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THEORY 6. A cost that bears an observable and known relationship to a quantifiable activity base is a(n)
Cost Behavior A. Engineered cost. C. Indirect cost.
1 Which of the following statements is false? B. Fixed cost. D. Target cost.
A. At zero production level, fixed costs is also zero.
B. At zero production level, fixed costs are positive. 7. Costs that increase as the volume of activity decreases within the relevant range are
C. At zero production level, variable costs are usually zero. A. Average costs per unit. C. Total fixed costs.
D. At zero production level, total costs equal total fixed costs. B. Average variable costs per unit. D. Total variable costs.

2. Variable costs are all costs 8. When production levels are expected to increase within a relevant range and a flexible budget
A. Of manufacturing incurred to produce units of output. is used. What effect would be anticipated with respect to each of the following costs?
B. That are associated with marketing, shipping, warehousing, and billing activities. A. B. C. D.
C. That fluctuate in total in response to small changes in the rate of utilization of capacity. Fixed Costs per Unit Increase Increase Decrease Decrease
D. That do not change in total for a given period and relevant range but become Variable Costs per Unit Increase No change No change Decrease
progressively smaller on a per unit basis as volume increases.
9. Weaknesses of the high-low method include all of the following except
3. NTQ, Inc.s net sales in 1996 were 15% below the 1995 level. NTQs semi-variable costs A. the mathematical calculations are relatively complex.
would B. the high and low activity levels may not be representative.
A. Increase in total and increase as a percentage of net sales. C. only two observations are used to develop the cost function.
B. Increase in total, but decrease as a percentage of net sales. D. the method does not detect if the cost behavior is nonlinear.
C. Decrease in total, but increase as a percentage of net sales.
D. Decrease in total and decrease as a percentage of net sales. 10. The scatter diagram method of cost estimation
A. requires the use of judgment
4. RSTs average cost per unit is the same at all levels of volume. Which of the following is true? B. uses the least-squares method
A. RST must have only fixed costs. C. is influenced by extreme observations
B. RST must have only variable costs. D. is superior to other methods in its ability to distinguish between discretionary and
C. RST must have some fixed costs and some variable costs. committed fixed costs
D. RSTs cost structure cannot be determined from this information.
11. Regression analysis is superior to other cost behavior techniques because it
5. Which of the following decision-making tools would NOT be useful in determining the slope A. Examines only one variable. C. Produces measures of probable error.
and intercept of a mixed cost? B. Is not a sampling technique. D. Proves a cause and effect relationship.
A. high-low method C. linear programming
B. least-squares method D. scatter diagrams

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12. The number of variables used in simple regression analysis is: B. The total revenues function is linear.
A. one C. three C. All costs are classified as fixed or variable
B. two D. more than three D. The units produced will equal the units sold
E. Sales mix may vary during the related period
13. The first to be undertaken in a simple regression analysis approach is
A. To calculate the coefficient correlation. 18. The sum of the costs necessary to effect a one-unit increase in the activity level is a(n)
B. To find the standard error of estimate. A. Incremental cost. C. Marginal cost.
C. To make the least squares computation. B. Margin of safety. D. Opportunity cost.
D. To plot two variables in a scatter diagram.
19. As an accountant, the most useful information you can get from break-even chart is the
14. If the coefficient of correlation between two variables is zero, how might a scatter diagram of A. Volume or output level at which the enterprise breaks even.
these variables appear? B. Amount of sales revenue needed to cover enterprise fixed costs.
A. Random points. C. Amount of sales revenue needed to cover enterprise variable costs.
B. A least squares line that slopes up to the right. D. Relationship among revenues, variable costs, and fixed costs at various levels of activity.
C. A least squares line that slopes down to the right.
D. Under this condition a scatter diagram could not be plotted on a graph. 20. In a cost-volume-profit graph
A. the total revenue line crosses the horizontal axis at the breakeven point.
15. Cost-volume-profit analysis is most important for the determination of the B. an increase in unit variable costs would decrease the slope of the total cost line.
A. Volume of operation necessary to break-even. C. an increase in the unit selling price would shift the breakeven point in units to the left.
B. Sales revenue necessary to equal variable costs. D. an increase in the unit selling price would shift the breakeven point in units to the right.
C. Variable revenues necessary to equal fixed costs. E. beyond the breakeven sales volume, profits are maximized at the sales volume where
D. Relationship between revenues and costs at various levels of operations. total revenues equal total costs.

