Review Questions
I. Cost behavior defined
The left column lists several cost classifications. The right column presents short definitions of those costs. In the blank space beside each of the numbers in the right column, write the letter of the cost best described by the definition.
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A. Curvilinear cost
B. Step-wise cost
C. Fixed cost
D. Mixed cost
E. Variable cost
F. Total Cost
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1.
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This cost increases in direct proportion to increases in
volume; its amount is constant for each unit produced.
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2.
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This cost remains constant over a limited range of volume; when it reaches the end of its limited range, it changes by a lump sum and remains at that level until it exceeds another limited range.
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3.
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This cost has a component that remains the same overall volume levels and another component that increases in direct proportion to increases in volume.
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4.
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This cost increases when volume increases, but the increase is not constant for each unit produced.
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5.
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This cost remains constant overall volume levels within the productive capacity for the planning period.
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6.
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This cost is the combined amount of all the other costs.
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II. Contribution margin and breakeven
Apollo Company manufactures a single product that sells for $168 per unit and whose total variable costs are $126 per unit. The company's annual fixed costs are $630,000.
Use this information to compute the company's (a). Contribution margin,
(b). Contribution margin ratio, (c). Break-even point in units,
(d). Break-even point in dollars of sales.
III. Computing sales to achieve target income
Apollo Company management (in problem II) targets an annual after-tax income of $840,000. The company is subject to a 20% income tax rate. Assume that fixed costs remain at $630,000. Compute the (1) unit sales to earn the target after-tax net income and (2) dollar sales to earn the target after-tax net income.
IV. CVP analysis using composite units
Home Builders sells windows and doors in the ratio of 8:2 (windows:doors). The selling price of each window is $100 and of each door is $250. The variable cost of a window is $62.50 and of a door is $175. Fixed costs are $450,000.
Use this information to determine the
1) Selling price per composite unit,
2) Variable costs per composite unit,
3) Break-even point in composite units, and
4) Number of units of each product that will be sold at the break-even point.
V. CVP analysis using weighted-average contribution margin
Using the information from IV above, determine the (1) weighted- average contribution margin,
(2) break-even point in units, and (3) number of units of each product that will be sold at the break-even point.
VI. Contribution margin income statement and contribution margin ratio
The following costs result from the production and sale of 4,000 drum sets manufactured by Vince Drum Company for the year ended December 31, 2013. The drum sets sell for $250 each. The company has a 25% income tax rate.
Variable production costs
Plastic for casing........................................ $68,000
Wages of assembly workers.................................................... 328,000
Drum stands................................................ 104,000
Variable selling costs
Sales commissions......................................... 60,000
Fixed manufacturing costs
Taxes on factory.................................................. 10,000
Factory maintenance............................................... 20,000
Factory machinery depreciation.................................... 80,000
Fixed selling and administrative costs
Lease of equipment for sales staff................................. 20,000
Accounting staff salaries.......................................... 70,000
Administrative management salaries................................ 150,000
1. Prepare a contribution margin income statement for the company.
2. Compute its contribution margin per unit and its contribution margin ratio.
VII. Break-even analysis, different cost structures, and income calculations
Letter Co. produces and sells two products, T and O. It manufactures these products in separate factories and markets them through different channels. They have no shared costs. This year, the company sold 50,000 units of each product. Sales and costs for each product follow.
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Product T
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Product 0
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Sales ............................
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$800,000
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$800,000
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Variable costs.................
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560.000
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100.000
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Contribution margin ........
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240.000
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700,000
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Fixed costs.....................
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100.000
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560,000
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Income before taxes ......
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140.000
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140,000
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Income taxes (32% rate)
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44.800
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44,800
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Net income .............
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$ 95.200
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$ 95,200
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1. Compute the break-even point in dollar sales for each product.
2. Assume that the company expects sales of each product to decline to 33,000 units next year with no change in unit sales price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown with columns for each of the two products (assume 32% tax rate). Also, assume that any loss before taxes yields a 32% tax savings.
3. Assume that the company expects sales of each product to increase to 64,000 units next year with no change in unit sales price. Prepare forecasted financial results for next year following the format of the contribution margin income statement shown with columns for each of the two products. (Assume a 32% tax rate.)
VIII. Cost behavior estimation - high-low method
The following information is available for a company's maintenance cost over the last seven months.
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Month
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Maintenance Hours
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Maintenance Cost
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June........................
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20
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$6,020
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July ........................
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48
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8.100
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August ....................
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24
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5,100
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September..............
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38
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7,000
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October...............
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42
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6,900
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November ..............
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36
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6,900
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December ..............
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12
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3,600
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1. Using the high-low method, estimate both the fixed and variable components of its maintenance cost.
2. Show the cost function formula for monthly maintenance costs.