Different

Cost-Volume-Profit Analysis
MODULE 4 7. Which of the factors is (are) involved in studying cost-volume-profit relationships?

COST-VOLUME-PROFIT ANALYSIS A. Levels of production C. Fixed costs
B. Variable costs D. All of these Bobadilla
THEORIES:
1. To which function of management is CVP analysis most applicable? 8. At the breakeven point, fixed cost is always
A. Planning C. Directing A. Less than the contribution margin C. More than the contribution margin
B. Organizing D. Controlling Bobadilla B. Equal to the contribution margin. D. More than the variable cost Bobadilla
2. The systematic examination of the relationships among selling prices, volume of sales and 9. At the break-even point:
production, costs, and profits is termed: A. net income will increase by the unit contribution margin for each additional item sold
A. contribution margin analysis C. budgetary analysis above break-even.
B. cost-volume-profit analysis D. gross profit analysis Bobadilla B. the total contribution margin changes from negative to positive
C. fixed costs are greater than contribution margin
3. The term contribution margin is best defined as the: D. the contribution margin ratio begins to increase Bobadilla
A. difference between fixed costs and variable costs.
B. difference between revenue and fixed costs. 10. In cost-volume-profit analysis, the greatest profit will be earned at
C. amount available to cover fixed costs and profit. A. One hundred percent at normal productive capacity.
D. amount available to cover variable costs. Bobadilla B. The production point with the lowest marginal cost.
C. The production point at which average total revenue exceeds average marginal cost.
4. Cost-volume-profit analysis allows management to determine the relative profitability of a D. The point at which marginal cost and marginal revenue are equal. Bobadilla
product by
A. Highlighting potential bottlenecks in the production process. 11. Which of the following is not an assumption underlying C-V-P analysis?
B. Determining the contribution margin per unit and projected profits at various levels of A. The behavior of total revenue is linear.
production. B. Unit variable expenses remain unchanged as activity varies.
C. Assigning costs to a product in a manner that maximizes the contribution margin. C. Inventory levels at the beginning and end of the period are the same.
D. Keeping fixed costs to an absolute minimum. Bobadilla D. The number of units produced exceeds the number of units sold. Bobadilla
5. Cost-volume-profit analysis cannot be used if which of the following occurs? 12. Which of the following assumptions is inherent to C-V-P analysis?
A. Costs cannot be properly classified into fixed and variable costs. A. In manufacturing firms, the beginning and ending inventory levels are the same.
B. The per unit variable costs change. B. In a multi-product organization, the sales mix varies over time.
C. The total fixed costs change. C. The behavior of total revenue is curvilinear.
D. Per unit sales prices change. Bobadilla D. he relevant range is not a consideration. Bobadilla
6. The most useful information derived from a breakeven chart is the 13. Which of the following assumptions is closely relevant to cost-volume-profit analysis?
A. Amount of sales revenue needed to cover enterprise variable costs. A. for multiple product analysis, the sales mix is not important
B. Amount of sales revenue needed to cover enterprise fixed costs. B. inventory levels remain unchanged
C. Relationship among revenues, variable costs, and fixed costs at various levels of activity. C. total fixed costs and unit variable costs can be identified and remain constant over the
D. Volume or output level at which the enterprise breaks even. Bobadilla relevant range
D. B and C Bobadilla
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20. As projected net income increases the
14. Advocates of cost-volume-profit analysis argue that: A. degree of operating leverage declines. C. break-even point goes down. Bobadilla
A. Fixed costs are irrelevant for decision making. B. margin of safety stays constant. D. contribution margin ratio goes up.
B. Fixed costs are mandatory for CVP decision making.
C. Differentiation between the patterns of variable costs and fixed costs is critical. 21. Given the following notations, what is the breakeven sales level in units?
D. Fixed costs are necessary to calculate inventory valuations. Bobadilla SP = selling price per unit
FC = total fixed cost
15. With respect to fixed costs, C-V-P analysis assumes total fixed costs VC = variable cost per unit
A. per unit remains constant as volume changes A. SP / (FC/VC) C. VC/(SP – FC)
B. remain constant from one period to the next B. FC/(VC/SP) D. FC/(SP – VC) Bobadilla
C. vary directly with volume
D. remain constant across changes in volume Bobadilla 22. A company increased the selling price for its product from P1.00 to P1.10 a unit when total
fixed costs increased from P400,000 to P480,000 and variable cost per unit remained
16. The CVP model assumes that over the relevant range of activity: unchanged. How would these changes affect the breakeven point?
A. only revenues are linear. C. unit variable cost is not constant. Bobadilla A. The breakeven point in units would be increased.
B. total fixed cost changes. D. revenues and total costs are linear. B. The breakeven point in units would be decreased.
C. The breakeven point in units would remain unchanged.
17. Which of the following is not a limiting factor of Cost-Volume-Profit analysis? D. The effect cannot be determined from the information given. Bobadilla
A. The process assumes a linear relationship among the variables.
B. The process assumes variable costs per unit are available. 23. On January 1, 2007, Incremental Company increased its direct labor wage rates. All other
C. Efficiency is assumed to be constant. budgeted costs and revenues were unchanged. How did this increase affect Incremental
D. Inventory levels are assumed to not change. Bobadilla Company’s budgeted break-even point and budgeted margin of safety?
Bobadilla A. B. C. D.
18. Cost-volume-profit analysis is a technique available to management to understand better the Budgeted Break-even Point Increase Increase Decrease Decrease
interrelationships of several factors that affect a firm's profit. As with many such techniques, Expected Margin of Safety Increase Decrease Decrease Increase
the accountant oversimplifies the real world by making assumptions. Which of the following is
not a major assumption underlying CVP analysis? 24. As the variable cost increases but the selling price remains constant, the
A. All costs incurred by a firm can be separated into their fixed and variable components. A. Degree of operating leverage declines C. Breakeven point goes down Bobadilla
B. The product’s selling price per unit is constant at all volume levels within a relevant range. B. Margin of safety stays constant D. Contribution margin ratio goes up
C. Operating efficiency and employee productivity is constant at all volume levels.
D. For multi-product situations, the sales mix can vary at different volume levels. Bobadilla 25. A very high degree of operating leverage (DOL) indicates that a firm:
A. has high fixed costs. C. has high variable costs. Bobadilla
19. Pines Company has a higher degree of operating leverage than Tagaytay Company. Which of B. has a high net income. D. is operating close to its breakeven point.
the following is true?
A. Pines has higher variable expense. 26. With the aid of computer software, managers can vary assumptions regarding selling prices,
B. Pines is more profitable than Tagaytay Company’s. costs, and volume and can immediately see the effects of each change on the break-even
C. Pines is more risky than Tagaytay is. point and profit. Such an analysis is called
D. Pines' profits are less sensitive to percentage changes in sales. Bobadilla A. “What if” or sensitivity analysis. C. Computer aided analysis.
B. Vary the data analysis. D. Data gathering. Bobadilla
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27. If a company raises its target peso profit, its 32. On a cost-volume-profit chart (break-even graph), where are the total fixed costs shown?
A. break-even point rises. A. As the point where the sales line intersects the vertical axis (pesos)
B. fixed costs increase. B. As the point where the sales line crosses the total cost line
C. required total contribution margin increases. C. As the point where the sales line crosses the horizontal axis (volume)
D. selling price rises. Bobadilla D. As the point where the total cost line intersects the vertical axis (pesos) Bobadilla
28. Broadway Company sells three products: A, B and C. Product A's unit contribution margin is 33. When using conventional cost-volume-profit analysis, some assumptions about costs and
higher than Product B's which is higher than Products C's. Which one of the following events is sales prices are made. Which of the following is one of those assumptions?
most likely to increase the company's overall break-even point? A. The contribution margin will change as volume increases
A. The installation of new automated equipment and subsequent lay-off of factory workers. B. The variable cost per unit will decrease as volume increases
B. A decrease in Product C's selling price. C. The sales price per unit will remain constant as volume increases
C. An increase in the overall market demand for Product B. D. Fixed cost per unit will remain the same as volume increases Bobadilla
D. A change in the relative market demand for the products, with the increase favoring
Product A relative to Product B and Product C. Bobadilla 34. Classifying a cost as fixed or variable depends on how it behaves
A. per unit, as the volume of activity changes.
29. Which of the following is not a benefit of using sensitivity analysis? B. in total, as the volume of activity changes.
A. More people can see the impact of their ideas on the project. C. both A and B are correct.
B. The use of a spreadsheet program increases the accuracy of the projections. D. none of the above. Bobadilla
C. What will happen is not known in advance so a variety of options can be explored prior to
making a decision. 35. A fixed cost is the same percentage of sales in three different months. Which of the following
D. A well-written spreadsheet will allow for a variety of questions to be answered in a minimal is true?
amount of time. Bobadilla A. The company had the same sales in each of those months.
B. The cost is both fixed and variable.
30. A Cost-Volume-Profit graph contains an "Area of Loss" and an "Area of Profitability". Which of C. The company is operating at its break-even point.
the following best explains the difference between the two points on the graph? D. The company is achieving its target level of profit. Bobadilla
A. The area of loss represents the difference between Sales and Variable Cost.
B. The area of loss begins with the concept that fixed costs have to be recovered prior to 36. Per-unit variable cost
sales contributing to profit. A. remains constant within the relevant range.
C. The area of profit represents the difference between Sales and Variable Cost. B. increases as volume increases within the relevant range.
D. The area of profit begins with the concept that no company would have any level of sales C. decreases as volume increases within the relevant range.
below the break-even point. Bobadilla D. decreases if volume increases beyond the relevant range. Bobadilla
31. Which of the following best describes the impact of selling more units? 37. In planning product mix for maximum profit, CVP analysis would stimulate sales of the product
A. The increase in sales volume increases total variable cost. by increasing the:
B. The increase in sales volume means an increase in total fixed cost. A. sales price C. contribution margin
C. The increase in sales increases contribution margin, causing net income to decrease. B. variable cost per unit D. emphasis on customer priority Bobadilla
D. The increase in sales increases contribution margin per unit causing the break-even point
to decrease. Bobadilla 38. A relatively low margin of safety ratio for a product is usually an indication that the product:
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A. is losing money A. the break-even point. C. total variable costs.
B. has a high contribution margin B. contribution margin. D. unit selling price. Bobadilla
C. is riskier than higher margin of safety products
D. is less risky than higher margin of safety products Bobadilla 47. The most likely strategy to reduce the breakeven point would be to
A. Increase both the fixed costs and the contribution margin.
39. Within the relevant range, total revenues and total costs B. Decrease both the fixed costs and the contribution margin.
A. increase, but at a decreasing rate. C. remain constant. C. Decrease the fixed costs and increase the contribution margin.
B. decrease. D. can be graphed as straight lines. Bobadilla D. Increase the fixed costs and decrease the contribution margin. Bobadilla
40. An assumption in a CVP analysis is that a change in costs is caused by a change in 48. The break-even point in total sales decreases when:
A. unit direct material cost C. sales commission per unit Bobadilla A. variable cost increases and sales remain unchanged
B. the number of units D. efficiency due to learning curve effect B. variable cost increases and sales increase
C. fixed cost increases
41. In CVP analysis, when the number of units changes, which one of the following will remain the D. fixed cost decreases Bobadilla
same?
A. Total sales revenues C. Total fixed costs 49. Which of the following best describes the impact of an increase in fixed cost?
B. Total variable costs D. Total contribution margin Bobadilla A. The increase in fixed cost will result in an increase in selling more units.
B. The increase in fixed cost will cause an increase in variable cost.
42. As fixed costs for a firm rise, all other things held constant, the breakeven point will C. The increase in fixed cost causes net income to decrease and the break-even point to
A. be unchanged C. increase decrease.
B. not be affected by fixed costs D. decrease Bobadilla D. The increase in fixed cost causes net income to decrease and the break-even point to
increase. Bobadilla
43. Which of the following would not affect the breakeven point?
A. Number of units sold. C. Total fixed costs. 50. A company’s breakeven point in peso sales may be affected by equal percentage increases in
B. Variable cost per unit. D. Sales price per unit. Bobadilla both selling price and variable cost per unit (assume all other factors are equal within the
relevant range). The equal percentage changes in selling price and variable cost per unit will
44. The margin of safety is a key concept of CVP analysis. The margin of safety is cause the breakeven point in peso sales to
A. The contribution margin rate. A. Decrease by less than the percentage increase in selling price.
B. The difference between budgeted contribution margin and actual contribution margin. B. Decrease by more than the percentage increase in the selling price.
C. The difference between budgeted contribution margin and breakeven contribution margin C. Increase by less than the percentage increase in selling price.
D. The difference between budgeted sales and breakeven sales. Bobadilla D. Remain unchanged. Bobadilla
45. A technique for determining what would happen in a decision analysis if a key prediction or 51. If the fixed costs attendant to a product increase while variable costs and sales price remains
assumption proves to be wrong is called: constant, what will happen to contribution margin (CM) and breakeven point (BEP)?
A. CVP analysis. C. Post-audit analysis. Bobadilla Bobadilla A. B. C. D.
B. Sensitivity analysis. D. Contribution-margin variation analysis. CM Increase Decrease Unchanged Unchanged
BEP Decrease Increase Increase Unchanged
46. An increase in the unit variable cost will generally cause an increase in all of the following
except 52. Which of the following will decrease the breakeven point? Bobadilla
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Decrease in Selling Price Increase in Direct Labor Increase in Fixed Cost 57. Which of the following decreases per-unit contribution margin the most for a company that is
A. YES YES YES currently earning a profit?
B. YES NO YES A. A 10% decrease in selling price. C. A 10% increase in fixed costs. Bobadilla
C. NO NO YES B. A 10% increase in variable cost per unit. D. A 10% increase in fixed cost per unit.
D. NO NO NO
58. If variable cost as a percentage of sales increases, the
53. Which of the following is an incorrect statement? A. contribution margin percentage increases.
A. The contribution income statement that is prepared for internal users is better than the B. selling price increases.
traditional income statement as a management tool to predict the results of increases or C. break-even point in pesos increases.
decreases in sales volume, variable costs, and fixed costs. D. fixed costs decrease. Bobadilla
B. The greater the proportion of fixed costs in a firm's cost structure, the smaller will be the
impact on profit from a given percentage change in sales revenue. 59. Introducing income taxes into cost-volume-profit analysis
C. In an economic recession, the highly automated company with high fixed costs will be less A. raises the break-even point.
able to adapt to lower consumer demand than will a firm with a more labor-intensive B. lowers the break-even point.
production process. C. increases unit sales needed to earn a particular target profit.
D. A major difference between income statements prepared under the traditional format and D. decreases the contribution margin percentage. Bobadilla
those prepared under the contribution format is that expenses under the traditional format
are shown by function, while the expenses shown under the contribution format are 60. If a company is earning a profit, its fixed costs
shown by function and cost behavior. Bobadilla A. are less than total contribution margin.
B. are equal to total contribution margin.
54. If a company is operating at a loss, C. are greater than total variable costs.
A. fixed costs are greater than sales. D. can be greater than or less than total contribution margin. Bobadilla
B. selling price is lower than the variable cost per unit.
C. selling price is less than the average total cost per unit. 61. A cost-volume-profit graph reflects relationships
D. fixed cost per unit is greater than variable cost per unit. Bobadilla A. that are expected to hold over the relevant range.
B. of results over the past few years.
55. As volume increases, average cost per unit C. that the company's managers would like to have happen.
A. increases. D. likely to prevail for the industry. Bobadilla
B. decreases.
C. remains constant. 62. The following diagram is a cost-volume-profit graph for a manufacturing company.
D. increases in proportion to the change in volume. Bobadilla
E
56. If all goes according to plan except that unit variable cost falls, P
A. total contribution margin will be lower than expected. C
B. the contribution margin percentage will be lower than expected. D
C. profit will be higher than expected.
D. per-unit contribution margin will be lower than expected. Bobadilla A
B
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O A. expected mix C. most desirable mix
Volume B. least desirable mix D. traditional mix Bobadilla
The difference between line AB and line AC (area BAC) is the
A. contribution ratio. C. total variable cost. 69. Which of the following is a true statement about sales mix?
B. contribution margin per unit. D. total fixed cost. Bobadilla A. Profits may decline with an increase in total peso of sales if the sales mix shifts to sell
more of the high contribution margin product.
63. Select the answer that best describes the labeled item on the diagram. B. Profits may decline with an increase in total peso of sales if the sales mix shifts to sell
A. Area CDE represents the area of net loss. more of the lower contribution margin product.
B. Line AC graphs total fixed costs. C. Profits will remain constant with an increase in total peso of sales if the total sales in units
C. Point D represents the point at which the contribution margin per unit increases. remains constant.
D. Line AC graphs total costs. Bobadilla D. Profits will remain constant with a decrease in total peso of sales if the sales mix also
remains constant. Bobadilla
64. In a cost-volume-profit graph
A. the total revenue line crosses the horizontal axis at the breakeven point. Bobadilla
B. beyond the breakeven sales volume, profits are maximized at the sales volume where PROBLEMS:
total revenues equal total costs. 1. Green Corporation expects to sell 3,000 plants a month. Its operations manager estimated the
C. an increase in unit variable costs would decrease the slope of the total cost line. following monthly costs:
D. an increase in the unit selling price would shift the breakeven point in units to the left. Variable costs P 7,500
Fixed costs 15,000
65. An increase in the income tax rate What sales price per plant does she need to achieve to begin making a profit if she sells the
A. raises the break-even point. estimated number of plants per month?
B. lowers the break-even point. A. P7.51 C. P5.00
C. decreases sales required to earn a particular after-tax profit. B. P7.50 D. P2.50 Bobadilla
D. increases sales required to earn a particular after-tax profit. Bobadilla
2. An organization's break-even point is 4,000 units at a sales price of P50 per unit, variable cost
66. If the sales mix shifts toward higher contribution margin products, the break-even point of P30 per unit, and total fixed costs of P80,000. If the company sells 500 additional units, by
A. decreases. how much will its profit increase?
B. increases. A. P25,000 C. P10,000
C. remains constant. B. P15,000 D. P12,000 Bobadilla
D. it is impossible to tell without more information. Bobadilla
3. The Red Lions Brotherhood is planning its annual Riverboat Extravaganza. The Extravaganza
67. Target costing is committee has assembled the following expected costs for the event:
A. a substitute for CVP analysis. Dinner per person P 70
B. used by companies that cannot classify their costs by behavior. Programs and souvenir per person 30
C. inappropriate if a company has already established a target profit. Orchestra 15,000
D. used in decisions to offer a new product or enter a new market. Bobadilla Tickets and advertising 7,000
Riverboat rental 48,000
68. In order for the break-even computation to be meaningful to management, sales mix should be Floor show and strolling entertainment 10,000
computed using the The committee members would like to charge P300 per person for the evening’s activities.
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Assume that only 250 persons are expected to attend the extravaganza, what ticket price must 9. The sales price per unit will increase from P32 to P40. The variable cost per unit will remain at
be charged to breakeven? P24, and the fixed costs will remain unchanged at P400,000. How many fewer units must be
A. P420 C. P320 sold to break-even at the new sales price of P40 per unit?
B. P350 D. P390 Bobadilla A. 25,000 C. 10,000
B. 2,500 D. 12,500 Bobadilla
4. Consider the following:
Fixed expenses P78,000 10. The Hard Company sells widgets. The company breaks even at an annual sales volume of
Unit contribution margin 12 80,000 units. At an annual sales volume of 100,000 units the company reports a profit of
Target net profit 42,000 P220,000. The annual fixed costs for the Hard Company are:
How many unit sales are required to earn the target net profit? A. P 880,000 C. P 800,000
A. 15,000 units C. 12,800 units B. P1,100,000 D. P1,000,000 Bobadilla
B. 10,000 units D. 20,000 units Bobadilla
11. Albatross Company has fixed costs of P90,300. At a sales volume of P360,000, return on
5. Carribean Company produces a product that sells for P60. The variable manufacturing costs sales is 10%; at a P600,000 volume, return on sales is 20%. What is the break-even volume?
are P30 per unit. The fixed manufacturing cost is P10 per unit based on the current level of A. P225,000 C. P301,000
activity, and fixed selling and administrative costs are P8 per unit. A selling commission of B. P258,000 D. P240,000 Bobadilla
10% of the selling price is paid on each unit sold.
The contribution margin per unit is: 12. An entity has fixed costs of P200,000 and variable costs per unit of P6. It plans on selling
A. P24. C. P30. 40,000 units in the coming year. If the entity pays income taxes on its income at a rate of
B. P36. D. P54. Bobadilla 40%, what sales price must the firm use to obtain an after-tax profit of P24,000 on the 40,000
units?
6. Seal Yard Ornaments sells lawn ornaments for P15 each. Seal's contribution margin ratio is A. P11.60 C. P12.00
40%. Fixed costs are P32,000. Should fixed costs increase 30%, how many additional units B. P11.36 D. P12.50 Bobadilla
will Seal have to produce and sell in order to generate the same net profit as under the current
conditions? 13. The following is the Lux Corporation's contribution format income statement for last month:
A. 1,600. C. 6,933. Sales P2,000,000
B. 5,333. D. 1,067. Bobadilla Less variable expenses 1,400,000
Contribution margin 600,000
7. At a break-even point of 5,000 units sold, variable expenses were P10,000 and fixed expenses Less fixed expenses 360,000
were P50,000. The profit from the 5,001st unit would be? Net income P 240,000
A. P10 C. P15 The company has no beginning or ending inventories. A total of 40,000 units were produced
B. P50 D. P12 Bobadilla and sold last month. What is the company's degree of operating leverage?
A. 0.12 C. 2.50
8. Galactica Company has fixed costs of P100,000 and breakeven sales of P800,000. Based on B. 0.40 D. 3.30 Bobadilla
this relationship, what is its projected profit at P1,200,000 sales?
A. P 50,000 C. P150,000 14. Delmar Company has the opportunity to increase its annual sales by P125,000 by selling to a
B. P200,000 D. P400,000 Bobadilla new, riskier group of customers. The uncollectible expense is expected to be 10%, and
collection costs will be 10%. The company’s manufacturing and selling expenses are 70% of
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sales, and its effective tax rate is 40%. If Delmar were to accept this opportunity, the
company’s after tax profits would increase by 20. The following economic data were provided by the corporate planning staff of Heaven, Inc.:
A. P 7,500 C. P12,500 Sales volume 30,000 units
B. P 6,000 D. P15,000 Bobadilla Sales price per unit P30
Unit variable costs:
15. In 2006 Lucia Company had a net loss of P8,000. The company sells one product with a Variable manufacturing P13
selling price of P80 and a variable cost per unit of P60. In 2007, the company would like to Other variable costs 8
earn a before-tax profit of P40,000. How many additional units must the company sell in 2007 Unit variable costs P21
than it sold in 2006? Assume that the tax rate is 40 percent. Unit contribution margin P 8
A. 1,600 C. 2,000
B. 2,400 D. 5,400 Bobadilla Fixed costs:
Manufacturing P150,000
16. Bulusan Company has sales of P400,000 with variable costs of P300,000, fixed costs of Other fixed costs P 50,000
P120,000, and an operating loss of P20,000. How much increase in sales would Bulusan Total fixed costs P200,000
need to make in order to achieve a target operating income of 10% of sales? The management is considering installing a new, automated manufacturing process that will
A. P400,000 C. P500,000 increase fixed costs by P50,000 and reduce variable manufacturing cost by P3 per unit. The
B. P462,000 D. P800,000 Bobadilla management set a target a profit of P70,000 before and after the acquisition of the automated
machine. After installation of the automated machine, what will be the change in the units
17. The following data apply to Diva Corporation for the year 2006: required to achieve the target profit?
Total variable cost per unit P3.50 A. 6,667 unit increase C. 3,333 unit decrease
Contribution margin/sales 30% B. 5,667 unit decrease D. 4,333 unit decrease Bobadilla
Breakeven sales (present volume) P1,000,000
Diva wants to sell an additional 50,000 units at the same selling price and contribution margin 21. In planning its operations for next year based on a sales forecast of P6,000,000, Herran, Inc.
per unit. By how much can fixed costs increase to generate a gross margin equal to 10% of prepared the following estimated costs and expenses:
the sales value of the additional 50,000 units to be sold? Variable Fixed
A. P 50,000 C. P 67,500 Direct materials P1,600,000
B. P 57,500 D. P125,000 Bobadilla Direct labor 1,400,000
Factory overhead 600,000 P 900,000
18. Marsman Company had a margin of safety ratio of 20%, variable costs of 60% of sales, fixed Selling expenses 240,000 360,000
costs of P240,000, a break-even point of P600,000, and an operating income of P60,000 for Administrative expenses 60,000 140,000
the current year. What are the current year's sales? P3,900,000 P1,400,000
A. P 500,000 C. P 750,000 What would be the amount of peso sales at the breakeven point?
B. P 600,000 D. P 900,000 Bobadilla A. P2,250,000. C. P4,000,000.
B. P3,500,000. D. P5,300,000. Bobadilla
19. Regal, Inc. sells Product M for P5 per unit. The fixed costs are P210,000 and the variable
costs are 60% of the selling price. What would be the amount of sales if Regal is to realize a 22. The Expressive Company currently has fixed cost of P770,500. This cost is expected to
profit of 10% of sales? increase by P103,500 if the company expands its production facilities. Currently, it sells its
A. P700,000 C. P525,000 product for P47. The product has a variable cost per unit of P24. How many more units must
B. P472,500 D. P420,000 Bobadilla
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the company sell to break even, at the current sales price per unit, than it did to break even 26. Mercado, Inc. had the following economic data for 2007:
prior to the increase in fixed cost? Net sales P400,000
A. 3,500 C. 4,500 Contribution margin 160,000
B. 4,000 D. 6,000 Bobadilla Margin of safety 40,000
What is Mercado’s breakeven point in 2007?
23. The Tanker Company estimated the following data for the coming year: A. P360,000 C. P320,000
Fixed manufacturing costs P565,000 B. P288,000 D. P 80,000 Bobadilla
Variable production costs per peso of sales
Materials P 0.125 27. Marquez Co. manufactures a single product. For 2006, the company had sales of P90,000,
Direct labor 0.150 variable costs of P50,000, and fixed costs of P30,000. Marquez expects its cost structure and
Variable overhead 0.075 sales price per unit to remain the same in 2007; however total sales are expected to jump by
Variable selling costs per peso of sales 0.150 20%. If the 2007 projections are realized, net income in 2007 should exceed net income in
Tanker estimates its sales for the coming year to be P2,000,000. 2006 by
A. 100% C. 20%
The expected cost of goods sold for the coming year is B. 80% D. 50% Bobadilla
A. P1,265,000 C. P1,565,000
B. P1,115,000 D. P 700,000 Bobadilla 28. Below is the income statement for Harpo Co. for 2006:
Sales P400,000
24. At a sales volume level of 2,250 units, Baluarte Company’s contribution margin is one and Variable costs ( 125,000)
one-half of the fixed costs of P36,000. Contribution margin is 30% How much peso sales Contribution margin P275,000
should the Baluarte Company sell to earn 10 percent of sales? Fixed costs ( 200,000)
A. P270,000 C. P360,000 Profit before tax P 75,000
B. P180,000 D. P540,000 Bobadilla Assuming that the fixed costs are expected to remain at P200,000 for 2007, and the sales
price per unit and variable cost per unit are also expected to remain constant, how much profit
25. The Alpine Company’s year-end income statement is as follows: before tax will be produced if the company anticipates 2007 sales rising to 130% of the 2006
Sales (20,000 units) P360,000 level?
Variable costs 220,000 A. P 97,500 C. P195,000
Contribution margin P140,000 B. P157,500 D. P180,000 Bobadilla
Fixed costs 105,000
Net income P 35,000 29. Almos Corporation produces a product that sells for P10 per unit. The variable cost per unit is
Alpine’s management is unhappy with the results and plans to make some changes for next P6 and total fixed costs are P12,000. At this selling price, the company earns a profit equal to
year. If management implements a new marketing program, fixed costs are expected to 10% of total peso sales. By reducing its selling price to P9 per unit, the manufacturer can
increase by P19,200 and variable costs to increase by P1 per unit. Unit sales are expected to increase its unit sales volume by 25%. Assume that there are no taxes and that total fixed
increase by 15 percent. costs and variable cost per unit remain unchanged. If the selling price were reduced to P9 per
unit, the company’s profit would have been
What is the effect on income if the foregoing changes are implemented? A. P3,000. C. P5,000.
A. decrease of P21,200 C. increase of P 1,800 B. P4,000. D. P6,000. Bobadilla
B. increase of P13,800 D. increase of P14,800 Bobadilla
30. Information concerning the 2007 financial projections of the Silver Company is as follows:
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Net sales of P3,000,000. 35. A firm has fixed costs of P200,000 and variable cost per unit of P6. It plans to sell 40,000
Fixed costs of P800,000. units in the coming year. If the firm pays income taxes on its income at a rate of 40%, what
P0.65 increase in cost of sales for each peso increase in net sales. sales price must the firm use to obtain an after-tax profit of P24,000?
What is the projected cost of sales for 2007? A. P11.60 C. P11.36
A. P 950,000 C. P1,050,000 B. P12.00 D. P12.50 Bobadilla
B. P2,750,000 D. P1,850,000 Bobadilla
31. The Childless Company sells widgets. The company breaks even at an annual sales volume 36. Below is the income statement for Blender Co. for 2007:
of 75,000 units. Sales P400,000
Variable costs (125,000)
Actual annual sales volume was 100,000 units, and the company reported a profit of Contribution margin P275,000
P200,000. The annual fixed costs for the Childless Company are Fixed costs ( 200,000)
A. P800,000 C. P200,000 Profit before tax P 75,000
B. P600,000 D. P150,000 Bobadilla What is the degree of operating leverage for Blender Company for 2007?
A. 3.67 C. 5.33
32. The costs to produce 24,000 units at 70% capacity are: B. 1.45 D. 1.67 Bobadilla
Direct materials P36,000
Direct labor 54,000 37. Food Factory, Inc. sells loose biscuits for P5 per unit. The fixed costs are P210,000 and the
Factory overhead, all fixed 29,000 variable costs are 45% of the selling price. What would be the amount of sales if Food
Selling expense (35% variable, 65% fixed) 24,000 Factory, Inc. were to realize a profit of 15% of sales?
What unit price would the company have to charge to make P2,250 on a sale of 1,500 A. P700,000 C. P525,000
additional units that would be shipped out of the normal market area? B. P472,500 D. P420,000 Bobadilla
A. P5.10 C. P4.10
B. P5.60 D. P5.00 Bobadilla 38. The Opposition Sales Corporation is expecting an increase of fixed costs by P78,750 upon
moving their place of business to the downtown area. The company anticipates that the
33. The Mandarin Company's product mix includes P720,000 in sale of X and P640,000 in sale of selling price per unit and the variable expenses will not change. At present, the sales volume
Y. X's contribution margin is 60% and Y's is 40% of sales. Fixed costs amount to P505,881. necessary to breakeven is P750,000 but with the expected increase in fixed costs, the sales
Y's sale at breakeven point should amount to volume necessary to breakeven would go up to P975,000.
A. P640,000 C. P529,490
B. P720,000 D. P470,590 Bobadilla Based on these projections, what were the total fixed costs before the increase of P78,750?
A. P341,250 C. P183,750
34. Levi’s Company has revenues of P500,000, variable costs of P300,000, and pretax profit of B. P262,500 D. P300,000 Bobadilla
P150,000. Had the company increased the sales price per unit by 10%, reduced fixed costs
by 20%, and left variable cost per unit unchanged, what would the new breakeven point in 39. At 40,000 units of sales, Benevolent Corporation had an operating loss of P3.00 per unit.
pesos have been? When sales were 70,000 units, the company had a profit of P1.20 per unit. The number of
A. P 88,000 C. P100,000 units to breakeven is
B. P 80,000 D. P125,000 Bobadilla A. 35,000 C. 45,000
B. 52,500 D. 57,647 Bobadilla
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40. The following information pertains to Hennin Corporation for the year ending December 31, 43. Menor Company sells two products with the following per unit data:
2006: Standard Deluxe
Budgeted sales P1,000,000 Selling price/unit P75 P120
Breakeven sales 700,000 Variable costs/unit 45 60
Budgeted contribution margin 600,000 Contribution margin/unit P30 P 60
Cashflow breakeven 200,000 Sales mix 3 2
The margin of safety for the Hennin Corporation is: If fixed costs are P630,000, the number of standard and deluxe units that Menor must sell to
A. P300,000 C. P500,000 break even is Bobadilla
B. P400,000 D. P800,000 Bobadilla A. 1,800 standard and 1,200 deluxe. C. 9,000 standard and 6,000 deluxe.
B. 3,600 standard and 2,400 deluxe. D. 21,000 standard and 14,000 deluxe.
41. Balboa, Inc. had the following economic information for the year 2006:
Sales (50,000 units @ P20) P1,000,000 44. The following are projections about the two products of Dorine Company, baubles and trinkets,
Variable manufacturing costs 400,000 for the coming year:
Fixed costs 250,000
Baubles Trinkets
Income tax rate 40 percent
Units Amount Units Amount Total
Balboa, Inc. budgets its 2007 sales at 60,000 units or P1,200,000. The company anticipates
Sales 10,000 P10,000 7,500 P10,000 P20,000
an increased competition; hence, an additional P75,000 advertising costs is budgeted in order
Costs
to maintain its sales target for 2007.
Fixed P 2,000 P 5,600 P 7,600
Variable 6,000 3,000 9,000
What is the amount of peso sales needed for 2007 in order to equal the after-tax income in
P 8,000 P 8,600 P16,600
2006?
A. P1,125,000 C. P1,325,000 Income before taxes P 2,000 P 1,400 P 3,400
B. P1,187,500 D. P1,387,500 Bobadilla Assuming that the customers purchase composite units of four baubles and three trinkets, the
breakeven output for the two products would be
42. Mauresmo Company developed the following information for the year ended December 31, Bobadilla A. B. C. D.
2007: Baubles 6,909 6,909 5,000 5,000
Product A Product B Total Trinkets 6,909 5,182 8,000 6,000
Units Sold 4,000 6,000 10,000
45. The sales mix for Dial Enterprise is as follows:
Sales P12,000 P27,000 P39,000 Product A: 12 units @ P5.25 sales price; P4.85 variable cost per unit.
Variable costs 6,000 15,000 21,000 Product B: 10 units @ P7.50 sales price; P6.95 variable cost per unit.
Contribution margin P 6,000 P12,000 18,000 Product C: 6 units @ P12.25 sales price; P10.35 variable cost per unit.
Fixed costs 12,600
Net income P 5,400 Dial Enterprise's fixed costs are P75,950.
If the sales mix changes to 5,000 units of Product A and 5,000 units of Product B, the effect on
the company’s break-even point would be What are the composite break-even point?
A. to increase it by 200 units. C. to increase it by 1,200 units. A. 98,000 C. 3,500
B. to decrease it by 200 units. D. no change. Bobadilla B. 2,000 D. 4,000 Bobadilla
107
46. Alexandra Co. provides two products, Velvet and Cotton. Velvet accounts for 60 percent of A. P 72,000 C. P 80,000
total sales. The variable costs as a percentage of selling prices are 60% for Velvet and 85% B. P288,000 D. P320,000 Bobadilla
for Cotton. Total fixed costs are P225,000.
51. Glareless Company manufactures and sells sunglasses. The price and cost data are as
If fixed costs will increase by 30 percent, what amount of peso sales would be necessary to follows:
generate an operating profit of P48,000? Selling price per pair of Sunglasses P25.00
A. P1,350,000 C. P1,135,000 Variable costs per pair of sunglasses:
B. P 486,425 D. P 910,000 Bobadilla Raw materials P11.00
Direct labor 5.00
47. Last month, Zamora Company had an income of P0.75 per unit with sales of 60,000 units. Manufacturing overhead 2.50
During the current month when the unit sales are expected to be only 45,000, there is a loss of Selling expenses 1.30
P1.25 per unit. Both the variable cost per unit and total fixed costs remain constant. Total variable costs per unit P19.80
Annual fixed costs:
The fixed costs amounted to Manufacturing overhead P192,000
A. P 80,000 C. P360,000 Selling and administrative 276,000
B. P247,500 D. P210,000 Bobadilla Total fixed costs P468,000
Forecasted annual sales volume (120,000 pairs) P3,000,000
48. Bytes Company is a retailer of video disks. The projected after-tax income for the current year Income tax rate 40%
is P120,000 based on a sales volume of 200,000 video disks. Bytes has been selling the Glareless Company estimates that its direct labor costs will increase 8 percent next year. How
disks at P16 each. The variable costs consist of the P10 per unit purchase price of the disks many units will Glareless have to sell next year to reach breakeven?
and a handling cost of P2 per disk. Bytes’ annual fixed costs are P600,000, and Bytes is A. 97,500 units C. 101,740 units
subject to a 40% income tax rate. Management is planning for the coming year when it B. 83,572 units D. 86,250 units Bobadilla
expects that the unit purchase price of the video disks will increase 30%.
52. Santos Company is planning its advertising campaign for next year and has prepared the
Bytes Company’s breakeven point for the current year in number of video disks is following budget data based on a zero advertising expenditure:
A. 100,000 units C. 50,000 units Normal plant capacity 200,000 units
B. 150,000 units D. 60,000 units Bobadilla Sales 150,000 units
Selling price P25 per unit
49. Alonzo Corporation had sales of P120,000 for the month of May. It has a margin of safety Variable manufacturing costs P15 per unit
ratio of 25 percent, and an after-tax return on sales of 6 percent. The company assumes its Fixed manufacturing costs P800,000
sales being constant every month. If the tax rate is 40 percent, how much is the annual fixed Fixed selling costs P700,000
cost? An advertising agency claims that an aggressive advertising campaign would enable Santos to
A. P 36,000 C. P 90,000 increase its unit sales by 20%. What is the maximum amount that Santos Company can pay
B. P432,000 D. P360,000 Bobadilla for advertising and have an operating profit of P200,000 next year?
A. P100,000 C. P300,000
50. Cultured Company is a manufacturer of its only one product line. It had sales of P400,000 for B. P200,000 D. P550,000 Bobadilla
2007 with a contribution margin ratio of 20 percent. Its margin of safety ratio was 10 percent.
53. Adventurous Co. is considering dropping a product. Variable costs are P60.00 per unit. Fixed
What are the company’s fixed costs? overhead costs, exclusive of depreciation, have been allocated at a rate of P3.50 per unit and
108
will continue whether or not production ceases. Depreciation on the equipment is P60,000 a Plastic Frames Glass Frames
year. If production is stopped, the equipment can be sold for P270,000, if production Sales price P10.00 P15.00
continues, however, it will be useless at the end of 1 year and will have no salvage value. The Direct materials ( 2.00) ( 3.00)
selling price is P100 a unit. Ignoring taxes, the minimum number of units to be sold in the Direct labor ( 3.00) ( 5.00)
current year to break even on a cash flow basis is Fixed overhead ( 3.00) ( 2.75)
A. 1,500 units. C. 8,250 units. Net income per unit P 2.00 P 4.25
B. 6,750 units. D. 9,750 units Bobadilla Budgeted unit sales 100,000 300,000
The budgeted unit sales equal the current unit demand, and total fixed overhead for the year is
54. Pansipit Company had a 25 percent margin of safety. Its after-tax return on sales is 6 percent. budgeted at P975,000. Assume that the company plans to maintain the same proportional
The company’s income is subject to tax rate of 40 percent. If fixed costs amount to P320,000, mix.
how much peso sales did Pansipit make for the year?
A. P1,066,667 C. P1,280,000 The total number of units that MultiFrame needs to produce and sell in order to break even is
B. P1,000,000 D. P 800,000 Bobadilla A. 150,000 units C. 153,947 units
55. The management of Mesa Company has performed cost studies and has projected the
following annual costs based on 60,000 units of production and sales: 58. During 2006, St. Paul Lab supplied hospitals with a comprehensive diagnostic kit for P120. At
Total Annual Costs Percent of Variable Portion of Total Annual Costs a volume of 80,000 kits, St. Paul had fixed costs of P1,000,000 and operating income before
Direct material P600,000 100 income taxes of P200,000. Because of an adverse legal decision, St. Paul’s 2007 liability
Direct labor 720,000 80 insurance increased by P1,200,000 over 2006. Assuming the volume and other costs are
Mfg. Overhead 400,000 50 unchanged, what should the 2007 price be if St. Paul is to make the same P200,000 operating
Selling costs 192,500 25 income before income taxes?
What selling price will yield a 15 percent profit from sales of 60,000 units? A. P120 C. P150
A. P41.67 C. P27.30 B. P135 D. P240 Bobadilla
B. P37.50 D. P35.42 Bobadilla
59. The following data relate to Herbert Company which sells a single product:
56. The following data relate to Harvester Company which sells a single product: Unit selling price P 20.00
Unit selling price P 80.00 Purchase cost per unit 11.00
Purchase cost per unit 55.00 Sales commission, 10% of selling price 2.00
Sales commission 15 % of selling price 12.00 Monthly fixed costs P80,000
Monthly fixed costs P180,000 The firm’s salespersons would like to change their compensation from a 10 percent
The firm’s two salespersons would like to change their compensation from a 15 percent commission to a 5 percent commission plus P20,000 per month in salary. Currently, they only
commission to a 7.5 percent commission plus P15,000 each per month in fixed salary. receive commissions as their compensation.
Currently, they only receive commissions as their compensation.
The change in compensation plan should change the monthly breakeven point by
At what sales volume in units would the two cost structures be indifferent? A. 1,071 Increase C. 1,538 Increase
A. 2,500 units C. 4,000 units B. 1,071 Decrease D. 1,538 Decrease Bobadilla
60. The manager of Naughty Food Company reviewed the following data:
57. MultiFrame Company has the following revenue and cost budgets for the two products it sells: Fruits Meat Canned Products
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Contribution margin ratio 40% 50% 40% B. P 8.25 D. P 9.75 Bobadilla

