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BUSI 562

Sample Test Chapter 5,6,7

1. When the activity level is expected to decline within the relevant range, what effects
would be anticipated with respect to each of the following?

A
B
C
D
A)
B)
C)
D)

.
.
.
.

F ix e d c o s t
p e r u n it
In c re a se
In c re a se
N o change
N o change

V a r ia b le c o s t
p e r u n it
N o change
In c re a se
N o change
In c re a se

Entry A
Entry B
Entry C
Entry D

2. Which of the following costs, if expressed on a per unit basis, would be expected to vary
inversely with the level of production and sales?
A) Sales commissions.
B) Fixed manufacturing overhead.
C) Variable manufacturing overhead.
D) Direct materials.
3. An example of a committed fixed cost would be:
A) taxes on real estate.
B) management development programs.
C) public relations.
D) advertising programs.
4. The relative proportion of variable, fixed, and mixed costs in a firm is known as the
firm's:
A) contribution margin.
B) cost structure.
C) product mix.
D) relevant range.
5. Which of the following types of firms likely would have a high proportion of variable
costs in its cost structure?
A) Public utility.
B) Airline.
C) Fast food outlet.
D) Architectural firm.

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6. The traditional income statement required for external reporting:


A) organizes costs by behavior rather than by function.
B) organizes costs by function rather than by behavior.
C) emphasizes the concept of contribution margin.
D) is equally useful for internal as well as external decisions.
Use the following to answer questions 7-10:
An income statement for Sam's Bookstore for the first quarter of the year is presented below:

On average, a book sells for $50. Variable selling expenses are $5 per book with the remaining
selling expenses being fixed. The variable administrative expenses are 4% of sales with the
remainder being fixed.
7. The contribution margin for Sam's Bookstore for the first quarter is:
A) $180,000.
B) $774,000.
C) $144,000.
D) $756,000.
8. The net operating income using the contribution approach for the first quarter is:
A) $270,000.
B) $180,000.
C) $144,000.
D) $66,000.
9. The cost formula for operating expenses with "X" equal to the number of books sold is:
A) Y = $102,000 + $5X.
B) Y = $102,000 + $7X.
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C) Y = $78,000 + $7X.
D) Y = $78,000 + $9X.
10. If 20,000 books are sold during the second quarter and this activity is within the relevant
range, the company's expected contribution margin would be:
A) $300,000.
B) $160,000.
C) $860,000.
D) $ 58,000.
Use the following to answer questions 11-13:
Marger, Inc., provided the following data for two recent months:
S a le s in U n its ......

A p r il
3 ,2 0 0

M ay
4 ,5 0 0

C o s t:
C o s t T ..............
C o s t U ..............
C o s t W .............

5 ,6 0 0
4 ,4 8 0
3 ,9 5 0

5 ,6 0 0
6 ,3 0 0
5 ,2 5 0

11. Which of the following classifications best describes the behavior of Cost T?
A) Variable
B) Fixed
C) Mixed
D) None of the above
12. Which of the following classifications best describes the behavior of Cost U?
A) Variable
B) Fixed
C) Mixed
D) None of the above
13. Which of the following classifications best describes the behavior of Cost W?
A) Variable
B) Fixed
C) Mixed
D) None of the above

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Use the following to answer questions 14-15:


Hiss Company's activity for the last six months is as follows:

14. Using the high-low method, the estimated variable electrical cost per machine hour is:
A) $0.40.
B) $0.65.
C) $0.70.
D) $0.67.
15. Using the high-low method, the estimated monthly fixed component of the electrical
cost is:
A) $260.
B) $235.
C) $280.
D) $800.
16. Contribution margin is the amount remaining after:
A) variable expenses have been deducted from sales revenue.
B) fixed expenses have been deducted from sales revenue.
C) fixed expenses have been deducted from variable expenses.
D) cost of goods sold has been deducted from sales revenues.
17. Which of the following formulas is used to calculate the break-even point in terms of
sales dollars?
A) Fixed expenses/Unit contribution margin
B) Variable expenses/Contribution margin ratio
C) Fixed expenses/Contribution margin ratio
D) Net operating income/Unit contribution margin

