Achievement Test

PART I — TRUE/FALSE
Instructions: Designate whether each of the following statements is true or false by circling the T or F.

T F 1. Contribution margin is the amount of revenue left over to cover selling and administrative costs
after manufacturing costs have been deducted.
T F 2. The margin of safety is the difference between actual profit and target net income.
T F 3. At the break-even point, total contribution margin is equal to total fixed costs.
T F 4. A company’s break-even point can be decreased by increasing the contribution margin ratio.
T F 5. A CVP income statement classifies costs by function, but a traditional income statement classifies
costs by cost behavior (variable or fixed).

PART 2 — MULTIPLE CHOICE

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

____ 1. Nova Supreme has a weighted-average unit contribution margin of $12 for its two products, Standard
and Premium. Expected sales for Nova are 30,000 for Standard and 10,000 for Premium. Fixed
expenses
are $840,000. How many Standards will Nova Supreme sell at the break-even point?
a. 70,000
b. 50,000
c. 30,000
d. 52,500

____ 2. Winners Games reported sales of $72,000 and net income totaling $12,000 during the year. It’s selling
price is $6 per unit, its variable cost is $2 per unit, and its total fixed costs are $36,000. How much is
the projected margin of safety?
a. $54,000
b. $66,000
c. $12,000
d. $18,000

____ 3. Hanley’s Carwash has $80,000 of fixed costs and variable costs of 60% of sales. How much is total
sales to achieve a net income of $140,000?
a. $550,000
b. $220,000
c. $150,000.
d. $366,667

____ 4. In order to decrease a company's break-even point, which of the following should be decreased?
a. The contribution margin ratio
b. The contribution margin
c. The selling price
d. Variable costs per unit

____ 5. Little Tykes Day Care desires net income of $84,000. It has $28,000 of fixed costs and variable costs
of 60% of sales. How much is contribution margin?
a. $280,000
b. $112,000
c. $186,667
d. $75,000
____ 6. Assume October is the high-volume month for a toy manufacturer and July is the low-volume month.
The following total production costs and volume levels have been recorded:
Total Costs Volume
October $72,000 4,000
July $60,000 1,500
How much are total fixed costs?
a. $12,000
b. $52,800
c. $132,000
d. $60,010

____ 7. Fixed costs

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

____ 8. Variable costs, as activity increases, will

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

____ 9. A cost that increases in total, but not proportionately with increases in the activity level, is a(n)
a. mixed cost.
b. variable cost.
c. fixed cost.
d. unusual fixed cost.

____ 10. Which of the following would not be deducted in determining the contribution margin under variable
costing?
a. Direct labor
b. Sales commissions
c. Sales office depreciation using the straight line method
d. Variable factory overhead

PART III — SCARCE RESOURCE ALLOCATION

Genavine manufactures and sells two products. Relevant per unit data concerning each product are given below:
Product
X21 R45
Selling price $55 $88
Variable costs $30 $48
Machine hours 2.5 4.2

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

(b) Which product should be manufactured if 1,200 additional machine hours are available? Explain.
PART IV — HIGH-LOW METHOD
Nugent Enterprise incurred the following high and low maintenance costs totals during 2014: $208,000 at 12,000
units of activity during March and $164,000 at 7,000 units during August.

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

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

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

(c) Compute the total maintenance cost for May when activity is 11,000 units.

PART V
Walton Widgets manufactures a product that sells for $40 per unit. Walton incurs a variable cost per unit of $24 and
$1,400,000 in total fixed costs to produce this product. It is currently selling 92,000 units.
Instructions: Complete each of the following requirements, presenting labeled supporting computations.

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

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

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

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

(e) Compute the number of units that must be sold in order to generate net income of $240,000 using the
contribution margin per unit.

(f) Should Walton Widgets give a commission to its salesmen based on 8% of sales, if it will decrease fixed costs
by $300,000 and increase sales volume 10%? Support your answer with labeled computations.

PART VI — OPERATING LEVERAGE (12 points)

The following CVP income statements are available for Liu Company and Sadji Company.
Lui Company Sadji Company
Sales revenue $800,000 $800,000
Variable costs 325,000 195,000
Contribution margin 475,000 605,000
Fixed costs 375,000 505,000
Net income $100,000 $100,000
Instructions
(a) Compute the degree of operating leverage for each company.