Sales mix in pesos 20% 30% 50%
Fixed costs, P1,290,000 per month. 64. During the month of June, Armani Corporation produced 12,000 units and sold them for P20
The breakeven sales for each month is per unit. Total fixed costs for the period were P154,000, and the operating profit was P26,000.
A. P1,677,000 C. P4,500,000 The variable cost per unit for June was
B. P3,000,000 D. P6,000,000 Bobadilla A. P4.50 C. P6.00
61. The Oregano Watch Company manufactures a line of ladies’ watches which are sold through
discount houses. Each watch is sold for P1,500; the fixed costs are P3,600,000 for 30,000 65. Stone Company plans to sell 400,000 laundry hangers. The fixed costs are P600,000, and the
watches or less; variable cost is P900 per watch. variable cost is 60% of the selling price. If the company wants to realize a profit of P120,000,
the selling price of each laundry hanger must be
What is Oregano’s degree of operating leverage at sales of 12,000 watches? A. P2.50 C. P4.50
A. 2.0X C. 0.5X B. P3.75 D. P5.00 Bobadilla
B. 5.0X D. 0.2X Bobadilla
66. The unit contribution margin of Product A is P20 and of Product B is P16. If six units of Product
62. Duke, Inc. owns and operates a chain of food centers. The management is considering A and eight units of Product B can be produced per machine hour, the contribution margin of
installing machines that will make popcorn on the premises. These machines are available in the products per machine hour is Bobadilla
two different sizes with the following details: A. Product A, P160; Product B, P96 C. Product A, P3.33; Product B, P2.00
Economy Regular B. Product A, P120; Product B, P128 D. Product A, P32.00; Product B, P30.00
Annual capacity 20,000 50,000
Costs: Annual machine rental P60,000.00 P82,500.00 67. The Bittersweet Company is a wholesale distributor of candy. The company services various
Popcorn cost per box 3.90 3.90 grocery, convenience, and drug stores in Metro Manila. Small, but steady growth in sales, has
Cost of each box 0.80 0.80 been achieved by the company over the past few years while candy prices have been
Other variable cost per box 6.60 4.20 increasing. The company is formulating its plans for the coming fiscal year. Presented below
are the data used to project the current year’s after-tax net income of P110,400.
The level of output in boxes at which the Economy and the Regular would earn the same profit
Average selling price P4.00 per box
(loss) is
Average variable costs
A. 20,000 boxes C. 15,000 boxes
Cost of candy P2.00 per box
B. 9,375 boxes D. 12,500 boxes Bobadilla
Selling expenses 0.40 per box
Total P2.40 per box
63. The Harper Corporation manufactures and sells T-shirts imprinted with college names and
slogans. Last year, the shirts sold for P7.50 each, and the variable cost to manufacture them
Annual fixed costs:
was P2.25 per unit. The company needed to sell 20,000 shirts to break even. The net income
Selling P 169,000
last year was P5,040. Harper’s expectations for the coming year include the following:
Administrative 280,000
1. The sales price of the T-shirts will be P9
Total P 440,000
2. Variable cost to manufacture will increase by one-third
Expected annual sales volume (390,000 boxes) P1,560,000
3. Fixed costs will increase by 10%
The manufacturers of candies have announced that they will increase prices of their products
4. The income tax rate of 40% will be unchanged
an average of 15% in the coming year due to increases in raw material (sugar, cocoa,
The selling price that would maintain the same contribution margin rate as last year is
A. P 9.00 C. P10.00
110
peanuts, etc.) and labor costs. Bittersweet Company expects that all other costs will remain at Sunday openings are estimated at P31,200. Round’s gross margin on sales is 25 percent.
the same rates or levels as the current year. Bittersweet is subject to 40 percent tax rate. Round estimates that 75 percent of its Sunday sales to customers would be made on other
days if the store were not open on Sundays.
If net income after taxes would remain the same after the cost of candy increases but no
increase in the sales price is made, how many boxes of candy must Bittersweet sell? The one-day volume of Sunday sales that would be necessary for Round to attain the same
A. 480,000 C. 400,000 weekly operating as the current six-day week is
B. 27,600 D. 29,300 Bobadilla A. P2,400 C. P9,600
B. P3,200 D. P9,984 Bobadilla
68. Larz Company produces a single product. It sold 25,000 units last year with the following
results: 71. Ailu Company has the following operating data for its manufacturing operations:
Sales P625,000 Unit selling price P 250
Variable costs P375,000 Unit variable cost 100
Fixed costs 150,000 525,000 Total fixed costs 840,000
Net income before taxes P100,000 The company’s decision to increase the wages of hourly workers will increase the unit variable
Income taxes 40,000 cost by 10 percent. Increases in the salaries of factory supervisors and property taxes for the
Net income P 60,000 factory will increase fixed costs by 4 percent. If sales price is held constant, the next break-
In an attempt to improve its product in the coming year, Larz is considering replacing a even point for Ailu Company will be
component part in its product that has a cost of P2.50 with a new and better quality costing A. Increased by 640 units. C. Decreased by 640 units.
P4.50 per unit. A new machine will also be needed to increase plant capacity. The machine B. Increased by 400 units. D. Increased by 800 units. Bobadilla
would cost P18,000 with a useful life of 6 years and no salvage value. The company uses
straight-line depreciation method on all plant assets. 72. Solar Company sells two products, Biggs and Boggs. Last year, Solar Company sold 12,000
units of Biggs and 24,000 units of Boggs.
If Larz wishes to maintain the same contribution margin ratio after implementing the changes,
what selling price per unit of product must it charge next year to cover the increased material Related data for last year are:
costs? Product Unit Selling Price Unit Variable Cost Unit Contribution Margin
A. P27.00 C. P25.00 Biggs P120 P80 P40
B. P32.50 D. P28.33 Bobadilla Boggs 80 60 20
Assuming that last year’s fixed costs totaled P910,000, what was Solar Company’s composite
69. BM Motors, Inc. employs 40 sales personnel to market its line of economy automobiles. The break-even point?
average car sells for P1,200,000 and a 6% commission is paid to the salesperson. BM Motors A. 34,125 C. 11,375
is considering a change to a commission arrangement that would pay each salesperson a B. 27,302 D. 9,101 Bobadilla
salary of P24,000 per month plus a commission of 2% of the sales made by that salesperson.
73. River and Co., maker of quality pipes, has experienced a steady growth in sales for the past
The amount of total car sales at which the two expense structures would be indifferent is five years. However, increase in competition has led River Co. to believe that an aggressive
A. P22,500,000 C. P30,000,000 advertising campaign will be necessary next year to maintain the company’s present growth.
B. P24,000,000 D. P12,000,000 Bobadilla
To prepare for next year’s advertising campaign, the company’s accountant has prepared and
70. Round Company is a grocery store that is currently open only Monday through Saturday. presented the management with data for the current year, 2006, as presented below:
Round Company is considering opening on Sundays. The annual incremental costs of Cost Schedule
111
Variable costs: Other fixed costs 32,000
Direct labor P 80.00/pipe Total P396,000
Direct materials 32.50/pipe The company is considering changing the compensation plan for sales personnel. If the
Variable overhead 25.00/pipe organization increases the commission to 10% of revenues and reduces salaries by P80,000,
Total variable costs P137.50/pipe what revenues must the organization have to raise in order to earn the same net income as
Fixed costs: last year?
Manufacturing P 250,000 A. P1,600,000 C. P1,350,000
Selling 400,000 B. P1,150,000 D. P1,630,000 Bobadilla
Administrative 700,000
Total fixed costs P1,350,000 76. Tactless Manufacturing Company produces two products for which the following data have
been tabulated. Fixed manufacturing cost is applied at a rate of P1.00 per machine hour.
Selling price, per pipe P 250.00 Per Unit XY-7 BD-4
Expected sales, 2007 (20,000 units) P5,000,000 Selling price P4.00 P3.00
Tax rate: 40% Variable manufacturing cost P2.00 P1.50
The company has set the sales target for 2007 at a level of P5,500,000 (or 22,000 pipes). Fixed manufacturing cost P0.75 P0.20
Variable selling cost P1.00 P1.00
If an additional P112,500 have to be spent for advertising in 2007, what is the required sales The sales manager has had a P160,000 increase in the budget allotment for advertising and
level in pesos to equal 2006’s after-tax income? wants to apply the money to the most profitable product. The products are not substitutes for
A. P4,750,000 C. P5,250,000 one another in the eyes of the company’s customers.
B. P5,750,000 D. P4,250,000 Bobadilla
The manager may devote the entire P160,000 to increased advertising for either XY-7 or BD-
74. Adobe Company sold 100,000 units of its product at P20 per unit. Variable costs were P14 4.
per unit, consisting of manufacturing costs of P11 and selling costs of P3. Fixed costs, which
were incurred uniformly throughout the year, amounted to P792,000 (manufacturing costs of Suppose Tactless has only 100,000 machine hours that can be made available to produce
P500,000 and selling expenses of P292,000). There had been no beginning or ending additional units of XY-7 and BD-4. If the potential increase in sales units for either product
inventories. resulting from advertising is far in excess of this production capacity, which product should be
advertised and what is the estimated increase in contribution margin earned? Bobadilla
If labor costs comprise of 50 percent variable costs and 20 percent f fixed costs, a 10 percent A. Product XY-7 should be produced, yielding a contribution margin of P75,000.
increase in wages and salaries would increase the number of units required to break even to B. Product XY-7 should be produced, yielding a contribution margin of P133,333.
A. 152,423 C. 143,875 C. Product BD-4 should be produced, yielding a contribution margin of P187,500.
B. 175,617 D. 129,938 Bobadilla D. Product BD-4 should be produced, yielding a contribution margin of P250,000.
75. Mellow, Inc. sells its single product for P40 per unit. Mellow purchases the product for P20. 77. Drape Corp. would like to market a new product at a selling price of P15 per unit. Fixed costs
The salespeople receive a salary plus a commission of 5% of sales. Last year the for this product are P1,000,000 for less than 500,000 units of output and P1,500,000 for
corporation’s net income was P100,800. The corporation is subject to 30% income tax rate. 500,000 or more units of output. The contribution margin percentage is 35%. How many units
The fixed costs of the company are: of this product must be sold to earn a target operating income of P1 million?
Advertising P124,000 A. 366,667 C. 476,190
Rent 60,000 B. 380,952 D. 256,410 Bobadilla
Salaries 180,000
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78. Care Company sold 100,000 units of its product at P20 per unit. Variable costs are P14 per 80. The total variable costs per unit for the large and small discs, respectively, are
unit, consisting of manufacturing costs of P11 and selling costs of P3. Fixed costs, which are A. P10.20 and P8.60. C. P 9.10 and P5.30.
incurred uniformly throughout the year, amount to P792,000 (manufacturing costs of P500,000 B. P14.40 and P8.40. D. P11.80 and P6.60. Bobadilla
and selling costs of P292,000). There were no beginning or ending inventories.
81. If the material costs for large and small discs are P8.50 and P5.10, respectively, and the
If labor costs are 50% of variable costs and 20% of fixed costs, a 10% increase in wages and normal production capacity is 100,000-unit level, what is the breakeven point?
salaries would increase the number of units required to breakeven (in fraction form) to A. 91,611. C. 79,816.
A. 807,840/5.3. C. 807,840/14.7. B. 87,216. D. 82,412. Bobadilla
B. 831,600/5.78. D. 831,600/14.28. Bobadilla
Questions 82 through 86 are based on the Statement of Income of Davao, Inc. which represents
Question Nos. 79 through 81 are based on the following: the operating results for the current fiscal year ending December 31. Davao had sales of 1,800
Metal Industries, Inc. operates its production department only when orders are received for one or tons of product during the current year. The manufacturing capacity of Davao’s facilities is 3,000
both of its two products, two sizes of metal discs. The manufacturing process begins with the tons of product. Consider each question’s situation separately.
cutting of doughnut-shaped rings from rectangular strips of sheet metal; these rings are then Sales P900,000
pressed into discs. The sheets of metal, each 4 feet long and weighing 32 ounces, are purchased Variable costs
P13.60 per running foot. The department has been operating at a loss for the past year as shown Manufacturing P315,000
below. Selling costs 180,000
Sales for the year P1,720,000 Total variable costs P495,000
Less: expenses 1,772,000 Contribution margin P405,000
Net loss for the department P 52,000 Fixed costs
Manufacturing P 90,000
The following information is available. Selling 112,500
Administration 45,000
Ten thousand 4-foot pieces of metal yielded 40,000 large discs, each weighing 4 ounces and Total fixed costs P247,500
selling for P29, and 40,000 small discs, each weighing 2.4 ounces and selling for P14. Net income before income taxes P157,500
Income taxes (40%) (63,000)
The corporation has been producing at less than “normal capacity” and has had no spoilage in the Net income after income taxes P 94,500
cutting step of the process. The skeletons remaining after the rings have been cut are sold for
scrap at P8.00 per pound. 82. The breakeven volume in tons of product for the year is
A. 420 C. 1,100
The variable conversion cost of each large disc is 80% of the disc’s direct material cost, and B. 495 D. 550 Bobadilla
variable conversion cost of each small disc is 75% of the disc’s direct material cost. Variable
conversion costs are the sum of direct labor and variable overhead. 83. If the sales volume is estimated to be 2,100 tons in the next year, and if the prices and costs
Fixed costs were P860,000. stay at the same levels and amounts next year, the after-tax income that Davao can expect for
next year is
79. The net cost per ounce of material is A. P135,000 C. P110,250
A. P2.00 C. P1.70 B. P283,500 D. P184,500 Bobadilla
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84. Davao has a potential foreign customer that has offered to buy 1,500 tons at P450 per ton.
Assume that all of Davao’s costs would be at the same levels and rates as last year. What net 88. The total sales revenue at which Anilao Ski Company would make the same profit or loss
income after taxes would Davao make if it took this order and rejected some business from regardless of the ski model it decided to produce is
regular customers so as not to exceed capacity? A. P880,000 C. P924,000
A. P297,500 C. P211,500 B. P422,400 D. P686,400 Bobadilla
B. P252,000 D. P256,500 Bobadilla
89. How much would the variable cost per unit of the touring model have to change before it had
85. Without prejudice to your answers to previous questions, and assume that Davao plans to the same breakeven point in units as the mountaineering model?
market its product in a new territory. Davao estimates that an advertising and promotion A. P2.68/unit increase C. P5.03/unit decrease
program costing P61,500 annually would need to be undertaken for the next two or three B. P4.53/unit increase D. P2.97/unit decrease Bobadilla
years. In addition, a P25 per ton sales commission over and above the current commission to
the sales force in the new territory would be required. How many tons would have to be sold 90. If the variable cost per unit of touring skis decreases by 10%, and the total fixed cost of touring
in the new territory to maintain Davao’s current after-tax income of P94,500? skis increases by 10%, the new breakeven point will be
A. 307.5 C. 273.3 A. 10,730 pairs
B. 1,095.0 D. 1,545.0 Bobadilla B. 13,007 pairs
C. 12,812 pairs Bobadilla
86. Without prejudice to preceding questions, assume that Davao estimates that the per ton D. Unchanged from 11,648 pairs because the cost changes are equal and offsetting
selling price will decline 10% next year. Variable costs will increase P40 per ton and the fixed
costs will not change. What sales volume in pesos will be required to earn an after-tax income 91. If the Anilao Ski Company sales department could guarantee the annual sale of 12,000 skis of
of P94,500 next year? either model, Anilao would
A. P1,140,000 C. P1,500,000 A. Produce touring skis because they have a lower fixed cost.
B. P 825,000 D. P1,350,000 Bobadilla B. Produce only mountaineering skis because they a lower breakeven point.
C. Produce mountaineering skis because they are more profitable.
Question Nos. 87 through 91 are based on the following: D. Be indifferent as to which model is sold because each model has the same variable cost
Anilao Ski Company recently expanded its manufacturing capacity to allow it to product up to per unit. Bobadilla
15,000 pairs of cross-country skis of either the mountaineering model or the touring model. The
sales department assures management that it can sell between 9,000 and 13,000 pairs (units) of Question Nos. 92 through 96 are based on the following:
either product this year. Because the models are very similar, Anilao Ski will produce only one of Pullman Company is a small but growing manufacturer of telecommunications equipment. The
the two models. The following data were compiled by the accounting department. company has no sales force of its own; rather, it relies completely on independent sales agents to
Mountaineering Touring market its products. These agents are paid a commission of 15% of selling price for all items sold.
Selling price per unit P88.00 80.00
Variable cost per unit 52.80 2.80 Maui Soliman, Pullman’s controller, has just prepared the company’s budgeted income statement
Fixed costs will total P369,600 if the mountaineering model is produced but will be only P316,800 if for next year. The statement follows:
the touring model is produced. Anilao Ski Company is subject to a 40% income tax rate.
Pullman Company
87. If Anilao Ski Company desires an after-tax net income of P24,000, how many pairs of touring Budgeted Income Statement
model skis will the company have to sell? For the Year Ended December 31
A. 13,118 C. 13,853 Sales P16,000,000
B. 12,529 D. 4,460 Bobadilla Manufacturing costs:
114
Variable P7,200,000 Total P2,400,000

