Fixed costs expressed on a per unit basis:

A) will increase with increases in activity.

B) will decrease with increases in activity.
C) are not affected by activity.
D) should be ignored in making decisions since they cannot change.

Use the following to answer next 2 questions :

At a sales volume of 30,000 units, Carne Company's total fixed costs are $30,000 and total
variable costs are $45,000. The relevant range is 20,000 to 40,000 units.

If Carne Company were to sell 32,000 units, the total expected cost would be:
A) $75,000
B) $78,000
C) $80,000
D) $77,000

If Carne Company were to sell 40,000 units, the total expected cost per unit would be:
A) $2.50
B) $2.25
C) $2.13
D) $1.88

As the level of activity increases, how will a mixed cost in total and per unit behave?
In Total Per Unit
A) Increase Decrease
B) Increase Increase
C) Increase No effect
D) Decrease Increase
E) Decrease No effect

Since Anytime Pizza is open 24 hours a day, its pizza oven is constantly on and is, therefore,
always using natural gas. However, when there is no pizza in the oven, the oven automatically
lowers its flame and reduces its natural gas usage by 70%. The cost of natural gas would best be
described as a:
A) fixed cost.
B) mixed cost.
C) step-variable cost.
D) true variable cost.
The high-low method is used with which of the following types of costs?
A) Variable.
B) Mixed.
C) Fixed.
D) Step-variable.
Contribution margin is:
A) Sales less cost of goods sold.
B) Sales less variable production, variable selling, and variable administrative
expenses.
C) Sales less variable production expense.
D) Sales less all variable and fixed expenses.
Shipping costs at Columbia Mining Company are a mixture of variable and fixed
components The company shipped 8,000 tons of coal for $400,000 in shipping costs in
February and 10,000 tons for $499,000 in March Assuming that this activity is within
the relevant range, expected shipping costs for 11,000 tons would be:
A) $544,500
B) $548,500
C) $422,222
D) $554,000
Given the cost formula Y = $12,500 + $5.00X, total cost for an activity level of 4,000
units would be:
A) $20,000
B) $12,500
C) $16,000
D) $32,500

The following data relate to two levels of activity at an out-patient clinic in a hospital:
Number of patient-visits ............. 4,500 5,750
General overhead ........................ $269,750 $289,125
The best estimate of the variable general overhead cost per patient-visit is closest to:
A) $15.50
B) $44.44
C) $59.94
D) $50.28

Use the following to answer next 4 questions :

Solo Company is a small merchandising firm. During the next month, the company expects to
sell 500 units. The company has the following revenue and cost structure:
Selling price per unit ..................... $60
Cost per unit .................................. $15
Sales commission .......................... 10% of sales
Advertising expense ...................... $5,000 per month
Administrative expense ................. $3,000 per month plus 20% of sales

The expected gross margin next month is:

A) $ 5,500
B) $22,500
C) $13,500
D) $ 7,500
The expected contribution margin next month is:
A) $13,500
B) $ 5,500
C) $ 7,300
D) $22,500

The expected total administrative expense next month is:

A) $3,000
B) $4,000
C) $9,000
D) $6,000

The expected net operating income is:

A) $22,500
B) $ 5,500
C) $ 7,500
D) $13,500

Mossfeet Shoe Company is a single product firm. Mossfeet is predicting that a price
increase next year will not cause unit sales to decrease. What effect would this price
increase have on the following items for next year?
Contribution Break-even
Margin Ratio Point
A) Increase Decrease
B) Decrease Decrease
C) Increase No effect
D) Decrease No effect

The contribution margin ratio always increases when the:

A) break-even point increases.
B) break-even point decreases.
C) variable expenses as a percentage of net sales decrease.
D) variable expenses as a percentage of net sales increase.
A $2.00 increase in a product's variable expense per unit accompanied by a $2.00
increase in its selling price per unit will:
A) decrease the degree of operating leverage.
B) decrease the contribution margin.
C) have no effect on the break-even volume.
D) have no effect on the contribution margin ratio.
Which of the following would not affect the break-even point?
A) number of units sold
B) variable expense per unit
C) total fixed expenses
D) selling price per unit

Salinas Corporation has a degree of operating leverage of 8. This means that a 1%

change in sales dollars at Salinas will generate an 8% change in:
A) variable expenses.
B) fixed expenses.
C) contribution margin.
D) net operating income.
Variable expenses for Alpha Company are 40% of sales. What are sales at the breakeven
point, assuming that fixed expenses total $150,000 per year:
A) $250,000
B) $375,000
C) $600,000
D) $150,000