16. The relevant range is 21. In a cost-volume-profit graph, the slope of the total revenue curve represents
A. a relatively wide range of sales where all costs remain the same A. total contribution margin D. the selling price per unit.
B. a relatively wide range of sales where total variable costs remain the same B. total revenues. E. the variable cost per unit
C. a relatively narrow range of production where total variable costs remain the same C. the contribution margin per unit
D. a relatively wide span of production where total fixed costs are expected to remain the
same 22. In a profit-volume graph, the slope of the profit curve represents
A. the contribution margin per unit D. total contribution margin
17. Which of the following assumptions does NOT pertain to cost-volume-profit analysis? B. the selling price per unit E. total revenues.
A. Inventories are constant C. the variable cost per unit

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23. If a companys variable costs are 70% of sales, which formula represents the computation of
dollar sales that will yield a profit equal to 10% of the contribution margin when S equals sales
in dollars for the period and FC equals total fixed costs from the period?
A. S = FC 0.2 C. S = 0.2 FC
B. S = FC 0.27 D. S = 0.27 FC
24. Cost-volume-profit analysis is a key factor in many decisions, including choice of product lines,
pricing of products, marketing strategy, and utilization of productive facilities. A calculation
used in CVP analysis is the break-even point. Once the break-even point has been reached
operating income will increase by the
A. Fixed cost per unit for each additional unit sold.
B. Sales price per unit for each additional unit sold.
C. Gross margin per unit for each additional unit sold.
D. Contribution margin per unit for each additional unit sold.
25. When used in cost-volume-profit analysis, sensitivity analysis
A. Determines the most profitable mix of products to be sold.
B. Allows the decision maker to introduce probabilities in the evaluation of decision
alternatives.
C. Is limited because in cost-volume-profit analysis, costs are not separated into fixed and
variable components.
D. Is done through various possible scenarios and computes the impact on profit of various
predictions of future events.
26. At its present level of operations, a small manufacturing firm has total variable costs equal to
75 percent of sales and total fixed costs equal to 15 percent of sales. Based on variable
costing, if sales change by $1.00, income will change by
A. $0.10.
B. $0.25.
C. $0.75.
D. can't be determined from the information given.
MSQ-01 COST BEHAVIOR & COST-VOLUME-PROFIT ANALYSIS
HILARIO TAN
27. A companys breakeven point in sales dollars may be affected by equal percentage increases
in both selling price and variable costs per unit (assume all other factors are constant within
the relevant range.) The equal percentage changes in selling price and variable cost per unit
will cause the breakeven point in sales dollars to
A. Remain unchanged.
B. Increase by the percentage change in variable cost per unit.
C. Decrease by less than the percentage increase in selling price.
D. Decrease by more than the percentage increase in the selling price.
28. The most likely strategy to reduce the breakeven point would be to
A. Increase both the fixed costs and the contribution margin.
B. Decrease both the fixed cost and the contribution margin.
C. Increase the fixed costs and decrease the contribution margin.
D. Decrease the fixed costs and increase the contribution margin.
29. A company increased the selling price of its product from $1.00 to $1.10 a unit when total fixed
costs increased from $400,000 to $480,000 and variable cost per unit remained unchanged.
How will these changes affect the breakeven point?
A. The breakeven point in units will be increased.
B. The breakeven point in units will be decreased.
C. The breakeven point in units will remain unchanged.
D. The effect cannot be determined from the information given.
30. According to CVP analysis, a company could never incur a loss that exceeded its total
A. contribution margin. C. fixed costs.
B. costs. D. variable costs.
31. Two companies produce and sell the same product in a competitive industry. Thus, the selling
price of the product for each company is the same. Company 1 has a contribution margin ratio
of 40% and fixed costs of $25 million. Company 2 is more automated, making its fixed costs
40% higher than those of Company 1. Company 2 also has a contribution margin ratio that is
30% greater than that of Company 1. By comparison, Company 1 will have the <List A>
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breakeven point in terms of dollar sales volume and will have the <List B> dollar profit potential 35. Love Corp. is operationally a highly leveraged company, that is, it has high fixed costs and low
once the indifference point in dollar sales volume is exceeded. variable costs. As such, small changes in sales volume result in
A. B. C. D. A. Large changes in net income. C. No change in net income.
List A Lower Lower Higher Higher B. Negligible change in net income. D. Proportionate change in net income.
List B Lesser Greater Lesser Greater
PROBLEMS
32. Which of the following is a true statement about sales mix? Cost equation
A. Profits will remain constant with an increase in total dollars of sales if the total sales in 1. Smart Company is relocating its facilities. The company estimates that it will take three trucks
units remains constant. to move office contents. If the per truck rental charge is $1,000 plus 25 cents per mile, what is
B. Profits will remain constant with a decrease in total dollars of sales if the sales mix also the expected cost to move 800 miles?
remains constant. A. $1,000 C. $2,400
C. Profits may decline with an increase in total dollars of sales if the sales mix shifts to sell B. $1,200 D. $3,600
more of the high contribution margin product.
D. Profits may decline with an increase in total dollars of sales if the sales mix shifts to sell 2. The following cost functions were developed for manufacturing overhead costs:
more of the lower contribution margin product. Manufacturing Overhead Cost Cost Function
Electricity $100 + $20 per direct labor hour
33. Saints Co. sells three chemicals: Simpol, Plutex, and Coplex. Simpol is the most profitable Maintenance $200 + $30 per direct labor hour
product while Coplex is the least profitable. Which one of the following events will definitely Supervisors salaries $10,000 per month
decrease the firms overall B.E.P. for the upcoming accounting period? Indirect materials $16 per direct labor hour
A. A decrease in Coplexs selling price. If July production is expected to be 1,000 units requiring 1,500 direct labor hours, estimated
B. An increase in Simpol raw materials cost. manufacturing overhead costs would be
C. An increase in the overall market of Plutex. A. $10,366 C. $99,000
D. An increase in anticipated sales of Simpol relative to the sales of Plutex and Coplex. B. $76,300 D. $109,300