Fixed overhead 2,340,000 9,540,000
Gross margin 6,460,000 “Super,” replied Kim. “And I note that the P2,400,000 is just what we’re paying the agents under
Selling and administrative costs: the old 15% commission rate.”
Commissions to agents 2,400,000
Fixed marketing costs* 120,000 “It’s even better than that,” explained Maui. “We can actually save P75,000 a year because that’s
Fixed administrative costs 1,800,000 4,320,000 what we’re having to pay the auditing firm now to check out the agents’ reports. So our overall
Net operating income 2,140,000 administrative costs would be less.”
Less fixed interest cost 540,000
Income before income taxes 1,600,000 “Pull all of these number together and we’ll show them to the executive committee tomorrow,” said
Less income tax (30%) 480,000 Kim. “With the approval of the committee, we can move on the matter immediately.”
Net income P1,120,000
*Primarily depreciation on storage facilities 92. What is the breakeven point in pesos for next year assuming that the agents’ commission rate
remains unchanged at 15%?
As Maui handed the statement to Kim Viceroy, Pullman’s president, she commented, “I went ahead A. P10,650,000 C. P 9,000,000
and used the agents’ 15% commission rate in completing these statements, but we’ve just learned B. P12,000,000 D. P10,750,000 Bobadilla
that they refuse to handle our products next year unless we increase the commission rate to 20%.”
93. What is the breakeven point in pesos for next year assuming that the agents’ commission rate
“That’s the last straw,” Kim replied angrily. “Those agents have been demanding more and more, is increased to 20%?
and this time they’ve gone too far. How can they possibly defend a 20% commission rate?” A. P13,171,000 C. P13,714,286
B. P15,000,000 D. P12,750,000 Bobadilla
“They claim that after paying for advertising, travel, and the other costs of promotion, there’s
nothing left over for profit,” replied Maui. 94. What is the breakeven point in pesos for next if the company employs its own sales force?
A. P15,000,000 C. P13,090,909
“I say it’s just plain robbery,” retorted Kim. “And I also say it’s time we dumped those guys and got B. P12,954,545 D. P15,157,895 Bobadilla
our own sales force. Can you get your people to work up some cost figures for us to look at?”
95. Assume that Pullman Company decides to continue selling through agents and pays the 20%
“We’ve already worked them up,” said Maui. “Several companies we know about pay a 7.5% commission rate. The volume of sales that would be required to generate the same net
commission to their own salespeople, along with a small salary. Of course, we would have to income as contained in the budgeted income statement for next year would be:
handle all promotion costs, too. We figure our fixed costs would increase by P2,400,000 per year, A. P18,285,714 C. P19,225,000
but that would be more than offset by the P3,200,000 (20% x P16,000,000) that we would avoid on B. P18,368,421 D. P20,414,714 Bobadilla
agents’ commissions.”
96. The volume of sales at which net income would be equal regardless of whether Pullman
The breakdown of the P2,400,000 cost figure follows: Company sells through agents at a 20% commission rate or employs its own sales force:
Salaries: A. P11,625,000 C. P19,200,000
Sales manager P 100,000 B. P12,000,000 D. P18,600,000 Bobadilla
Salespersons 600,000
Travel and entertainment 400,000 Question Nos. 97 through 102 are based on the following information:
Advertising 1,300,000
115
San Carlos operates a general hospital but rents space and beds to separate entities for The staffing levels above represent full-time equivalents, and it should be assumed that the
specialized treatment such as pediatrics, maternity, psychiatric, etc. San Carlos charges each Pediatrics Department always employs only the minimum number of required full-time equivalent
separate entity for common services to its patients like meals and laundry and for all administrative personnel.
services such as billings, collections, etc. All uncollectible accounts are charged directly to the
entity. Space and bed rentals are fixed for the year. Annual salaries for each class of employee follow: supervising nurses, P180,000; nurses,
P130,000; and aides, P50,000. Salary expense for the year ended June 30 for supervising nurses,
For the entire year ended June 30, the Pediatrics Department at San Carlos Hospital charged each nurses, and aides was P720,000, P1,560,000, and P1,100,000, respectively.
patient an average of P650 per day, had a capacity of 60 beds, operated 24 hours per day for 365
days, and had revenue of P10,676,250. The Pediatrics Department operated at 100% capacity during 111 days of the past year. It is
estimated that during 90 of these capacity days, the demand average 17 patients more than
Expenses charged by the hospital to the Pediatrics Department for the year ended June 30 were: capacity and even went as high as 20 patients more on some days. The hospital has an additional
Basis of Allocation 20 beds available for rent for the coming fiscal year.
Patient Days Bed Capacity
Dietary P 328,500 97. The contribution margin per patient day is
Janitorial P 118,400 A. P400.00 C. P500.00
Laundry 197,100 B. P450.00 D. P525.00 Bobadilla
Lab, other than direct charges to patients
410,625 98. How many patient days are necessary to cover fixed costs for bed capacity and for
Pharmacy 410,625 supervisory nurses?
Repairs and maintenance 65,700 66,045 A. 9,500 C. 10,250
General administrative services 1,218,780 B. 9,820 D. 12,000 Bobadilla
Rent 2,546,710
Billings and collections 689,850 99. The number of patient days needed to cover total costs is
Bad debt expense 246,375 A. 14,780 C. 15,820
Others 114,975 240,315 B. 15,140 D. 16,080 Bobadilla
Total P2,463,750 P4,190,250
The only personnel directly employed by the Pediatrics Department are supervising nurses, 100. If the Pediatrics Department rented an additional 20 beds and all other factors remain the
nurses, and aides. The hospital has minimum personnel requirements based on total annual same as in the past year, what would be the increase in revenue?
patient days. Hospital requirements beginning at the minimum, expected level of operation follow: A. P 994,500 C. P1,054,500
B. P 877,500 D. P 897,500 Bobadilla
Annual Patient Days Aides Nurses Supervising Nurses
10,000 – 14,000 21 11 4
101.Continuing to consider the 20 additional rented beds, the increase in total variable cost applied
14,001 – 17,000 22 12 4
per patient day is
17,001 – 23,725 22 13 4
A. P229,350 C. P229,650
23,726 – 25,550 25 14 5
B. P229,500 D. P239,350 Bobadilla
25,551 – 27,375 26 14 5
27,376 – 29,200 29 16 6
102.What is the increase in fixed cost applied for bed capacity, given the increase in number of
beds?
A. P1,396,667 C. P1,470,000
116
B. P1,187,238 D. P1,520,000 Bobadilla 105.What is the cash flow breakeven point in number of pizzas that must be sold?
A. 19,529 C. 12,990
Question Nos. 103 – 105 are based on the following: B. 21,284 D. 10,773 Bobadilla
Ms. Sharkey started a pizza restaurant in 2003. For this purpose a building was rented for P40,000
per month. Two women were hired to work full time at the restaurant and six college students were Question Nos. 106 through 109 are based on the following information:
hired to work 30 hours per week delivering pizza. This level of employment has been consistent. Timex Sporting Goods Company, a wholesale supply company, engages independent sales
An outside accountant was hired for tax and bookkeeping purposes, for which Ms. Sharkey pays agents to market the company’s products throughout the country. These agents currently receive
P30,000 per month. The necessary restaurant equipment and delivery cars were purchased with a commission of 20 percent of sales, but they are demanding an increase to 25 percent of sales
cash. Ms. Sharkey has noticed that expenses for utilities and supplies have been rather constant. made during the year ending December 31, 2007. The controller already prepared the 2007
Ms. Sharkey increased her business between 2003 and 2006. Profits have more than doubled budget before learning of the agents’ demand for an increase in commission. The budgeted 2007
since 2003. Ms. Sharkey does not understand why profits have increased faster than volume. income statement is shown below. Assume that cost of goods sold is 100 percent variable cost.
Sales P10,000,000
A projected income statement for the year ended December 31, 2007, prepared by the accountant, Cost of goods sold 6,000,000
is shown below: Gross margin P 4,000,000
Sales P9,500,000 Selling and administrative
Cost of food sold P2,850,000 Commissions P2,000,000
Wages & fringe benefits: Other expenses (fixed) 100,000 2,100,000
Restaurant help 815,000 Income before taxes P 1,900,000
Delivery help 1,730,000 Income tax (30%) 570,000
Rent 480,000 Net income P 1,330,000
Accounting services 360,000 Timex’s management is considering the possibility of employing full-time sales personnel. Three
Depreciation: individuals would be required, at an estimated annual salary of P30,000 each, plus commissions of
Delivery equipment 500,000 5 percent of sales. In addition, a sales manager would be employed at a fixed annual salary of
Restaurant equipment 300,000 P160,000. All other fixed costs, as well as the variable cost percentages, would remain the same
Utilities 232,500 as the estimates in the 2007 budgeted income statement.
Supplies 120,000 7,387,500
Net income before taxes P2,112,500 106.How much is the estimated break-even point in peso sales for the year ending December 31,
Income taxes (40%) 845,000 2007, based on the budgeted income statement prepared by the controller?
Net income P1,267,500 A. P500,000 C. P250,000
Note: The average pizza sells for P250. B. P400,000 D. P125,000 Bobadilla
103.What is the tax shield on the noncash fixed costs? 107.How much is the estimated break-even point in peso sales for the year ending December 31,
A. P320,000 C. P149,500 2007, if the company employs its own sales personnel?
B. P340,000 D. P540,000 Bobadilla A. P 542,857 C. P 875,000
B. P 742,857 D. P1,000,000 Bobadilla
104.What is the breakeven point in number of pizzas that must be sold?
A. 25,929 C. 23,569 108.How much volume in peso sales would be required for the year ending December 31, 2007, to
B. 18,150 D. 42,114 Bobadilla yield the same net income as projected in the budgeted income statement, if Timex continues
117
to use the independent sales agents and agrees to their demand for a 25 percent sales
commission? 113.Assuming that Step Company will just rent a manufacturing space for a month in order to
A. P 8,000,000 C. P10,000,000 produce special order for 8,000 toys. What is the acceptable minimum selling price to Step
B. P 9,533,333 D. P13,333,333 Bobadilla Company for the special sale?
A. P14.00 C. P22.00
109.How much is the estimated volume in peso sales that would generate an identical net income B. P15.25 D. P24.00 Bobadilla
for the year ending December 31, 2007, regardless of whether Timex employs its own sales
personnel or continues to use the independent sales agents and pays them a 25 percent Question Nos. 114 through 118 are based on the following:
commission? Bolton Company’s income statement for last month is given below:
A. P1,000,000 C. P1,500,000 Sales (15,000 units @ P30) P450,000
B. P1,250,000 D. P1,800,000 Bobadilla Less variable expenses 315,000
Question Nos. 110 through 113 are based on the following data: Less fixed expenses 90,000
Step Company produces toys and other items for use in beach and resort areas. A small, inflatable Net income P 45,000
toy has come onto the market that the company is anxious to produce and sell. Enough capacity The industry in which Bolton Company operates is quite sensitive to cyclical movements in the
exists in the company’s plant to produce 16,000 units of the toy each month. Variable costs to economy. Thus, profits vary considerably from year to year according to general economic
manufacture and sell one unit would be P12.50, and fixed costs associated with the toy would total conditions. The company has a large amount of unused capacity and is studying ways of improving
P350,000 per month. profits.
The company’s Marketing Department predicts that demand for the new toy will exceed the 16,000 A new equipment has come onto the market that would allow Bolton Company to automate a
units that the company is able to produce. Additional manufacturing space can be rented from portion of its operations. Variable costs would be reduced by P9 per unit. However, fixed costs
another company at a fixed cost of P10,000 per month. Variable costs in the rented facility would would increase to a total of P225,000 each month.
total P14 per unit, due to somewhat less efficient operations than in the main plant. The new toy
will sell for P30 per unit. 114.How much income for the month would the company earn if the new equipment is purchased?
A. P45,000 C. P60,000
110.The breakeven units for the new toy would be: B. P30,000 D. P75,000 Bobadilla
A. 20,000 C. 21,000
B. 18,000 D. 22,500 Bobadilla 115.How many units are required as increase or decrease in breakeven point if the new equipment
is purchased?
111.How many units should the company need to sell in order to earn a before-tax profit of A. Zero C. 3,200 units
P150,000? B. 2,500 units D. 4,000 units Bobadilla
A. 9,143 C. 31,875
B. 30,375 D. 35,000 Bobadilla 116.The degree of operating leverage during the month where the new equipment is used is:
A. 3.0 times C. 6.0 times
112.If the sales manager receives a bonus of P1.00 for each unit sold in excess of the break-even B. 4.5 times D. 9.0 times Bobadilla
point, how many units must be sold each month to earn a return of 25% on the monthly
investment in fixed costs? 117.Refer to the original data. Rather than purchase a new equipment, the president is thinking
A. 23,344 C. 29,833 about changing the company’s marketing method. Under the new method, sales would
B. 27,000 D. 30,000 Bobadilla increase by 20% each month and net income would increase by one-third. Fixed costs could
118
be slashed to only P48,000 per month. Compute the break-even point for the company after B. P(600,000) D. P(500,000) Bobadilla
the change in marketing method.
A. 8,000 units C. 9,000 units 121.The company is considering paying the store manager of Davao sales outlet an incentive
B. 12,500 units D. 10,000 units Bobadilla commission of P75 per pair of shoes (in addition to the salesperson’s commission). If this
change is made, what will be the new breakeven in pairs of shoes?
118.Assuming that during the month following the month new equipment has been started in use, A. 26,667 C. 20,000
the unit sales increased by 4,500 units. The variable expenses per unit and the monthly fixed B. 16,000 D. 22,000 Bobadilla
costs as affected by the acquisition of the new equipment are expected to remain constant.
122.Instead of paying the manager a straight P75 per pair of shoes commission on all pairs of
What is the expected profit of the company for that month? shoes sold, the company is considering paying the store manager P50 commission on each
A. P 81,000 C. P 85,500 pair of shoes sold in excess of the breakeven point. If this change is made, what will be the
B. P126,000 D. P 45,000 Bobadilla sales outlet’s net income or loss if 25,000 pairs of shoes are sold?
A. P 250,000 C. P1,500,000
Question Nos. 119 through 124 are based on the following: B. P 900,000 D. P1,250,000 Bobadilla
Zapatero Corporation operates a chain of shoe stores around the country. The stores carry many
styles of shoes that are all sold at the same price. To encourage sales personnel to be aggressive 123.If the company would pay the manager P50 commission on each pair of shoes sold in excess
in their sales efforts, the company pays a substantial sales commission on each pair of shoes sold. of the breakeven point, how many pairs of shoes are required to earn P900,000 profit?
Sales personnel also receive a small basic salary. A. 23,600 C. 25,000
B. 23,000 D. 27,500 Bobadilla
The following cost and revenue data relate to Davao sales outlet and are typical of the company’s
many sales outlets: 124.The company is considering eliminating sales commissions entirely in its stores and increasing
Selling price P800 fixed salaries by P2,142,000 annually.
Variable expenses:
Invoice costs P360 If this change is made, what will be the number of pairs of shoes to be sold by Davao outlet to
Sales commission 140 be indifferent to commission basis?
P500 A. 25,300 C. 21,000
B. 15,300 D. 18,505 Bobadilla
Fixed expenses per year:
Rent P1,600,000 The following information should be used to answer Question Nos. 125 through 131.
Advertising 3,000,000 Due to erratic sales of its sole product - a high-capacity battery for laptop computers, Salcedo
Salaries 1,400,000 Company has been experiencing difficulty for some time. The company’s income statement for the
Total P6,000,000 most recent month is given below:
Sales (19,500 units @ P300) P5,850,000
119.How many units are required for the company’s Davao sales outlet to breakeven? Less variable expenses 4,095,000
A. 12,000 pairs C. 20,000 pairs Contribution margin 1,755,000
B. 17,143 pairs D. 22,000 pairs Bobadilla Less fixed expenses 1,800,000
Net loss P (45,000)
120.If 18,000 pairs of shoes are sold in a year, what would be Davao sales outlet’s net income?
A. P 600,000 C. P 500,000 125.The break even in peso sales for Salcedo Company is:
119
A. P6,000,000 C. P5,852,756 Question Nos. 132 – 134 are based on the following:
B. P2,571,429 D. P7,500,000 Bobadilla Almo Company manufactures and sells adjustable canopies that attach to motor homes and
trailers. The market covers new unit purchases as well as replacement canopies. Almo developed
126.The president believes that a P160,000 increase in the monthly advertising budget, combined its 2007 business plan based on the assumption that canopies would sell at a price of P400 each.
with an intensified effort by the sales staff, will result in an P800,000 increase in monthly sales. The variable costs for each canopy were projected at P200, and the annual fixed costs were
If the president is right, what will be the effect on the company’s monthly net income or loss? budgeted at P100,000. Almo’s after–tax profit objective was P240,000; the company’s effective tax
A. P120,000 increase C. P120,000 decrease rate is 40 percent.
B. P 80,000 increase D. P 80,000 decrease Bobadilla
While Almo’s sales usually rise during the second quarter, the May financial statements reported
127.Refer to the original data. The sales manager is convinced that a 10% reduction in the selling that sales were not meeting expectations. For the first five months of the year, only 350 units had
price, combined with an increase of P600,000 in the monthly advertising budget, will cause been sold at the established price, with variable costs as planned, and it was clear that the 2007
unit sales to double. What will the new profit or loss if these changes are adopted? after-tax profit projection would not be reached unless some actions were taken. Almo’s president
A. P 60,000 C. P 45,000 assigned a management committee to analyze the situation and develop several alternative
B. P(60,000) D. P(45,000) Bobadilla courses of action. The following mutually exclusive alternatives, labeled A, B, and C, were
presented to the president.
128.Refer to the original data. The Marketing Department thinks that a fancy new package for the
laptop computer battery would help sales. The new package would increase packaging costs Reduce the sales price by P40. The sales organization forecast that with the significantly reduced
by P7.50 per unit. Assuming no other changes, how many units would have to be sold each sales price, 2,700 units can be sold during the remainder of the year. Total fixed and variable unit
month to earn a profit of P97,500? costs will stay as budgeted.
A. 21,818 C. 25,450
B. 23,000 D. 28,000 Bobadilla Lower the variable costs per unit by P25 through the use of less expensive materials and slightly
modified manufacturing techniques. The sales price will also be reduced by P30, and sales of
129.Refer to the original data. By automating certain operations, the company could reduce 2,200 units for the remainder of the year are forecast.
variable costs by P3 per unit. However, fixed costs would increase by P72,000 each month.
Cut fixed costs by P10,000, and lower the sales price by 5 percent. Variable costs per unit will be
How would the breakeven point in units change if the company automated the operations? unchanged. Sales of 2,000 units are expected for the remainder of the year.
A. 1,000 units increase C. 3,000 units increase
B. 1,000 units decrease D. 3,000 units decrease Bobadilla 132.Assuming no changes were made to the selling price or cost structure, how many units must
Almo sell to break even?
130.At what level of production would the automation of the production process be indifferent to the A. 167 C. 500
present process? B. 250 D. 1,700 Bobadilla
A. 18,000 C. 24,000
B. 21,000 D. 28,000 Bobadilla 133.Assuming no changes were made to the selling price or cost structure, how many units must
Almo sell to achieve its after-tax profit objective?
131.Which of the two methods (the present or the automated) has higher income at the level of A. 1,250 C. 2,000
sales of 26,000 units? B. 1,700 D. 2,500 Bobadilla
A. Manual, P60,000 C. Manual, P240,000
B. Automated, P60,000 D. Automated, P240,000 Bobadilla 134.If management decides to reduce the selling price by P40, what will Almo's after-tax profit be?
A. P157,200 C. P241,200
120
B. P160,800 D. P301,200 Bobadilla
After the break-even level, the amount of profit equals the unit contribution margin multiplied
135.If the management can reduce the variable cost per unit by P25 through the use of less by the number of units sold in excess of break-even units.
expensive materials and slightly modified manufacturing techniques, with the sales price
reduced by P30, and sales of 2,200 units for the remainder of the year are forecast, the The candidates should remember that the profit increases by the amount of contribution
amount of expected income for the year was: margin brought by additional units sold.
A. P239,400 C. P241,200
B. P204,000 D. P399,000 Bobadilla 3 . Answer: A
Cost of dinner P 70.00
136.How much would be the expected income for the year if the management cut fixed costs by Favors and program 30.00
P10,000, and lower the sales price by 5 percent, with variable costs per unit unchanged and Fixed costs
sales of 2,000 units are expected for the remainder of the year? (15,000 + 7,000 + 48,000 + 10,000)/250 320.00
A. P239,400 C. P241,200 Cost to be charged P420.00
B. P204,000 D. P399,000 Bobadilla
4 . Answer: B
137.If the sales price is reduced by 6.25 percent starting June 1, an analysis indicates that 2,500 The number of units required to earn the target profit is equal to the sum of fixed expenses
unit sales can be made if the company has to spent for additional advertising. What is the and the target profit divided by the unit contribution margin. The number of units required to
maximum amount of advertising cost that the company can spend and still the profit objective earn the target net profit is:
is achieved? (P78,000 + P42,000) ÷ P12 10,000
A. P35,000 C. P15,000
B. P22,500 D. P 7,500 Bobadilla 5 . Answer: A
Selling Price P 60
Less: Variable Manufacturing Cost ( 30)
10% Commission ( 6)
1 . Answer: B Unit Contribution Margin P 24

