Solutions for
Chapters 15 and 19 Practice Test
1) At the various sales levels shown, Parker Company will incur the costs listed below.
Identify each of these costs as fixed (F), variable (V) or mixed (M).
Units Sold
Total salary cost
Insurance cost per unit
Supplies cost per unit
Total utility cost
Rent cost per unit sold
Total shipping cost
Depreciation cost per unit
Total rent cost
Total cost of goods sold
50
750
24
5
100
12
20
30
600
2,000
100
1,000
12
5
150
6
40
15
600
4,000
150
1,250
8
5
200
4
60
10
600
6,000
200
1,500
6
5
250
3
80
7.50
600
8,000
Type of
cost
M
F
V
M
F
V
F
F
V
Total fixed costs do not vary with changes in activity level. See Total rent cost above.
Fixed costs per unit vary inversely with changes in volume of activity (decreasing
proportionately with increased activity level). See Insurance cost per unit, Rent cost
per unit and Depreciation cost per unit above.
Total variable costs vary in direct proportion to changes in activity level. See CGS
and Shipping cost above.
Variable costs per unit remain constant with changes in volume. See Supplies cost
per unit above.
Mixed costs are semi-variable costs which contain both fixed and variable cost
components. See Total salary cost and Total utility cost above.
2) The Wilshire Corp. estimated the following unit costs of producing and selling
20,000 units per month of its product:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Variable selling costs
Fixed selling costs
$10
2
5
4
3
2
Variable
Variable
Variable
Fixed
Variable
Fixed
(a) Compute the total cost of producing and selling 18,000 units. __$480,000__
Variable Costs = 10 (DM) + 2 (DL) + 5 (Var. OH) + 3 (Var. Sell.) = $20 per unit
Fixed Costs = 4 (Fixed OH) + 2 (Fixed Sell.) = $6 per unit
$20 VC per unit * 18,000 units = $360,000
$6 FC per unit * 20,000 units = $120,000 (remember -- FC per unit was based
on an estimation of 20,000 units; therefore, $120,000 are the total fixed costs
within the relevant range, regardless of changes in activity level).
$360,000 + $120,000 = $480,000
(b) Compute the total cost of producing and selling 21,000 units.
_$540,000_
$20 VC per unit * 21,000 = $420,000 + $120,000 FC = $540,000
3) Humpback Hiking Co. normally produces and sells 25,000 backpacks each month
at a total variable cost of $150,000 and total fixed costs of $50,000.
(a) What is Humpback’s cost per backpack (@ 25,000 units)? $8.00
150,000 / 25,000 = $6 VC per unit
50,000 / 25,000 = $2 FC per unit
(b) What is the unit cost if production / sales drop to 20,000 units? $8.50
$6 VC per unit * 20,000 = $120,000 + $50,000 FC = $170,000
$170,000 / 20,000 = $8.50 per unit
(c) Explain why the unit cost changes with the decreased production.
With decreased production, the fixed cost is spread over fewer units,
which increases the total production cost per unit.
4) The Carolina Company makes and sells hammocks. Each hammock costs $50 to
manufacture and sells for $75. Carolina spends $3 to ship the hammock to
customers and pays salespersons $2 for each hammock sold. The remaining annual
expenses of operation are administrative salaries, $70,000; advertising, $20,000;
and rent, $30,000. Carolina plans to sell 18,000 hammocks in the coming year.
(a) Prepare a projected contribution margin income statement.
Sales Revenue (18,000 * 75)
Variable Expenses
Cost of Goods Sold (18,000 * 50)
Sales Commissions (18,000 * 2)
Shipping Exp. (18,000 * 3)
Contribution Margin
Fixed Expenses
1,350,000
(900,000)
(36,000)
(54,000)
360,000
Admin. Salaries
Advertising
Rent
Net Income
(70,000)
(20,000)
(30,000)
