Achievement Test 3: Chapters 5-6 Name ___________________________

Managerial Accounting, 5e Instructor ________________________

Section # _________ Date __________

Part I II III IV V VI Total

Points 28 10 12 14 24 12 100

Score

PART I — MULTIPLE CHOICE (28 points)

Instructions: Designate the best answer for each of the following questions.

____ 1. Brooke Company desires net income of $360,000 when it has $1,000,000 of fixed
costs and variable costs of 60% of sales. Required sales equals
a. $1,600,000.
b. $3,400,000.
c. $2,500,000.
d. $2,266,667.

____ 2. A company's break-even point can be decreased by decreasing

a. the contribution margin ratio.
b. the contribution margin.
c. the selling price.
d. variable costs per unit.

____ 3. Brooke Company desires net income of $360,000 when it has $1,000,000 of fixed
costs and variable costs of 60% of sales. Contribution margin equals
a. $3,400,000.
b. $1,360,000.
c. $640,000.
d. $600,000.

____ 4. Fixed costs

a. increase in total as total production increases.
b. decrease in total as total production decreases.
c. decrease per unit as total production decreases.
d. increase per unit as total production decreases.

____ 5. Assume October is the high-volume month for a toy manufacturer and July is the low-
volume month. The following total production costs and volume levels have been
recorded:
Total Costs Volume
October $30,000 6,000
July $12,000 2,000
The total fixed costs are
AT3- 2 Test Bank for Managerial Accounting, Fifth Edition

a. $18,000
b. $3,000
c. $9,000
d. $6,000

____ 6. Variable costs, as activity increases, will

a. will stay the same in total.
b. increase per unit.
c. remain constant per unit.
d. decrease in total.

____ 7. A cost that increases in total, but not proportionately with increases in the activity level,
is a(n)
a. mixed cost.
b. variable cost.
c. fixed cost.
d. unusual fixed cost.

____ 8. Given the following costs for Bently Company, classify each cost as either variable,
fixed, or mixed.
Total Cost at
2,000 Units 3,000 Units
Cost A $12,900 $19,350
Cost B 12,300 16,650
Cost C 13,000 13,000
a. Cost A and Cost B are variable; Cost C is fixed.
b. Cost A is variable; Cost B is mixed; Cost C is fixed.
c. Cost A and Cost B are mixed; Cost C is fixed.
d. Cost A is mixed; Cost B is variable; Cost C is fixed.

____ 9. The assumptions that underlie basic CVP analysis include all of the following except
a. when more than one product is sold, total sales will be in a constant sales mix.
b. all costs can be classified as variable or fixed with reasonable accuracy.
c. the behavior of both costs and revenues is linear throughout the relevant range.
d. all of the above are assumptions.

Use the following information for questions 10 and 11.

Wynne Company has a weighted-average unit contribution margin of $25 for its two products,
Regular and Deluxe. Expected sales for Wynne are 60,000 Regular and 40,000 Deluxe. Fixed
expenses are $2,200,000.

____ 10. How many Regulars would Wynne sell at the break-even point?
a. 35,200
b. 44,000
c. 52,800
d. 66,000
 Achievement Test 3 AT3- 3

____ 11. At the expected sales level, Wynne’s net income will be
a. $(300,000).
b. $0.
c. $300,000.
d. $2,500,000.

____ 12. Fernetti Company can produce and sell only one of the following two products:
Machine Hours Contribution
Required Margin Per Unit
Product X 0.2 $3
Product Y 0.3 $5
The company has machine capacity of 1,200 hours. How much will contribution
margin be if it produces only the most profitable product?
a. $1,800
b. $2,000
c. $18,000
d. $20,000

____ *13. Which of the following is included in the cost of goods manufactured under absorption
costing but not under variable costing?
a. Direct materials
b. Variable factory overhead
c. Fixed factory overhead
d. Direct labor

____ *14. Which of the following would not be deducted in determining the contribution margin
under variable costing?
a. Direct labor
b. Sales commissions
c. Sales office depreciation using the straight line method
d. Variable factory overhead

PART II — TRUE/FALSE (10 points)

Instructions: Designate whether each of the following statements is true or false by circling the T
or F.

T F 1. Contribution margin is the amount of revenue left over to cover selling and
administrative costs after manufacturing costs have been deducted.

T F 2. The margin of safety is the difference between actual sales and target net income
sales.

T F 3. At the break-even point, total contribution margin is equal to total fixed costs.

T F 4. A company’s break-even point can be decreased by increasing the contribution

margin ratio.

T F 5. A CVP income statement classifies costs by function, but a traditional income

statement classifies costs by cost behavior (variable or fixed).
AT3- 4 Test Bank for Managerial Accounting, Fifth Edition

PART III — SCARCE RESOURCE ALLOCATION (12 points)

Ogle Company manufactures and sells two products. Relevant per unit data concerning each
product are given below:
Product
SVT XLE
Selling price $74 $110
Variable costs $40 $50
Machine hours 2 3

Instructions
(a) Compute the contribution margin per unit of limited resource for each product.

