Solution MCQ’s

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Homework

If your company follows the principle of management by exception, which of the following departures from the budget would most likely be investigated?

Rent

($100).

Labor (

$800

Water (

0).

Depreciation

($2,000).

Shula’s 347 Grill has budgeted the following costs for a month in which 1,600 steak dinners will be produced and sold: Materials, $4,080; hourly labor (variable), $5,200; rent (fixed), $1,700; depreciation, $800; and other fixed costs, $600. Each steak dinner sells for $1

4.0

0 each. How much would Shula’s profit increase if 10 more dinners were sold?

$82.00

$14

0.00

$62.60

$58.00

Paradise Pottery had the following costs in May when production is 800 ceramic pots: materials, $8,700; labor (variable), $2,900; depreciation, $1,100; rent, $900; and other fixed costs, $

1,500

. If production changes to 850 units, which will stay the same?

total cost per unit

total variable cost

fixed cost per unit

variable cost per unit

Raron’s Rockers is in the process of preparing a production cost budget for August. Actual costs in July for 120 rocking chairs were:

Materials cost		$4,800
Labor cost		3,000
Rent	1,500
Depreciation	2,500
Other fixed costs	3,200
Total	$15,000

Materials and labor are the only variable costs. If production and sales are budgeted to increase to 150 chairs in August, how much is the expected total variable cost on the August budget?

$9,750

$17,325

$16,950

$18,750

ProGo plans to sell 1,200 carriers next year and has budgeted sales of

$48,000

and profits of

$20

,000.

Variable costs

are projected to be $22 per unit. Nathan Co. offers to pay $

,000 to buy 600 units from ProGo. Total fixed costs are $5,000 per year. This offer does not affect ProGo’s other planned operations. The incremental revenues for this situation are

$7,800.

$6,000

$21,000.

7,000

Breezes Curacao has 200 rooms. Each room rents at $130 per night and variable costs total $42 per room per night of occupancy.

Fixed costs

total $18,700 per month. If 70% of the rooms are occupied each of the 30 nights in June, how much will total variable costs be for June?

$546,000

$369,600

$176,400

$252,000

Rose Wilson is entering her senior year as an accounting major and has a number of options for her summer break. Her options for the 3 month break follow:
(1) Work full time at a local accounting firm making $2,200 per month.
(2) Take a summer class which will cost $800 and work half time making $1,100 per month.
(3) Take a class at a cost of $800 and not work at all during the summer.
Rose’s incremental revenue if she chooses option 1 over option 2 would be

$1,600.

$3,300.

$800.

$6,600.

Serta Carpet, which manufactures carpet, incurred the following costs for March when 2,600 yards of carpet were produced and sold:

 $12,200 for nylon thread used on carpet

 $

16,000

for scotch guard for carpet

 $4,000 for jute backing to reinforce the carpet

 $5,000 for glue to be used in the manufacturing process

 $21,000 for insurance (half for administrative activities, half for production activities)

 $7,000 for production employee’s wages

 $10,000 for rent (60% for the production facility, 40% for the administrative offices)
How much are total variable costs if 2,200 yards of carpet are produced and sold in April?

$37,400

$44,200

$55

,169

Assume you purchase a ticket to a local football game for next week at a cost of $50. Before the day of the game, you are invited to a picnic by your best friend. You would have to bring $20 of hotdogs to the picnic. You could sell the ticket to the game for $55 to a scalping company. What is the sunk cost connected with deciding whether or not to attend the picnic?

$55

$50

$30

Juanita is trying to decide whether or not to attend college during the next 12-week session. She has the following options:

1. Attend college full-time at a cost of $1,200.

2. Attend college part-time at a cost of $600 and work part-time earning $1,800.

3. Work full-time earning $4,800.

What is Juanita’s incremental profit if she chooses option 3 over option 2?

$3,600

$4,800

$6,000

$3,000

Clearance Depot has total monthly costs of $8,000 when 2,500 units are produced and $12,400 when 5,000 units are produced. What is the estimated total monthly fixed cost?

$8,800

$3,600

$4,400

$6,580

Total costs were $75,800 when

30,000

units were produced and $95,800 when 40,000 units were produced. Use the high-low method to find the estimated total costs for a production level of 32,000 units.