34. A very high degree of operating leverage indicates a firm 3. Bradley Co. budgets its total production costs at $220,000 for 75,000 units of output and
A. has high fixed costs $275,000 for 100,000 units of output. Since additional facilities are needed to produce 100,000
B. has a high net income units, fixed costs are budgeted at 20% more than for 75,000 units. What is Bradley's budgeted
C. has high variable costs fixed cost at 100,000 units?
D. is operating close to its breakeven point A. 16,500 C. 156,000
B. 66,000 D. 165,000

High-low method
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5. The Austin Manufacturing Company wants to develop a cost estimating equation for its
monthly cost of electricity. It has the following data: 8. Sago Co. uses regression analysis to develop a model for predicting overhead costs. Two
Month Cost of Electricity Direct Labor Hours different cost drivers (machine hours and direct materials weight) are under consideration as
January $6,750 1,500 the independent variable. Relevant data were run on a computer using one of the standard
April 7,500 1,700 regression programs, with the following results:
July 8,500 2,000 Coefficient
October 7,250 1,600 Machine hours Direct materials weight
Using the high-low method, what is the best equation? Y intercept 2,500 4,600
A. Y = $750 + $3.50X D. Y = $1,500 + $5.00X B 5.00 2.60
B. Y = $750 + $5.00X E. Y = $2,000 + $3.50X R2 0.70 0.50
C. Y = $1,500 + $3.50X What regression equation should be used?
A. Y = 2,500 + 3.5X C. Y = 4,600 +1.3X
6. Total production costs of prior periods for a company are listed as follows. Assume that the B. Y = 2,500 + 5.0X D. Y = 4,600 + 2.6X
same cost behavior patterns can be extended linearly over the range of 3,000 to 35,000 units
and that the cost driver for each cost is the number of units produced. Contribution margin income statement
Production in units per month 3,000 9,000 16,000 35,000 9. A retail company determines its selling price by marking up variable costs 60%. In addition,
Cost X $23,700 $52,680 $86,490 $178,260 the company uses frequent selling price markdowns to stimulate sales. If the markdowns
Cost Y 47,280 141,840 252,160 551,600 average 10%, what is the companys contribution margin ratio?
What is the average cost per unit at a production level of 8,000 units for cost X? A. 27.5% C. 37.5%
A. $4.83 C. $5.98 B. 30.6% D. 41.7%
B. $5.85 D. $7.90