(b) Which product should be manufactured if 1,000 additional machine hours are available?

PART IV — HIGH-LOW METHOD (14 points)

Peterson Company incurred the following high and low maintenance costs totals during 2011:
$432,000 at 20,000 units of activity during March and $320,000 at 12,000 units during August.

Instructions: Answer parts (a) through (c) below, presenting carefully labeled supporting
calculations in all cases.

(a) Use the high-low method to compute the variable cost per unit and the total fixed cost
element of the mixed cost component.

(b) Based on the above analysis, express the total maintenance cost in formula format.

(c) Compute the total maintenance cost for May when activity is 16,000 units.
 Achievement Test 3 AT3- 5

PART V — COST-VOLUME-PROFIT (24 points)

Harder Company manufactures a product that sells for $50 per unit. Harder incurs a variable cost
per unit of $30 and $3,400,000 in total fixed costs to produce this product. It is currently selling
200,000 units.

Instructions: Complete each of the following requirements, presenting labeled supporting

computations.

(a) Compute and label the contribution margin per unit and contribution margin ratio.

(b) Using the contribution margin per unit, compute the break-even point in units.

(c) Using the contribution margin ratio, compute the break-even point in dollars.

(d) Compute the margin of safety and margin of safety ratio.

(e) Compute the number of units that must be sold in order to generate net income of $400,000
using the contribution margin per unit.

(f) Should Harder give a commission to its salesmen based on 10% of sales, if it will decrease
fixed costs by $400,000 and increase sales volume 10%? Support your answer with labeled
computations.
AT3- 6 Test Bank for Managerial Accounting, Fifth Edition

PART VI — OPERATING LEVERAGE (12 points)

The following CVP income statements are available for Baxter Company and Donaldson
Company.
Baxter Company Donaldson Company
Sales revenue $1,050,000 $1,050,000
Variable costs 525,000 210,000
Contribution margin 525,000 840,000
Fixed costs 325,000 640,000
Net income $ 200,000 $ 200,000

Instructions
(a) Compute the degree of operating leverage for each company.

(b) Prepare a CVP income statement for each company, assuming that sales revenue
decreases by 20%.
 Achievement Test 3 AT3- 7

Solutions — Achievement Test 3: Chapters 5-6

PART I — MULTIPLE CHOICE (28 points)

1. b 6. c 11. c
2. d 7. a 12. d
3. b 8. b *13. c
4. d 9. d *14. c
5. b 10. c

PART II — TRUE/FALSE (10 points)

1. F 4. T
2. F 5. F
3. T

PART III — SCARCE RESOURCE ALLOCATION (12 points)

(a) Product
SVT XLE
Contribution margin per unit $34 $60
Machine hours required ÷2 ÷3
Contribution margin per unit of limited resource $17 $20

(b) The XLE product should be manufactured because it results in the highest contribution
margin per machine hour: $20 × 1,000 = $20,000

PART IV — HIGH-LOW METHOD (14 points)

(a) $432,000 – $320,000 $112,000

————————— = ———— = $14 Variable
20,000 – 12,000 8,000

High Low
Total costs $432,000 $320,000
Less: Variable costs
20,000 × $14 280,000
12,000 × $14 168,000
Total fixed costs $152,000 $152,000

(b) Total cost = ($14 × sales volume) + $152,000

(c) (16,000 × $14) + $152,000 = $376,000

PART V — COST-VOLUME-PROFIT (24 points)

(a) Unit selling price $50 Contribution margin per unit $20
Unit variable costs (30) Unit selling price ÷ $50
Contribution margin per unit $20 40%

(b) $3,400,000 ÷ $20 = 170,000 units

AT3- 8 Test Bank for Managerial Accounting, Fifth Edition

(c) $3,400,000 ÷ 40% = $8,500,000 sales dollars

(d) $10,000,000 – $8,500,000 = $1,500,000 margin of safety

$1,500,000 ÷ $10,000,000 = 15% margin of safety ratio

(e) ($3,400,000 + $400,000) ÷ $20 = 190,000 units

(f) Current expected income New expected income

Sales (200,000 × $50) $10,000,000 Sales (220,000 × $50) $11,000,000
V.E. (200,000 × $30) 6,000,000 V.E. [(220,000 × $30) +
C.M. 4,000,000 ($11,000,000 × 10%)] 7,700,000
F.E. 3,400,000 C.M. 3,300,000
N.I. $ 600,000 F.E. 3,000,000
N.I. $ 300,000
Therefore, No.

PART VI — OPERATING LEVERAGE (12 points)

(a) Contribution Margin ÷ Net Income = Degree of Operation Leverage
Baxter $525,000 ÷ $200,000 = 2.63
Donaldson $840,000 ÷ $200,000 = 4.20

(b) Baxter Company Donaldson Company

Sales revenue $840,000* $840,000*
Variable costs 420,000** 168,000***
Contribution margin 420,000 672,000
Fixed costs 325,000 640,000
Net income $95,000 $ 32,000

*$1,050,000 × .8
**($525,000 ÷ $1,050,000) × $840,000
***($210,000 ÷ $1,050,000) × $840,000