$80,115

$91,800

$76,000

$79,800

Stetson University teaches a large range of undergraduate courses. It is interested in determining the cost equation for the facilities cost as a function of student credit hours so that it an more accurately budget its facilities costs as enrollment grows. Information for the high and low cost semesters and volumes for last 5 years appears below

Semester

Student Credit Hours

Facilities Cost

Spring 2007

50,000

$500,000

Fall 2004

300,000

$530,000

Using the high low method, with student credit hours as the activity driver, what is the equation for facilities cost (FC) as a function of student credit hours?

FC = $2 / student credit hour

FC = -$585,100 + $

1.6

7 / student credit hour

FC = $1.77 / student credit hour

FC = $350,000 + $0.60 / student credit hour

Circle K Furniture has a contribution margin ratio of 16%. If fixed costs are $176,800, how many dollars of revenue must the company generate in order to reach the break-even point?

$208,476

$1,105,000

$1060,800

$282,880

Marshal Corporation sells a single product at a price of $62 per unit. Fixed costs total $640,000 and variable costs per unit are $22. Marshal is considering the purchase of new equipment which would reduce variable costs per unit to $16, but fixed costs would increase to $820,000. Above what minimum volume would machine replacement be justified?

30,000

16,000

17,827

The problem does not provide enough information to answer the question.

Rambles Toyland makes a product that sells for $70 per unit and has $45 per unit in variable costs. Annual fixed costs are $

24,000

. If Rambles sells 10 units less than breakeven, how much loss would the company recognize on its income statement?

$700

$250

$450

$960

Berha’s Cellular sells phones for $100. The unit variable cost per phone is $50 plus a selling commission of 10%. Fixed manufacturing costs total $1,250 per month, while fixed selling and administrative costs total $2,500. How many phones must be sold to achieve the breakeven point?

Byters on Call provides computer repairs on-site and has a contribution margin ratio of 32%, a contribution margin per service call of $5, and fixed costs of $21,160 per month. During March, it made 5,000 service calls. How much will Byters on Call’s profit increase if 160 more service calls are made?

$6,771

$4,232

$1,354

$800

Donto Company produces two models of buckets, Tonto and Pronto. Information regarding these products for May follows:

3,000

	Tonto	Pronto
Number of units	7,000
Sales revenue	$120,000	$140,000
Variable costs	60,000	42,000
Fixed costs	24,000	50,000
Net Income	$36,000	$48,000
Pounds of plastic to produce one bucket	4.0	1.6
Contribution margin per unit	$20	$14

Due to increased demand of plastic in the market, Donto Company can obtain only 9,000 pounds of plastic per month. Donto can sell as many buckets as it can produce of either model. How many of each model should Donto produce to maximize profit in May considering the constraint?

Tonto: 0; Pronto: 4,375

Tonto: 1,125; Pronto: 2,812

Tonto: 0; Pronto: 5,625

Tonto: 2,250; Pronto: 0

Product A has a contribution margin per unit of $500 and required 2 hours of machine time. Product B has a contribution margin per unit of $1,000 and requires 5 hours of machine time. How much of each product should be produced given there are 100 hours of available machine time?

50 units of A and

25 units of B.

50 units of A.

None of the above is correct.

Sierra Company allocates the estimated $

00,000 of its accounting department costs to its production and sales departments since the accounting department supports the other two departments particularly with regard to payroll and accounts payable functions. The costs will be allocated based on the number of employees using the direct method. Information regarding costs and employees follows:

Department

	Employees
Accounting		4
Production	36
			Sales	1 2

How much of the accounting department costs will be allocated to the production and sales departments?

$1,

00,000

$600,000

80,000

60,000

Production Department

Sales Department

$22,222

$66,667

,000

50,000

Velvet Company allocates costs from the payroll department (S1) and the maintenance department (S2) to the molding (P1), finishing (P2), and packaging (P3) departments. Payroll department costs are allocated based on the number of employees in the department and maintenance department costs are allocated based on the number of square feet which the production department occupies within the factory.
Information about the departments is presented below:

Employees

150,000

Number of	Number of Square
	Department	Costs	Feet Occupied
Payroll (S1)	2	2,000
Maintenance (S2)	$2 20,000		8	64,000
Molding (P1)	75	100,000
Finishing (P2)	50			60,000
Packaging (P3)	25	40,000

Velvet uses the direct method to allocate costs. Round all answers to the nearest dollar.
What amount of the payroll department costs will be allocated to the molding department?

