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# Accounting:break-even,operating leverage,budgets etc.

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1 A company has \$27 per unit in variable costs and \$1,000,000 per year in fixed costs. Demand is estimated to be 100,000 units annually. What is the price if a markup of 40% on total cost is used to determine the price?
A) \$51.80
B) \$37
C) \$27
D) \$37.80

2 True or False: Firms that have high levels of fixed costs have low operating leverage
A) True
B) False

3 According to the theory of constraints, everything else should be subordinate to the binding constraint.
A) True
B) False

Use the following to answer questions 4-7:

RNO Company's market for the Model 55 has changed significantly, and RNO has had to drop the price per unit from \$265 to \$125. There are some units in the work in process inventory that have costs of \$150 per unit associated with them. RNO could sell these units in their current state for \$100 each. It will cost RNO \$10 per unit to complete these units so that they can be sold for \$125 each.

4 Which of the following is the amount of sunk costs in this problem?
A) \$150 per unit
B) \$125 per unit
C) \$10 per unit
D) \$265 per unit

5 A new employee looks at the analysis and exclaims, "We'll lose money with either of these alternatives! Let's just throw these units in the trash!" Suppose the alternative to trashing is choosing the more profitable of the two alternatives (that the new employee looked at and did not like). What effect will the trashing option (that the new employee
wants) have on net income?

A) Net income will increase by \$35 per unit for each unit discarded.
B) Net income will decrease by \$115 per unit for each unit discarded.
C) It will have no effect on net income.
D) Net income will decrease by \$265 per unit for each unit discarded.

6 When the incremental revenues and expenses are analyzed, the company is better off by
A) \$10 per unit if the sell the units in their current state.
B) \$25 per unit if they sell the units in their current state.
C) \$15 per unit if they complete the units.
D) \$125 per unit if they complete the units.

7 Which of the following is not a relevant value in this problem?
A) \$10 = cost to complete units
B) \$265 = former price
C) \$125 = current price
D) \$100 = price for partially completed units

8 Budgets are financial plans prepared by managerial accountants.
A) True
B) False

9 Indirect costs occur because resources are shared by more than cost object.
A) True
B) False

10 How many joint products can come from a set of common inputs?
A) no more than four
B) only two or three
C) It depends on the process involved.
D) One

11 When fixed costs are unitized, they
A) may appear to be variable costs.
B) may cause managers to make decisions that are not in the best interest of the company as a whole.
C) are stated on a per unit basis.
D) All of the above are true.

12 Financial accounting is concerned with presenting results of past transactions while managerial accounting places considerable emphasis on the future.
A) True
B) False

13 The most difficult part of determining the profit maximizing price is determining profit at a given level of unit sales.
A) True
B) False

14 A company using activity based pricing marks up the direct cost of goods by 30% plus charges customers for indirect costs based on the activities utilized by the customer. Indirect costs are charged as follows: \$8.00 per order placed; \$4.00 per separate item ordered; \$30.00 per return. A customer places 10 orders with a total direct cost of \$3,000, orders 300 separate items, and makes 5 returns. What will the customer be charged?
A) \$5,330
B) \$3,000
C) \$5,759
D) \$3,900

15 Manufacturing overhead is allocated to products based on the number of machine hours required. In a year when 20,000 machine hours were anticipated, costs were budgeted at \$125,000. If a product requires 7,000 machine hours, how much manufacturing overhead will be allocated to this product?
A) \$41,667
B) \$43,750
C) \$1,120
D) \$50,000

16 One of the reasons that companies allocate costs is to reduce the frivolous use of common resources.
A) True
B) False

17 The more costs that are allocated to a cost plus contract, the more the supplier will be paid under the contract.
A) True
B) False

Use the following to answer questions 18-20:
The Sunrise Hotel has 200 rooms. Each room rents at \$110 per night and variable costs total \$16 per room per night of occupancy. Fixed costs total \$84,000 per month.