Contribution Margin = Fixed costs
= P15,000 6 . Answer: A
Current break-even:
(Contribution Margin/Unit Sales) + Variable cost per unit Pesos: (P32,000 ÷ 0.40) P80,000
= Desired Minimum Sales Price Units: [P32,000 ÷ P6) 5,333
Contribution margin per unit: P15 x 0.40 P 6.00
(P15,000 ÷ 3,000) + (P7,500 ÷ 3,000) 7.50
Additional units to cover additional fixed costs:
2 . Answer: C (P32,000 x 0.3)  P6 1,600
Unit contribution margin (P50 - P30) P 20.00
Additional profit (500 x P20) P10,000 Alternative solution:
New breakeven units (P32,000 x 1.3) ÷ P6 6,933
Less current breakeven units 5,333
121
Increase in breakeven units 1,600 The contribution margin per unit is linear or constant per unit.
Therefore: TCM  Units = UCM
7 . Answer: A
The amount of contribution margin per unit is constant within a relevant range. The amount of 11 . Answer: B
profit is increased by the amount of unit contribution margin. TCM  Sales = CMR
Change in TCM: (600,000*0.2) – (360,000*0.1) 84,000
Contribution margin per unit: CMR: Increase in TCM ÷ Increase in Sales
fixed cost ÷ breakeven unit sales 50,000 ÷ 5,000 P10.00 84,000 ÷ 240,000 35%
At breakeven point, the profit is zero. Therefore, the profit at a level of 5,001 units will be P10
which is the amount of contribution provided by the unit (one unit) in excess of breakeven Breakeven sales 90,300 ÷ 0.35 258,000
point.
12 . Answer: C
8 Answer: A Before-tax profit 24,000 ÷ 0.6 40,000
CMR = Fixed cost/Sales Add fixed cost 200,000
= 100,000/800,000 = 12.50% Total contribution margin 240,000
Profit = (1,200,000 – 800,000)0.125 P50,000 Selling price = UVC + UCM

Selling Price = 6 + (240,000 ÷ 40,000) 12.00
The amount of sales that provides profit should be the sales revenues above the break even
sales. 13 . Answer: C
The company's degree of operating leverage is determined as follows:
Alternative solution: Degree of operating leverage = Contribution margin ÷ Net income
Total contribution margin 1,200,000 x 0.125 P150,000 Degree of operating leverage = P600,000 ÷ P240,000 = 2.50
Fixed costs 100,000
Profit P 50,000 14 . Answer: A
Increase in sales 125,000
9 . Answer: A Less variable costs and expenses
Current unit contribution margin (P32 – P24) P8 0.90 x 125,000 112,500
Current break-even units (P400,000 ÷ P8) 50,000 Additional profit before tax 12,500
New unit contribution margin (P40 - P24) P16 Less additional tax 0.40 x 12,500 5,000
New break-even units (400,000 ÷ 16) 25,000 Additional profit 7,500
Net decrease in breakeven units
(50,000 – 25,000) 25,000 15 . Answer: B
Additional profit ÷ UCM = additional unit sales
10 . Answer: A = (40,000 + 8,000) ÷ (80-60)
CM per unit: 220,000 / (100,000 – 80,000) 11.00 = 2,400 units
Fixed costs: 80,000 x 11 P880,000
16 . Answer: A
122
Total peso sales required 120,000 ÷ (0.25 – 0.1) 800,000* S = P210,000 + 0.10S
Less prior sales 400,000 0.40
Required increase in sales 400,000
0.40S = P210,000 + 0.10S
*Peso sales required to earn profit stated as percentage of sales (ROS): 0.40S - 0.10S = P210,000
S = [FC + (ROSS)]  CMR S = P210,000/(0.40 – 0.10)
(CMR S) = [FC + (ROSS)] S = P700,000
(CMR S) - (ROSS) = FC
(CMR – ROS) S = FC 20 . Answer: C
Current number of units required to earn the target net profit:
S = FC  (CMR – ROS) [(P200,000 + P70,000) ÷ P9] 30,000
17 . Answer: A After the automated machine is placed into service,

Contribution margin 50,000 x (5-3.50) 75,000 the number of units required to earn the target
Less: additional profit (250,000 x 0.10) 25,000 net profit will be:
Additional fixed costs 50,000 ((P250,000 + P70,000) ÷ P12) 26,667
Selling price = P3.50 ÷ 0.70 P5.00 Change in units: 30,000 - 26,667 = 3,333 decrease in unit sales
18 . Answer: C 21 . Answer: C
A shorter calculation of finding the amount of sales is to divide breakeven sales by (1 – MSR) CMR= 100% - (3.9 ÷ 6.0) = 35%
Sales = P600,000  (1 – 0.2) P750,000 BES = 1,400,000 ÷ .35 4,000,000
An alternative solution to find sales is to compute the profit margin. 22 . Answer: C

New break-even point: P874,000 ÷ P23 38,000
Profit margin = Contribution margin ratio x margin of safety ratio. Current break-even point in units: P770,500 ÷ P23 33,500
Profit margin = 20% x 40% 8% Increase in units: 38,000 - 33,500 4,500
Sales = Profit ÷ Profit margin Alternative solution: (P103,500 ÷ P23) 4,500
Sales (60,000 ÷ 0.08) P750,000 23 . Answer: A

The estimated cost of goods sold
19 . Answer: A = P565,000 + 0.35S*
Peso sales = FC/(CMR - ROS) *Sum of all percentages for variable production costs
= P210,000/(0.40 - 0.10) P700,000
CMR = 40% = P565,000 + (P2,000,000 x 0.35)
= P1,265,000
A long computation of required sales uses the following equation:
24 . Answer: B
123
Peso sales required to earn 10% of sales; Increased units 4,000 x 1.25 5,000
FC/(CMR – ROS) Revised contribution margin 5,000 x (9 – 6) P15,000
= P36,000/(0.30-0.10) Less fixed cost 12,000
= 180,000 Revised profit P 3,000
25 . Answer: A 30 . Answer: B
Revised contribution margin 20,000 x 1.15 x (7-1) 138,000 Projected cost of sales:
Fixed cost (105,000 + 19,200) 124,200 P800,000 + (P3,000,000 x 0.65) P2,750,000
Revised profit 13,800
Prior profit 35,000 31 . Answer: B
Decrease in profit 21,200 Unit CM = Change in Profit ÷ Change in Sales
= 200,000 ÷ (100,000 – 75,000)
26 . Answer: A =8
Margin of Safety = Budgeted sales – Breakeven sales
Margin of Safety: P400,000 – P40,000 P360,000 Fixed costs = Breakeven units x UCM
75,000 x 8 = 600,000
27 . Answer: B
DOL at P90,000 sales: 32 . Answer: B
Sales 90,000 Unit cost:
Variable costs 50,000 Materials (P36,000 ÷ 24,000) P1.50
Total Contribution margin 40,000 Labor (P54,000 ÷ 24,000) 2.25
Fixed costs 30,000 Variable selling expense 0.35
Profit 10,000 Variable unit cost P4.10
Required profit (2,250 ÷ 1,500) 1.50
DOL = TCM/OP Required minimum selling price P5.60
= 40,000/10,000 4 times
33 . Answer: D
% increase in sales x DOL = % increase in profit Composite ratio:
4 x 20% = 80% X: 640,000 ÷ (720,000 + 640,000) 47.059%
Y: 720,000 ÷ (720,000 + 640,000) 52.941%
28 . Answer: B
2006 DOL = 275,000/75,000 3.67 Weighted-Average Contribution Margin:
Percentage Increase in profit, 2007 = 3.67 x 30% 110% (.52941 × .60) + (.47059 × .40) 0.505882
2007 Profit = 75,000 +(75,000 x 1.10) P157,500
Breakeven sales in pesos:
29 . Answer: A (505,881 ÷ 0.505882) P1,000,000
Peso sales 12,000/(0.40 – 0.1) P40,000
Unit sales P40,000/10 4,000 Y’s peso sales at breakeven P1M x 0.47059 P 470,590
124
Fixed costs before an increase of 78,750:

34 . Answer: A 750,000 x 0.35 262,500
Sales (500,000 x 1.10) 550,000
Variable cost 300,000 The increase in fixed costs of P78,750 equals the increase in contribution margin in order to
Contribution margin 250,000 continue at breakeven sales.
CMR = 250 ÷ 550 = 45.45% 39 . Answer: D

Original fixed costs: UCM = (70,000 x 1.20)+(40,000 x 3)
500,000 – 300,000 – 150,000 = 50,000 70,000 – 40,000
New fixed cost = 50,000 x 0.80 = 40,000 = P6.80
Breakeven sales = 40,000/0.4545 = P88,000
FC = Units(UCM – profit per unit)
35 . Answer: B = 70,000(6.80 – 1.20)
Before-tax profit (24,000 ÷ 0.6) P 40,000 = P392,000
Add fixed costs 200,000
Total contribution margin P240,000 BEU = 392,000/6.80
= 57,647
Contribution margin per unit (P240,000 ÷ 40,000) P 6.00
Variable cost per unit 6.00 40 . Answer: A
Selling price P12.00 Margin of safety in peso sales = Budgeted sales – Breakeven sales
Margin of safety = P1M – P.7M P300,000
36 . Answer: A
DOL = CM/OP 41 . Answer: A
= 275,000/75,000 2006 Sales 1,000,000
= 3.67 times Advertising Cost (75000 ÷ .6) 125,000
Required 2007 peso sales 1,125,000
37 . Answer: C
Peso sales : FC ÷ (CMR - Profit Margin) 42 . Answer: A
= P210,000 ÷ (0.55 - 0.15) Revised WACM (0.5 x 1.50) + (0.5 x 2) 1.75
= P525,000 Original WACM (0.4 x 1.50) + (0.6 x 2) 1.80
Revised Breakeven units 12,600/1.75 7,200
CMR = 100% - 45% = 55% Original Breakeven units 12,600/1.80 7,000
Increase in breakeven units 200
38 . Answer: B
CMR: Change in Fixed Costs ÷ Change in Breakeven Sales 43 . Answer: C
78,750 ÷ (975,000 – 750,000) WACM = (30 x 0.6) + (60 x 0.4) P42
0.35 Breakeven units: 630,000/42 15,000
125
Breakdown: 49 . Answer: B
Product Standard 15,000 x 0.6 9,000 CMR = Before Tax Profit Margin
Product Deluxe 15,000 x 0.4 6,000 M/S Ratio
= (0.06 ÷ 0.6) ÷ .25
44 . Answer: B = 40%
WACM = (4/7 x 0.40)+(3/7 x 0.93 = P0.62857
BE units = 7,600/0.62857 = 12,091 FC = (120,000 x .40) – (120,000 x .10) = P36,000
Baubles = 12,091 x 4/7 = 6,909 Annual FC = 36,000 x 12 P432,000
Trinkets = 12,091 x 3/7 = 5,182
50 . Answer: A
45 . Answer: C Profit Margin = 20% x 10% = 2%
Total sales revenue per composite sales: Profit = 400,000 x 2% = 8,000
(12 x P5.25) + (10 x P7.50) + (6 x P12.25) P211.50 Fixed Costs = CM - Profit
Total variable cost per composite sales: Fixed Costs = (400,000 x 20%) – 8,000 P72,000
(12 x P4.85) + (10 x P6.95) + (6 x P10.35) P189.80
Total contribution margin per composite sales 51 . Answer: A
(P211.50 - P189.80) P 21.70 Revised UCM = 25 – 19.80 – (5 x 0.08) P4.80
Composite breakeven point BEU = 468,000/4.80 97,500
P75,950 ÷ P21.70 3,500
52 . Answer: A
Note: Total breakeven units: 3,500 x 28 = 98,000 The Company projected zero profit based on zero advertising expenditure.
Additional CM (30,000 units @ 10) P300,000
46 . Answer: C Less: Required profit 200,000
WACMR = (.6 x .4) + (.4 x .15) 30% Maximum advertising cost P100,000
Fixed Costs = 225000 x 1.3 P 292,500
Sales (292500 + 48000) ÷ .3 P1,135,000 53 . Answer: B
Cash-flow breakeven: 270,000 ÷ (100-60) 6,750
47 . Answer: C
UCM = (60,000 x 0.75)+(45,000 x 1.25) 54 . Answer: A
60,000 – 45,000 CMR = Before-tax return on sales/MSR
= 6.75 = (0.06  0.60)  0.25 0.40 or 40%
BES = 320,000  0.40 P 800,000
Fixed cost = (60,000 x 6.75)-(60,000 x 0.75) P360,000 Sales = 800,000  0.75 P1,066,667
48 . Answer: B 55 . Answer: B
BEV = 600,000 P150,000 The easier calculation of sales value of 60,000 units is to divide the total annual costs by total
16 – 12 cost ratio of 85% (100% - 15%).
Sales required = P1,912,500/0.85 P2,250,000
126
Unit selling price = 2,250,000/60,000 P37.50

62 . Answer: B
56 . Answer: D The indifference point refers to the level of sales that would give equal profit or total costs for
Indifference Point = Change in Fixed Cost ÷ Change in Variable Cost the two alternatives
Increase in fixed cost: 2 @ 15,000 P30,000 11.30x + 60,000 = 8.90x + 82,500
Decrease in variable cost (15% - 7.5%) 80 P6 2.40x = 22,500
x = 9,375
Indifference point: 30,000 ÷ 6 5,000 units
63 . Answer: C
57 . Answer: A Variable cost ratio = 2.25/7.50 = 30%
WACM = (0.25 x 5)+(0.75 x 7) Variable cost next year = 2.25 x 1.3333 = 3
= 6.50 Selling price required = 3/0.30 = P10
BEU = 975,000/6.50 64 . Answer: B

= 150,000 Total Fixed Cost P154,000
Operating Profit 26,000
58 . Answer: B Total Contribution Margin P180,000
The additional fixed costs of P1,200,000 should be fully covered by the same amount as
additional sales (also additional contribution margin) through an increase in selling price. Selling price P 20
Contribution margin per unit
Increased price P120 +(1.20M/80,000) P 135 (180,000 ÷ 12,000) 15
Unit variable cost P 5
59 . Answer: A
Breakeven point: 65 . Answer: C
Old policy: P80,000/7 11,429 Fixed costs 600,000
New policy: P100,000/8 12,500 Operating profit 120,000
Increase in Breakeven point 1,071 Contribution margin 720,000
60 . Answer: B Unit contribution margin 720,000 ÷ 400,000 1.80

WACMR = (.4 x .2) + (.5 x.3) + (.4 x.5) = 0.43
BES = 1,290,000 ÷ .43 = P3,000,000 Selling price (1.80 ÷ 0.40) P4.50
61 . Answer: A 66 . Answer: B
Contribution margin 12,000 x (1,500 – 900) P7,200,000 Contribution margin per machine hour: Contribution margin per unit x No. of units produced
Fixed costs 3,600,000 per machine hours
Operating profit P3,600,000 Product A P20 x 6 P120
Product B P16 x 8 P128
DOL: 7.2/3.6 = 2 times
127
67 . Answer: A Increase in BEU = 6,240 – 5,600 = 640

440,000 + (110,400/0.61) = 480,000
4 – 2.70 72 . Answer: C
Composite CM = 40 + (2 x 20)
Revised variable cost: P2.40 + (P2.00 x 0.15) P2.70 = 80
68 . Answer: D Composite BE = 910,000/80

VC Ratio 375,00/625,000 = 60% = 11,375
VC / unit 375,000/25,000 = P15
New VC = 15 + (4.50 – 2.50)= P17 73 . Answer: C
SP = 17/0.6 = P28.33 Required new sales = 2005 sales + (P112,500/CMR)
= P5M +(P112,500/0.45)
69 . Answer: B P5.25M
The level of sales that would give equal costs:
0.06S = (40 x 24,000)+ 0.02S CMR = (250 – 137.50)/250 45%
0.04S = 960,000
S = 24M 74 . Answer: A
Breakeven units = 807,840 ÷ 5.30 152,423
70 . Answer: C New CM/unit = 20 – 14.70 = 5.30
Additional fixed cost/week: New variable cost: (14 + (14 x.5 x 0.10) = 14.70
31,200/52 = 600 New FC = 792,000 + (792,000 x.20x.10) = 807,840
Additional weekly sales to cover additional fixed cost: 75 . Answer: A

600/0.25 = 2,400 Indifference point = Decrease in Fixed Cost
Increase in Variable Cost
Total Sunday’s sales (where 2,400 represents 25%): = 80,000/0.05
2,400/0.25 = 9,600 = P1.60M
Alternative solution: 76 . Answer: D

600 = 0.25 x 0.25S Processing hours per unit:
600 = 0.0625S XY – 7: 0.75/1 = 0.75 or 45 minutes
S = 9,600 BD – 4: 0.20/1 = 0.20 or 12 minutes
71 . Answer: A Additional contribution margin using 100,000 hours:

New BES = 873,600/140 = 6,240 XY – 7: 100,000/0.75 x P1 = P133,333
New FC = 840,000 x 1.04 = 873,600 BD – 4: 100,000/0.20 x P0.50 = P250,000
New CM = 250 – 100 –(100 x 0.10) = 140
Old BES = 840,000/150 = 5,600 77 . Answer: B
128
Units sold to earn P1M: = 91,611

(1,000,000 + 1,000,000) / 5.25 = 380,952
82 . Answer: C
The use of P1M fixed costs will require 380,952 units which are within the first range. CM /unit 405,000 ÷ 1,800 225
BEV = 247,500 ÷ 225 1,100 units
78 . Answer: A
Fixed costs 83 . Answer: A
= 792,000 +(792,000 x 0.20 x 0.10) Operating Profit: (2,100 x 225) – 247,500 = P225,000
= 807,840 After–tax profit: 225,000 x 60% = 135,000
UCM = 20 – 14 –(14 x 0.50 x 0.10)= 5.30 84 . Answer: C

Computation = 807,840/5.30 Contribution margin
Regular sales 1,500 x 225 337,500
79 . Answer: A Special sale 1500 x 175 262,500
Cost of one 4–foot piece of metal 4 x 13.60 54.40 Total Contribution 600,000
Less proceeds from sale of scrap 6.4 / 16 x 8 3.20 Fixed costs 247,500
Net cost of one 4- foot piece of metal 51.20 Taxable income 352,500
Income tax 141,000
Net cost per ounce P 51.20 ÷ 25.6 oz P2.00 Net income 211,500
Output per one 4-foot piece of metal 85 . Answer: A

Large 4 x 4oz 16.00 Additional FC/ New Unit CM
Small 4 x 2.4oz 9.60 61,500 ÷ 200 = 307.5 tons
Scrap 6.40
Total oz 32.00 86 . Answer: D
New SP = 500 x .90 450 100%
80 . Answer: B New VC 275 + 40 315 70%
Material cost per unit New CM 135 30%
Large: 4 x P2 x 1.8 P14.40
Small 2.4 x P2 x 1.75 P 8.40 Sales required:]
(Fixed costs + Before Tax profit) ÷ CMR
81 . Answer: A 247,500 + (94,500 ÷ 60) P1,350,000
Unit CM
Large: 29.00 – (8.5 x 1.8) = 13.70 87 . Answer: A
Small: 14.00 – ( 5.1 x 1.75) = 5.075 Unit sales required:
(316,800 + 40,000) ÷ 27.20 = 13,118 pairs
WACM = (13.70 + 5.075) ÷ 2 = 9.3875 Unit Contribution Margin, Touring:
Breakeven point = 860,000/9.3875 80.00 – 52.80 P27.20
129
Breakeven next year with no change in commission:

88 . Answer: A 4,800,000 ÷ 0.4 = P12,000,000
Indifference point in peso sales:
0.4S – P369,600 = 0.34S – P316,800 93 . Answer: C
0.06S = 52,800 If the commission rate is increased by 5%, the contribution margin is decreased by 5% or a
S = P880,000 new contribution margin ratio of 35%
89 . Answer: D Breakeven sales next year.