$132,353

$75,000

$70,313

$18

5,000

Rand Company sells fine collectible statues and has implemented activity-based costing. Costs in the shipping department have been divided into three cost pools. The first cost pool contains costs that are related to packaging and shipping and Rand has determined that the number of boxes shipped is an appropriate cost driver for these costs. The second cost pool is made up of costs related to the final inspection of each item before it is shipped and the cost driver for this pool is the number of individual items that are inspected and shipped. The final cost pool is used for general operations and supervision of the department and the cost driver is the number of shipments. Information about the department is summarized below:

					Cost Pool	Total Costs	Cost Driver	Annual Activity
Packaging and shipping	$1 70,000	Number of boxes shipped	25,000 boxes
Final inspection		$ 200 ,000	Number of individual items shipped	100,000 items
General operations and supervision	$85,000			Number of orders	10,000 orders

During the period, the Far East sales office generated 680 orders for a total of 6,120 items. These orders were shipped in 1,495 boxes. What amount of shipping department costs should be allocated to these sales?

$22,406

$16,590

$10,588

$28,186

Library Resources Company uses activity-based costing. The company produces soft and hard-cover books. The estimated costs and expected activity for each of the activity pools follow:

Cost Pool

800

Activity	Estimated	Expected Activity
	Cost	Hard-Cover	Soft-Cover			Total
Activity 1	$15,675		800	300	1,100
Activity 2	$11,900	500	200	700
Activity 3	$36,000	400	1,200

To which of the following is the rate for activity 3 that will used to apply costs to Soft-cover books closest?

$90.00

$12,000

$30

.00

Not enough information is provided

Biltmore Financial is a banking services company that offers many different types of checking accounts. The bank has recently adopted an activity-based costing system to assign costs to their various types of checking accounts. The following data relate to the money market checking accounts, one of the popular checking accounts, and the ABC cost pools:
Annual number of accounts = 60,000 accounts
Checking account cost pools:

Cost Pool

Cost

60,000

Cost Drivers
Returned check costs			$3,000 ,000	Number of returned checks
Checking account reconciliation costs	Number of account reconciliation requests
New account setup	650,000	Number of new accounts
Copies of cancelled checks		400,000	Number of cancelled check copy requests
Online banking web site maintenance	195,000	Per product group (type of account)
Total checking account costs	$4,305,000

Annual activity information related to cost drivers:

Cost Pool

60,000

All Products	Money Market Checking
Returned check	200,000 returned checks	18,000
Check reconciliation costs	3,000 checking account	420
New accounts	60,000 new accounts		15,000
Cancelled check copy requests	100,000 cancelled check
Web site costs	10 types of accounts	1

Calculate the overhead cost per account for the Money Market Checking.

Rockwell Company owns a single restaurant which has a cantina primarily used to seat patrons while they wait on their tables. The company is considering eliminating the cantina and adding more dining tables. Segmented contribution income statements are as follows and fixed costs applicable to both segments are allocated on the basis of sales.

Total

Sales

$20

0,000

15,000

$50,000

Restaurant	Cantina
$ 800,000							$1,000,000
		Variable costs	475,000		160,000	635,000
Direct fixed costs				50,000		65,000
Allocated fixed costs	212,500	37,500	250,000
		Net Income	$ 62,500	($12,500)

What financial effect will occur to profit if Rockwell eliminates the cantina but no more dining customers are served?

Net income

will decrease to $37,500.

Net income will decline by $25,000.

Net income will increase by $12,500.

Net income will be $50,000.

Explorer Company manufactures two products, hard-tops and covers for its convertible vehicles. Data for each follows:

Hard-top

Covers

Direct labor hours required per unit

Contribution margin

per unit

$240

$390

Only 4,200 direct labor hours are available per month. How many units of each product should Explorer make in order to maximize profits?

Hard-top

Covers

250

1,050

4,200

400

1,050

250

Superior Gaming, a computer enhancement company, has three product lines: audio enhancers, video enhancers, and connection-speed accelerators. Common costs are allocated based on relative sales. A product line income statement for the year ended December 31, 2011 follows:

Total

Sales

65,000

417,000

Audio	Video	Accelerators
$1,045,000	$2,255,000	$2,200,000	$5, 500,000
Less COGS	575,000	1, 240,000	1,870,000	3,685,000
Gross margin	470,000	1,015,000	330,000	1,815,000
Less other var costs	53,000	69,000			20,000	142,000
Contribution margin		417,000	946,000	310,000	1,673,000
Less direct salaries	155,000	175,000	395,000
Less common fixed costs:
Rent	11,970	25,830	25,200	63,000
Utilities	4,370	9,430	9,200	23,000
Depreciation	5,890	12,710	12,400	31,000
Other admin costs	79,230	170,970	166,800
Net income	$160,540	$552,060		$31,400	$744,000

Since the profit for accelerators is relatively low, the company is considering dropping this product line. What is the incremental effect of dropping accelerators?

