A product sells for $200 per unit, and its variable costs per unit are $130

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1. A product sells for $200 per unit, and its variable costs per unit are $130. The fixed costs are $420,000. If the firm wants to earn $35,000 pretax income, how many units must be sold? (Points : 5)
6,500
500
5,000
200

Units required to earn target pre-tax income of $35,000 = ($35,000 + $420,000)/$70 = 6,500 units

2. For January, sales revenue is $700,000; sales commission are 5% of sales; the sales manager’s salary is $96,000; advertising expenses are $90,000; shipping expenses total 2% of sales; and miscellaneous selling expenses are $2,100 plus 1/2 of 1% sales. Total selling expenses for the month of January are: (Points : 5)

$157,100

$240,600

$183,750

$182,100

3. A company’s product sells at $12 per unit and has a $5 per unit variable cost. The company’s total fixed costs are $98,000.The break-even point in units is: (Points : 5)
14,000
7,000
5,187
2,123

$98,000/$7 = 14,000 units

4. The contribution margin per unit is equal to the sales price per unit minus the variable costs per unit. (Points : 5)
True
False

5. Total variable costs change proportionately with changes in output activity. (Points : 5)
True
False

6. Variable costs per unit increase proportionately with increases in output activity. (Points : 5)
True
False

7.
If fixed costs are $500,000 and variable costs are 60% of break-even sales, profit is zero when sales revenue is $930,000.
(Points : 5)
True
False

8. Which of the following is a mixed cost? (Points : 5)

Salary of a factory supervisor

Electricity costs of $2 per kilowatt-hour

Rental costs of $5,000 per month plus $.30 per machine hour of use

Straight-line depreciation on factory equipment

9. Variable costs are costs that remain constant in total dollar amount as the level of activity changes (Points : 5)
True
False

10. Variable costs as a percentage of sales for Lemon Inc. are 80%, current sales are $600,000, and fixed costs are $130,000. How much will operating income change if sales increase by $40,000? (Points : 5)

$8,000 increase

$8,000 decrease

$30,000 decrease

$30,000 increase

11. A break-even point can be calculated either in units or in dollars. (Points : 5)
True
False

12.
How does contribution margin differ from gross margin? Give a specific example as part of your explanation.
(Points : 10)
The Contribution Margin is calculated by subtracting Variable Costs from Sales. This is used in Variable Costing where costs are categorized based on the cost behavior; while Gross Margin is calculated by subtracting Cost of Goods Sold from Sales which is used in Absorption Costing where costs are categorized based on function.

13. A product sells for $30 per unit and has variable costs of $18 per unit. The fixed costs are $720,000. If the variable costs per unit were to decrease to $15 per unit and fixed costs increase to $900,000, and the selling price does not change, break-even point in units would:

a. current breakeven
b. new breakeven

Show all work to receive full credit (Points : 10)

a)
Contribution Margin = $30 – $18
= $12
BEP = $720,000 / $12
= 60,000 units

b)
Contribution Margin = $30 – $15
= $15
BEP = $900,000 / $15
= 60,000 units

14. State the difference in cost of goods manufactured between absorption costing and variable costing. As part of your explanation give an example of the statement format difference. (Points : 10)

The main difference between those methods is in the treatment of Fixed Manufacturing Costs; where under Variable Costing, Fixed Manufacturing Costs are not included in Product Costs and are treated as a Period Cost while Under Absorption Costing Fixed Manufacturing Overhead are treated as Product Costs. Hence, under Variable Costing Product Costs consist solely of Variable Production Costs.

The following Income Statements show the difference:

Company A
Income Statement (Variable Costing)
Month Ended April 30, 20xx
Sales revenue (10,000 × $27) $270,000
Variable manufacturing costs $80,000
Variable selling and administrative costs $20,000 $100,000
Contribution margin $170,000
Fixed manufacturing costs $35,000
Fixed selling and administrative costs $10,000 $45,000
Operating income $125,000

Company A
Income Statement (Absorption Costing)
Month Ended April 30, 20xx
Sales revenue (10,000 × $27) $270,000
Cost of goods manufactured $131,000
Less: Ending inventory ($22,000)
Cost of Goods Sold $109,000
Gross Profit $161,000
Operating expenses:
Variable Selling and administrative cost $20,000
Fixed Selling and administrative
$10,000 $30,000
Operating income $131,000

Income statements

15. The more activities tracked by activity-base…The more activities tracked by activity-based costing, the more accurately overhead costs are assigned. (Points : 5)
True
False

16. Which of the following would not be considered a product cost? (Points : 5)
Cost accountant’s salary
Factory line worker’s salary.
Direct labor costs
Manufacturing overhead costs

17. A retail store has three departments, 1, 2, and 3, and does general advertising that benefits all departments. Advertising expense totaled $41,000 for the year, and departmental sales were as follows. Which department would be allocated the highest amount of the advertising expense if the activity base is sales?

Sales: Department 1 $101,000
Department 2 $212,750
Department 3 $157,750

(Points : 5)
Department 1
Department 2
Department 3
Each department would have and equal amount since advertising benefits all departments

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