Regression analysis Breakeven analysis

7. Y = P575,000 + P8.50X represents the behavior of maintenance costs (Y) as a function of 10. Ultra Vogue Co. sells 50,000 units of yo a top-of-the-line garden sprinkler. These were taken
machine hours (X). Thirty (30) monthly observations were used to develop the foregoing from the companys records:
regression equation. The related coefficient of determination was 0.90. If 2,500 machine Accounts receivable, P129,000. Contribution margin ratio, 49%.
hours are worked in one month, the related point estimate of total variable maintenance costs Days sales outstanding, 15 days. Profit for the period was P485,040.
would be The ending receivables balance is the average balance during the year. Assume a 360-day
A. P19,125 C. P23,000 year. All sales are on credit. Determine the companys break-even revenue.
B. P21,250 D. P25,250 A. P1,032,000 C. P2,106,122
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B. P1,517,040 D. P3,096,000 4. Matias Corporation wishes to market a new product for P12.00 a unit. Fixed costs to
manufacture this product are P800,000 for less than 500,000 units and P1,200,000 for
11. Tonykinn Company is contemplating of marketing a new product. Fixed costs will be $800,000 500,000 or more units. Contribution margin is 20%. How many units must be sold to realize a
for production of 75,000 units or less and $1,200,000 if production exceeds 75,000 units The net income from this product of P500,000?
variable cost ratio is 60% for the first 75,000. Contribution margin percentage will increase to A. 433,333 C. 666,667
50% for units in excess of 75,000. If the product is expected to sell for $25 per unit, how many B. 500,000 D. 708,333
units must Tonykinn sell to breakeven?
A. 80,000 C. 111,000 14. NCB, Inc. manufactures computer tables. It has an investment of P1,750,000 in assets and
B. 96,000 D. 120,000 expects a 25% return on investment. Its total fixed production costs for 2,000 units is
P550,000 plus an additional P150,000 for selling and administrative expenses. The variable
12. A company manufactures a single product. Estimated cost data regarding this product and cost to manufacture is P1,500 per table. The selling price per table should be
other information for the product and the company are as follows: A. P1,850.00 C. P2,531.25
Sales price per unit $40 B. P2,068.75 D. P2,725.00
Total variable production cost per unit $22
Sales commission (on sales) 5% 15. Story Manufacturing incurs annual fixed costs of $250,000 in producing and selling "Tales."
Fixed costs and expenses Estimated unit sales for 2001 are 125,000. An after-tax income of $75,000 is desired by
Manufacturing overhead $5,598,720 management. The company projects its income tax rate at 40 percent. What is the maximum
General and administrative $3,732,480 amount that Story can expend for variable costs per unit and still meet its profit objective if the
Effective income tax rate 40% sales price per unit is estimated at $6?
The number of units the company must sell in the coming year in order to reach its breakeven A. $3.00 C. $3.59
point is B. $3.37 D. $3.70
A. 388,800 units C. 583,200 units
B. 518,400 units D. 972,000 units Incremental analysis
16. A company is concerned about its operating performance, as summarized below:
Profit planning Sales ($12.50 per unit) $300,000
13. Merchandisers, Inc. sells Product O to retailers for P200. The unit variable cost is P40 with a Variable costs 180,000
selling commission of 10%. Fixed manufacturing costs total P1,000,000 per month while fixed Net operating loss (40,000)
selling and administrative costs total P420,000. The income tax rate is 30%. The target sales How many additional units should have been sold in order for the company to break even in
if after tax income is P123,200 would be 1992?
A. 10,950 units. C. 13,750 units. A. 8,000 C. 16,000
B. 11,400 units. D. 15,640 units. B. 12,800 D. 32,000
17. Scottso Enterprises has fixed costs of $120,000. At a sales volume of $400,000, return on