Breakeven sales, Mountaineering: 4,800,000 / 0.35 = P13,714,286
369,600 ÷ 35.20 = 10,500
Required contribution margin – Touring 94 . Answer: A
316,800 ÷ 10,500 = 30.17 Fixed cost under 15% commission plan 4,800,000
Present contribution margin – Touring 27.20 Increase in Fixed cost 2,400,000
Required decrease in variable cost per unit 2.97 Decrease in audit fee ( 75,000)
Increased fixed costs 7,125,000
90 . Answer: A
New breakeven point: 348,480 ÷ 32.48 10,730 The commission rate of 7.5%, instead of 15% will raise the contribution margin ratio to 47.5%
(40% + 7.5%).
New UCM, Touring: 27.20 + (52.80 x 0.1) = 32.48
New Fixed costs: 316,800 x 1.1 = 348,480 Revised breakeven sales 7,125,000 / .475 = P 15M
91 . Answer: C 95 . Answer: A
The indifference point in number of pairs is 6,600. Inasmuch that the expected level is 12,000 Required sales, with 20% commission and profit target of P1,120,000:
units, it is better to sell Mountaineering because it has high leverage than the touring model. (P4,800,000 + 1,600,000) ÷ .35 = 18,285,714
Once the indifference point is exceeded, the one with the higher contribution margin (leverage)
has the advantage over the one with the lower contribution margin. 96 . Answer: D
The question asked for is the indifference point. The peso sales required to produce equal
92 . Answer: B income can be easily calculated by dividing the net increase in fixed costs by the increase in
Fixed Costs: contribution margin ratio:
Overhead 2,340,000
Marketing 120,000 Difference in CMR = 35% - 47.5 = 12.5%
Administrative 1,800,000 Increase in fixed costs = 2,400,000 – 75,000 P2,325,000
Interest 540,000
Total 4,800,000 Indifference Point: 2,325,000 ÷ 0.125 P18.6M
Contribution margin ratio: Alternative Solution:

1 - [(7,200,000 + 2,400,000)/16M] = 40% .355 – 4,800,000 = .475S – 7,125,000
.125S = 2,325,000
130
S = P18,6M The calculated breakeven point of 14,780 is invalid because the number falls under the
second range wherein the amount of fixed costs that had been used are not relevant to that
97 . Answer: C range.
Billing charge per patient day P650
Variable cost per patient day 150 Second Range (Final calculation):
Contribution margin P500 Total fixed cost, lowest range 7,390,000
Additional fixed cost:
Number of patient days for the year: 1 aide 50,000
P10,676,250/650 16,425 1 nurse 130,000
Total 7,570,000
Variable cost per patient day: Breakeven in patient days:
P2,463,650÷16,425 P150 7,570,000 ÷ 500 15,140
98 . Answer: B 100 .Answer: A

Fixed costs for bed capacity P4,190,000 Additional revenues if 20 beds are rented:
Salary, supervisory nurse 720,000 90 days @ 17 patient days x 650 994,500
Total P4,910,000
101 .Answer: B
Number of patient days required to cover fixed costs for bed capacity and salaries of Increase in variable cost should be calculated based on additional patient days for 90 days at
supervisory nurse P150 per patient day.
4,910,000 ÷ 500 9,820
17 beds x 90 days x P150 P229,500
99 . Answer: B
In solving for the breakeven level where there are step fixed costs, the logical approach is to 102 .Answer: A
test the validity of the ranges of activities. The increase in fixed cost based on bed capacity:
P4,190,250 ÷ 60 x 20 P1,396,750
First Range:
Fixed costs based on capacity 4,190,000 103 .Answer: A
Salaries: Tax shield in non cash expenses
Aides 21 x 50,000 1,050,000 40% x 800,000 = P320,000
Nurses 11 x 130,000 1,430,000
Supervisor 4 x 180,000 720,000 3,200,000 104 .Answer: A
Total 7,390,000 Breakeven in number of pizzas (traditional)
4,537,500/(250 – 75) = 25,929
Breakeven calculation: 7,390,000 ÷ 500 14,780
Units sold: P9,500,000/250 = 38,000
Unit variable cost (cost of food)
131
2,850,000 ÷ 38,000 = P75.00 2S = 250,000

S = P1,250,000
Fixed cost = 7,387,500 – 2,850,000 P4,537,500
110 .Answer: C
105 .Answer: A The problem illustrates a calculation of breakeven point for a company with a step variable and
Cash Flow Breakeven: step fixed cost.
3,417,500 ÷ 175 19,529
Contribution Margin per Unit:
Total fixed cost: P4,537,500 60,000 or less (P30 – P12.50) P17.50
Less: Noncash fixed cost ( 800,000) Units above 60,000 (P30 – P14.00) P16.00
Tax shield on noncash
Fixed costs ( 320,000) Total contribution margin from the first
Fixed cash flow P3,417,500 60,000 (60,000 x P17.50) P280,000
106 .Answer: A Let X = Number of units above 16,000

Breakeven sales based on 20% commission:
P100,000 ÷ 0.20 P500,000 0 = 280,000 + 16X -360,000
X = 80,000 ÷ 16
Contribution margin ratio: X = 5,000 units
(10M – 8M) ÷ 10M 20%
Breakeven units: 16,000 + 5,000 21,000
107 .Answer: D
Breakeven sales if the company employs its own salesmen: Alternative Solution:
(P350,000 ÷ 0.35) P1,000,000
Total fixed costs P360,000
The new contribution margin ratio is (20% + 15%) 35% Less Contribution margin from 60,000 units 280,000
Remaining fixed costs to be covered by
Fixed costs are expected to be P350,000 additional units, each with CM of P16 P 80,000
(100,000 + 90,000 + 160,000)
Breakeven units: 16,000 + (80,000 ÷ 16) 21,000
108 .Answer: D
The required peso sales to earn net income of P1,330,000 if the commission is raised to 25%: 111 .Answer: B
The units that will generate the desired profit of P150,000 for the company, contributes P16
(P100,000 + P1,900,000) ÷ 0.15 P13,333,333 each. These units are the excess of 21,000 units to breakeven.
109 .Answer: B Unit sales required:

The indifference point, the level of sales where the alternatives will have equal profits: 21,000 + (150,000 ÷ P16) 30,375
.15S- 100,000 = .35S – 350,000
132
112 .Answer: B (Please see solution for No. 94)

The bonus plan of P1.00 per unit on sales made in excess of breakeven point (21,000 units)
will necessarily decrease the contribution margin to P15. 117 .Answer: A
Breakeven units if there is a change in marketing method:
The desired profit based on fixed cost: P48,000 ÷ 6 8,000 units
25% x P360,000 P90,000
Contribution margin per unit:
Units required: 21,000 + (P90,000 ÷ 15) 27,000 (Fixed cost + profit) ÷ Units sold
113 .Answer: B (P48,000 + P60,000) ÷ 18,000 units P6.00

In determining the minimum selling price for the 8,000 units should consider the increased
variable cost per unit and the additional fixed cost. Any cost and losses on the first 16,000 118 .Answer: B
units are irrelevant: The percentage increase in profit can be calculated by multiplying the degree of operating
Variable cost per unit P14.00 leverage (DOL) by the percentage increase in sales during the second month.
Additional fixed cost per unit (10,000 ÷ 8,000) 1.25
Minimum selling price P15.25 The sales increased by 30% (P4,500 ÷ P15,000) and therefore the profit percentage
increased by 180% (6 x 30%).
114 .Answer: A
The net income for the month if the new equipment is acquired: The expected profit during the next month would be:
Contribution margin based on the present system P135,000
Add increase in contribution margin due to P45,000 + (P45,000 x 1.8) P126,000
decrease in variable cost (15,000 x 9) 135,000
Increased contribution margin 270,000 119 .Answer: C
Less Increased fixed costs 225,000 Breakeven Units:
Fixed Costs ÷ Unit Contribution Margin
Net income P 45,000 P6,000,000 ÷ 300 20,000 pairs
115 .Answer: B 120 .Answer: B

The increase in breakeven point would be: Contribution margin (P18,000 x 300) P5,400,000
(12,500 – 10,000) 2,500 units Less Fixed costs 6,000,000
Breakeven, present (P90,000 ÷ P9) 10,000 units Net loss P( 600,000)
Breakeven, proposed (P225,000 ÷ P18) 12,500 units
121 .Answer: A
116 .Answer: C The breakeven level for the sales outlet is expected to rise because of additional commission,
The degree of operating leverage (DOL) a variable cost item, and such a commission is being paid for all pairs of shoes sold.
during the month that the new
equipment would be used: (270,000 ÷ 45,000) 6X Breakeven in pairs of shoes:
6,000,000 ÷ (300 – 75) 26,667 pairs
133
127 .Answer: B
122 .Answer: D Sales 39,000 x P270 P10,530,000
Though an additional commission is paid on pairs of shoes sold, the breakeven point is not Variable cost 39,000 x P210 8,190,000
affected and shall remain at 20,000 because the additional commission applies only to number Contribution margin 2, 340,000
of pairs of shoes sold in excess of breakeven level. Fixed cost 2,400,000
Net loss P( 60,000)
The profit contribution by the 5,000 pairs is based on reduced contribution margin per pair.
128 .Answer: B
Profit: 5,000 x (300 – 50) P1,250,000 Original unit contribution margin
(1,755,000 ÷ 19,500) P90.00
Alternative Solution: Less increase in packaging cost 7.50
Sales (25,000 x P800) P20,000,000 New Unit contribution margin P82.50
Variable costs (24,000 x P500) 12,750,000
Total contribution margin 7,250,000 Unit sales required:
Fixed costs 600,000 (P1,800,000 + P97,500) ÷ P82.50 23,000
Profit P 1,250,000
129 .Answer: A
123 .Answer: A Breakeven units, Automated
Because the breakeven level is unchanged, the calculation of the number of pairs to earn (P1,800,000 + P720,000) ÷ (P90 + P30)
P900,000 is simple. The amount of the desired profit will be contributed by the number of P2,520,000 ÷ 90 21,000
pairs of shoes in excess of breakeven, each contributing P250. Breakeven units, Present
(P1,800,000 ÷ 90) 20,000
20,000 +(P900,000 ÷ 250) 23,600 pairs Increase in breakeven units 1,000
124 .Answer: B 130 .Answer: C

300X – P6,000,000 = 440X – P8,142,000 The computation of the indifference point for the two processes can be determined by dividing
140X = P2,142,000 the increase in fixed costs by the decrease in variable cost per unit because the selling price
X = 15,300 pairs was unchanged.
125 .Answer: A Indifference Point: P720,000 ÷ 30 24,000

Breakeven peso sales: P1,800,000 ÷ 0.3 P6,000,000
CMR = P1,755,000 ÷ P5,850,000 30% 131 .Answer: B
If the level of sales is higher than the indifference point, the one with higher leverage, i.e.,
126 .Answer: B higher fixed costs and lower unit variable cost, will provide higher income. The automated
Additional contribution margin P800,000 x 0.30 P240,000 process has the higher leverage and therefore, it has higher income:
Additional fixed cost 160,000
Increase in profit P 80,000 Difference in income: (26,000 – 24,000)30 P60,000
134
132 .Answer: C Revenue (350 x P400) + (2,000 x P380) P 900,000

Breakeven units = Fixed costs  Unit contribution margin Variable costs (2,350 x P200) 470,000
P100,000  (P400 – P200) Contribution margin P 430,000
500 units Fixed costs 90,000
Operating profit 340,000
133 .Answer: D Income tax 136,000
Step 1: Compute before-tax profit: Net income P 204,000
P240,000  (1.0 – 0.4) P400,000
137 .Answer: D
Units sales required to earn before-tax profit: Before tax profit objective (240,000 ÷ 0.6) P400,000
(P100,000 + P400,0000)  P200 2,500 units Fixed costs 100,000
Total contribution margin required 500,000
Alternative Solution: Less contribution margin made on units sold
Profit = Sales – Variable costs – Fixed costs January – May (350 x 200) 70,000
Additional contribution margin still needed P430,000
P400,000 = P400X – P200X – P100,000 Additional contribution margin from 2,500 units
P500,000 = P200X (2,500 x P175) P437,500
X = 2,500 units Less additional contribution margin required to meet profit objective 430,000
Maximum advertising cost P 7,500
134 .Answer: C
Revenue (350 x P400) + (2,700 x P360) P1,112,000
Variable costs (3,050 x P200) 610,000
Fixed expenses 100,000
Operating income P 402,000
Income tax 160,800
Net income P 241,200
135 .Answer: A
Revenue (350 x P400) + (2,200 x P370) P 954,000
Variable costs (350 x P200) + (2,200 x P175) 455,000
Fixed expenses 100,000
Operating income 399,000
Income tax 159,600
Net income P 239,400
136 .Answer: B
135
Practice Final Exam for AC 225 Managerial Accounting Discussion: The control function is evaluating the results of company
Answers will be released on FRIDAY. actions. Only A involves both measuring results and comparison to
determine whether the results are favorable or unfavorable.
NOTE: These questions will give you practice on answering questions in the
format of the final exam, which has 60 to 70 multiple choice questions. You 4. Management accounting is used by
should not depend on reviewing these specific questions alone to review all of the A. Human resource employees who need to plan hiring
topics on the Final Exam Review also posted in D2L. B. Marketing employees who make decisions on profit achievable through an
advertising campaign
Chapter 1 C. Accounting employees who make budget recommendations.
1. Managerial Accounting and Financial Accounting differ in the following way: D. All of the above.
A. Financial Accounting emphasizes forecasts of future performance.
B. Financial Accounting summarizes information for the company as a whole. 5. The CMA certification requires
C. Financial Accounting is private information for company managers A. A rigorous professional exam only
D. Financial Accounting emphasizes timeliness over precision. B. Experience in Financial management only.
C. A rigorous professional exam and experience in financial management only.
Discussion: Managerial accounting emphasizes providing information about D. An accounting degree and a rigorous professional exam and experience in
segments and products within a company, rather than the company as a whole. financial management.
Financial accounting creates financial statements that must present all
components under common control. Discussion: Individuals with any college major can become Certified
Management Accountants.
2. Common users of managerial accounting reports include the following:
A. Operations manager and loan officer 6. Guidelines for ethical behavior for management accountants require
B. Chief financial officer and public shareholder A. Management accountants maintain professional competence.
C. Public shareholder and loan officer B. Management accountants disclose confidential information to competitors.
D. Chief financial officer and operations manager C. Management accountants eliminate all potential limitations before
communicating recommendations.
Discussion: Managerial accounting is used by company insiders. Loan officers D. Management accountants ignore conflicts of interest.
work for a bank. Shareholders are the external owners of a business.
Discussion: Competence is one ethical value in the Institute of Management
3. The management function of controlling is carried out through the use of Accountants ethical standards. Management accountants maintain confidentiality
A. A performance report that compares budgeted to actual results. unless disclosure is required by law. Full disclosure of limitations is required,
B. A reconciliation of the beginning and ending retained earnings balances. but no one can eliminate all limitations on recommendations. Management
C. A schedule of cash collections and cash payments accountants disclose conflicts of interest.
D. A forecast of next period’s production.
7. Institute of Management Accountants supports ethical practices by
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A. Staffing an ethics hotline for its members Discussion: A, C, and D are product costs; salaries within selling &
B. Representing its members in legal cases administrative costs are period costs.
C. Investigating corporate ethical lapses
D. Requiring members to report unethical conduct to their supervisors. 4. Last month 10,000 units of a product were manufactured, and the total cost per
unit was $60. At this level of production the variable cost is $30 per unit and the
Discussion: The Institute of Management Accountants has an ethical hotline to fixed cost is $30 per unit. If 10,500 units are manufactured the next month, and
provide an objective consultation to members. the costs remain within the same relevant range,
A. Total variable cost will remain unchanged.
Chapter 2 B. Fixed costs will increase in total
C. Variable cost per unit will increase
1. The wages of factory maintenance personnel would usually be considered to be D. Total cost per unit will decrease
a
A. Direct labor cost Discussion: Numerically the unchanging fixed cost is $30 * 10,000 = $300,000.
B. Manufacturing overhead cost The cost for 10,500 units = 10,500 units * $30 variable cost + fixed cost of
C. Administrative cost $300,000 = $315,000 + $300,000 = $615,000. The total cost per unit is $615,000
D. Selling cost / 10,500 units = $58.57. Alternatively, when production increases, fixed costs
PER UNIT decrease because the same fixed cost is spread over more units, so
Discussion: Maintenance is an indirect labor cost, which is a part of total cost per unit will decrease.
manufacturing overhead.
5. The following costs were incurred in September:
2. Conversion costs include Direct materials $39,000
A. Manufacturing overhead costs Direct labor 23,000
B. Direct material costs Manufacturing overhead 17,000
C. Sales commission costs Selling expenses 14,000
D. Advertising costs Administrative expenses 27,000
Prime costs during the month totaled
Discussion: Conversion costs include the product costs of direct labor and A. $79,000
manufacturing overhead. B. $120,000
C. $62,000
3. Which of the following costs is an example of a period rather than a product D. $40,000
cost?
A. Depreciation on production equipment Discussion: Prime costs ae direct labor and direct material costs.
B. Salaries of salespersons
C. Wages of production machine operators 6. ABC Corporation sells its product for $195.70 per unit. In 2015 the company
D. Insurance on production equipment had total sales in units of 6,000. The total costs were the following:
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Variable cost of sales $457,800 High: June 12,088 visits $28,892

Fixed cost of sales 100,000 Low: August 11,193 visits $28,221
Variable selling & administrative costs 108,500 Difference 895 visits $671
Fixed selling & administrative costs 512,400 Variable cost per client visit = 671/895 = $.75per client visit
What is the best estimate of the total contribution margin? Fixed Cost for supplies per month = 28,892-12,088 *.75 = 19826
A. $4,600
B. $507,800 8. Buckeye Company has provided the following data for maintenance cost:
C. $607,900 2014 2015
D. $616,400 Machine hours 12,500 15,000
Maintenance cost $27,000 $31,000
Discussion: Total Contribution Margin = Total Sales – Total Variable Costs; The best estimate of the cost formula for maintenance would be:
Total Sales = 195.70 * 6000 = 1174200. Total Variable Costs = 457,800 + A. $21,625 per year plus $0.625 per machine hour
108,500 = 566,300. Contribution Margin = 1171200-566300 = 607,900 B. $7,000 per year plus $0.625 per machine hour
7. Supply costs at ABC Corporation's chain of gyms are listed below: C. $7,000 per year plus $1.60 per machine hour
D. $27,000 per year plus $1.60 per machine hour
Discussion: Difference in Machine hours = 2,500; Difference in Maintenance:

$4,000; Maintenance cost per machine hour = $4,000 / 2,500 = 1.60 per machine
hour; Fixed Cost of maintenance = 27000 – 1.60*12,500=7,000
Use the following information for questions 9 and 10.
Chaffee Corporation staffs a helpline to answer questions from customers. The

costs of operating the helpline are variable with respect to the number of calls in a
Management believes that supply cost is a mixed cost that depends on client- month. At a volume of 33,000 calls in a month, the costs of operating the helpline
visits. Using the high-low method to estimate the variable and fixed components total $742,500.
of this cost, those estimates would be closest to:
A. $2.44 per client-visit; $28,623 per month 9. To the nearest whole dollar, what should be the total cost of operating the
B. $1.33 per client-visit; $12,768 per month helpline costs at a volume of 34,800 calls in a month? (Assume that this call
C. $0.79 per client-visit; $19,321 per month volume is within the relevant range.)
D. $0.75 per client-visit; $19,826 per month A. $742,500
B. $783,000
Discussion: C. $704,095
D. $762,750
Client Visit Supply Cost
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Discussion: From the initial data, the cost per call is $742,500/33,000 = $22.48; D. Manufacturing Overhead.
Therefore the cost at 34,800 calls would be $22.48*34,800=78472 Discussion: A debit increases an asset account. When direct materials are used
Raw Materials inventory decreases and Work in Process increases.
10. To the nearest whole cent, what should be the average cost of operating the
helpline per call at a volume of 36,100 calls in a month? (Assume that this call 3. In a job-order costing system, indirect materials that have been previously
volume is within the relevant range.) purchased and that are used in production are recorded as a debit to:
A. $21.54 A. Work in Process inventory.
B. $20.57 B. Manufacturing Overhead.
C. $21.34 C. Finished Goods inventory.
D. $22.50 D. Raw Materials inventory.
Discussion: See above. Discussion: Indirect materials increase manufacturing overhead and decrease
Raw Materials Inventory.
Chapter 3
4.Overapplied manufacturing overhead occurs when:
1. In computing its predetermined overhead rate, Marple Company inadvertently A. applied overhead exceeds actual overhead.
left its indirect labor costs out of the computation. This oversight will cause: B. applied overhead exceeds estimated overhead.
A. Manufacturing Overhead to be overapplied. C. actual overhead exceeds estimated overhead.
B. The Cost of Goods Manufactured to be understated. D. budgeted overhead exceeds actual overhead
C. The debits to the Manufacturing Overhead account to be understated. Discussion: While estimated overhead or budgeted overhead is used to calculate
D. The ending balance in Work in Process to be overstated. the predetermined manufacturing overhead rate, overhead is then applied based
Discussion: If indirect labor is omitted from the predetermined overhead rate, on the actual direct labor hours (or machine hours etc.). So if the overhead
then the predetermined overhead rate is too low. (C) is correct because Cost of applied is more than the actual overhead incurred, then overhead is overapplied.
Goods Manufactured is increased by the amount of overhead applied. So if
overhead applied is too low, then Cost of Goods Manufactured would be too 5. Wert Corporation uses a predetermined overhead rate based on direct labor cost
low. (A) would be true if the predetermined overhead rate were too high. (D) to apply manufacturing overhead to jobs. Last year, the company's estimated
could be true if predetermined overhead rate were too high. (C) refers to the manufacturing overhead was $1,200,000 and its estimated level of activity was
increases in Manufacturing Overhead when overhead is incurred. It decreases 50,000 direct labor-hours. The company's direct labor wage rate is $12 per hour.
as it is applied to jobs based on the predetermined overhead rate, so it is the Actual manufacturing overhead amounted to $1,240,000, with actual direct labor
credits to Manufacturing Overhead that could be effected by this error. cost of $650,000. For the year, manufacturing overhead was:
A. overapplied by $60,000
2. In a job-order costing system, the use of direct materials that have been B. underapplied by $60,000
previously purchased is recorded as a debit to: C. overapplied by $40,000
A. Raw Materials inventory. D. underapplied by $44,000
B. Finished Goods inventory.
C. Work in Process inventory.
139
Discussion: The predetermined manufacturing overhead rate is $1,200,000 in C. $2,068

overhead over direct labor cost of 50,000 direct labor hours * $12 per hour: D. $5,112
1,200,000 / (12*50,000)=1200000/600,000=2. Discussion: Total Job Cost = 2,039 + 32*14+15*175=2039+448+2625=5,112
So the manufacturing overhead applied would have been 650,000*2=$1,300,000.
However the actual overhead is $1,240,000. $1,300,000- $1,240,000=$60,000 8. Hults Corporation has provided data concerning the company's Manufacturing
overapplied Overhead account for the month of November. Prior to the closing of the
overapplied or underapplied balance to Cost of Goods Sold, the total of the debits
6. Hayne Corporation bases its predetermined overhead rate on the estimated to the Manufacturing Overhead account was $75,000 and the total of the credits to
machine-hours for the upcoming year. Data for the most recently completed year the account was $57,000. Which of the following statements is true?
appear below: A. Manufacturing overhead transferred from Finished Goods to Cost of Goods Sold
during the month was $75,000.
B. Actual manufacturing overhead incurred during the month was $57,000.
C. Manufacturing overhead applied to Work in Process for the month was $75,000.
D. Manufacturing overhead for the month was underapplied by $18,000.
Discussion: The $75,000 is the actual amount of manufacturing incurred;
$57,000 is the amount of overhead applied. The difference between these two
is the amount of overhead that is UNDERapplied, since actual overhead is less
than overhead applied by $75,000-$57,000=$18,000
The predetermined overhead rate for the recently completed year was closest to: 9. Wedd Corporation had $35,000 of raw materials on hand on May 1. During the
A. $7.89 month, the company purchased an additional $68,000 of raw materials. During
B. $30.95 May, $92,000 of raw materials were requisitioned from the storeroom for use in
C. $24.52 production. These raw materials included both direct and indirect materials. The
D. $32.41 indirect materials totaled $5,000. The debits to the Work in Process account as a
Discussion: predetermined overhead rate = estimated total overhead / consequence of the raw materials transactions in May total:
estimated machine hours = $465,880 / 19,000 = 24.52 A. $92,000
B. $0
7. The following data have been recorded for recently completed Job 674 on its C. $68,000
job cost sheet. Direct materials cost was $2,039. A total of 32 direct labor-hours D. $87,000
and 175 machine-hours were worked on the job. The direct labor wage rate is $14 Discussion: The decrease to Raw Materials Inventory is $92,000. This is made
per labor-hour. The company applies manufacturing overhead on the basis of up of both direct materials and indirect materials. Since indirect materials are
machine-hours. The predetermined overhead rate is $15 per machine-hour. The $5,000, then direct materials, which would be a debit to Work in Process, is
total cost for the job on its job cost sheet would be: 92,000-5,000=87,000.
A. $2,967
B. $2,487
140
10. Lietz Corporation has provided the following data concerning manufacturing 2. The break-even point in unit sales increases when variable expenses:
overhead for January: A. increase and the selling price remains unchanged.
B. decrease and the selling price remains unchanged.
C. decrease and the selling price increases.
D. remain unchanged and the selling price increases.
Discussion: Since breakeven in sales = fixed expenses / contribution margin
ratio breakeven in sales increases when the contribution margin gets smaller.
The company's Cost of Goods Sold was $369,000 prior to closing out its
Contribution margin gets smaller when variable expenses increase and the
Manufacturing Overhead account. The company closes out its Manufacturing
selling price is the same or smaller. Selections B, C, and D increase the
Overhead account to Cost of Goods Sold. Which of the following statements is
contribution margin ratio.
true?
A. Manufacturing overhead was underapplied by $23,000; Cost of Goods Sold after
3. The amount by which a company's sales can decline before losses are incurred
closing out the Manufacturing Overhead account is $392,000
is called the:
B. Manufacturing overhead was underapplied by $23,000; Cost of Goods Sold after
A. contribution margin.
B. degree of operating leverage.
C. Manufacturing overhead was overapplied by $23,000; Cost of Goods Sold after
C. margin of safety.
D. contribution margin ratio.
D. Manufacturing overhead was overapplied by $23,000; Cost of Goods Sold after
Discussion: Definition.
Discussion: If Manufacturing overhead is underapplied, then Cost of Goods Sold
4. The degree of operating leverage can be calculated as:
is too low and will increase; If Manufacturing overhead is overapplied, then
A. contribution margin divided by sales.
Cost of Goods Sold is too high and will decrease. This is a case in which
B. gross margin divided by net operating income.
manufacturing overhead is overapplied.
C. net operating income divided by sales.
D. contribution margin divided by net operating income.
Discussion: Definition
Chapter 5
5. Mancuso Corporation has provided its contribution format income statement
1. The break-even point in unit sales is found by dividing total fixed expenses by: for January. The company produces and sells a single product.
A. the contribution margin ratio.
B. the variable expenses per unit.
C. the sales price per unit.
D. the contribution margin per unit.
Discussion: breakeven point in units = fixed expenses/ contribution margin per
unit. If one is computing breakeven point in dollars of sales = fixed expenses /
contribution margin RATIO.
141
If the company sells 3,100 units, its total contribution margin should be closest Given these data, the contribution margin ratio for the company as a whole would
to: be:
A. $27,045 A. 25%
B. $181,000 B. 75%
C. $162,400 C. 33.3%
D. $173,600 D. it is impossible to determine from the data given.
Discussion: Contribution Margin per unit = 162,400/2900 = 56. So if there are Discussion: Contribution margin for company as a whole = Total Contribution
3100 units sold, then contribution margin = 3100 * 56=173,600 Margin / Total Sales
Total Contribution Margin = .45 * 20000 + .4 * 40000 + .15 * 100000 =
6. Rothe Company manufactures and sells a single product that it sells for $90 per 9000+16000+15000=40000
unit and has a contribution margin ratio of 35%. The company's fixed expenses Total Sales = 20000+40000+100000=160000
are $46,800. If Rothe desires a monthly target net operating income equal to 15% Overall contribution margin ratio = 40000/160000=25%
of sales, the amount of sales in units will have to be (rounded):
A. 1,486 units 8. Pool Company's variable expenses are 36% of sales. Pool is contemplating an
B. 3,467 units advertising campaign that will cost $20,000. If sales increase by $80,000, the
C. 1,040 units company's net operating income should increase by:
D. 2,600 units A. $28,800
Discussion: The equations set up from this problem are the following: B. $64,000
Net Operating income = contribution margin – fixed expenses C. $8,800
Net Operating Income = 35%*90*sales in units – 46800. D. $31,200
Net Operating Income = 15% * 90* sales in units Discussion: Incremental income= incremental contribution margin-incremental
So setting these equal and solving fixed expenses
35%*90*sales in units -46800=15%*90*sales in units Incremental contribution margin = (1-.36) * 80000=.64*80000= 51200
31.5 sales in units – 46800=13.5*sales in units Incremental fixed cost = 20,000
18 sales in units = 46800 Incremental income = 51200-20000=31200
Sales in units = 2600
7.Darth Company sells three products. Sales and contribution margin ratios for 9. Olis Corporation sells a product for $130 per unit. The product's current sales
the three products follow: are 28,900 units and its break-even sales are 25,721 units. What is the margin of
safety in dollars?
A. $413,270
B. $3,343,730
C. $2,504,667
D. $3,757,000
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Discussion: Margin of Safety (in dollars) = sales above breakeven = (28,900- A. Under variable costing, net operating income for Year 1 and Year 2
25,721)*$130=$413,270 would be the same.
B. Because of the changes in production levels, under variable costing
10. Balbuena Corporation produces and sells two products. Data concerning those the unit product cost will change each year.
products for the most recent month appear below: C. The total net operating income for all four years combined would be the
same under variable and absorption costing.
D. Under absorption costing, net operating income in Year 4 would be less
than the net operating income in Year 2.
Discussion: (A) is true because there will be the same contribution
margin due to the same amount of sales and variable costing includes the
The fixed expenses of the entire company were $15,630. If the sales mix were to fixed costs incurred during the year, which is assumed to be the same in
shift toward Product K87W with total sales dollars remaining constant, the overall this question. (B) is false because variable costs per unit don’t change
break-even point for the entire company: with the amount of production. (C) is true because over the four year
A. would not change. period the number of units sold is equal to the number of units produced,
B. would increase. so there is no deferred manufacturing overhead costs in ending inventory
C. would decrease. to differentiate variable and absorption costing income values. (D) is true
D. could increase or decrease because even though there are fewer sales in year 2 than in year 4, in year
Discussion:Which product is more profitable? Product K87W has a contribution 2 there is much more production and 1/3 of the fixed manufacturing
margin ratio of (17000-7650)/17000= 55%; Product I57P has a contribution overhead would be deferred. This deferred overhead would be recognized
margin ration of (19000-9270)/19000=49%. So if the company has a sales mix in part in Year 3 and in part in Year 4, making Year 4 income lower.
shift toward K87W it is toward the higher profit margin product and the company
will have a lower breakeven point. 2. Fixed manufacturing overhead is included in product costs under:
A. Both Absorption costing and Variable costing
Chapter 6 B Only Absorption costing
C. Only Variable costing
1. Routsong Company had the following sales and production data for the past D. Neither Absorption costing nor variable costing
four years: Discussion: Only Absorption costing includes fixed manufacturing
overhead as a product cost., meaning that it is part of the value of
inventory. In variable costing, fixed manufacturing costs are deducted as a
period cost in the period in which it is incurred.
3. Net operating income reported under absorption costing will exceed net
operating income reported under variable costing for a given period if:
Selling price per unit, variable cost per unit, and total fixed cost are the same in A. production equals sales for that period.
each year. Which of the following statements is not correct? B. production exceeds sales for that period.
143
C. sales exceed production for that period.