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18. Assume a company sells a single product. If Q equals the level of output, P is the selling
price per unit, V is the variable expense per unit, and F is the fixed expense, then the
break-even point in sales dollars is:
A) F/(P-V).
B) F/[Q(P-V)].
C) F/[Q(P-V)/P].
D) F/[(P-V)/P].
19. If sales volume increases and all other factors remain constant, then the:
A) contribution margin ratio will increase.
B) break-even point will decrease.
C) margin of safety will increase.
D) net operating income will decrease.
20. In calculating the break-even point for a multi-product company, which of the following
assumptions are commonly made?
I. Sales volume equals production volume.
II. Variable expenses are constant per unit.
III. A given sales mix is maintained for all volume changes.
A) I and II
B) I and III
C) II and III
D) I, II, and III
21. Solen Company's break even-point in sales is $900,000, and its variable expenses are
75% of sales. If the company lost $32,000 last year, sales must have amounted to:
A) $868,000.
B) $804,000.
C) $772,000.
D) $628,000.
22. Street Company's fixed expenses total $150,000, its variable expense ratio is 60% and
its variable expenses are $4.50 per unit. Based on this information, the break-even point
in units is:
A) 50,000.
B) 37,500.
C) 33,333.
D) 100,000.
23. Oxford Company had sales of $3,000,000, variable expenses of $1,800,000, and fixed
expenses of $800,000. What would be the amount of sales dollars at the break-even
point?
A) $2,000,000
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B) $2,400,000
C) $2,600,000
D) $2,760,000
24. Iverson Company's variable expenses are 60% of sales. At a $400,000 sales level, the
degree of operating leverage is 5. If sales increase by $40,000, the new degree of
operating leverage will be (rounded):
A) 3.67.
B) 2.86.
C) 5.25.
D) 5.00.
25. The following monthly data are available for the W.K. Kent Company:

The break-even sales for the month for the company are:
A) $170,089.
B) $189,200.
C) $139,164.
D) $127,567.
26. Last year, Flynn Company reported a profit of $70,000 when sales totaled $520,000 and
the contribution margin ratio was 40%. If fixed expenses increase by $10,000 next year,
what will sales have to be for the company to earn a profit of $80,000?
A) $600,000
B) $570,000
C) $562,500
D) $625,000
27. The production budget is typically prepared prior to the sales budget.
A) True
B) False
28. Which of the following is not a benefit of budgeting?
A) It reduces the need for tracking actual cost activity.
B) It sets benchmarks for evaluation performance.
C) It uncovers potential bottlenecks.
D) It formalizes a manager's planning efforts.
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29. Which of the following represents the correct order in which the indicated budget
documents for a manufacturing company would be prepared?
A) Sales budget, cash budget, direct materials budget, direct labor budget
B) Production budget, sales budget, direct materials budget, direct labor budget
C) Sales budget, cash budget, production budget, direct materials budget
D) Selling and administrative expense budget, cash budget, budgeted income
statement, budgeted balance sheet
30. A continuous (or perpetual) budget:
A) is prepared for a range of activity so that the budget can be adjusted for changes in
activity.
B) is a plan that is updated monthly or quarterly, dropping one period and adding
another.
C) is a strategic plan that does not change.
D) is used in companies that experience no change in sales.
31. The budgeted amount of raw materials to be purchased is determined by:
A) adding the desired ending inventory of raw materials to the raw materials needed to
meet the production schedule.
B) subtracting the beginning inventory of raw materials from the raw materials needed
to meet the production schedule.
C) adding the desired ending inventory of raw materials to the raw materials needed to
meet the production schedule and subtracting the beginning inventory of raw
materials.
D) adding the beginning inventory of raw materials to the raw materials needed to meet
the production schedule and subtracting the desired ending inventory of raw
materials.
32. Trumbull Company budgeted sales on account of $120,000 for July, $211,000 for
August, and $198,000 for September. Collection experience indicates that none of the
budgeted sales will be collected in the month of the sale, 60% will be collected the
month after the sale, 36% in the second month, and 4% will be uncollectible. The cash
receipts from accounts receivable that should be budgeted for September would be:
A) $169,800.
B) $147,960.
C) $197,880.
D) $194,760.

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33. Berol Company plans to sell 200,000 units of finished product in July and anticipates a
growth rate in sales of 5% per month. The desired monthly ending inventory in units of
finished product is 80% of the next month's estimated sales. There are 150,000 finished
units in inventory on June 30.
Berol Company's production requirement in units of finished product for the threemonth period ending September 30 is:
A) 712,025 units.
B) 630,500 units.
C) 664,000 units.
D) 665,720 units.
34. Paradise Company budgets on an annual basis for its fiscal year. The following
beginning and ending inventory levels (in units) are planned for next year.

R a w m a te r ia ls * ......
F in is h e d g o o d s ......

B e g in n in g
In v e n to r y
4 0 ,0 0 0
8 0 ,0 0 0

E n d in g
In v e n to r y
5 0 ,0 0 0
5 0 ,0 0 0

* T h re e p o u n d s o f ra w m a te ria ls a re n e e d e d to p ro d u c e e a c h u n it o f
fin is h e d p ro d u c t.
If Paradise Company plans to sell 480,000 units during next year, the number of units it
would have to manufacture during the year would be:
A) 440,000 units.
B) 480,000 units.
C) 510,000 units.
D) 450,000 units.

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Use the following to answer questions 35-36:


Noskey Corporation is a merchandising firm. Information pertaining to the company's sales
revenue is presented in the following table.