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sales is 10%. At a $600,000 volume, return on sales is 20%. What is the break-even volume? If the company increased the sales price per unit by 10%, reduced fixed costs by 20%, and left
A. $160,000 C. $300,000 variable cost per unit unchanged, what would be the new breakeven point in sales dollars?
B. $210,000 D. $420,000 A. $88,000 C. $110,000
B. $100,000 D. $125,000
18. Nette & Co. has sales of P400,000 with variable costs of P300,000, fixed costs of P120,000,
and an operating loss of P20,000. By how much would Nette need to increase its sales in 23. Singsing, Inc. manufactures and sells key rings embossed with college names and slogans.
order to achieve a target operating income of 10% of sales? Last year, the key rings sold for P75 each, and the variable costs to manufacture them were
A. P400,000 C. P500,000 P22.50 per unit. The company needed to sell 20,000 key rings to break-even. The net
B. P462,000 D. P800,000 income last year was P50,400. The company expects the following for the coming year:
The selling price of the key rings will be P90.
19. Sari-Sari Grocery is currently open only on Monday to Saturday. It is considering opening on Variable manufacturing costs per unit will increase by one-third.
Sundays. The annual incremental costs of Sunday opening is estimated at P124,800. Its Fixed costs will increase by 10%.
gross margin is 20%. It estimates that 60% of Sunday sales to customers would be on other The income tax rate will remain unchanged.
days if its stores were not open on Sundays. The Sunday sales that would be necessary for For the company to break-even the coming year, the company should sell
Sari-sari to attain the same weekly operating income is A. 2,600 units. C. 21,250 units.
A. P19,500. C. P29,250. B. 19,250 units. D. 21,600 units.
B. P20,000. D. P30,000.
24. Austin Manufacturing, which is subject to a 40% income tax rate, had the following operating
20. ABC Company breaks even at $300,000 sales and earns $30,000 at $350,000 sales. Which data for the period just ended.
of the following is true? Selling price per unit $ 60
A. Fixed costs are $20,000. Variable cost per unit 22
B. The selling price per unit is $3. Fixed costs 504,000
C. Contribution margin is 60% of sales. Management plans to improve the quality of its sole product by: (1) replacing a component that
D. Profit at sales of $400,000 would be $80,000. costs $3.50 with a higher-grade unit that costs $5.50 and (2) acquiring a $180,000 packing
machine. Austin will depreciate the machine over a 10-year life with no estimated salvage
Sensitivity analysis value by the straight-line method of depreciation. If the company wants to earn after-tax
21. A product has a selling price of P5 and variable cost of P3.50 per unit. The effect of a P0.50 income of $172,800 in the upcoming period, it must sell
per unit increase in cost is to increase the break-even level of activity by A. 19,300 units. C. 22,500 units.
A. P1.50 per unit. C. 33-1/3% B. 21,316 units. D. 23,800 units.
B. 14.3% D. 50%

22. A company has sales of $500,000, variable costs of $300,000, and pretax profit of $150,000. 25. During 1996, RPS Corporation supplied hospitals with a comprehensive diagnostic kit for