99,000

$31,400

($310,000)

($245,000)

Molina Medical Supply Company is trying to decide whether or not to continue distributing hospital supplies. The following information is available for Molina’s business segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs would remain unchanged if a segment is dropped.

Sales

Variable costs

64,000

50,000

20,000

60,000

Net Income

Hospital Supplies	Retail Stores	Mail Order
$ 120,000	$440,000	$360,000
	200,000		140,000
Contribution Margin	56,000	240,000		220,000
Direct Fixed Costs	80,000	90,000
Allocated common fixed costs	70,000
($ 14,000)	$ 90,000	$ 70,000

If hospital supplies are dropped, what would happen to profit?

Increase by $14,000.

Decrease by $114,000.

Decrease by $6,000.

Increase by $76,000.

Hospital Supplies

Retail Stores

Mail Order

Sales

$120,000

$440,000

$360,000

Variable costs

64,000

200,000

140,000

Contribution Margin

56,000

240,000

220,000

Direct Fixed Costs

50,000

80,000

90,000

Allocated common fixed costs

20,000

70,000

60,000

Net Income

($ 14,000)

$ 90,000

$ 70,000

Assume that if hospital supplies were dropped, retail store sales would increase by 25%. What would the impact on overall profitability be if the “Hospital Supplies” segment is eliminated?

Income will increase by $104,000.

Income would increase by $54,000.

Income will increase by $14,000.

Income will increase by $60,000.

Iguana Company sells a single product. Iguana estimates demand and costs at various activity levels as follows:

$3,000,000

$1,000,000

140,000

$1,000,000

160,000

$1,000,000

200,000

$1,000,000

Units Sold		Price	Total Variable Costs	Fixed Costs
120,000	$48
$45	$3,500,000
$40	$4,000,000
180,000	$35	$4,500,000
$30	$5,000,000

How would you best describe Iguana’s variable cost per unit over the range shown?

It is decreasing as volume increases.

It is first increasing as volume increases, then decreasing.

It is constant.

It is increasing as volume increases.

Jackson Company is trying to determine the optimal price to charge for its PUNCH model. Jackson has fixed costs of $50,000 and the PUNCH has variable costs of $12.00 per unit. Jackson has determined that the following relationships exist between price and demand:

Price

Demand
	$20	6,875
	$19	8,800
	$18	10,000
	$17	11,000

What price should Jackson charge in order to maximize its profit?

$19

$18

$17

$20

Costa Company has a capacity of 40,000 units per year and is currently selling 35,000 for $400 each. Barton Company has approached Costa about buying 2,000 units for only $300 each. The units would be packaged in bulk, saving Costa $20 per unit when compared to the normal packaging cost. Normally, Costa has a variable cost of $280 per unit. The annual fixed cost of

$2,000,000

would be unaffected by the special order. What would be the impact on profits if Costa were to accept this special order?

Profits would increase $80,000.

Profits would increase $60,000.

Profits would decrease $200,000.

Profits would increase $40,000.

The Pure Company uses cost-plus pricing with a 50% mark-up. The company is currently selling 100,000 units at $12 per unit. Each unit has a variable cost of $6. In addition, the company incurs $200,000 in fixed costs annually. If demand falls to 80,000 units and the company wants to continue to earn a 50% return, what price should the company charge?

$12.75

$14.55

$10.95

$13.50

A company has $8.00 per unit in variable costs and $4.00 per unit in fixed costs at a volume of 50,000 units. If the company marks up total cost by 60%, what price should be charged if 60,000 units are expected to be sold?

$11.33

$18.13

$19.20

$7.20

The chief engineer at Tech Deals has proposed production of a high-tech portable electronic storage device to be sold at a 30 percent markup above its full cost. Management estimates that the fixed costs per year will be $160,000. The quantity demanded is 40,000 units. How much is the price with a 30 percent markup?

$20.00

$19.60

$20.80

Processing electronic orders	500,000
Processing non-electronic orders		$2,000,000
Picking orders	Number of different products ordered	800,000
Packaging orders	$1,500,000	Number of items ordered	50,000,000
Returns	Number of returns

Consultation	Number of consultations	100 consultations
Administrative Costs	150,000	Admin labor hours	10,000 labor hours
Client Service	99,000	Number of clients	110 clients