Black Company's sales are $600,000, its fixed expenses are $150,000, and its variable
expenses are 60% of sales. Based on this information, the margin of safety is:
A) $90,000
B) $190,000
C) $225,000
D) $240,000
Mason Company's selling price was $20.00 per unit. Fixed expenses totaled $54,000,
variable expenses were $14.00 per unit, and the company reported a profit of $9,000
for the year. The break-even point for Mason Company is:
A) 10,500 units
B) 4,500 units
C) 8,500 units
D) 9,000 units
Given the following data:
Selling price per unit ................................. $2.00
Variable production cost per unit .............. $0.30
Fixed production cost ................................ $3,000
Sales commission per unit ......................... $0.20
Fixed selling expenses ............................... $1,500
The break-even point in dollars is:
A) $6,000
B) $4,500
C) $2,647
D) $4,000
Hollis Company sells a single product for $20 per unit. The company's fixed expenses total
$240,000 per year, and variable expenses are $12 per unit of product. The company's break-even
point is:
A) $400,000
B) $600,000
C) 20,000 units
D) 12,000 units
Darwin, Inc., sells a particular textbook for $20. Variable expenses are $14 per book.
At the current volume of 50,000 books sold per year the company is just breaking
even. Given these data, the annual fixed expenses associated with the textbook total:
A) $300,000
B) $1,000,000
C) $1,300,000
D) $700,000

Frank Company manufacturers a single product that has a selling price of $20.00 per
unit. Fixed expenses total $45,000 per year, and the company must sell 5,000 units to
break even. If the company has a target profit of $13,500, sales in units must be:
A) 6,000
B) 5,750
C) 6,500
D) 7,925
Company X sold 25,000 units of product last year. The contribution margin per unit
was $2, and fixed expenses totaled $40,000 for the year. This year fixed expenses are
expected to increase to $45,000, but the contribution margin per unit will remain
unchanged at $2. How many units must be sold this year to earn the same net
operating income as was earned last year:
A) 22,500
B) 27,500
C) 35,000
D) 2,500

A product sells for $10 per unit and has variable expenses of $6 per unit. Fixed
expenses total $45,000 per month. How many units of the product must be sold each
month to yield a monthly profit of $15,000?
A) 6,000 units
B) 3,750 units
C) 15,000 units
D) 10,000 units

Chibu Corporation is a single product firm with the following cost formula for all of
its costs for next year:
Y = $225,000 + $30X
Chibu sells its product for $120 per unit. What would Chibu's total sales dollars have
to be next year in order to generate $270,000 of net operating income?
A) $618,750
B) $660,000
C) $1,080,000
D) $1,980,000
Rapid Delivery, Inc., operates a parcel delivery service across the nation. The company keeps
detailed records relating to operating costs of trucks, and has found that if a truck is driven
150,000 miles per year the average operating cost is 10 cents per mile. This cost increases to 11
cents per mile if a truck is driven only 100,000 miles per year. Assume that all of the activity
levels mentioned in this problem are within the relevant range.
Required:
a. Using the high-low method, derive the cost formula for truck operating costs.
b. Using the cost formula you derived above, what total cost would you expect the company to
incur in connection with the truck if it is driven 130,000 miles in a year?

a.
Miles Cost
High level 150,000 (150,000 miles × $.10 =) $15,000
Low level 100,000 (100,000 miles × $.11 =) 11,000
Change 50,000 $ 4,000

$4,000 ÷ 50,000 miles = $0.08 per mile variable cost

Total cost at high level .................................................... $15,000
Less variable element: 150,000 miles × $0.08 ................ 12,000
Fixed element .................................................................. $ 3,000

Cost formula: $3,000 plus $0.08 per mile or

Y = $3,000 + $0.08X

b.
Variable cost: 130,000 miles × $0.08 per mile................ $10,400
Fixed cost ........................................................................ 3,000
Total cost ......................................................................... $13,400
Problem:

Nike Sports sells Sports Sunglass. One of the company’s products, a high-tech Sunglass, sells for Tk 90
per unit. CGS is Tk. 63 per unit, and fixed expenses associated with the product total Tk. 135,000 per
year. Company’s income statement for 2012 is given bellow:

Nike Sports
Income Statement
For the year ended December 2012

Sales Tk. 720,000

CGS 504,000
Gross Profit 216,000

Operating Expenses 135,000

Net Operating Income 81,000

At present, the sales manager is convinced that a 10% reduction in the selling price along with a
Tk.12,000 increase in advertising expenses will result in a 25% increase in the number of sunglasses sold
next year.
i) By how much should net operating income changes in 2013.
ii) How much increase in sales will be required in order to make existing profit?
iii) How much increase in sales will be required in order to make Tk.100,000 profit?