D. the variable manufacturing overhead exceeds the fixed manufacturing
overhead.
Discussion: When production is higher than sales, there is an increase in
inventory and some of the fixed manufacturing is in the value of that
inventory. Thus a variable costing income will have more expenses than
absorption costing will have.
4. In an income statement segmented by product line, a fixed expense that cannot

be allocated among product lines on a cause-and-effect basis should be:
A. classified as a traceable fixed expense and not allocated.
B. allocated to the product lines on the basis of sales dollars. There were no beginning or ending inventories. The absorption costing
C. allocated to the product lines on the basis of segment margin. unit product cost was:
D. classified as a common fixed expense and not allocated. A. $97
Discussion: Fixed Expenses are classified as either traceable to a B. $130
segment or common to the company as a whole. Traceable fixed expenses C. $99
are deducted from segment revenues and variable expenses to calculate D. $207
segment margin. Common fixed expenses are not allocated, but deducted Discussion: The absorption cost includes both the variable product costs
from company income as a whole. of $99 from the direct materials, direct labor, and variable manufacturing
overhead as well as the allocation of fixed manufacturing overhead of
5. All other things equal, if a division's traceable fixed expenses decrease: 31000/1000 = $31 per unit for a total of $130.
A. the division's segment margin will increase.
B. the overall company net operating income will decrease. 7. Cockriel Inc., which produces a single product, has provided the following data
C. the division's contribution margin will increase. for its most recent month of operations:
D. the division's sales volume will increase.
Discussion: Traceable fixed expenses are deducted from segment
Revenues less Variable expenses. When fixed expenses are smaller, then
there is more leftover in segment margin. It does not affect sales. It is
deducted after contribution margin is calculated. It affects only the
segment, and there are other factors that may affect the overall company.
6. Olds Inc., which produces a single product, has provided the following data for
its most recent month of operations:
144
There were no beginning or ending inventories. The variable costing unit product B. The net operating income under absorption costing for the year will be
cost was: $544 higher than net operating income under variable costing.
A. $42 C. The net operating income under absorption costing for the year
B. $43 will be $544 lower than net operating income under variable costing.
C. $37 D. The net operating income under absorption costing for the year will be
D. $48 $800 lower than net operating income under variable costing.
Discussion: Variable costing of the product includes only the Direct Discussion: The difference in income is the amount of deferred fixed
materials, direct labor and variable manufacturing overhead costs of $14 manufacturing overhead. The ending inventory of 5,000-4,600=400 units
+ $22 + $1 = $37. Selling and administrative expenses are not product were allocated fixed overhead of 6800/5000 = 1.36 for a total of 400 *
costs. Fixed costs are not considered product costs in Variable Costing. 1.36=544. This amount is still part of ending inventory and is not
deducted in an absorption costing income statement. So net operating
8. Craft Company produces a single product. Last year, the company had a net income under absorption is lower under variable costing than under
operating income of $80,000 using absorption costing and $74,500 using variable absorption costing when production is greater than sales.
costing. The fixed manufacturing overhead cost was $5 per unit. There were no
beginning inventories. If 21,500 units were produced last year, then sales last year 10. Sugiki Corporation has two divisions: the Alpha Division and the Delta
were: Division. The Alpha Division has sales of $820,000, variable expenses of
A. 16,000 units $369,000, and traceable fixed expenses of $347,300. The Delta Division has sales
B. 20,400 units of $460,000, variable expenses of $294,400, and traceable fixed expenses of
C. 22,600 units $134,100. The total amount of common fixed expenses not traceable to the
D. 27,000 units individual divisions is $97,300. What is the company's net operating income?
Discussion: The difference in the income between absorption and variable A. $135,200
costing = $80,000-$74,500 = $5,500. This $5,500 is the deferred fixed B. $37,900
manufacturing overhead that is deducted in variable costing, but not in C. $616,600
fixed costing. If fixed manufacturing overhead is $5 per unit, then the D. $519,300
$5,500 represents $5,500/$5 = 1,100 units in ending inventory. If 21,500 Discussion: Net Operating income is calculated as the sum of all of the
were produced and 1,100 are in ending inventory and there was no segment margins less common fixed expenses. The segment margin for
beginning inventory, then sales are 21,500+0-1100=20,400 units. Alpha = 820000-369000-347300=103700. The segment margin for Delta
= 460000-294400-134100=31,500. Net Operating income = 103700 +
9. Moore Company produces a single product. During last year, Moore's variable 31,500-97,300=37,900.
production costs totaled $10,000 and its fixed manufacturing overhead costs
totaled $6,800. The company produced 5,000 units during the year and sold 4,600 Chapter 7
units. There were no units in the beginning inventory. Which of the following
statements is true? 1. Which of the following activities would be classified as a batch-level activity?
A. The net operating income under absorption costing for the year will be A. Setting up equipment.
$800 higher than net operating income under variable costing. B. Designing a new product.
145
C. Training employees. Discussion: Property taxes are typically assessed at the level of the
D. Milling a part required for the final product. organization and occurs on an ongoing basis as a period cost. This
Discussion: A batch level activity occurs for each time the company produces describes an organization-sustaining cost.
an order or a group of a particular kind of product, such as equipment
set up. 5. McKenrick Corporation uses an activity-based costing system with three activity
cost pools. The company has provided the following data concerning its costs
2. Which of the following is not a limitation of activity-based costing? and its activity based costing system:
A. Maintaining an activity-based costing system is more costly than maintaining
a traditional direct labor-based costing system.
B. Changing from a traditional direct labor-based costing system to an activity-
based costing system changes product margins and other key performance
indicators used by managers. Such changes are often resisted by managers.
C. In practice, most managers insist on fully allocating all costs to products,
customers, and other costing objects in an activity-based costing system.
This results in overstated costs
D. More accurate product costs may result in increasing the selling prices of
some products.
Discussion: (D) is an advantage and not a limitation of activity-based
costing. If the company has been underpricing a product and thus losing
money on each sale of the product, activity-based costing may identify that
product so that it can become profitable for the company.
3. Designing a new product is an example of (an):

A. Unit-level activity
B. Batch-level activity How much cost, in total, would be allocated in the first-stage allocation to the
C. Product-level activity Setting Up activity cost pool?
D. Organization-sustaining activity. A. $229,000
Discussion: Designing a new product is a product-level activity because it B. $155,000
occurs once for each type of product. C. $310,000
D. $248,000
4. Property taxes are an example of a cost that would be considered to be: Discussion: The way to use this information from an activity costing system is
A. Unit-level. that the Setting Up Cost Pool would be 25% * 280,000 + 45% * 220,000 + 50% *
B. Batch-level. 120,000 = 70,000+99,000+60,000=229,000
C. Product-level.
D. Organization-sustaining.
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6. Spendlove Corporation has provided the following data from its activity-based
costing system:
Assembly $19.56 per machine hour

Processing orders $26.12 per order
Inspection $68.80 per inspection hour
The activity rate for the "designing products" activity cost pool is closest to:
The company makes 430 units of product S78N a year, requiring a total of 1,120 A. $78 per product design hour
machine-hours, 40 orders, and 30 inspection-hours per year. The product's B. $582,016 per product design hour
direct materials cost is $49.81 per unit and its direct labor cost is $12.34 per C. $128 per product design hour
unit. According to the activity-based costing system, the total costs for this D. $89 per product design hour
product line is Discussion: Finding the rate to use in activity based costing begins with
A. $26,725 information on measuring the amount of cost created by the amount of activity.
B. $75,951 Here $582,016 in cost occurs over 4,547 product design hours. So the cost per
C. $23,736 product design hour is $582016/4547 = $128
D. $50,460
Discussion: In activity based costing, the activities are measured for each Chapter 8
product and costing uses those measures:
Cost Amount used for Total A. Which of the following represents the normal sequence in which the indicated
budgets are prepared?
the product line
A. Direct Materials, Cash, Sales
Assembly 19.56 per 1120 machine 21907.20
B. Production, Cash, Income Statement
machine hour hours
C. Sales, Balance Sheet, Direct Labor
Processing 26.12 per order 40 orders 1044.8 D. Production, Manufacturing Overhead, Sales
orders
Inspection 68.80 per 30 inspection 783.6 B. Self-imposed budgets typically are:
inspection hour hours A. not subject to review by higher levels of management since to do so
Direct Materials 49.81 per unit 430 units 21418.3 would contradict the participative aspect of the budgeting processing.
Direct Labor 12.34 per unit 430 units 5306.2 B. not subject to review by higher levels of management except in specific
Total costs $50,460.1 cases where the input of higher management is required.
C. subject to review by higher levels of management in order to prevent
the budgets from becoming too loose.
7. Gaucher Corporation has provided the following data from its activity-based D. not critical to the success of a budgeting program.
costing accounting system:
C. A continuous (or perpetual) budget:
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A. is prepared for a range of activity so that the budget can be adjusted for A. $138,000
changes in activity. B. $122,000
B. is a plan that is updated monthly or quarterly, dropping one period C. $119,000
and adding another. D. $108,000
C. is a strategic plan that does not change. Discussion: March cash sales + 50% of March credit sales + 30%
D. is used in companies that experience no change in sales. of February credit sales + 20% * January credit sales=
DISCUSSION: A continuous budget is adjusted on an ongoing basis 18,000+50%*90,000+30% * 120,000+20%*100,000 = 18,000 +
based on the results in the most recent period. 45,000 + 36,000 + 20,000 = 119,000
D. Budgeted production in units are determined by: F. Prestwich Company has budgeted production for next year as follows:
A. adding budgeted sales in units to the desired ending inventory in
units and deducting the beginning inventory in units from this total.
B. adding budgeted sales in units to the beginning inventory in units and
deducting the desired ending inventory in units from this total.
C. adding budgeted sales in units to the desired ending inventory in units.
D. deducting the beginning inventory in units from budgeted sales in units.
DISCUSSION: Budgeted production must meet the forecasted sales in the
period of production as well as preparing for the next period’s expected
sales. This sum is then adjusted for the amount of inventory expected to Two pounds of material A are required for each unit produced. The
already be on hand. company has a policy of maintaining a stock of material A on hand at the
end of each quarter equal to 25% of the next quarter's production needs for
material A. A total of 30,000 pounds of material A are on hand to start the
year. Budgeted purchases of material A for the second quarter would be:
E. Shown below is the sales forecast for Cooper Inc. for the first four months of the A. 82,500 pounds
coming year. B. 165,000 pounds
C. 200,000 pounds
D. 205,000 pounds
Discussion: In quarter 2, the materials needed are for production of
80,000 units + for 25% of the third quarter 90,000 production =
80,000 * 2 pounds + .25 * 90,000 * 2 pounds = 160,000+45,000
=205,000 pounds. The amount on hand at the beginning of the second
quarter is 25% of the second quarter sales = .25 * 80,000 * 2 =
40,000. So purchases are 205,000- 40,000 = 165,000. Note that the
On average, 50% of credit sales are paid for in the month of the sale, 30% in the amount at the beginning of the year is a distractor and not used in the
month following sale, and the remainder are paid two months after the month of solution of this problem.
the sale. Assuming there are no bad debts, the expected cash inflow in March is:
148
disbursements total $187,000. The desired ending cash balance is $40,000. The
G. Hagos Corporation is working on its direct labor budget for the next two excess (deficiency) of cash available over disbursements for June will be:
months. Each unit of output requires 0.84 direct labor-hours. The direct A. $15,000
labor rate is $9.40 per direct labor-hour. The production budget calls for B. $1,000
producing 2,100 units in June and 1,900 units in July. If the direct labor work C. $17,000
force is fully adjusted to the total direct labor-hours needed each month, D. $204,000
what would be the total combined direct labor cost for the two months? Discussion: The ending balance of cash is $16,000 beginning balance +
A. $15,792.00 $188,000 receipts - $187,000 in disbursements = $17,000
B. $15,002.40
C. $16,581.60 10. Shuck Inc. bases its manufacturing overhead budget on budgeted direct labor-
D. $31,584.00 hours. The direct labor budget indicates that 8,100 direct labor-hours will be
Discussion: The Direct Labor cost for June and July is for 2100 + required in May. The variable overhead rate is $1.40 per direct labor-hour. The
1900 units = 4000 units. The labor for these units is .84 DLH per company's budgeted fixed manufacturing overhead is $100,440 per month, which
unit * 4000 = 3360 DLH. The amount employees are paid for includes depreciation of $8,910. All other fixed manufacturing overhead costs
3360 hours is 3360 * 9.40 = 31,584 represent current cash flows. The May cash disbursements for manufacturing
overhead on the manufacturing overhead budget should be:
H. Lunderville Inc. bases its selling and administrative expense budget on budgeted A. $102,870
unit sales. The sales budget shows 3,200 units are planned to be sold in December. B. $11,340
The variable selling and administrative expense is $3.10 per unit. The budgeted fixed C. $91,530
selling and administrative expense is $60,800 per month, which includes D. $111,780
depreciation of $6,720 per month. The remainder of the fixed selling and Discussion: On the overhead budget all overhead counts including the
administrative expense represents current cash flows. The cash disbursements for non-cash overhead of depreciation. Variable overhead of 8100 * 1.40 +
selling and administrative expenses on the December selling and administrative 100,440=11,340+100,440=111,780
expense budget should be:
A. $70,720
B. $54,080 Chapter 9
C. $64,000
D. $9,920 1. The purpose of a flexible budget is to:
Discussion: The cash disbursements for selling & administrative expenses A. remove items from performance reports that are not controllable by
are the variable selling & administrative expenses plus the cash-based fixed managers.
expenses. This is (3,200 *3.10)+ (60,800-6720)=9920+54080=64000 B. permit managers to reduce the number of unfavorable variances that are
reported.
I. Mosbey Inc. is working on its cash budget for June. The budgeted beginning cash
C. update the static planning budget to reflect the actual level of
balance is $16,000. Budgeted cash receipts total $188,000 and budgeted cash
activity of the period.
149
D. reduce the amount of conflict between departments when the master A. $10,930
budget is prepared. B. $11,470
Discussion: Definition C. $8,739
D. $8,780
2. Salyers Family Inn is a bed and breakfast establishment in a converted 100- Discussion: The planning budget uses the expected snow days of 16. So
year-old mansion. The Inn's guests appreciate its gourmet breakfasts and the amount planned would be 1900 + 430 * 16 = 1900 + 6880=8780.
individually decorated rooms. The Inn's overhead budget for the most
recent month appears below 4. Orscheln Snow Removal's cost formula for its vehicle operating cost is $2,800
per month plus $381 per snow-day. For the month of February, the company
planned for activity of 17 snow-days, but the actual level of activity was 14 snow-
days. The actual vehicle operating cost for the month was $7,920. The activity
variance for vehicle operating cost in February would be closest to:
A. $1,357 F
B. $1,357 U
C. $1,143 F
D. $1,143 U
Discussion: Activity variance is the difference due solely to the change
from 17 planned snow days to 14 actual snow days. The planning budget
cost is 2800+381*17=9277. The flexible budget cost is 2800 + 381 * 14 =
8134. This is a favorable variance because costs are LESS. The amount is
The Inn's variable overhead costs are driven by the number of guests. 9277-8134=1,143
What would be the total budgeted overhead cost for a month if the activity
level is 53 guests? 5. Farver Air uses two measures of activity, flights and passengers, in the cost
A. $7,159.20 formulas in its budgets and performance reports. The cost formula for plane
B. $6,680.60 operating costs is $44,420 per month plus $2,008 per flight plus $1 per passenger.
C. $7,184.80 The company expected its activity in May to be 80 flights and 281 passengers, but
D. $26,154.40 the actual activity was 81 flights and 277 passengers. The actual cost for plane
Discussion: Variable overhead per unit * actual guests + Fixed overhead operating costs in May was $199,650. The spending variance for plane operating
= Total overhead; (148.2+216.6)/57*53+(170+4310+2340) = 7159.2 costs in May would be closest to:
A. $5,691 F
3. Wadhams Snow Removal's cost formula for its vehicle operating cost is $1,900 B. $7,695 U
per month plus $430 per snow-day. For the month of December, the company C. $7,695 F
planned for activity of 16 snow-days, but the actual level of activity was 21 snow- D. $5,691 U
days. The actual vehicle operating cost for the month was $11,470. The vehicle Discussion: The spending variance is the difference between the flexible budget
operating cost in the planning budget for December would be closest to: and actual costs. The flexible budget cost is 44420+2008*81 flights + 1*277
150
passengers = 207345. The actual costs were 199650. The variance is favorable
because actual costs were less than the flexible budget. The amount is 207345-
199650=7695
6. Lantto Air uses two measures of activity, flights and passengers, in the cost
formulas in its budgets and performance reports. The cost formula for plane
operating costs is $34,810 per month plus $2,850 per flight plus $12 per
passenger. The company expected its activity in June to be 70 flights and 292
passengers, but the actual activity was 69 flights and 291 passengers. The actual
cost for plane operating costs in June was $236,550. The plane operating costs in
the flexible budget for June would be closest to:
A. $237,814
B. $234,952 Actual results for April:
C. $236,550
D. $234,417
Discussion: The flexible budget uses the parameters of the planning budget at the
actual activity levels: 34810+2850*69+12*291=34810+196650+3492=234952
Use the following information for questions 7 to 10.
MacPhail Corporation manufactures and sells a single product. The company 7. The revenue variance for April would be closest to:
uses units as the measure of activity in its budgets and performance reports. A. $1,645 F
During April, the company budgeted for 5,600 units, but its actual level of activity B. $1,645 U
was 5,650 units. The company has provided the following data concerning the C. $3,840 U
formulas used in its budgeting and its actual results for April: D. $3,840 F
Discussion: Flexible Budget revenue = 43.90*5650 = 248035 vs. actual revenue
Data used in budgeting: of 244195. The difference is 3840 UNFAVORABLE because actual results are
less than the flexible budget amount.
8. The spending variance for direct materials in April would be closest to:
A. $3,215 U
B. $2,260 U
C. $2,260 F
D. $3,215 F
151
Discussion: The flexible budget cost for direct materials is 19.10*5650 = 107915 Discussion: Labor efficiency variance is the difference between the standard
and actual results are 110,175. The difference is 2260 Unfavorable because actual number of hours used in production and the actual number of hours used in
costs are more than flexible budget expected costs. production times the standard wage rate per hour. So (C) and (D) are wrong.
Unfavorable means it reduces income and that happens when the actual hours
9. The spending variance for manufacturing overhead in April would be closest are more.
to:
A. $875 F 2. Variable manufacturing overhead is applied to products on the basis of standard
B. $970 U direct labor-hours. If the direct labor efficiency variance is unfavorable, the
C. $970 F variable overhead efficiency variance will be:
D. $875 U A. favorable.
Discussion: The spending variance for manufacturing overhead is based on the B. unfavorable.
difference between the actual results of $47,565 and the flexible budget results of C. either favorable or unfavorable.
$48,535 (37800+1.9*5650). The difference is 970 and is favorable because actual D. zero.
costs are less. Discussion: The variable overhead efficiency variance is the difference between
the standard number of direct labor hours and the actual number of direct labor
10. The overall revenue and spending variance (i.e., the variance for net operating hours times the standard variable overhead rate per hour. So the difference in
income in the revenue and spending variance column on the flexible budget direct labor hours is a factor in both the labor efficiency variance and the
performance report) for April would be closest to: overhead efficiency variance
A. $4,880 U
B. $4,090 F 3. Last month 75,000 pounds of direct material were purchased and 71,000
C. $4,090 U pounds were used. If the actual purchase price per pound was $0.50 more than the
D. $4,880 F standard purchase price per pound, then the materials price variance was:
Discussion: The Flexible Budget NOI= (43.90-28.10)*5650-61700=27570; The A. $2,000 F
actual NOI = 244195-36105-110175-47565-27660=22690; The difference B. $37,500 F
between the flexible budget and the actual results is 4,880. This is unfavorable C. $37,500 U
because the actual income is less than the flexible budget income. D. $35,500 U
Discussion: The material price variance = the difference in price between
Chapter 10 standard price per pound and actual price per pound times the amount purchased.
.50 * 75000 = 37500. This is unfavorable because actual purchase price is more.
1. If the labor efficiency variance is unfavorable, then
A. actual hours exceeded standard hours allowed for the actual output. 4. The following materials standards have been established for a particular
B. standard hours allowed for the actual output exceeded actual hours. product:
C. the standard rate exceeded the actual rate.
D. the actual rate exceeded the standard rate.
152
The following data pertain to operations concerning the product for the last
month: What is the labor efficiency variance for the month?
A. $13,805 U
B. $13,530 U
C. $15,305 U
D. $15,305 F
Discussion: The labor efficiency variance is the standard quantity * standard
price – actual quantity * standard price = 4.0 hours * 1,500 units *$12.30 per hour
– 7100 hours * $12.30 per hour = 1325. It is unfavorable because actual quantity
What is the materials quantity variance for the month? is 7100 and the standard quantity is 6000.
A. $19,460 F
B. $9,730 U 6. The following labor standards have been established for a particular product:
C. $10,115 U
D. $20,230 F
Discussion: The materials quantity variance is the difference between the
standard quantity * standard price and the actual quantity times standard price.
7.3 pounds per unit*$14.45 per pound*1000 units – 5900*$14.45 = 20230
FAVORABLE because the standard quantity (7300) is more than the actual The following data pertain to operations concerning the product for the last
quantity (5900) month:
5. The following labor standards have been established for a particular product:
What is the labor rate variance for the month?