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P120. At a volume of 80,000 kits, RPS has fixed cost of P1,000,000 and a profit before packaged meals at a price of P40 per meal. Variable cost per meal is P30 while total fixed
income taxes of P200,000. Due to an adverse legal decision, RPSs 1997 liability insurance costs for operation of all the stores amounted to 200,000 monthly. It is thinking to reduce its
increased by P1,200,000 over 1996. Assuming the volume and other costs are unchanged, store hours to only 12 hours a day as this would reduce fixed costs (utilities and wages) by
what should be the 1997 price be if RPS is to make the same P200,000 profit before income P60,000 a month. It is expected that the reduced store hours would result in loss of 1,500
taxes? packed meals monthly sales. The reduction in store hours would result in
A. P120. C. P150. A. No change in monthly operating income.
B. P135. D. P240. B. A prospective decrease in monthly operating income.
C. A prospective increase in monthly operating income of P45,000.
26. Lindsay Company reported the following results from sales of 5,000 units of Product A for D. A prospective increase in monthly operating income of P60,000.
June:
Sales $200,000 30. The Machan Manufacturing Companys year-end income statement is as follows:
Variable costs (120,000) Sales (20,000 units) $360,000
Fixed costs (60,000) Variable costs 220,000
Operating income $ 20,000 Contribution margin $140,000
Assume that Lindsay increases the selling price of Product A by 10 percent in July. How many Fixed costs 105,000
units of Product A would have to be sold in July to generate an operating income of $20,000? Net income $ 35,000
A. 4,000 C. 4,500 Management is unhappy with the results and plans to make some changes for next year.
B. 4,300 D. 5,000 If management implements a new marketing program, fixed costs are expected to increase by
$19,200 and variable costs to increase by $1 per unit. Unit sales are expected to increase by
27. CGW Corporation sells Product T at a unit price of P5 deriving annual gross sales of P50,000. 15 percent. What is the effect on income?
The variable cost to produce T is P4.50 per unit and total fixed costs is P10,000. If it increases A. no change D. increase of $14,800
Ts unit price to P8, a decrease of sales to only 4,000 units would result. The effect of the B. increase of $1,800 E. decrease of $21,200
price increase on CGWs net income from the sales of Product T will be a: C. increase of $13,800
A. No effect. C. P9,000 increase.
B. P4,000 increase. B. P18,000 decrease. Questions 31 and 32 are based on the following information.
28. Planners have determined that sales will increase by 25% next year, and that the profit margin The marketing department of Hennessy Co. proposed a price cut on its leading brand, a product
will remain at 15% of sales. Which of the following statements is correct? called Henry. From the accounting records these are available:
A. Profit will grow by 25%. Price per unit P 92.00
B. The profit margin will grow by 15%. Discount to customers 10%
C. Profit will grow proportionately faster than sales. Direct cost per unit P 52.60
D. Ten percent of the increase in sales will become net income. Variable operating expense per unit P 5.60
29. LXQ Turo Turo stores are open for 15 hours a day (from 6:00 a.m. to 9:00 p.m.). It sells Proposed price cut per unit P 10.00
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Estimated sales volume before price cut 1,220 pcs. A. B. C. D.

Product X 5,000 13,000 23,800 32,500
31. How much is the estimated contribution margin that will be lost due to price cut, assuming the Product Y 12,500 32,500 59,500 13,000
same pre-price cut sales volume?
A. P10,980 C. P17,990 Point of Indifference
B. P13,000 D. P18,000 36. Wheels Corp. employs 45 sales personnel to market its sedan cars. The average car sells for
P690,000 and a 6% commission is paid to the sales person. It is considering changing the
32. For the same Hennessy Co., in the immediately preceding number, what is the additional scheme to a commission arrangement that would pay each person a package of P30,000 plus
volume required after the price cut to get the same contribution margin before the price cut? a commission of 2% of the sales made by the person. The amount of total monthly car sales
Round off to the nearest whole unit. at which Wheels Corp. would be indifferent (answer may be rounded off) as to which plan to
A. 409 units C. 704 units select is
B. 500 units D. 1,000 units A. P22,500,000 C. P36,500,000
B. P33,750,000 D. P45,000,000
Multiple products
33. A company with $280,000 of fixed costs has the following data: 37. Two companies are expected to have annual sales of 1,000,000 decks of playing cards next
Product A Product B year. Estimates for next year are presented below:
Sales price per unit $5 $6 Company 1 Company 2
Variable costs per unit $3 $5 Selling price per deck $ 3.00 $3.00
Assume three units of A are sold for each unit of B sold. How much will sales be in dollars of Cost of paper deck 0.62 0.65
product B at the breakeven point? Printing ink per deck 0.13 0.15
A. $200,000 C. $280,000 Labor per deck 0.75 1.25
B. $240,000 D. $840,000 Variable overhead per deck 0.30 0.35
Fixed costs $960,000 $252,000
Questions 34 and 35 are based on the following information. Given these data, which of the following responses is correct?
A company sells two products, X and Y. The sales mix consists of a composite unit of two units of (In units) A. B. C. D.
X for every five units of Y (2:5). Fixed costs are $49,500. The unit contribution margins for X and
Breakeven point for Co. 1 533,334 533,334 800,000 800,000
Y are $2.50 and $1.20, respectively.
Breakeven point for Co. 2 105,000 105,000 420,000 420,000
Volume at which profits of Co. 1 and
34. Considering the company as a whole, the number of composite units to break even is
Co. 2 are equal 1,000,000 1,180,000 1,000,000 1,180,000
A. 1,650 C. 8,250
B. 4,500 D. 22,500
35. If the company had a profit of $22,000, the unit sales must have been Margin of safety

