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# Test 2- Sample questions with solutions:

Chapter 6
1. Within the relevant range, as the number of units produced increases:
A)
variable costs increase in total.
B)
the variable cost per unit remains the same.
C)
fixed costs in total remain the same.
D)
all of the above.
E)
none of the above
2. The high-low method is generally more accurate than the least-squares regression
method in analyzing cost behavior?
A)
B)

TRUE
FALSE

3. A is a fixed cost; B is a variable cost. During the current year the level of activity has
decreased but is still within the relevant range. We would expect that:
A)
The cost per unit of B to remain unchanged
B)
The cost per unit of A has decreased
C)
The cost per unit of A has remained unchanged
D)
The cost per unit of B has decreased
4. Utility costs at Service, Inc. are a mixture of fixed and variable components. Records
indicate that utility costs are an average of \$0.33 per hour at an activity level of 6,620
machine hours and \$0.25 per hour at an activity level of 14,770 machine hours.
Assuming that this activity is within the relevant range, what is the expected total utility
cost of the company works 10,000 machine hours?
A)
\$2,784
B)
\$2,809
C)
\$2,950
D)
\$2,712
E)
\$2,810
5. Farah Corporation has provided the following information and total cost data for two
levels of monthly production volume. The company produces a single product.
Production volume (units)
Direct materials
Direct labor

1,600
\$87,984
\$23,440
\$120,720

2,380
\$130,876
\$34,867
\$136,050

The best estimate of the total cost to manufacture 1,920 units is closest to:
A)
\$261,121
B)
\$262,104
C)
\$265,017
D)
\$260,718

Chapter 7
6. Stewart Company sells a single product. The product has a selling price of \$50 per
unit and variable expenses of 80% of sales. If the company's fixed expenses total
\$150,000 per year, then it will have a break-even of:
a.
b.
c.
d.

\$750,000
\$187,500
\$15,000
\$3,750

7. The following is Carter Corporation's contribution format income statement for last
month:
Sales

\$4,000,000

## Less variable expenses

2,800,000

Contribution margin

1,200,000

## Less fixed expenses

720,000

Net income

\$ 480,000

The company has no beginning or ending inventories. A total of 80,000 units were
produced and sold last month. What is the company's break-even in units?
a.
b.
c.
d.

0 units
48,000 units
72,000 units
80,000 units

8. Refer to the previous question. What is the company's margin of safety in dollars?
a.
b.
c.
d.

\$480,000
\$1,600,000
\$2,400,000
\$3,520,000

## 9. Gorham Gaslight Inc. has the following product information:

Sales price \$ 4.50 per unit
Variable costs \$ 3.25 per unit
Fixed Costs \$ 5,000
Units sold 20,000
What is the effect on net income if 2,000 more units are sold?
a. \$2,500 increase
b. \$9,000 increase
c. \$2,000 increase
d. No change

10. Foley Company produces two products which had the following information:
Sales
Variable Costs

Product A
\$100,000
25,000

Product B
\$50,000
5,000

## Total Fixed Costs = 90,000

What is the BE Point in Sales \$ For Both Products?
a.
b.
c.
d.

Product A = \$100,000
Product A = \$ 50,000
Product A = \$ 75,000
Product A = \$ 62,250

Product B = \$50,000
Product B = \$25,000
Product B = \$37,500
Product B = \$62,250

11. Lyman Corporation has a single product selling for \$140 with a variable cost of \$91
per unit. The companys monthly fixed costs are \$40,000. How much would the
company need to sell in total sales dollars in order to earn a target profit of \$16,000?
a.
b.
c.
d.

\$56,000
\$100,000
\$145,000
\$160,000

Chapter 8
12. The Caston Corporation has 4,000 obsolete units of a product that are carried in
inventory at a manufacturing cost of 80,000. If the units are re-worked for \$20,000, they
could be sold for \$36,000. Alternatively, the units could be sold for scrap for \$14,000.
Which alternative is more desirable and what are the total relevant costs for that
alternative?
a.
b.
c.
d.