The following data pertain to operations concerning the product for the last A. $1,325 U
month: B. $1,780 F
C. $430 F
D. $430 U
153
Discussion: Labor rate variance = Actual quantity * standard price – actual C. $17,100 unfavorable
quantity * actual price = 5300 * 17.55 – 94340 = 1325. It is unfavorable because D. $17,100 favorable
AQ*SP = $93,015, which is LESS than the actual cost of $94,340. Discussion: The direct materials quantity variance is standard price * standard
quantity – standard price * actual quantity = 1.80 * 8 * 19000 – 1.8 * 142,500 =
Use the following information for questions 7 to 10 273600-256500 = 17,100. It is favorable because the cost at the standard quantity
is more than at the actual quantity. Note that the quantity variance uses the
Arrow Industries uses a standard cost system in which direct materials inventory amount USED and not the amount PURCHASED.
is carried at standard cost. Arrow has established the following standards for the
prime costs of one unit of product. 8. The direct labor rate variance for May is:
A. $2,200 favorable
B. $1,900 unfavorable
C. $2,000 unfavorable
D. $2,090 favorable
Discussion: Direct labor rate variance = standard price * actual quantity – actual
price * actual quantity = 8 * 5000 – 37800 = 40,000 – 37,800=2200. This is
favorable because the expected cost at the standard rate is more than the actual
During May, Arrow purchased 160,000 pounds of direct material at a total cost of cost.
$304,000. The total direct labor wages for May were $37,800. Arrow
manufactured 19,000 units of product during May using 142,500 pounds of direct 10. The direct labor efficiency variance for May is:
material and 5,000 direct labor-hours. A. $2,200 favorable
B. $2,000 favorable
7. The direct materials price variance for May is: C. $2,000 unfavorable
A. $16,000 favorable D. $1,800 unfavorable
B. $16,000 unfavorable Discussion: The direct labor efficiency = standard price * standard quantity –
C. $14,250 favorable standard price * actual quantity = 8 * .25 * 19,000 – 8 * 5000 = 38,000 – 40,000 =
D. $14,250 unfavorable 2000. This is unfavorable because the expected cost at the standard quantity is
Discussion: Direct materials price variance = Actual quantity * standard price – less than the actual cost at the actual quantity.
actual quantity * actual price = 1.80 * 160,000 – 304000 = 16,000. This is
unfavorable because at the standard price the cost of materials would have been Chapter 11
$288,000, which is less than the actual cost at $304,000. Note that the price
variance uses the amount PURCHASED and not the amount USED. 1. Turnover is computed by dividing average operating assets into:
A. invested capital.
8. The direct materials quantity variance for May is: B. total assets.
A. $14,400 unfavorable C. net operating income.
B. $1,100 favorable D. sales.
154
Discussion: Definition
5. Average operating assets are $110,000, net operating income is $23,100, and
2. Which of the following will not result in an increase in the residual income, sales are $300,000. What is the profit margin?
assuming other factors remain constant? A. 7.70%
A. An increase in sales. B. 21.00%
B. An increase in the minimum required rate of return. C. 36.67%
C. A decrease in expenses. D. 92.30%
D. A decrease in operating assets. Discussion: Profit Margin = Net operating income / sales = 23100/300000=7.7%
Discussion: Residual income = Net operating income – (Average Operating
Assets * Minimum Required Rate of Return. An increase in minimum required 7. A company's current net operating income is $16,800 and its average operating
rate of return increases the amount deducted from net operating income to get assets are $80,000. The company's required rate of return is 18%. A new project
residual income, so it makes residual income smaller. (A) and (C) increase net being considered would require an investment of $15,000 and would generate
operating income. (D) makes the amount deducted smaller. annual net operating income of $3,000. What is the residual income of the new
project?
3. Which of the following is true? A. 20.8%
I. A profit center has control over both cost and revenue. B. 20%
II. An investment center has control over invested funds, but not over C. ($150)
costs and revenue. D. $300
III. A cost center has no control over sales. Discussion: Residual income = net operating income- (average operating assets
A. Only I * minimum required rate of return)=3,000-(15,000*.18)=3000-2,700=300
B. Only II
C. Only I and III 8. Galanis Corporation keeps careful track of the time required to fill orders. Data
D. Only I and II concerning a particular order appear below:
Discussion: Definitions
4. Average operating assets are $110,000 and net operating income is $23,100.
The company invests $25,000 in new assets for a project that will increase net
operating income by $4,750. What is the return on investment (ROI) of the new
project?
A. 21%
B. 19% The throughput time was:
C. 18.5% A. 38.8 hours
D. 20% B. 33.4 hours
Discussion: Return on investment = net operating income / average operating
assets=23100/110000= 21%
155
C. 14.1 hours A. The percentage of customers that report they would recommend our company
D. 5.4 hours to others
Discussion: Throughput time includes process time, inspection time, move time B. The percentage of employees that received certifications in their area of
and queue time: 1.4 +.4+3.6+8.7=14.1 expertise
C. The percentage of production that passed quality controls
9. Niemiec Corporation keeps careful track of the time required to fill orders. The D. The sales growth over the previous year
times recorded for a particular order appear below: Discussion: Learning and Growth pertains to measures about employees
and their competencies.
Chapter 12
1. The opportunity cost of making a component part in a factory with no excess

capacity is the:
A. variable manufacturing cost of the component.
B. fixed manufacturing cost of the component.
The manufacturing cycle efficiency (MCE) was closest to: C. total manufacturing cost of the component.
A. 0.20 D. net benefit foregone from the best alternative use of the capacity required.
B. 0.06 Discussion: For example, if the factory outsources making the headlights for its
C. 0.12 vehicles, then it will have the floor space to set up another assembly line to meet
D. 0.96 demand. So the net operating income of the second assembly line would be an
Discussion: MCE = process time / throughput time = opportunity cost in the Make or Buy decision.
1.5/((2.6+8.5+1.5+.2)=1.5/12.8=11.7% 2. Freestone Company is considering renting Machine Y to replace Machine X. It
is expected that Y will waste less direct materials than does X. If Y is rented, X
9. Which are the groups of performance measures on a balanced scorecard? will be sold on the open market. For this decision, which of the following factors
A. financial measures, customer measures, internal business process is (are) relevant?
measures, and external business process measures. A. Cost of direct materials used only
B. Unit, Batch, Product, and sustaining measures B. Resale value of Machine X only
C. Operating and non-operating measures C. Both cost of direct materials and resale value of Machine X
D. Product measures, Selling measures, and Administrative measures D. Neither Cost of direct materials used nor resale value of Machine X
Discussion: The balanced scorecard creates measures across the units of a Discussion: Relevant costs differ between the two alternatives.
company and not just financial measures. 3. When there is a production constraint, a company should emphasize the
products with:
10. Which of the following would be a measure in the category of Learning and A. the highest unit contribution margins.
Growth for a balanced scorecard? B. the highest contribution margin ratios.
156
C. the highest contribution margin per unit of the constrained resource. 6. Peluso Company, a manufacturer of snowmobiles, is operating at 70% of plant
D. the highest contribution margins and contribution margin ratios. capacity. Peluso's plant manager is considering making the headlights now being
Discussion: The highest contribution margin alone isn’t enough. Since there is a purchased from an outside supplier for $11 each. The Peluso plant has idle
constrained resource, the company must use that constrained resource most equipment that could be used to manufacture the headlights. The design engineer
profitably and obtain the most profit per unit of the constrained resource. estimates that each headlight requires $4 of direct materials, $3 of direct labor,
4. Cung Inc. has some material that originally cost $68,400. The material has a and $6.00 of manufacturing overhead. Forty percent of the manufacturing
scrap value of $30,100 as is, but if reworked at a cost of $1,400, it could be sold overhead is a fixed cost that would be unaffected by this decision. A decision by
for $30,800. What would be the incremental effect on the company's overall profit Peluso Company to manufacture the headlights should result in a net gain (loss)
of reworking and selling the material rather than selling it as is as scrap? for each headlight of:
A. -$69,100 A. $(2.00)
B. -$700 B. $1.60
C. $29,400 C. $0.40
D. -$39,000 D. $2.80
Discussion: Sell or Process Further Decision. The company will LOSE $700 if it DISCUSSION: Make or Buy Decision. The company should select the “Make”
processes further. because the cost is less for the firm. There is 40%*6=2.40 of manufacturing
The revenue at split off: $30,100. overhead that is irrelevant because it is present whether the company Makes or
The net revenue if processed further: $30,800-1400=$29,400 Buys.
Make Buy Difference
5. A study has been conducted to determine if Product A should be dropped. Sales Cost to Supplier 11
of the product total $200,000 per year; variable expenses total $140,000 per year. Direct Material 4
Fixed expenses charged to the product total $90,000 per year. The company Direct Labor 3
estimates that $40,000 of these fixed expenses will continue even if the product is Manufacturing Overhead -- Avoidable 60%*6=3.60
dropped. These data indicate that if Product A is dropped, the company's overall TOTAL 10.60 11 .40
net operating income would:
A. decrease by $20,000 per year
B. increase by $20,000 per year 7. A customer has requested that Inga Corporation fill a special order for 2,000
C. decrease by $10,000 per year units of product K81 for $25.00 a unit. While the product would be modified
D. increase by $30,000 per year slightly for the special order, product K81's normal unit product cost is
Discussion: Drop or Add Decision. $19.90:
The contribution to net operating income is Revenue – Avoidable Expenses=
200,000-140,000-(90000-40000)=10,000. Product A makes a $10,000
contribution to the company, so the company’s income would decrease by
$10,000 per year if the product were discontinued.
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Rank the products in order of their current profitability from most profitable to
least profitable. In other words, rank the products in the order in which they
should be emphasized.
A. OP, KU, YY
B. YY, OP, KU
C. KU, YY, OP
Direct labor is a variable cost. The special order would have no effect on the D. YY, KU, OP
company's total fixed manufacturing overhead costs. The customer would like
modifications made to product K81 that would increase the variable costs by Discussion:
$1.20 per unit and that would require an investment of $10,000 in special KU has a contribution margin of $104.89-$82.11=$22.78; CM per
molds that would have no salvage value. minute=22.78/1.7=13.4 per minute
OP has a contribution margin of $528.09-$429.78= 98.31; CM per minute =
This special order would have no effect on the company's other sales. The 98.31/8.7=11.3
company has ample spare capacity for producing the special order. If the YY has a contribution margin of $558.03-420.08=137.95; CM per minute =
special order is accepted, the company's overall net operating income 137.95/8.9=15.5
would increase (decrease) by: RANK YY, then KU, then OP
A. $13,000
B. $(9,700) 9. Wright Company produces products I, J, and K from a single raw material input.
C. $10,200 Budgeted data for the next month follows:
D. $(2,200)
Discussion: The increase to net operating income will be the contribution
margin from the special order less the additional investment. Revenue =
25*2000=50000; Variable expenses = (5.60+4+2.70+ 1.20)*2000 = 13.50 *
2000 = 27,000; Contribution margin = 50,000 – 27,000 = 23,000.
Contribution margin less additional investment = 23,000 – 10,000 = 13,000
8. An automated turning machine is the current constraint at Naik Corporation.

Three products use this constrained resource. Data concerning those products
appear below: If the cost of the raw material input is $78,000, which of the products should be
processed beyond the split-off point?
A. Project J only
B. Project I and Project J only
C. Project J and Project K only
D. Project I and Project K only
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If the company produces industrial fiber and refined sugar, the company gets 27 + 41 =
Project I 68
Sell at split off for $10 The profit is 68-65 = 3
Sell after $2 of processing costs for $15: $15-2=$13 This is more profit
Project J
Sell at split off for $12
Sell after $4 of processing costs for $15: $15-4=$11 This is less profit
Project K
Sell at split off for $15
Sell after $4 of processing costs for $20: $20-$4=$16 This is more profit
10. Galluzzo Corporation processes sugar beets in batches. A batch of sugar beets
costs $51 to buy from farmers and $14 to crush in the company's plant. Two
intermediate products, beet fiber and beet juice, emerge from the crushing
process. The beet fiber can be sold as is for $20 or processed further for $18 to
make the end product industrial fiber that is sold for $45. The beet juice can be
sold as is for $41 or processed further for $21 to make the end product refined
sugar that is sold for $62. How much profit (loss) does the company make by
processing one batch of sugar beets into the end products industrial fiber and
refined sugar?
A. $(104)
B. $(4)
C. $7
D. $3
Beet Fiber
A) Sell for $20 as is, or
B) Sell for $45 after costs of $18 = 45-18=$27
Beet Juice
A) Sell for $41,or
B) Sell for 62 after costs of $21= 62-21=$41
Sugar Beets cost $51 for raw materials + $14 for crushing: $65
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MODULE 8 - BUDGETING D. To make sure the company expands its operations.
THEORIES: 5. Which of the following does not contribute to an effective budgeting?

Basic Concepts A. Top management is involved in budgeting.
1. The concept of “management by exception” refers to management’s consideration of B. To give each manager a free hand in the preparation of the budget, the data within the master
A. only those items that vary materially from expectations. budget are flexible.
B. only rare events. C. The organization is divided into responsibility units.
C. samples selected at random. D. There is communication of results.
D. only significant unfavorable deviations.
6. The budgets that are based on a very high levels of performance, like expected costs using ideal
8. A formal written statement of management’s plans for the future, packaged in financial terms, is a: standards,
A. Responsibility report. C. Cost of production report. A. assist in planning the operations of the company
B. Performance report. D. Budget. B. stimulate people to perform better than they ordinarily would
C. are helpful in evaluating the performance of managers
2. Budgets are related to which of the following management functions? D. can lead to low levels of performance
A. Planning C. Control
B. Performance evaluation D. all of these 7. Which of the following statements is incorrect?
A. An imposed budget is the same as a participative budget.
22. Budgeting supports the planning process by encouraging all of the following activities except: B. Preparation of the budget would be the responsibility of each responsibility unit.
A. Requiring all organizational units to establish their goals for the coming period. C. Top management’s support is necessary to promote budget participation.
B. Increasing the motivation of managers and employees by providing agreed-upon expectations. D. The top management should review and approve each responsibility unit’s budget.
C. Improving overall decision making by considering all viewpoints, options, and cost control
programs. 9. The primary role of the budget director and the budgeting department is to
D. Directing and coordinating operations during the period. A. Settle disputes among operating executives during the development of the annual operating
plan.
3. Which of the following advantages does a budget mostly provide? B. Develop the annual profit plan by selecting the alternatives to be adopted form the suggestions
A. Coordination is increased. submitted by the various operating segments.
B. Planning is emphasized. C. Compile the budget and manage the budget process.
C. Communication is continuous. D. Justify the budget to the corporate planning committee of the board of directors.
D. Comparison of actual versus budgeted data.
10. The primary variable affecting active participation and commitment to the budget and the control
24. Which of the following is NOT an advantage of budgeting? system is
A. It forces managers to plan. A. Management efforts to achieve the budget rather than optimize results.
B. It provides resource information that can be used to improve decision making. B. The rigid adherence to the budget without recognizing changing conditions.
C. It aids in the use of resources and employees by setting a benchmark that can be used for the C. Top management involvement in support of the budget.
subsequent evaluation of performance. D. The opportunity budgeting gives to risk-taker managers for department growth.
D. It provides organizational independence.
12. A variant of fiscal-year budgeting whereby a twelve-month projections into the future is maintained at
4. Which of the following is least likely a reason why a company prepares its budget? all times:
A. To provide a basis for comparison of actual performance A. Forecasting. C. Continuous budgeting.
B. To communicate the company’s plans throughout the entire business organization B. Zero-based budgeting. D. Calendar budgeting.
C. To control income and expenditure in a particular period.
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35. The method of budgeting which adds one month’s budget to the end of the plan when the current A. Justify expenditures that are increases over the prior period’s budgeted amount.
month’s budget is dropped from the plan refers to B. Justify all expenditures, not just increases over last year’s amount.
A. Long-term budget C. Incremental budget C. Maintain a full-year budget intact at all times.
B. Operations budget D. Continuous budget D. Maintain a budget with zero increases over the prior period.
27. A continuous budget 13. Zero-based budgeting:

A. is a budget that is revised monthly or quarterly. A. involves the review of changes made to an organization’s original budget.
B. is a medium term plan that consists of more than 2 years’ projections. B. does not provide a summary of annual projections.
C. is appropriate only for use of a not-for-profit entity. C. involves the review of each cost component from a cost/benefit perspective.
D. works best for an entity that can reliably forecast events a year or more into the future. D. emphasizes the relationship of effort to projected annual revenues.
37. “Incremental budgeting” refers to 18. A systematized approach known as zero-based budgeting:
A. line-by-line approval of expenditures A. Classifies the budget by the prior year’s activity and estimates the benefits arising from each
B. setting budget allowances based on prior year expenditures activity.
C. requiring top management approval of increases in budgets B. Commence with either the current level of spending or projected whichever is lower.
D. using incremental revenues and costs in budgeting C. Presents planned activities for a period of time but does not present a firm commitment.
D. Divides the activities of individual responsibility centers into a series of packages that are
49. A budget plan for annual fixed costs that arises from top management decisions directly reflecting prioritized.
corporate policy.
A. Flexible budget. C. Discretionary budget. 20. Which of the following statements about Zero-based budgeting is incorrect?
B. Static budget. D. Program budget. A. All activities in the company are organized into break-up units called packages.
B. All costs have to be justified every budgeting period.
36. The term “decision package” relates to C. The process is not time consuming since justification of costs can be done as a routine matter.
A. comprehensive budgeting C. program budgeting D. Zero-based budgeting includes variable costs only.
B. zero-based budgeting D. line budgeting
34. Budgeting expenditures by purpose is called
41. The budget approach that is more relevant when the continuance of an activity or operation must be A. program budgeting C. zero-based budgeting
justified on the basis of its need or usefulness to the organization. B. line budgeting D. flexible budgeting
A. the incremental approach C. the baseline approach
B. the zero-based approach D. both a and b are true 28. A static budget is not appropriate in evaluating a manager's effectiveness if a company has
A. substantial fixed costs.
11. The process of developing budget estimates by requiring all levels of management to estimate sales, B. substantial variable costs.
production, and other operating data as though operations were being initiated for the first time is C. planned activity levels that match actual activity levels.
referred to as: D. no variable costs.
A. Forecasting. C. Continuous budgeting.
B. Zero-based budgeting. D. Program budgeting. 45. Flexible budgeting is a reporting system wherein the
A. Budget standards may be adjusted at management’s discretion.
38. Which of the following is a contemporary approach to budgeting? B. Planned level of activity is adjusted to the actual level of activity before the performance report is
A. incremental approach C. baseline approach prepared.
B. zero-based approach D. both a and b are true C. Reporting dates vary according to the managerial levels of the users.
D. Packages of activities vary from period to period.
51. Zero-base budgeting requires managers to
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15. A budget that presents the plan for a range of activity so that the plan can be adjusted for changes in C. Program planning and budgeting system.
activity levels is referred to as: D. Participative system.
A. Zero-based budgeting.
B. Continuous budgeting. 21. A budget that identifies revenues and costs with an individual controlling their incurrence is
C. Flexible budgeting. A. Master budget C. Product budget
D. Program planning and budgeting system. B. Responsibility budget D. None of the above
16. A flexible budget is 25. The difference between an individual's submitted budget projection and his or her best estimate of
A. one that can be changed whenever a manager so desires the item being projected is an example of
B. adjusted to reflect expected costs at the actual level of activity A. padding the budget
C. one that uses the formula total costs = cost per unit x units produced B. adhering to zero-based budgeting assumptions
D. the same as a continuous budget C. creating budgetary slack
D. being incongruent with participative budgeting
26. A series of budgets for varying levels of activity is a:
A. Variable cost budget. C. Master budget. 43. Budget slack is a condition in which
B. Flexible budget. D. Zero-based budget. A. Demand is low at various times of the year
B. Excess machine capacity exists in some areas of the plant
48. If a company wishes to establish a factory overhead budget system in which estimated costs can be C. There is an intentional overestimate of expenses or an underestimate of revenues
derived directly from estimates of activity levels, it should prepare a D. Managers grant favored employees extra time-off
A. flexible budget. C. Discretionary budget.
B. Program budget. D. Manufacturing budget. 39. The procedure for setting profit objectives in which the determination of profit objectives is
subordinated to the planning, and the objectives emerge as the product of the planning itself is the
46. The basic difference between a master budget and a flexible budget is that a A. a priori method C. practical method
A. Flexible budget considers only variable costs but a master budget considers all costs. B. theoretical method D. a posteriori method
B. Flexible budget allows management latitude in meeting goals whereas a master budget is based
on a fixed standard. 40. The procedure for setting profit objectives in which management specifies a given rate of return that it
C. Master budget is for an entire production facility but a flexible budget is applicable to single seeks to realize in the long run by means of planning toward that end is the
department only. A. a priori method C. pragmatic method
D. Master budget is based on one specific level of production and a flexible budget can be prepared B. theoretical method D. ad hoc method
for any production level within a relevant range
50. Budgeting process in which information flows top down and bottom up is referred to as:
47. Which of the following is a difference between a static budget and a flexible budgets? A. Continuous budgeting. C. Perpetual budgeting
A. A flexible budget includes only variable costs; a static budget includes only fixed costs. B. Participative budgeting D. Joint budgeting
B. A flexible budget includes all costs, a static budget includes only fixed costs.
C. A flexible budget gives different allowances for different levels of activity, a static budget does 42. Which of the following is not a potential problem with participative budgeting?
not. A. setting standards that are either too high or too low
D. There is no difference between the two. B. padding the budget
C. build slack into the budget
17. A system that classifies budget requests by activity and estimates the benefits arising from each D. all of the above are potential problems
activity:
A. Incremental budgeting system. 33. The ideal financial planning process would be
B. Static budgeting system. A. top-down planning.
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B. bottom-up planning. 31. Several sales forecasts are available from different sources and the managers have good ideas about
C. a combination of top-down and bottom-up planning. their likelihoods. This situation call for the use of
D. None of the above A. the expected value concept C. indicator methods
B. historical analysis D. a scatter diagram
44. A common starting point in the budgeting process is
A. expected future net income. C. to motivate the sales force. 53. An overly optimistic sales budget may result in
B. past performance. D. a clean slate, with no expectations. A. increases in selling prices late in the year.
B. insufficient inventories.
57. Which one of the following is an external factor that would need to be considered in forming an initial C. increased sales during the year.
budget proposal? D. excessive inventories.
A. changes in product design
B. introduction of a new product 56. Which of the following budgets provides the data for the preparation of the direct labor cost budget?
C. competitors' actions A. Direct materials purchase budget. C. Sales budget.
D. adoption of a new manufacturing process B. Cash budget. D. Production budget.
14. Operating budgets are 55. The increased use of automation and less use of the work force in companies has caused a trend
A. a forecast of expected operating expenses. towards an increase in
B. a forecast of operating expenses and related revenues. A. both variable and fixed costs.
C. a forecast of units of production. B. fixed costs and a decrease in variable costs.
D. concerned with the income-generating activities of a firm. C. variable costs and a decrease in fixed costs.
D. variable costs and no change in fixed costs.
54. What is the proper preparation sequencing of the following budgets?
1. Budgeted Balance Sheet 32. In preparing a cash budget, which of the following is normally the starting point for projecting cash
2. Sales Budget requirements?
3. Selling and Administrative Budget A. Fixed assets. C. Accounts receivable.
4. Budgeted Income Statement B. Sales. D. Inventories.
A. 1, 2, 3, 4 C. 2, 3, 4, 1
B 2, 3, 1, 4 D. 2, 4, 1, 3 52. Recognition of the many uncertainties in budgeting is exemplified by companies normally
A. forecasting sales
29. In estimating the sales volume for a master budget, which of the following techniques may be used to B. establishing minimum required cash balances
improve the projections? C. forecasting only fixed costs
A. Brainstorming. D. omitting expected dividend payments from budgeted disbursements
B. Statistical analysis.
C. Estimating from previous sales volume. 19. Which of the following statements is True?
D. All of these are useful. A. Under zero-based budgeting, a manager is required to start at zero budget levels each period, as if
the programs involved were being initiated for the first time.
30. Using the concept of ‘expected value” in sales forecasting means that the sales forecast to be used is B. The primary purpose of the cash budget is to show the expected cash balance at the end of the
A. developed using the indicator method budget period.
B. the sum of the sales expected by individual managers C. Budget data are generally prepared by top management and distributed downward in an
C. based on expected selling prices of the products organization.
D. based on probabilities D. The budget committee is responsible for preparing detailed budget figures in an organization.
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23. Which of the following is a valid statement? B. P100,000 D. P215,000

A. Responsibility budget identifies revenue and costs with the individual responsible for their
incurrence. Production budget
B. The best way to establish budget figures is to use last year’s actual cost and activity data as this 137. Montalban Company’s sales budget shows the following expected sales for the following year:
year’s budget estimates. Quarter Units

