Spring 2018 Chapter 5 Review Questions

Multiple Choice Questions

1. A mixed cost
a) is fixed over a wider range of activity than a variable cost.
b) is a fixed cost over the relevant range and a variable cost everywhere else.
c) contains both fixed and variable components.
d) always increases on a per unit basis.

2. The per-unit amount of three different production costs for Jones, Inc., are as
follows:
Production Cost A Cost B Cost C
20,000 $12.00 $15.00 $20.00
80,000 $12.00 $11.25 $5.00
What type of cost is each of these three costs?
a) Cost A is mixed, Cost B is variable, Cost C is mixed
b) Cost A is fixed, Cost B is mixed, Cost C is variable.
c) Cost A is fixed, Cost B is variable, Cost C is mixed.
d) Cost A is variable, Cost B is mixed, Cost C is fixed.

3. An activity level the company expects to operate at is called a

a) Margin of Safety
b) Relevant range
c) Contribution margin
d) Target net income

4. Buddy uses the high-low method of estimating costs. Bud had total costs of
$50,000 at its lowest level of activity, when 5,000 units were sold. When, at its
highest level of activity, sales equaled 12,000 units, total costs were $78,000.
Bud would estimate variable cost per unit as
a) $10.00
b) $6.50
c) $4.00
d) $7.53

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5. Buddy uses the high-low method of estimating costs. Bud had total costs of
$50,000 at its lowest level of activity, when 5,000 units were sold. When, at its
highest level of activity, sales equaled 12,000 units, total costs were $78,000.
Bud would estimate the fixed cost to be
a) $20,000
b) $30,000
c) $40,000
d) $50,000

6. ABC company sells shoes for $450. The variable cost is $200 per unit. The
fixed costs are $750,000. What is the breakeven in sales dollars?
a) $750,000
b) $937,500
c) $1,350,000
d) $1,687,500

7. ABC company sells shoes for $450. The variable cost is $200 per unit.
The fixed costs are $750,000. The company wants to have a profit of
$250,000. How many units do they have to sell to achieve this goal?
a) 3,000
b) 4,000
c) 5,000
e) 6,000
8. According to the graph below, what is the break-even point in units?

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a) 400
b) 600
c) 200
d) 700

9. Determine the margin of safety ratio from the following data:

Sales $30 per unit
Variable Cost $10 per unit
Units Sold 750 units
Fixed Costs $10,000

a) 20%
b) 33%
c) 45%
d) 75%
10. Determine fixed costs using the high-low method from the following data:

Total Costs Level of Activity

$65,000 11,250
$52,000 8,000
$86,000 16,500
a) 45,000
b) 20,000
c) 16,500
d) 9,500

Practice Problems
Practice Problem #1

A Company accumulated the following data for a delivery truck.

Miles
Miles Driven Total Cost Total Cost
Driven
January 10,000 $15,000 March 9,000 $12,500
February 8,000 $14,500 April 7,500 $13,000

Required: a) Determine the equation to predict total costs for the delivery truck.
b) Calculate the total costs be if 12,187 miles were driven.

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Practice Problem #2

Data concerning N Company's activity for the first six months of the year appear below:

Machine Hours Electrical Cost

January 4,000 $3,120
February 6,000 4,460
March 4,800 3,500
April 5,800 5,040
May 3,600 2,900
June 4,200 3,200

Required: Using the high-low method of analysis, estimate the variable

electrical cost per machine hour.

Practice Problem #3

P Company has provided the following data:

Sales Price per unit: $50

Variable Cost per unit: $30
Fixed Cost: $135,000
Expected Sales: 20,000 units

a) What is the breakeven point in sales dollars?

b) What is the current margin of safety?
c) If the company wants to have net income of $70,000, how many units must they
sell?

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Spring 2018 Chapter 5 Review Questions

Solutions
1. C
2. D
3. B
4. C
5. B
6. C
7. B
8. A
9. B
10. B

Practice Problem #1
a)
High Point - Low Point = Change
Cost $ $15,000 $13,000 $2,000
Activity 10,000 7,500 2,500

Change in Cost $ $2,000

= = $0.80 variable cost/unit
Change in Activity 2,500

Using either the high point or low point, total fixed cost is calculated next:
Fixed Cost = Total Cost - Variable Cost
$7,000 = $15,000 - $8,000 = $0.80 (10,000)
OR
$7,000 = $13,000 - $6,000 = $0.80 (7,500)

The equation is: Y = $7,000 + $0.80(X)

b)
Total Cost = Fixed Cost + Variable Cost
Y = a + b(X)
$16,750 = $7,000 + $9,750 = $0.80 (12,187)

Practice Problem #2:

High Point - Low Point = Change

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Cost $ $4,460 $2,900 $1,560

Activity 6,000 3,600 2,400

Change in Cost $ $1,560

= = $0.65 variable cost/unit
Change in Activity 2,400

Practice Problem #3:

a)
unit ratio
sales 50 100%
Variable cost 30 60%
Contribution margin 20 40%
Fixed cost/contribution margin ratio= breakeven in sales dollars
135,000/ 40%= $337,500

b)Find current margin of safety

Current Income:
Sales (20,000*$50) $1,000,000
Variable Cost (20,000* 30) 600,000
Contribution Margin 400,000
Fixed Expenses 135,000
Net Income 265,000

Sales- Breakeven Sales= Margin of Safety

1,000,000- 337,500= $662,500

c) (Fixed Costs + Target Profit)/ contribution margin per unit

(135,000+500,000)/ 20= 31,750

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