Re-work; \$20,000
Re-work; \$100,000
Scrap; \$66,000
Scrap; \$80,000

13. The managers of a firm are in the process of deciding whether to accept or reject a
special offer for one of its products. A cost that is not relevant is their decision is the:
a.
b.
c.
d.

Common fixed overhead that will continue if the special order is accepted
Direct materials
Fixed overhead that will be avoided if the special order is accepted

14. A study has been conducted to determine if one of the departments of Marigold
Company should be discontinued. The contribution margin in the department is \$150,000

per year. Fixed expenses charged to the department are \$195,000 per year. It is estimated
that \$120,000 of these fixed expenses could be eliminated if the department is
discontinued. These data indicate that if the department is discontinued, the company's
overall net operating income would:
a.
b.
c.
d.

Decrease by \$30,000
Increase by \$30,000
Decrease by \$75,000
Increase by \$75,000

15. Baja Company produces 2,000 parts per year, which are used in the assembly of one
of its products. The unit product cost of these parts is:
Variable Manufacturing Cost
Fixed Manufacturing Cost
Total Unit Product Cost

\$32
\$18
\$50

The part can be purchased from an outside supplier at \$40 per unit. If the part is
purchased from the outside supplier, two thirds of the fixed manufacturing costs can be
eliminated. The annual impact on Brown's net operating income as a result of buying the
part from the outside supplier would be:
a.
b.
c.
d.

\$4,000 increase
\$4,000 decrease
\$8,000 increase
\$8,000 decrease

16. Cool Corporation manufactures coolers. The company can manufacture 1,200,000
coolers a year at a variable cost of \$3,000,000 and a fixed cost of \$1,800,000. Based on
management's predictions for next year, 960,000 coolers will be sold at the regular price
of \$20.00 each. In addition, a special order was placed for 240,000 coolers to be sold at a
70% discount off the regular price. Total fixed costs would be unaffected by this order.
By what amount would the company's net operating income be increased as a result of
the special order?
a.
b.
c.
d.

\$480,000
\$600,000
\$840,000
It will not increase

Chapter 9

17. North Star Company's sales are 50% in cash and 50% on credit. Seventy percent of
the credit sales are collected in the month of sale, 20% in the month following sale, and
5% in the second month following sale. The remainder is expected to be uncollectible.
The following are budgeted sales data:
Total Sales

January
\$140,000

February
\$120,000

March
\$160,000

April
\$200,000

May
\$180,000

a.
b.
c.
d.

\$ 56,000
\$136,000
\$151,500
\$167,000

## 18. A companys sales budget in units is as follows:

April
50,000

May
75,000

June
90,000

July
80,000

The company plans to carry an ending inventory amount equal to 10% of next months sales.
How many units would the company plan to budget for production in June?
a.
b.
c.
d.

90,000
89,000
90,500
98,000

19. Martin plans to sell 75,000 units of its product in May, and each unit requires four lbs.
of raw material. Pertinent data follows:
May 1 inventory
May 31 inventory

Final Product
12,000 units
15,000 units

Raw Material
24,000 lbs.
19,000 lbs.

## How many lbs. of raw material should Martin purchase in May?

a. 283,000
b. 292,000
c. 307,000
d. none of the above
20. Refer to the previous question. Assume each unit requires .80 direct labor hours and
direct labor workers are paid an average of \$12.00 per hour. What is the direct labor
budget in dollars for May?
a.
b.
c.
d.

\$748,800
\$691,200
\$720,000
\$672,000

21. The Beta Company makes and sells a single product. Selected budgeted cash receipts
information is as follows:

## From March Acc Rec.

From April Sales
From May Sales

April
\$ 44,000
\$ 72,000

May
\$ 48,000
\$150,000

Assume sales price = \$20 and all sales are collected in two months. What is budgeted
sales in units for May?
a. 9,900
b. 7,500
c. 12,500
d. 15,700
22. Which of the following would depict the logical order for preparing (1) a production
budget, (2) a cash budget, (3) a sales budget, and (4) a direct labor budget?
a.
b.
c.
d.

