* $15,000.

$22,200.

impossible to compute.Hint for question 10What is contribution margin? What does it contribute to? For every additional dollar in sales above the break-even point, profits will increase by what amount?

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11.  

Hindquarter, Inc. sells a single product. In 2007, 7,000 units were sold resulting in $70,000 of sales revenue; $28,000 of variable costs; and $12,000 of fixed costs. If variable costs increase by $1 per unit, the new break-even point is --

* 2,400 units.

4,000 units.

1,740 units.

none of the above.Hint for question 11Total fixed costs / CM per unit = BE point in units. Total fixed costs / CM ratio = BE point in sales dollars.

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12.  

All of the following are cost-volume-profit assumptions except --

all costs can be classified as either fixed or variable.

fixed costs remain the same in total throughout the relevant range.

selling price and variable costs remain the same per unit throughout the relevant range.

* all assumptions match reality.

Hint for question 12CVP is an estimation technique and certain assumptions must be made for this type of analysis to be used effectively.

Chapter M5: Business Decisions Using Cost BehaviorTrue or False

1.   In order to perform cost-volume-profit analysis, a company must be able to separate its costs into their fixed and variable components.

* TRUE

FALSEHint for question 1What are the components of cost-volume-profit analysis?

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2. Break-even point is not an important concept since the goal of business is to make a profit.

TRUE* FALSEHint for question 2What information does break-even point provide?

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3. Selling price per unit is $30, variable cost per unit is $15, and fixed cost per unit is $10. When this company operates above the break-even point the sale of one more unit will increase the net income by $5.

TRUE* FALSEHint for question 3When an additional unit is sold, will additional variable costs be incurred? Will additional fixed costs be incurred?

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4. If the selling price per unit is $50 and the contribution margin ratio is 40%, then the variable cost per unit must be $20.

TRUE* FALSEHint for question 4How does the variable cost per unit relate to the contribution margin per unit?

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5. A company with sales of $100,000, variable costs of $70,000, and fixed costs of $50,000 will reach its break-even point if sales are increased by $20,000.

TRUE

* FALSE

Hint for question 5Calculate the contribution margin ratio. What portion of the $20,000 in additional sales will contribute to covering fixed costs and profit?

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Chapter M5: Business Decisions Using Cost BehaviorFill In The Blanks

1.   The __________ income statement organizes costs on the basis of cost behavior and is more useful to managers as a planning tool.

* contribution

functional

cost-volume-profit

sensitivityHint for question 1Cost behavior refers to whether costs are fixed or variable.

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2. The __________ income statement organizes costs as either product or period costs.

* functional

cost-volume-profit

contribution

sensitivityHint for question 2When costs are classified as either product or period costs they are being organized based on what feature?

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3. Sales revenue less all variable costs equals the __________ margin.

functional* contribution

sensitivity

cost-volume-profitHint for question 3This subtotal appears on one of the income statement formats.

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4. _________ analysis examines the relationship between cost and volume and the effect of these relationships on profit.

* Cost-volume-profit

Sensitivity

Functional

ContributionHint for question 4What three items are being examined?

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5. _________ analysis examines the effect on profits if there is a change in the selling price per unit, variable cost per unit, or total fixed cost.

* Sensitivity

Cost-volume-profit

Functional

Contribution

Hint for question 5When profits react to changes in the selling price per unit, variable cost per unit, or total fixed cost, this can be referred to as being what to these changes?

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Chapter M5: Business Decisions Using Cost BehaviorEssay Questions

1.   Describe the functional income statement, the contribution income statement, and the uses for both.

2.

What does the contribution margin contribute toward?

3.

In 2006, Grant Company has sales of $800,000, variable costs of $200,000, and fixed costs of $300,000. In 2007, Grant Company expects property taxes to decrease by $15,000. Calculate net income for 2006, break-even point for 2006, and break-even point for 2007.