1. Costs that do not change when the activity base fluctuates are known as:

a. Variable costs

b. Discretionary costs

c. Fixed costs

d. Mixed costs

Answerc. Fixed costs are costs that do not change when the activity base fluctuates. Variable costs vary in direct proportion to a change in an activity base. Discretionary costs are costs which can be avoided. Discretionary costs are typically fixed in nature. Mixed costs are those costs which contain both variable and fixed elements. Mixed costs change in response to fluctuations in the activity base; however, the change is not directly proportional because of the presence of a constant fixed charge.

 

2. A company's telephone bill consisting of a $200 monthly base amount, plus long distance charges, would be classified as a:

a. Variable cost

b. Committed fixed cost

c. Discretionary fixed cost

d. Mixed cost

Answerd. The phone bill would be a mixed cost because it includes a base or fixed amount plus a variable component. Variable costs vary in direct proportion to changes in the activity base. Fixed costs do not vary with the change in activity base. Fixed costs may be committed or discretionary. Committed costs are not easily changed. Discretionary costs can be avoided over time.

 

3. If one would prepare a graph with a horizontal axis representing units of production and a vertical axis representing per-unit production cost, how would a line representing fixed production cost be drawn?

a. As a horizontal line

b. As a vertical line

c. As a straight line sloping upward to the right

d. As a straight line sloping downward to the right

Answerd. The per-unit fixed cost would decline as production increased. That is, total production divided into the constant fixed cost amount would result in a decreasing per unit fixed cost. A line sloping downward to the right would represent this situation.

 

4. The term "committed costs" refers to those:

a. Costs which are likely to respond to additional sales volume.

b. Costs which are governed mainly by past decisions that establish the present level of capacity.

c. Costs which fluctuate in response to changes in the rate of utilization of capacity.

d. Costs which management decides to incur in the current period to enable the company to achieve objectives other than the filling of orders placed by customers.

Answerb. Committed costs arise from an organization's commitment to engage in operation and are governed mainly by past decisions that establish the present levels of capacity.

 

5. Lansing Corporation provides household painting services. During June, its busiest month, Lansing had total direct labor hours of 20,000 and total costs of $274,000. During December, its slowest month, the company had labor hours of 12,500 and total costs of $214,000. The company is planning for 16,000 direct labor hours in July. How many dollars should the company budget for fixed costs during July?

a. $114,000

b. $162,000

c. $242,000

d. $251,500

Answer a. $114,000. Using the high-low method, the difference between the highest and lowest activity levels was 7,500 hours (20,000 minus 12,500). The difference in cost was $60,000 ($274,000 minus $214,000). These computations reveal a variable per-hour cost of $8.00 ($60,000 divided by 7,500 hours). At 20,000 direct labor hours total variable costs would amount to $160,000 (20,000 hours times $8.00 per hour), leaving fixed costs of $114,000 ($274,000 minus $160,000). During the slowest month, fixed costs would also be computed to be $114,000. Therefore, during July the expectation continues at $114,000 for fixed costs.

 

6. Moore Company reported sales of $150,000 (20,000 units). Fixed costs amounted to $20,000 and income for the period was $90,000. Determine the per-unit variable cost.

a. $1.00

b. $2.00

c. $4.50

d. $5.50

Answer b. $2.00. The income plus the fixed costs incurred equals the contribution margin ($90,000 plus $20,000 equals $110,000). Therefore, total variable costs must have been $40,000 ($150,000 in sales minus $110,000 contribution margin equals $40,000 variable costs). If 20,000 units produced $40,000 of variable costs, then the per-unit variable cost must have been $2.00.

 

7. Blackhat Chimney Builders constructed 80 units during 19X1. The total sales value for these 80 units was $460,000. Variable costs associated with each unit was $4,000 and the company's fixed costs for 19X1 amounted to $50,000. How much was the per-unit contribution margin?

a. $750

b. $1,125

c. $1,750

d. $5,125

Answerc. $1,750. The sales price per unit was $5,750 ($460,000 divided by 80 units). The variable cost per unit was $4,000. Contribution margin per unit was $1,750 ($5,750 minus $4,000).

 

8. The Environmental Filter Company is planning to sell air filter systems for $2,500 per unit. Variable costs are $1,500 per unit and total fixed costs are $1,000,000. What is the dollar value of sales necessary to break even?

a. $1,000,000

b. $2,000,000

c. $2,500,000

d. $5,000,000

Answerc. $2,500,000. The contribution margin per unit is $1,000 ($2,500 sales price minus $1,500 variable cost). Dividing the $1,000,000 fixed cost by the $1,000 per-unit contribution margin yields required sales in units of 1,000. At $2,500 per unit, the 1,000 units sold would generate $2,500,000 of total sales.

 

9. The Rug Outlet Store produces two products, carpet and padding. These account for 40% and 60% of the total sales dollars of the company, respectively. Variable costs (as a percentage of sales dollars) are 40% for carpet and 50% for padding. Total fixed costs are $540,000. No other costs are expected to be incurred. How much is the company's total break-even point in sales dollars?

a. $540,000

b. $964,285

c. $1,000,000

d. $1,173,913

Answer c. $1,000,000. The total fixed cost of $540,000 must be divided by the weighted average contribution margin ratio. The contribution margin ratio for carpet is 60% of sales (1 minus .4) and the contribution margin ratio for padding is 50% of sales. The weighted average contribution margin ratio is 54% ((.4 times .6) plus (.6 times .5)). The $540,000 fixed cost divided by the .54 weighted average contribution margin ratio yields total sales in dollars of $1,000,000.

 

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

a. Increased sales volume.

b. Fixed costs increased due to addition of physical plant.

c. Total variable costs increased as a function of higher production.

d. Total production decreased.

Answer b. An increase in fixed cost with no change in variable cost would increase the number of units which must be produced and sold to achieve the break-even point. Changes in sales volume and production volume would not affect the break-even point.