ANS:

Units sold in 2012= Sales/ Unit price = 720,000/90 =8,000.

If price reduces 10%, then new price will be (90-90X10%)= Tk. 81.
Variable CGS = V= Tk. 63.
Fixed Operating expenses = 135,000+12,000= Tk. 147,000.
Quantity sales will be (8000 + 8000X25%)= 10,000 units.

i) NOI under proposed situation = Q*(P – V) – F

= 10,000*( 81 – 63) – 147,000 = 180,000 – 147,000 = 33,000.
So, income will decrease by Tk. 48,000 from the previous year if proposed change has been made.

ii) Existing Profit = 81,000.

NOI = Q*(P – V) – F
81,000 = Q*(81 – 63) – 147,000
18Q = 228,000
Q = 228,000/18 = 12,667 units.
Percentage increase in sales = (12,667 – 8,000)/ 8,000 = 58.33%.

iii) When expected profit = 100,000.

100,000 = Q*(81 – 63) – 147,000
18Q = 247,000
Q = 247,000/18 = 13,722 units.
 Percentage increase in sales = (13,722 – 8,000)/ 8,000 = 71.53%.
Problem :
Assume that, all the information in the previous problem will remain same, except sales quantity is
expected to increase by 60%. By how much should net operating income changes in 2013.

ANS:

Units sold in 2012= Sales/ Unit price = 720,000/90 =8,000.

If price reduces 10%, then new price will be (90-90X10%)= Tk. 81.
Quantity sales will be (8000 + 8000X60%)= 12,800 units.

NOI under proposed situation = Q*(P – V) – F

= 12,800*( 81 – 63) – 147,000 = 230,400 – 147,000 = 83,400.

So, income will increase by Tk. 2,400 from the previous year if proposed change has been made.

Problem :
Nike Sports sells Sports Sunglass. One of the company’s products, a high-tech Sunglass, sells for Tk 90
per unit. CGS is Tk. 63 per unit, and fixed expenses associated with the product total Tk. 135,000 per
year. Company’s income statement for 2012 is given bellow:

Nike Sports
Income Statement
For the year ended December 2012

Sales Tk. 720,000

CGS 504,000
Gross Profit 216,000

Operating Expenses 135,000

Net Operating Income 81,000

At present, the sales manager is convinced that a 10% reduction in the selling price along with a Tk. 2
sales commission on each unit sales will result in a 75% increase in the number of sunglasses sold next
year. By how much should net operating income changes in 2013.

ANS:

Units sold in 2012= Sales/ Unit price = 720,000/90 =8,000.

If price reduces 10%, then new price will be (90-90X10%)= Tk. 81.
Variable cost = 63+2 = Tk.65
Quantity sales will be (8000 + 8000X75%)= 14,000 units.

NOI under proposed situation = Q*(P – V) – F

= 14,000*( 81 – 65) – 135,000 = 224,000 – 135,000 = 89,000.

So, income will increase by Tk. 8,000 from the previous year if proposed change has been made.
Problem :
Baker Company has a product that sells for $20 per unit. The variable expenses are
$12 per unit, and fixed expenses total $30,000 per year.
Required:
a. What is the total contribution margin at the break-even point?
b. What is the contribution margin ratio for the product?
c. If total sales increase by $20,000 and fixed expenses remain unchanged, by how
much would net operating income be expected to increase?
d. The marketing manager wants to increase advertising by $6,000 per year. How
many additional units would have to be sold to increase overall net operating
income by $2,000?