C. A sales budget and a sales forecast are the same thing. First 120,000
D. The primary purpose of the cash budget is to show the expected cash balance at the end of the Second 160,000
budget period. Third 90,000
Fourth 110,000
PROBLEMS:
Total 480,000
Cost estimation formula
137. Management has prepared a graph showing the total costs of operating branch warehouses The inventory at December 31 of the prior year was budgeted at 36,000 units. The quantity of
throughout the country. The cost line crosses the vertical axis at P400,000. The total cost of finished goods inventory at the end of each quarter is to equal 30% of the next quarter’s budgeted
operating one branch is P650,000. The total cost of operating ten branches is P2,900,000. For sales of units.
purposes of preparing a flexible budget based on the number of branch warehouses in operation, How much should the production budget show for units to be produced during the first quarter?
what formula would be used to determine budgeted costs at various levels of activity? A. 48,000 C. 132,000
A. Y = P400,000 + P250,000X C. Y = P650,000 + P400,000X B. 96,000 D. 144,000
B. Y = P400,000 + P290,000X D. Y = P650,000 + P250,000X 137. Lorie Company plans to sell 400,000 units of finished product in July an anticipates a growth rate in
Sales budget sales of 5% per month. The desired monthly ending inventory in units of finished product is 80% of
Purchases budget – merchandising concern the next month’s estimated sales.
137. PTO Company desires an ending inventory of P140,000. It expects sales of P800,000 and has a There are 300,000 finished units in the inventory on June 30. Each unit of finished product requires
beginning inventory of P130,000. Cost of sales is 65% of sales. Budgeted purchases are four pounds of direct materials at a cost of P2.50 per pound. There are 800,000 pounds of direct
A. P 530,000 C. P 810,000 materials in the inventory on June 30.
B. P 790,000 D. P1,070,000 How many units should be produced for the three-month period ending September 30?
A. 1,260,000 C. 1,331,440
137. Calypso Co. has projected sales to be P600,000 in January, P750,000 in February, and P800,000 in B. 1,328,000 D. 1,424,050
March. Calypso wants to have 50% of next month’s sales needs on hand at the end of a month. If
Calypso has an average gross profit of 40%, what are the February 28 purchases? Ending inventory budget
137. If the required direct materials purchases are 8,000 pounds and the direct materials required for
A. P465,000 C. P775,000
B. P310,000 D. P428,000 production is three times the direct materials purchases, and the beginning direct materials are three
and a half times the direct materials purchases, what are the desired ending direct material in
137. Blue Company budgeted purchases of P100,000. Cost of sales was P120,000 and the desired ending pounds?
inventory was P42,000. The beginning inventory was A. 20,000 C. 12,000
A. P20,000 C. P42,000 B. 4,000 D. 32,000
B. P32,000 D. P62,000
Raw materials usage budget
137. Minerva Company sells a single product. Budgeted sales for the year are anticipated to be 640,000
137. The payment schedule of purchases made on account is: 60% in the time period of purchase, 30% in
the following time period, and 10% in the subsequent time period. Total credit purchases were units. The estimated beginning and ending finished goods inventory are 108,000 and 90,000,
P200,000 in May, and P100,000 in June. Total payments on credit purchases were P140,000 in respectively. A production of one unit requires the following materials:
June. What were the credit purchases in the month of April? Material LL 0.50 lb. @ P0.60
A. P200,000 C. P145,000 Material MM 1.00 lb. @ P1.70
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Material NN 1.20 lb. @ P1.00 production requirements. Each unit of product requires two pounds of materials. The production
What are the respective peso amounts of each material to be used in production during the year? budgets in units consist of the following:.
Material LL Material MM May 1,000
Material NN June
July
1,200
1,300
A. P181,200 P1,026,800 P724,800 August 1,600
B. P181,200 P1,026,800 P746,400 Raw material purchases in June would be
C. P186,600 P1,057,400 P746,400 A. 2,600 pounds C. 2,400 pounds
D. P186,600 P1,057,400 P724,800 B. 1,800 pounds D. 2,700 pounds
Raw materials purchases budget 137. Sales Company is budgeting sales of 300,000 units of its only product for the coming year.
137. If there were 30,000 pounds of raw material on hand on January 1, 60,000 pounds are desired for
Production of one unit of product requires three pounds of Material Q and 2 pounds of Material L.
inventory at December 31, and 180,000 pounds are required for annual production, how many Inventory units at the beginning of the year are:
pounds of raw material should be purchased during the year?
A. 150,000 pounds C. 120,000 pounds
Actual, Jan. 1 Budgeted, Dec 31
B. 240,000 pounds D. 210,000 pounds Finished goods 60,000 50,000
Material Q 80,000 60,000
137. Silver Bowl Company manufactures a single product. It keeps its inventory of finished goods at 75% the Material L 88,000 96,000
coming month’s budgeted sales. It also keeps its inventory of raw materials at 50% of the coming How many pounds of Material Q is Sales planning to buy during the coming year?
month’s budgeted production. Each unit of product requires two pounds of materials. The production A. 850,000 C. 862,000
budget is, in units: May, 1,000; June, 1,200; July, 1,300; august, 1,600. Raw material purchases in July B. 890,000 D. 908,000
would be
137. Strama Company prepares its budgets on annual basis. The following beginning and ending
A. 1,525 pounds C. 2,550 pounds
B. 2,900 pounds D. 3,050 pounds inventory unit levels are planned for the fiscal year of June 1, 2006 through May 31, 2007.
June 1, 2006 May 31, 2007
137. Each unit of finished product uses 6 kilograms of raw materials. The production and inventory budgets Raw material* 40,000 50,000
for May 2007 are as follows: Work-in-process 10,000 10,000
Beginning Inventory: Finished goods 80,000 50,000
Finished goods 15,000 units *Two (2) units of raw material are needed to produce each unit of finished product.
Raw materials 21,000 kg. If 500,000 finished units were to be manufactured during the 2006-2007 fiscal year by Strama
Budgeted unit sales 18,000 units Company, the units of raw material needed to be purchased would be
Planned ending inventory A. 1,000,000 units C. 1,020,000 units
Finished goods 11,400 units B. 1,010,000 units D. 990,000 units
Raw materials 24,400 kg.
During the production process, it is usually found that 10% of production units are scrapped as defective 137. Diliman Corporation includes the following quarterly budget for production:
and this loss occurs after the raw materials have been placed in process. Quarter Production
How many kilograms of raw materials should be purchased in June?
First 60,000 units
A. 89,800 C. 96,000
Second 45,000 units
B. 98,440 D. 99,400
Third 40,000 units
137. Fourth 65,000 units
Violet Company manufactures a single product. It keeps its inventory of finished goods at twice the
coming month’s budgeted sales, inventory of raw materials at 150% of the coming month’s budgeted Each unit of product requires 2.5 kilograms of direct materials. The company begins each quarter
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with inventory of direct materials equal to 25 percent of the total quarter’s material requirements. April P12,000
What is the budgeted purchases of materials for the second quarter? May 7,000
A. 113,750 C. 46,250 June 8,000
B. 109,375 D. 112,500 Seventy percent of sales are collected in the month of the sale, and the remainder is collected in the
following month.
Indirect labor costs Accounts receivable balance (April 1, 2007) P10,000
137. Namuco, Inc. uses flexible budgeting for cost control. During the month of September, Namuco, Inc.
Cash balance (April 1, 2007) 5,000
produced 14,500 units of finished goods with indirect labor costs of P25,375. Its annual master Minimum cash balance is P5,000. Cash can be borrowed in P1,000 increments from the local bank
budget reflects an indirect labor costs, a variable cost, of P360,000 based on an annual production of (assume no interest charges).
200,000 units. In the preparation of performance analysis for the month of September, how much How much cash would be collected in June from sales?
flexible budget should be allowed for indirect labor costs? A. P 7,700 C. P 8,000
A. P30,000 C. P25,375 B. P 8,500 D. P10,000
B. P29,167 D. P26,100
137. The Avelina Company has the following historical pattern on its credit sales.
Cash receipts budget 70 percent collected in month of sale
Sales 15 percent collected in the first month after sale
137. Generous Company began its operations on January 1 of the current year. Budgeted sales for the
10 percent collected in the second month after sale
first quarter are P240,000, P300,000, and P420,000, respectively, for January, February and March. 4 percent collected in the third month after sale
Generous Company expects 20% of its sales cash and the remainder on account. Of the sales on 2 percent uncollectible
account, 70% are expected to be collected in the month of sale, 25% in the month following the sale, The sales on open account have been budgeted for the last six months of 2007 are shown below:
and the remainder in the following month. July P 60,000
How much should Generous receive from sales in March? August 70,000
A. P304,800 C. P388,800 September 80,000
B. 294,000 D. P295,200 October 90,000
November 100,000
Credit sales December 85,000
137. Mendrez Company has a collection schedule of 60% during the month of sales, 15% the following
The estimated total cash collections during the fourth calendar quarter from sales made on open
month, and 15% subsequently. The total credit sales in the current month of September were account during the fourth calendar quarter would be
P80,000 and total collections in September were P57,000. What were the credit sales in July? A. P172,500 C. P265,400
A. P90,000 C. P45,000 B. P230,000 D. P251,400
B. P30,000 D. P32,000
137. The Le Amore Company had the following budgeted sales for the first half of the current year:
Cash collections Cash Sales Credit Sales
137. Obligacion Company has P299,000 in accounts receivable on January 1, 2006. Budgeted sales for
January P70,000 P340,000
January are P860,000. Obligacion expects to sell 20% of its merchandise for cash. Of the remaining February 50,000 190,000
sales, 75% are expected to be collected in the month of sale and the remainder the following month. March 40,000 135,000
The January cash collections from sales are: April 35,000 120,000
A. P815,000 C. P471,000 May 45,000 160,000
B. P691,000 D. P987,000 June 40,000 140,000
137. Adel Company has the following sales forecasts for the selected three-month period in 2007:
The company is in the process of preparing a cash budget and must determine the expected cash
Month Sales
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collections by month. To this end, the following information has been assembled:
Cash Sales Credit Sales
Collections on sales: 60% in month of sale January P600,000 P400,000
30% in month following sale February 300,000 500,000
10% in second month following sale March 400,000 600,000
The accounts receivable balance on January 1 of the current year was P70,000, of which P50,000 April 400,000 800,000
represents uncollected December sales and P20,000 represents uncollected November sales. Lazaro estimates that 70% of the credit sales will be collected in the month following the month of the
The total cash collected by Le Amore Company during the month of January would be: sale, with the balance collected in the second month following the sale. Based on these data, the
A. P410,000 C. P344,000 balance in accounts receivable on January 31 will be increased by
B. P254,000 D. P331,500 A. 400,000 C. P120,000
B. P280,000 D. P580,000
Accounts receivable balance
137. As of January 1, 2007, the Liberal Sales Company had an account receivable of P500,000. The
Cash disbursements
sales for January, February, and March were as follows: P1,200,000, P1,400,000 and P1,500,000, 137. Cascades Company, a merchandising firm, is preparing its master budget and has gathered the
respectively. Of each month’s sales, 80% is on account. 60% of account sales is collected in the following data to help budget cash disbursements:
month of sale, with remaining 40% collected in the following month. Budgeted data:
What is the accounts receivable balance as of March 31, 2007? Cost of goods sold P1,680,000
A. P720,000 C. P587,200 Desired decrease in inventories 70,000
B. P480,000 D. P600,000 Desired decrease in Accounts Payable 150,000
All of the accounts payables are for inventory purchases and all inventory items are purchased on
Credit to accounts receivable account. What are the estimated cash disbursements for inventories for the budget period?
137. Ironman Company is preparing its cash budget for the month ending November 30. The following
A. P1,460,000 C. P1,900,000
information pertains to Ironman’s past collection experience from its credit sales: B. P1,600,000 D. P1,760,000
Current month’s sales 12%
Prior month’s sales 75% 137. Albatross Company started its commercial operations on September 30 of the current year.
Sales two months prior to current month 6% Projected manufacturing costs for the first three months of operations are P1,568,000, P1,952,000,
Sales three months prior to current month 4% and P2,176,000, respectively. Depreciation, insurance, and property taxes represent P288,000 of
Cash discounts (2/30, net/90) 2% the estimated manufacturing costs. Insurance was paid on September 30, and property taxes will be
Doubtful accounts 1% paid in July next year. Seventy-five percent of the remainder of the manufacturing costs are
Credit sales: expected to be paid in the month in which they are incurred, with the balance to be paid in the
November – estimated P2,000,000 following month. The cash payments for manufacturing costs in the month of November are:
October 1,800,000 A. P1,568,000 C. P1,664,000
September 1,600,000 B. P1,952,000 D. P1,856,000
August 1,900,000
How much is the estimated credit to Accounts Receivable as a result of collections expected during Ending cash balance
November? 137. Albania Company expects its June sales to be P300,000, which is 25% higher than its May sales.
A. P1,730,200 C. P1,762,000 Purchases were P200,000 in May and are expected to be P240,000 in June. All sales are on credit
B. P1,757,200 D. P1,802,000 and are collected as follows: 80% in the month of the sale and 20% in the following month. All
payments in the month of sales are given 2% discount. Sixty percent of purchases are paid in the
Increase in accounts receivable month of purchase to take advantage of purchase term of 1/10, n/40. The remaining amount is paid
137. Lazaro Company will open a new store on January 1. Based on experience from its other retail
in the following month. The beginning cash balance on June 1 is P20,000. The ending cash balance
outlets, Lazaro is making the following sales projections:
167
on June 30 would be: A. P2,418,000 and P2,360,000 C. P2,250,000 and P2,436,000

A. P64,160 C. P80,640 B. P2,380,000 and P2,280,000 D. P3,570,000 and P3,420,000
B. P73,000 D. P85,440
137. The budgeted cash disbursements for the month of February are:
Comprehensive A. P2,929,000 C. P2,949,000
Question Nos. 30 through 33 are based on the following information: B. P2,873,790 D. P2,853,790
Apollo Merchandiser asks your services to develop cash and other budget information for the first quarter
of 2007. In December 31, the store had the following balance: 137. The amount of cash collected from sales during the month of January is:
Cash P 55,000 A. P3,338,760 C. P3,404,100
Accounts receivable 4,370,000 B. P3,551,160 D. P3,556,560
Inventories 3,094,000
Accounts payable 1,330,550 137. The number of units to be purchased during the month of March is:
A. 15,860 C. 12,000
The following information are relevant to 2007 operations: B. 12,260 D. 15,600
Sales:
a. Each month’s sales are billed on the last day of the month. Rajah Enterprises is a growing retailer of home care products. During the first four months of the
b. Customers are allowed a 3 percent discount if payment is made within 10 days after the billing following year, it forecasts the following sales and purchases:
date. Receivables are booked gross.
c. Sixty percent of the billings are collected within the discount period, twenty-five percent are Sales Purchases
collected by the end of the month, nine percent are collected by the end of the second month, January P7,200,000 P4,200,000
and six percent are considered entirely uncollectible. February 6,600,000 4,800,000
March 6,000,000 3,600,000
Purchases: April 7,800,000 5,400,000
1. Fifty four percent of all purchases and selling, general, and administrative expenses are paid in Rajah collects 70% of sales is collection during the month of sale, 20% the following month and 9% in the
the month purchased and the remainder in the following month. second month. 1% of sales are deemed uncollectible.
2. Each month’s units of ending inventory is equal to one hundred thirty percent of the next month’s
units of sales. In order to fully avail of the 2% discount, Rajah pays all the purchases by the tenth of the month following
3. The cost of each unit of inventory is P200. the month of purchase.
4. Selling, general, and administrative expenses, of which P20,000 is depreciation, are equal to
fifteen percent of the current month’s sales. Sales for the month of May are expected to be P6,600,000 and the amount of purchases are P6,000,000.
Operating expenses to be paid during the month of May will be P1,440,000 and the cash balance by May
Actual and projected sales are as follows: 1 is P2,200,000.
UNITS PESOS
November 11,800 P3,540,000 The Atlanta Corporation has forecast the following sales for the first seven months of the year:
December 12,100 3,630,000
January 11,900 3,570,000 January P120,000 May P120,000
February 11,400 3,420,000 February 160,000 June 200,000
March 12,000 3,600,000 March 180,000 July 220,000
April 12,200 3,660,000 April 240,000
137. The respective amounts of budgeted purchases for the months of January and February are: Monthly material purchases are set equal to 20 percent of forecasted sales for the next month. Of the total
168
material costs, 40 percent are paid in the month of purchase and 60 percent in the following month. Labor B. P408,900 D. P359,100
costs will run P60,000 per month, and fixed overhead is P30,000 per month. Interest payments on the debt
will be P45,000 for both March and June. Finally, Atlanta’s sales force will receive a 3 percent commission on 137. The cumulative amount of marketable securities purchased as of July 31 amounts to:
total sales for the first six months of the year, to be paid on June 30. A. P126,000 C. P143,300
B. 132,500 D. P 0
137. How much will be paid in the month of January for the purchase of materials?
A. P 27,200 C. P137,856 137. The amount of loan to be obtained to maintain a balance of P50,000 cash as of September 30 will be:
B. P117,200 D. P 33,600 A. P109.4 C. P 9.4
B. P 59.4 D. P 0.0
137. How much does Atlanta plan to disburse in the month of June?
A. P 41,600 C. P207,200 Question Nos. 39 through 45 are based on the following data:
B. P100,000 D. P117,200 The Ingo Corporation makes standard-size 2-inch fasteners, which it sells for P155 per thousand. Irine Tee,
the major stockholder, manages the inventory and finances of the company. She estimates sales for the
Question Nos. 36 through 38 are based on the following: following months to be:
Super Sales’ actual sales and purchases for April and May are shown here along with forecasted sales and
purchases for June through September. January P263,500 (1,700,000 fasteners)
February P186,000 (1,200,000 fasteners)
Sales Purchases March P217,000 (1,400,000 fasteners)
April (Actual) P390,000 P200,000 April P310,000 (2,000,000 fasteners)
May (Actual) 420,000 220,000 May P387,500 (2,500,000 fasteners)
June (forecast) 390,000 210,000
July (forecast) 350,000 240,000 Last year Ingo Corporation's sales were P175,000 in November and P232,500 in December (1,500,000
August (forecast) 420,000 320,000 fasteners).
September (forecast) 410,000 230,000
Ms. Tee is preparing for a meeting with Peninsula Banking Corporation to arrange the financing for the first
The company makes 10 percent of its sales for cash and 90 percent on credit. Of the credit sales, 30 percent quarter. Based on her sales forecast and the following information she has provided, you have to prepare a
are collected in the month after the sale and 70 percent are collected two months after. Super Sales pays for monthly cash budget, a monthly and quarterly pro forma income statement, a pro forma quarterly balance
45 percent of its purchases in the month after purchase and 55 percent two months after. sheet, and all necessary supporting schedules for the first quarter.
Labor expense equals 15 percent of the current month's sales. General overhead expense equals P10,000 Past history shows that Ingo Corporation collects 50 percent of its accounts receivable in the normal 30-day
per month. Interest payments of P35,000 are due in June and September. A cash dividend of P25,000 is credit period (the month after the sale) and the other 50 percent in 60 days (two months after the sale). It
scheduled to be paid in June. Tax payments of P30,000 are due in June and September. There is a pays for its materials 30 days after receipt. In general, Ms. Tee likes to keep a two-month supply of inventory
scheduled purchase for cash of an equipment, P290,000 in September. in anticipation of sales. Inventory at the beginning of December was 2,600,000 units. (This was not equal to
her desired two-month supply.)
Super Sales’ ending cash balance in May is P25,000. The minimum desired cash balance is P20,000. The
maximum desired cash balance is P50,000. Excess cash (above P50,000) is used to buy marketable The major cost of production is the purchase of raw materials in the form of steel rods, which are cut,
securities. Marketable securities are sold before borrowing funds in case of a cash shortfall (less than threaded, and finished. Last year raw material costs were P52 per 1,000 fasteners, but Ms. Tee has just
P20,000). been notified that material costs have risen, effective January 1, to P60 per 1,000 fasteners. The Ingo
Corporation uses FIFO inventory accounting. Labor costs are relatively constant at P20 per thousand
137. During the month of June, Super Sales expects to receive cash from sales amounting to: fasteners, since workers are paid on a piecework basis. Overhead is allocated at P10 per thousand units,
A. P606,000 C. P398,100 and selling and administrative expense is 20 percent of sales. Labor expense and overhead are direct cash
outflows paid in the month incurred, while interest and taxes are paid quarterly.
169
B. P224,750 D. P108,500
The corporation usually maintains a minimum cash balance of P25,000, and it puts its excess cash into
marketable securities. The average tax rate is 40 percent, and the company usually pays out 50 percent of 137. The cost of goods sold for the first quarter of the coming year amounts to:
net income in dividends to stockholders. Marketable securities are sold before funds are borrowed when a A. P363,800 C. P426,400
cash shortage is faced. Ignore the interest on any short-term borrowings. Interest on the long-term debt is B. P453,600 D. P373,400
paid in March, as are taxes and dividends.
137. The total cash and marketable securities as of January 31 will be:
As of year-end, the Ingo Corporation balance sheet was as follows: A. P45,450 C. P91,800
Ingo Corporation B. P25,000 D. P54,450
Balance Sheet
December 31, 2006 137. The expected net income during the first quarter of the coming year is:
A. P 91,080 C. P 96,840
ASSETS B. P161,400 D. P151,800
Current assets:
Cash P 30,000 Question Nos. 46 through 48 are based on the Russon Corporation, a retailer whose sales are all made on
Accounts receivable 320,000 credit. Sales are billed twice monthly, on the 10th of the month for the last half of the prior month’s sales,
Inventory 237,800 and on the 20th of the month for the first half of the current month’s sales. The terms of all sales are 2/10,
Total current assets 587,800 net 30. Based upon past experience, the collection of accounts receivable is as follows:
Plant and equipment, net of accumulated depreciation of P200,000 800,000
Total Assets P1,387,800 Within the discount period 80%
On the 30th day 18%
LIABILITIES AND STOCKHOLDERS’ EQUITY Uncollectible 2%
Accounts payable P 93,600
Long-term debt, 8% 400,000 Russon’s average markup on its products is 20% of the sales price. All sales and purchases occur uniformly
Common stock 504,200 throughout the month. The sales value of shipments for May and the forecasts for the next four months
Retained earnings 390,000 follow:
Total Liabilities and Stockholders’ Equity P1,387,800 May (actual) P500,000
June 600,000
137. The budgeted production respective to each month of the first quarter of the coming year are: July 700,000
A. 1,400,000; 2,000,000; 2,500,000 C. 2,500,000; 2,000,000; 1,400,000 August 700,000
B. 1,400,000; 2,500,000; 2,000,000 D. 2,000,000; 1,400,000; 2,500,000 September 400,000
Russon purchases merchandise for resale to meet the current month’s sales demand and to maintain a
137. The amount of accounts payable paid in March for the purchase of materials is: desired monthly ending inventory of 25% of the next month’s sales. All purchases are on credit with terms of
A. P150,000 C. P104,000 net/30. Russon pays for 50% of a month’s purchases in the month of purchase and 50% in the month
B. P120,000 D. P130,000 following the purchase.
137. The expected cash collections on accounts receivable in the month of February are: 137. How much cash can Russon plan to collect in September from sales made in August?
A. P224,750 C. P 93,000 A. P337,400 C. P400,400
B. P248,000 D. P186,000 B. P343,000 D. P280,000
137. The amount of accounts receivable outstanding as of March 31, 2007 is: 137. The budgeted peso value of Russon’s inventory on August 31 will be
A. P217,000 C. P310,000 A. P110,000 C. P112,000
170
B. P 80,000 D. P100,000
137. How much cash can Russon plan to collect from accounts receivable during July?
A. P574,000 C. P619,000
B. P662,600 D. P608,600
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Cost-Volume-Profit Analysis

MODULE 4 7. Which of the factors is (are) involved in studying cost-volume-profit relationships?

Contribution margin ratio 40% 50% 40% B. P 8.25 D. P 9.75 Bobadilla

Variable P7,200,000 Total P2,400,000

1 . Answer: B Unit Contribution Margin P 24

Profit = (1,200,000 – 800,000)0.125 P50,000 Selling price = UVC + UCM

17 . Answer: A After the automated machine is placed into service,

An alternative solution to find sales is to compute the profit margin. 22 . Answer: C

Sales (60,000 ÷ 0.08) P750,000 23 . Answer: A

Fixed costs before an increase of 78,750:

CMR = 250 ÷ 550 = 45.45% 39 . Answer: D

Unit selling price = 2,250,000/60,000 P37.50

BEU = 975,000/6.50 64 . Answer: B

60 . Answer: B Unit contribution margin 720,000 ÷ 400,000 1.80

67 . Answer: A Increase in BEU = 6,240 – 5,600 = 640

68 . Answer: D Composite BE = 910,000/80

Additional weekly sales to cover additional fixed cost: 75 . Answer: A

Alternative solution: 76 . Answer: D

71 . Answer: A Additional contribution margin using 100,000 hours:

Units sold to earn P1M: = 91,611

UCM = 20 – 14 –(14 x 0.50 x 0.10)= 5.30 84 . Answer: C

Output per one 4-foot piece of metal 85 . Answer: A

Breakeven next year with no change in commission:

89 . Answer: D Breakeven sales next year.

Contribution margin ratio: Alternative Solution:

98 . Answer: B 100 .Answer: A

Unit variable cost (cost of food)

2,850,000 ÷ 38,000 = P75.00 2S = 250,000

106 .Answer: A Let X = Number of units above 16,000

109 .Answer: B Unit sales required:

112 .Answer: B (Please see solution for No. 94)

113 .Answer: B (P48,000 + P60,000) ÷ 18,000 units P6.00

115 .Answer: B 120 .Answer: B

124 .Answer: B 130 .Answer: C

125 .Answer: A Indifference Point: P720,000 ÷ 30 24,000

132 .Answer: C Revenue (350 x P400) + (2,000 x P380) P 900,000

Variable cost of sales $457,800 High: June 12,088 visits $28,892

Discussion: Difference in Machine hours = 2,500; Difference in Maintenance:

Use the following information for questions 9 and 10.

Chaffee Corporation staffs a helpline to answer questions from customers. The

Discussion: The predetermined manufacturing overhead rate is $1,200,000 in C. $2,068

C. sales exceed production for that period.

4. In an income statement segmented by product line, a fixed expense that cannot

3. Designing a new product is an example of (an):

Assembly $19.56 per machine hour

Use the following information for questions 7 to 10.

What is the labor rate variance for the month?

1. The opportunity cost of making a component part in a factory with no excess

8. An automated turning machine is the current constraint at Naik Corporation.

MODULE 8 - BUDGETING D. To make sure the company expands its operations.

THEORIES: 5. Which of the following does not contribute to an effective budgeting?

27. A continuous budget 13. Zero-based budgeting:

23. Which of the following is a valid statement? B. P100,000 D. P215,000

year’s budget estimates. Quarter Units

on June 30 would be: A. P2,418,000 and P2,360,000 C. P2,250,000 and P2,436,000

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