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38. Product Cott has sales of $200,000, a contribution margin of 20%, and a margin of safety of Almo sell to achieve its after-tax profit objective?
$80,000. What is Cotts fixed cost? A. 1,250 C. 2,000
A. $16,000 C. $80,000 B. 1,700 D. 2,500
B. $24,000 D. $96,000
42. If management decides to reduce the selling price by $40, what will Almo's after-tax profit be?
39. Bell Company has a 25% margin of safety. Its before-tax return on sales is 6%, and its tax A. $157,200 C. $241,200
rate is 40%. Assuming that current sales are $120,000, what is Bells total fixed costs. B. $160,800 D. $301,200
A. $21,600 C. $84,000
ANSWER KEY
B. $36,000 D. $60,000
Theory Problems
Comprehensive 1. A 21. D 1. D 21. D 41. D
Questions 40 through 42 are based on the following information. 2. C 22. A 2. D 22. A 42. C
Almo Company manufactures and sells adjustable canopies that attach to motor homes and 3. C 23. B 3. D 23. B
trailers. The market covers both new unit purchasers as well as replacement canopies. Almo 4. B 24. D 4. D 24. C
developed its business plan based on the assumption that canopies would sell at a price of $400 5. C 25. D 5. C 25. B
each. The variable costs for each canopy were projected at $200, and the annual fixed costs were 6. A 26. B 6. C 26. A
budgeted at $100,000. Almo's after-tax profit objective was $240,000; the company's effective tax 7. A 27. A 7. B 27. C
rate is 40%. 8. C 28. D 8. B 28. A
While Almo's sales usually rise during the second quarter, the May financial statements reported 9. A 29. D 9. B 29. C
that sales were not meeting expectations. For the first 5 months of the year, only 350 units had 10. A 30. B 10. C 30. E
been sold at the established price, with variable costs as planned, and it was clear that the after-tax 11. D 31. A 11. C 31. A
profit projection would not be reached unless some actions were taken. Almo's president assigned 12. B 32. D 12. C 32. C
a management committee to analyze the situation and develop an alternative course of action. The 13. C 33. D 13. B 33. B
following was presented to the president. 14. A 34. D 14. B 34. B
Reduce the sales price by $40. The sales organization forecasts that with the significantly reduced 15. D 35. A 15. A 35. B
sales price, 2,700 units can be sold during the remainder of the year. Total fixed and variable unit 16. D 16. A 36. B
costs will stay as budgeted. 17. E 17. C 37. D
40. Assuming no changes were made to the selling price or cost structure, how many units must 18. C 18. A 38. B
Almo sell to break even? 19. D 19. D 39. A
A. 167 C. 500 20. C 20. C 40. C
B. 250 D. 1,700
41. Assuming no changes were made to the selling price or cost structure, how many units must
MSQ-01 COST BEHAVIOR & COST-VOLUME-PROFIT ANALYSIS Page 10 of 10