Answer:
a. At the break-even, the total contribution margin equals total fixed expenses.
Therefore, the total contribution margin would be $30,000.
b. Contribution margin ratio =Unit contribution margin ÷ Selling price
= ($20 - $12) ÷ $20 = 40%

c. Increase in sales ....................................... $20,000

CM ratio .................................................. 40%
Increase in net operating income ............. $8,000

d. Increase in advertising expenses ................... $6,000

Desired increase in net operating income ..... 2,000
Total required contribution margin ............... $8,000
÷ Contribution margin per unit ...................... $8
Required unit sales ........................................ 1,000
Problem :
Delphi Company has developed a new product that will be marketed for the first time
during the next fiscal year. Although the Marketing Department estimates that 35,000
units could be sold at $36 per unit, Delphi's management has allocated only enough
manufacturing capacity to produce a maximum of 25,000 units of the new product
annually. The fixed expenses associated with the new product are budgeted at
$450,000 for the year. The variable expenses of the new product are $16 per unit.
Required:
a. How many units of the new product must Delphi sell during the next fiscal year in
order to break even on the product?
b. What is the profit Delphi would earn on the new product if all of the
manufacturing capacity allocated by management is used and the product is sold
for $36 per unit?
c. What is the degree of operating leverage for the new product if 25,000 units are
sold for $36 per unit?
d. The Marketing Department would like more manufacturing capacity to be devoted
to the new product. What would be the percentage increase in net operating
income for the new product if its unit sales could be expanded by 10% without any
increase in fixed expenses and without any change in the unit selling price and unit
variable expense?
e. Delphi's management has stipulated that the new product must earn a profit of at
least $125,000 in the next fiscal year. What unit selling price would achieve this
target profit if all of the manufacturing capacity allocated by management is used
and all of the output can be sold at that selling price?

Answer:
a. Break-even in units = Fixed expenses ÷ Unit contribution margin
= $450,000 ÷ $20 = 22,500
b.
Sales (25,000 × $36) .................................. $900,000
Variable expenses (25,000 × $16) ............. 400,000
Contribution margin ................................... 500,000
Fixed expenses ........................................... 450,000
Net operating income ................................. $ 50,000

c. Degree of operating leverage = Contribution margin ÷ Net operating income

= $500,000 ÷ $50,000 = 10
d. Percentage increase in net operating income
= Degree of operating leverage × Percentage change in sales
= 10 × 10% =100%

e. Sales = Variable expenses + Fixed expenses + Target profit

25,000P = ($16 × 25,000) + $450,0000 + $125,000
where P is the selling price
25,000P = $400,000 + $450,000 + $125,000
P = $975,000 ÷ 25,000 = $39
 FEDCO DEPARTMENT STORE
Projected Income Statement
For the Year Ended December 31, 2012
Net sales [$700,000 + ($700,000 X 6%)] ...... $742,000
Cost of goods sold ($742,000 X 76%)*........... 563,920
Gross profit ($742,000 X 24%)**...................... 178,080
Operating expenses
Selling expenses............................................. $100,000
Administrative expenses.................................... 20,000
Total operating expenses................................. 120,000
Net income........................................................ $ 58,080

**Alternatively: Net sales, $742,000 – gross profit, $178,080.

**24% = ($147,000 ÷ $700,000) + 3%.

(2)
FEDCO DEPARTMENT STORE
Projected Income Statement
For the Year Ended December 31, 2012
Net sales ................................................................ $700,000
Cost of goods sold............................................ …..553,000
Gross profit.............................................................. 147,000
Operating expenses
Selling expenses..................................... $72,000*
Administrative expenses.......................... 20,000* 92,000
Net income............................................................... $ 55,000

*$100,000 – $30,000 – ($30,000 X 40%) + ($700,000 X 2%) = $72,000.

(b) Carrie’s proposed changes will increase net income by $31,080. Luke’s
proposed changes will reduce operating expenses by $28,000 and result in
a corresponding increase in net income. Thus, if the choice is between
Carrie’s plan and Luke’s plan, Carrie’s plan should be adopted. While
Luke’s plan will increase net income, it may also have an adverse effect on
sales personnel. Under Luke’s plan, sales personnel will be taking a cut of
$16,000 in compensation [$60,000 – ($30,000 + $14,000)].
(c)
FEDCO DEPARTMENT STORE
Projected Income Statement
For the Year Ended December 31, 2012

Net sales [$700,000 + ($700,000 X 6%)] ...... .$742,000

Cost of goods sold ($742,000 X 76%)*............ 563,920
Gross profit ($742,000 X 24%)**...................... 178,080
Operating expenses
Selling expenses............................................. $72,840
Administrative expenses.................................. 20,000
Total operating expenses................................. 92,840
Net income........................................................ $ 85,240

*$72,000 + [2% X ($742,000 – $700,000)] = $72,840.

If both plans are implemented, net income will be $85,240