240,000
(b) Calculate Carolina’s magnitude of operating leverage. ___1.5___
360,000 Cont. Margin / 240,000 Net Income = 1.5
(c) Use the measure of operating leverage to determine the amount of net
income Carolina will earn if sales increase by 10%. ___$276,000__
1.5 Operating Leverage * 10% sales increase = 15% increase in Net Inc.
$240,000 Net Income * 1.15 = $276,000
OR
240,000 * 15% = 36,000 + 240,000 = 276,000
5) The Thomson Company, Alexander Associates, Inc. and The Ballard Group are
competing accounting firms. The following information is available for 2007:
Revenue
Variable Costs
Fixed Costs
Thomson
500,000
100,000
300,000
Alexander
500,000
300,000
100,000
Ballard
500,000
50,000
400,000
Which company has the highest degree of operating leverage? Ballard (9)
Thomson: 500,000 – 100,000 = 400,000 CM – 300,000 = 100,000 Net Income
400,000/100,000 = 4 OL
Alexander: 500,000 – 300,000 = 200,000 CM – 100,000 = 100,000 Net Income
200,000/100,000 = 2 OL
Ballard: 500,000 – 50,000 = 450,000 CM – 400,000 = 50,000 Net Income
450,000/50,000 = 9 OL
6) Kickit, Inc. plans to introduce a soccer ball using a revolutionary new material. The
following revenue and cost relationships are provided for 2 different plans for
manufacturing and marketing – Plan A and Plan B:
Plan A
Plan B
Selling Price
Manufacturing Costs
Selling and Admin.
Costs
$36 / unit
$21 / unit + $80,000 per year
$3 / unit + $20,000 per year
$36 / unit
$9 / unit + $300,000 per year
$3 / unit + $100,000 per year
(a) Prepare a projected contribution margin income statement for each plan assuming
that 25,000 soccer balls will be sold.
Plan A
Plan B
Sales Revenue (36 * 25,000)
900,000 Sales Revenue (36 * 25,000)
900,000
Variable Costs (24 * 25,000)
(600,000) Variable Costs (12 * 25,000)
(300,000)
Contribution Margin
300,000 Contribution Margin
600,000
Fixed Costs
(100,000) Fixed Costs
(400,000)
Net Income
200,000 Net Income
200,000
(b) Calculate the degree of operating leverage for both Plan A and Plan B.
Plan A: 300,000 / 200,000 = 1.5
Plan B: 600,000 / 200,000 = 3.0
(c) Compute each plan’s net income if the number of soccer balls sold increases by
20%.
Plan A: 1.5 OL * 20% sales increase = 30% profit increase
200,000 * 1.30 (30%) = $260,000 Net Income
Plan B: 3.0 OL * 20% sales increase = 60% profit increase
200,000 * 1.60 = $320,000 Net Income
(d) Which plan should Kickit follow if it is optimistic about the new soccer ball’s
sales growth?
If Kickit is optimistic (and risk aggressive), it should pursue Plan B due to the
higher operating leverage. Because Plan B has more fixed costs than A, a 20%
increase in sales will yield a much larger increase in net income for Plan B (+
60%) vs. Plan A (+ 30%).
7) Fill in the following blanks:
Total
Revenues
a.
b.
c.
$500,000
600,000
500,000
Total
Variable
Costs
$400,000
360,000
350,000
Contribution
Margin %
20%
40%
30%
Total Fixed
Costs
Operating
Income
$40,000
165,000
90,000
$60,000
75,000
60,000
(a) 60,000 + 40,000 = 100,000 + 400,000 = 500,000
100,000/500,000 = 20%
(b) 600,000 * .4 = 240,000 -75,000 = 165,000
600,000 – 240,000 = 360,000
(c) 60,000 + 90,000 = 150,000
150,000/30% = 500,000 500,000-150,000 = 350,000
Total
Revenues
d.
e.
f.
$420,000
440,000
$180,000
Total
Contribution
Variable
Margin per
Costs
unit
$22
222,000
$210,000
$46
105,000
$15
(d) 22 * 9,000 units = 198,000 CM – 50,000 = 148,000
(e) 70,000 + 160,000 = 230,000 CM + 210,000 = 440,000
(f) 30,000 +45,000 = 75,000 CM / 5,000 units = $15 CMU
Total
Fixed
Costs
148,000
$160,000
$45,000
Operating
Income
$50,000
$70,000
$30,000
Units
Sold
9,000
5,000
5,000
420,000 – 198,000 = 222,000
230,000/46 = 5,000 units
180,000 – 75,000 = 105,000
8) Rip Stix, Inc. manufactures lacrosse sticks that it sells for $50 each. The following
unit cost information assumes a production and sales volume of 12,000 units:
Direct material
Direct labor
Variable overhead costs
Fixed overhead costs
Variable selling and administrative costs
Fixed selling and administrative costs
$10
$5
$4
$3
$1
$2
(a) Compute the company’s total fixed costs.
