. FARMLAND INC. PRODUCES 80,000 UNITS OF PRODUCT A AT A TOTAL COST OF $2.4 MILLION. TOTAL FIXED COSTS ARE $1.4 MILLION.
1. Buy here:
Farmland Inc. produces 80,000 units of product A at a total cost of $2.4 million. Total
fixed costs are $1.4 million. If the company increases production by 25% and uses a
40% markup the price per unit will be:
Use the following to answer questions 2-3:
TXU Company's market for the Model 55 has changed significantly, and TXU has had to drop
the price per unit from $225 to $165. There are some units in the work in process inventory that
have costs of $200 per unit associated with them. TXU could sell these units in their current
state for $150 each. It will cost TXU $50 per unit to complete these units so that they can be
sold for $165 each.
2. 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
2. 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 $150 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.
3. When the incremental revenues and expenses are analyzed, the company is better off by
A) $10 per unit if they sell the units in their current state.
B) $35 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.
4. A company using activity based pricing marks up the direct cost of goods by 43% 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 6 returns. What will the customer be
5. 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?
Use the following to answer questions 6-7:
The Sunderland 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.
6. If Sunderland 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)?
4. 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.
7. If 80% of the rooms are occupied each night in the month of February (28 days) what
will total costs be for the month?
8. Leicester Company manufactures widgets. West Ham Company has approached
Leicester 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. Leicester 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:
5. Manufacturing overhead
The manufacturing overhead consists of $32,000 of costs that will be eliminated if the
components are no longer produced by Leicester. The remaining manufacturing
overhead will continue whether or not Leicester makes the components.
What is the amount of avoidable costs if Leicester buys rather than makes the
9. Below is a performance report that compares budgeted and actual profit of Boyles Beer
for the month of April:
8. All three components have equal importance.
10. 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%?
C) There is not enough information in the problem to answer
11. If a company is currently operating at its breakeven point, which of the following
statements is true? (Income tax considerations are ignored.)
A) If fixed costs increase, net income will decrease by the contribution margin ratio
times the amount of the increase in fixed costs.
B) If sales increase by 20%, net income will also increase by 20%, assuming fixed
costs are not equal to zero.
C) If variable costs double, net income will decrease by 50%.
D) Net income will decrease by the decrease in number of units sold times the
contribution margin per unit.
9. 12. One Small Grill Company is a start up with the following profile:
Unit selling price = $230; Variable cost per unit = $130; Fixed Costs = $36,000;
Tax rate = 40%. How many units should Small Grill sell to achieve an after-tax target
income of $6,000?
13. Western Apparel Company owns two stores and management is considering eliminating
the East store due to declining sales. Segmented contribution income statements are as
follows and common fixed costs are allocated on the basis of sales.
Direct fixed costs
Allocated fixed costs
Western feels that if they eliminate the East store that sales in the West store will decline
by 25%. If they close the East store, overall company net income will:
11. A) decline by $90,000.
B) decline by $63,500.
C) decline by $85,625.
D) decline by $74,375.
14. JungleGym, a best-selling toy has a selling price of $15. If the contribution margin ratio
is 40% and if the fixed costs are $60,000, how many JungleGyms must the company sell
to realize a profit of $450,000?
15. Given a resource constraint, management should shift the focus of cost-volume-profit
A) Increasing labor productivity and reducing output.
B) The product with the lowest variable cost per sales dollar.
C) The contribution margin per unit of the constraint.
D) Decreasing the firm’s breakeven point by increasing the selling price.
12. 16. Which of the following changes will result in a change in the break-even point?
A) The number of units sold goes up.
B) The sales price per unit goes up.
C) The company buys a new depreciable machine.
D) The tax rate on profits changes.
17. Assume that Charlie’s Bikes has fixed costs of $101,250. Each unit generates variable
costs of $80 and sells for $125. What is the break-even point for Charlie’s Bikes?
A) 2,250 units
B) 221,250 units
C) 1,536 units
D) 8,025 units
18. For which of the following decisions are sunk costs relevant?
A) The decision to sell or not sell a new product after paying for its market surveys.
B) The decision to sell a product after the split-off point or after further processing.
C) The decision to accept or reject a special order.
D) None of the above.
19. Della’s Furniture has a contribution margin ratio of 15%. If fixed costs are $175,500,
how many dollars of revenue must the company generate in order to reach the breakeven point?
13. C) $1,170,000
20. The Copy Department of the Cadiz Company is budgeted to incur $40,000 per month in
fixed costs and $0.02 per copy in variable costs. It allocates copy costs to user
departments as follows: Fixed costs are allocated (as a lump sum) based on budgeted
fixed costs and estimated peak demand for each department. Variable costs are allocated
based on the budgeted rate per copy times the department's actual usage. Which of the
following is not an advantage of this allocation scheme over allocating actual costs
based on actual usage?
A) The amount charged to one using department is not affected by the number of
copies used by another department.
B) Managers in the using departments pay for the fixed costs that are created by their
demands for capacity.
C) Using departments are not charged for cost overruns in the copy department.
D) All of the above are advantages of this allocation system.
21. Alfredo’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
14. 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.
22. The Swansea 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 Swansea wants to continue to earn a 50% return, what price should the
Use the following to answer question 23:
Taylor's Treasures has collected the following information over the last six months.
23. Using the high-low method, what is the variable cost per unit?
24. A manufacturing company produces and sells 40,000 units of a single product. Variable
costs total $80,000 and fixed costs total $120,000. If unit is sold for $8, what markup
percentage is the company using?
25. Visit finance.yahoo.com and determine which of the following statements is incorrect:
A) The current market cap of Alphabet Inc. is greater than the market cap of Microsoft.
B) The current ratio for the most recent quarter for Alphabet Inc. is greater than the
current ratio for Microsoft.
C) The current Price per share of Microsoft is more than ten times that of Alphabet Inc.
D) Return on equity for the most recent quarter for Alphabet Inc. is higher than return