18 Go back to the original data. If the hotel spends an additional \$10,000 in the month of February on advertising they feel that they can expect occupancy rate to increase by 5%. What would be the financial impact of spending this additional money on advertising for the month of February (28 days)?

A) Total fixed costs will increase by \$10,500.
B) Net income will increase by \$16,320.
C) Net income will increase by \$26,320.
D) Total fixed costs will remain the same.

19 If 80% of the rooms are occupied each night in the month of February (28 days) what will total costs be for the month?
A) \$86,560.
B) \$173,600.
C) \$71,680.
D) \$155,680.

20 If the hotel is able to increase occupancy to 90% by how much will total costs increase for the month of February (28 days)?
A) \$7,168.
B) \$8,960.
C) \$17,360.
D) \$15,568.

21 Cost allocation methods that provide the most accurate full cost for financial reporting also provide the most accurate information for making decisions within the company.
A) True
B) False

22 Jones Company manufactures widgets. Old Ham Company has approached Jones with a proposal to sell the company one of the components used to make widgets at a price of \$100,000 for 50,000 units. Jones is currently making these components in its own factory. The following costs are associated with this part of the process when 50,000 units are produced:

Direct material \$44,000
Direct labor 20,000
Total \$124,000

The manufacturing overhead consists of \$32,000 of costs that will be eliminated if the components are no longer produced by Jones. The remaining manufacturing overhead will continue whether or not Jones makes the components.
What is the amount of avoidable costs if Jones buys rather than makes the components?
A) \$60,000
B) \$96,000
C) \$124,000
D) \$100,000

23 K-Henry's Dull Diner has a contribution margin ratio of 16%. If fixed costs are \$176,800, how many dollars of revenue must K-Henry's generate in order to reach the break-even point?
A) \$282,880
B) \$1060,800
C) \$208,476
D) \$1,105,000

24 Which of the following statements about cost pools is not true?
A) Only four different kinds of costs may be included in a single cost pool.
B) More cost pools usually provide more accurate information, but are more expensive.
C) Managers must make a cost-benefit decision when determining how many cost pools are appropriate.
D) The costs in each of the cost pools should be homogeneous or similar.

25 Conan Company's monthly activity level ranged from a low of 17,000 units in May to a high of 26,000 units in October. Average production was 20,000 units per month. Utilities cost was \$8,250 in May and \$10,500 in October. The variable utility cost per unit, to the nearest cent, is:
A) \$0.49.
B) \$0.47.
C) \$0.25.
D) \$0.40.

26 Which of the following is not a term used to describe the additional costs incurred as a result of selecting one decision alternative over another?
A) sunk costs
B) incremental costs
C) relevant costs
D) differential costs

27 A retailer purchased some trendy clothes that have gone out of style and must be marked down to 20% of the original selling price in order to be sold. Which of the following is a sunk cost in this situation?
A) the original selling price
B) the original purchase price
C) the anticipated profit
D) the current selling price

28 A company has a total cost of \$50.00 per unit at a volume of 100,000 units. The variable cost per unit is \$20.00. What would the price be if the company expected a volume of 120,000 units and used a markup of 50%?
A) \$75.00
B) \$62.50
C) There is not enough information in the problem to answer
D) \$67.50

29 Sunk costs:
A) would include the cost of your tuition after the refund deadline has passed.
B) Are costs that have been incurred in the past.
C) are not relevant for decision making
D) All of the above are correct.

30 At Caleb's Tights, the break-even point is 2,000 units. If fixed costs total \$300,000 and variable costs are \$30 per unit, what is the selling price per unit?
A) \$210
B) \$180
C) \$5
D) \$150
31 The margin of safety is the difference between the current level of sales and break-even sales.
A) True
B) False

32 Incremental revenue is the additional revenue received as a result of selecting one decision alternative over another.
A) True
B) False

Use the following to answer questions 33-35:
Crede Company sells a single product that has variable costs of \$10 per unit. Fixed costs will be \$700,000 across all levels of sales shown.