3 (OH) + 2 (S & A) = 5 * 12,000 = $60,000
(b) Calculate the variable cost per unit.
10 (DM) + 5 (DL) + 4 (Var. OH) + 1 (Var. S & A) = $20 VC per unit
(c) What is Rip’s contribution margin per unit?
50 Selling Price per unit – 20 Var. Cost per Unit = $30 CM per unit
(d) Compute the breakeven point in units and dollars.
60,000 (Total Fixed Costs) / $30 (CM per unit) = 2,000 BE units
OR
50x – 20x -60,000 = 0
x = 2,000 BE units
2,000 BE units * $50 = $100,000 BE Sales
(e) Calculate Rip’s estimated profit if 12,000 lacrosse sticks are produced and
sold.
(30 CM per unit * 12,000) – 60,000 FC = $300,000 Net Income
OR
($50 * 12,000) – ($20 *12,000) – 60,000 = $300,000
(f) Compute the margin of safety in units, dollars and as a percentage, assuming
12,000 units are expected to be produced and sold.
12,000 budgeted – 2,000 breakeven = 10,000 units
$600,000 budgeted sales - $100,000 breakeven sales = $500,000
600,000 – 100,000 / 600,000 = 83%
(g) How many units does Rip Stix need to sell in order to earn a $180,000 profit?
(60,000 FC + 180,000) / $30 CMU = 8,000 units
OR
50x – 20x -60,000 = 180,000
x = 8,000
(h) If only 10,000 lacrosse sticks are produced and sold, compute Rip’s profit,
and indicate the change in profit from the original plan of 12,000.
(50 * 10,000) – (20 * 10,000) – 60,000 = $240,000
240,000 – 300,000 = 60,000 decrease in profit
(i) Refer to the original data. Rip Stix estimates that it can sell an additional
2,000 lacrosse sticks if it spends $50,000 on an advertising campaign. Should
the company proceed with the advertising campaign? Yes
(30 CM per unit * 2,000) = $60,000 - $50,000 Adv. Exp. = $10,000
additional profit
9) CGD Manufacturing, Inc. sells its product for $100 per unit. The company’s
accountant provided the following cost information:
Manufacturing Costs
$25,000 + 40% of sales
Selling Costs
Administrative Costs
$10,000 + 15% of sales
$15,000 + 5% of sales
Compute CGD’s contribution margin ratio. 40%
VC = 40% + 15% +5% = 60% of sales 100 – 60% = 40% CM ratio
10) The Emerson Company’s breakeven point is 12,000 units. Its product sells for $25
with variable costs per unit of $10.
Compute Emerson’s total fixed costs. $180,000
FC / (25-10) = 12,000
FC = 180,000
OR
(25 * 12,000) – (10 * 12,000) – FC = 0
FC = 180,000
11) Hiroshi Computers manufactures two types of laptops. Model A’s variable costs
per unit are $700 and it sells for $1,000. Model B’s variable costs per unit are
$1,200 and sells for $1,800. The planned sales mix is 4 units of Model A for every
one unit of Model B. Total fixed costs are $864,000.
Assuming the 4-to-1 sales mix is maintained, compute the number of laptops that
must be sold to break even.
Model A
1920 units
1,000 – 700 = 300 CMU
Model B
480 units
1,800 – 1,200 = 600 CMU
[(300 * 4) + (600 * 1)] / 5 = 360 Weighted Average CMU
864,000 FC / 360 = 2,400 BE Total Units
2,400 * 80% = 1,920 units Model A
2,400 * 20% = 480 units Model B
Break even Proof:
[(1,920 units A * 300 CMU) + (480 units B * 600 CMU)] – 864,000 FC = 0