1-3-4-2
3-4-2-1
2-1-3-4
3-1-4-2

Solutions:
4. Total Cost High Point = 14,770 x \$0.25 = \$3,692.50
Total Cost Low Point = 6,620 x \$ 0.33 = \$2,184.60
VC Per unit = (3,692.50 2,184.60) / (14,770 6,620) = \$.185
\$3,692.50 = FC + (.185 x 14,770)
FC = \$960
TC = \$960 + (.185 x 10,000) = \$2,810
5. DM cost = \$87,984 / 1,600 = \$54.99 var. cost per unit (same as for 2,380 units)
DL cost = \$23,440 / 1,600 = \$14.65 var. cost per unit (same as for 2,380 units)
MOH (use high low) = (\$136,050 - \$ 120,720) / (2,380 1,600) = \$19.65 var.
cost per unit
MOH fixed cost \$120,720 = FC + (19.65 x 1,600)
FC = \$89,281
Cost at 1,920 units: TC = \$89,281 + (*89.29 x 1,920) = \$260,718

## *sum of all 3 vc per unit (\$54.99 + 14.65 + 19.65)

6. CM ratio = 20% (100% - 80%)
BE in Sales \$ = \$150,000 / 20% = \$750,000
7. CM per unit = \$15 (\$1,200,000 / 80,000)
BE in units = \$720,000 / 15 = 48,000 units
8. BE in Sales \$ = \$2,400,000 (\$720,000 / 30%)
Margin of Safety = \$4,000,000 2,400,000 = \$1,600,000
9. CM per unit = \$1.25 (4.50 3.25)
Increase to income = 2,000 units x \$1.25 = \$2,500

## 10. Overall CM ratio = 80% (Total CM / Total Sales = \$120,000 / 150,000)

Overall BE = \$90,000 / 80% = \$112,500
Sales Mix of each product: Product A = 66.67% (100,000 / 150,000) and B =
33.33% (50,000 / 150,000)
Allocate overall BE by sales mix of each product: Product A = 112,500 x
66.67% = \$75,000 and Product B = 112,500 x 33.33% = \$37,500
11. CM ratio = 35% (\$49 / \$140)
Sales to make a Target Profit of \$16,000 = (40,000 + 16,000) / 35% =
\$160,000
12. Re-work = +36,000 20,000 = 16,000
Scrap = +14,000
Choose Re-work
14. Lose CM = \$(150,000)
Save FE = \$ 120,000
Net Effect = \$(30,000)
Cost Savings
Net Effect

\$40 x 2,000 =
\$(80,000)
(\$32 + 12) x 2,000 = \$ 88,000
=
8,000

## 16. Special Order:

Revenue (\$6.00 x 240,000) = \$ 1,440,000
Variable Costs (\$2.50 x 240,000) = 600,000
Net Increase
= 840,000
17. March Collections:
Cash sales in March = \$80,000 (160,000 x 50%)
March credit sales collected in March = \$56,000 (\$80,000 x 70%)
February credit sales collected in March = \$12,000 (\$60,000 x 20%)
January credit sales collected in March = \$3,500 (\$70,000 x 5%)
Add up total collected in March = \$151,500 (\$80,000 + 56,000 + 12,000 +
3,500)
18. June Production:
+ Sales in June
+ Ending inventory
- Beginning inventory

90,000
8,000
-9,000

= Production required

89,000

(80,000 x 10%)
(90,000 x 10%)

## 19. First calculate Production requirement:

Sales + Ending Inv. Beg Inv. = +75,000 + 15,000 12,000 = 78,000
Use Production requirement to calculate raw material requirement:
Raw Material needed for production + 312,000 lbs (78,000 x 4lb)
+ Ending Inventory
+ 19,000 lbs
Beginning Inventory
- 24,000 lbs
= Raw materials to purchase

= 307,000 lbs

## 20. Production required x DL hours per unit x Rate per hour =

78,000 x .80 x \$12.00 = \$748,800
21. Total Sales for May x 60% = collection in May
Total Sales x 60% = \$150,000 ; \$150,000 / 60% = \$250,000
Unit Sales = \$250,000 / 20 = 12,500