Units Sold Price per unit
80,000 \$35
90,000 \$33
100,000 \$31
110,000 \$30
120,000 \$28

33 What price should Crede charge to maximize profits?
A) \$28
B) \$30
C) \$35
D) \$31
E) \$33

34 What price would Crede charge to maximize revenues?
A) \$30
B) \$31
C) \$35
D) \$28
E) \$33

35 What, if any information given was not relevant to the profit maximization decision?
A) The variable costs per unit
B) The quantities demanded
C) All of the information was relevant
D) The selling prices
E) The total fixed costs

36 A company should never accept any orders below its normal selling price.
A) True
B) False

37 The value of benefits foregone by selecting one decision alternative over another is a(n)
A) differential revenue.
B) sunk cost.
C) opportunity cost.
D) incremental benefit.

Information for Questions 38-39
Anderson Manufacturing makes a single product. Budget information regarding the current period is given below:

Revenue (100,000 units at \$8.00) \$800,000
Direct materials 150,000
Direct labor 125,000
Net income \$180,000

Dye Company approaches Anderson with a special order for 15,000 units at a price of \$7.50 per unit. Variable costs will be the same as the current production and accepting the special order will not have any impact on the rest of the company's orders. However, Anderson is operating at capacity and will incur an additional \$50,000 in fixed manufacturing overhead if the order is accepted.

38 What is the incremental income (loss) associated with accepting the special order?
A) (\$14,000)
B) \$36,000
C) (\$23,500)
D) \$27,000

39 What is the incremental revenue associated with accepting the special order?
A) \$170,000
B) \$112,500
C) \$70,000
D) \$120,000

40 Cost-plus contracts are common in which of the following industries?
A) defense contractors
B) newspaper publishers
C) soft drink bottlers
D) manufactured home builders

41 The price which maximizes revenues is the price that should be selected.
A) True
B) False

42 Which of the following is a direct cost in relation to the cost of teaching the managerial accounting course you are currently taking?
A) The cost of the registration system that allowed you to enroll in the class
B) The cost of the paper that you receive as handouts for the class
C) The cost of the financial aid department that helps you fund the cost of taking the class
D) The cost of the room you are using for the class

43 Paul's Pizza produced and sold 2,000 pizzas last month and had fixed costs of \$6,000. If production and sales are expected to increase by 10% next month, which of the following statements is true?
A) Total fixed costs will decrease.
B) Fixed cost per unit will decrease.
C) Total fixed costs will increase.
D) Fixed cost per unit will increase.

44 Total fixed costs divided by the contribution margin ratio equals the breakeven point.
A) True
B) False

45 The Dynamaco Company uses cost-plus pricing with a 50% mark-up. The company is currently selling 100,000 units at \$12 per unit. Each unit has a variable cost of \$6. In addition, the company incurs \$200,000 in fixed costs annually. If demand falls to 80,000 units and the company wants to continue to earn a 50% return, what price should the company charge?
A) \$12.75
B) \$14.55
C) \$13.50
D) \$10.95

46 The contribution margin is fixed costs minus total variable costs.
A) True
B) False

Use the following to answer questions 47-48:
Taylor's Treasures has collected the following information over the last six months.

Month Units produced Total costs
March 10,000 \$25,600
April 12,000 26,200
May 18,000 27,600
June 13,000 26,450
July 12,000 26,000
August 15,000 26,500

47 Using the high-low method, what is the variable cost per unit?
A) \$0.25
B) \$2.56
C) \$0.22
D) \$2.00

48 Using the high-low method, what is the total fixed cost?
A) \$1,000
B) \$4,500
C) \$23,100
D) \$5,600

49 A manufacturing company produces and sells 20,000 units of a single product. Total products costs are \$14 per unit. If total sales were \$560,000 what markup percentage is the company using?
A) 100%
B) 4%
C) 200%
D) 50%

50 The high-low method fits a straight line to the data points that represent the highest and lowest levels of activity.
A) True
B) False