Management estimates that 5% of credit sales are uncollectible. Of the credit sales that are
collectible, 60% are collected in the month of sale and the remainder in the month following the
sale. Purchases of inventory are equal to next month's cost of goods sold. The cost of goods sold
is 30% of the selling price. All purchases of inventory are on account; 25% are paid in the month
of purchase, and the remainder is paid in the month following the purchase.
35. Noskey Corporation's budgeted cash collections in July from June credit sales are:
A) $144,000.
B) $136,800.
C) $96,000.
D) $91,200.
36. Noskey Corporation's budgeted total cash receipts in August are:
A) $240,000.
B) $294,000.
C) $299,400.
D) $239,400.
Use the following to answer questions 37-39:
Young Enterprises has budgeted sales in units for the next five months as follows:
J u n e .................
J u ly .................
A u g u s t .............
S e p te m b e r .......
O c to b e r ...........

4 ,6 0 0
7 ,2 0 0
5 ,4 0 0
6 ,8 0 0
3 ,8 0 0

u n its
u n its
u n its
u n its
u n its

Past experience has shown that the ending inventory for each month should be equal to 10% of
the next month's sales in units. The inventory on May 31 fell short of this goal since it contained
only 400 units. The company needs to prepare a Production Budget for the next five months.

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37. The beginning inventory in units for September should be:


A) 460 units.
B) 6,800 units.
C) 540 units.
D) 680 units.
38. The total number of units to be produced in July is:
A) 7,740 units.
B) 7,200 units.
C) 7,020 units.
D) 7,280 units.
39. The desired ending inventory for August is:
A) 540 units.
B) 680 units.
C) 720 units.
D) 380 units.
Use the following to answer questions 40-42:
Balmforth Products, Inc. makes and sells a single product called a Bik. It takes three yards of
Material A to make one Bik. Budgeted production of Biks for the next five months is as follows:

The company wants to maintain monthly ending inventories of Material A equal to 20% of the
following month's production needs. On January 31, this target had not been attained since only
2,000 yards of Material A were on hand. The cost of Material A is $0.80 per yard. The company
wants to prepare a Direct Materials Purchases Budget.
40. The total cost of Material A to be purchased in February is:
A) $45,200.
B) $42,900.
C) $39,440.
D) $34,320.
41. The desired ending inventory of Material A for the month of March is:
A) 9,300 yards.
B) 7,140 yards.
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C) 3,100 yards.
D) 8,400 yards.
42. The total needs (i.e., production requirements plus desired ending inventory) of Material
A for the month of May are:
A) 37,800 yards.
B) 45,360 yards.
C) 46,500 yards.
D) 38,940 yards.
Use the following to answer questions 43-45:
The Gomez Company, a merchandising firm, has budgeted its activity for December according
to the following information:
* Sales at $500,000, all for cash.
* Merchandise Inventory on November 30 was $250,000.
* The cash balance at December 1 was $20,000.
* Selling and administrative expenses are budgeted at $50,000 for December and are paid for in
cash.
* Budgeted depreciation for December is $30,000.
* The planned merchandise inventory on December 31 is $260,000.
* The cost of goods sold represents 75% of the selling price.
* All purchases are paid for in cash.
43. The budgeted cash receipts for December are:
A) $125,000.
B) $375,000.
C) $530,000.
D) $500,000.
44. The budgeted cash disbursements for December are:
A) $435,000.
B) $385,000.
C) $425,000.
D) $465,000.
45. The budgeted net income for December is:
A) $75,000.
B) $45,000.
C) $125,000.
D) $65,000.

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Use the following to answer questions 46-47:


The Davis Company makes and sells a product called Kapp. Each Kapp sells for $18 and has a
unit variable cost of $12. The company has budgeted the following data for September:
* Sales of $648,000, all in cash.
* A cash balance on September 1 of $36,000.
* Cash disbursements (other than interest) during September of $652,600.
* A minimum cash balance on September 30 of $45,000.
If necessary, the company will borrow cash from a bank. The borrowing will be in multiples of
$1,000 and will bear interest at 2% per month. All borrowing will take place at the beginning of
the month. The September interest will be paid in cash during September.
46. The number of Kapps budgeted to be sold during September is:
A) 54,000 units.
B) 38,000 units.
C) 36,000 units.
D) 36,500 units.
47. The amount of cash needed to be borrowed on September 1 to cover all cash
disbursements and to obtain at least the desired September 30 cash balance is:
A) $13,000.
B) $14,000.
C) $41,000.
D) $40,000.

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Answer Key
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47.

A
B
A
B
C
B
C
D
C
B
B
A
C
B
C
A
C
D
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D
C
A
A
A
B
B
B
A
D
B
C
A
D
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D
C
D
C
B
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B
C
D
A
B
C
B
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