Product Cost Under Absorption Costing Is Characteristically

Redford, Inc. has provided the following data:If the dollar contribution margin per unit is increased by 10%, total fixed cost is decreased by 20%, and all other factors remain the same, net income will:| | | A)| decrease by $60,000. | | | B)| increase by $60,000. | | | C)| increase by $120,000. | | | D)| increase by $420,000. | | | | | | Feedback:The correct answer is C (Learning Objective 1): Net income will change as follows. Calculations: $600,000 x 10% = $60,000 $300,000 x 20% = $60,000| | 2 INCORRECT| |

Gardner Manufacturing Company produces a product that sells for $120. A selling commission of 10% of the selling price is paid on each unit sold.

Variable manufacturing costs are $60 per unit. Fixed manufacturing costs are $20 per unit based on the current level of activity, and fixed selling and administrative costs are $16 per unit. The contribution margin per unit is:| | | A)| $104. | | | B)| $72. | | | C)| $60. | | | D)| $48. | | | | | | Feedback:The correct answer is D (Learning Objective 1): The contribution margin per unit is determined as follows. | | 3 CORRECT| |

Newman Corporation produced and sold 80,000 units and reported sales of $4,000,000 during the past year. Management determined that variable expenses totaled $2,800,000 and fixed expenses totaled 0,000.

What is the company’s contribution margin ratio? | | | A)| 30%| | | B)| 70%| | | C)| 150%| | | D)| 250%| | | | | | Feedback:The correct answer is A (Learning Objective 3): The company’s contribution margin (CM) ratio is determined as follows. CM ratio = CM ? Sales = (Sales – Variable expenses) ? Sales CM ratio = ($4,000,000 – $2,800,000) ? $4,000,000 = 30%| | 4 INCORRECT| | Astair, Inc. eported sales of $8,000,000 for the month and incurred variable expenses totaling $5,600,000 and fixed expenses totaling $1,440,000. The company has no beginning or ending inventories. A total of 80,000 units were produced and sold last month. If sales increase by 200 units, how much should net income increase? | | | A)| $1,600| | | B)| $6,000| | | C)| $10,000| | | D)| $19,200| | | | | | Feedback:The correct answer is B (Learning Objectives 1 and 3): First, determine the contribution margin (CM) per unit as follows.

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CM per unit = (Sales – Variable expenses) ?

Number of units sold  CM per unit = ($8,000,000 – $5,600,000) ? 0,000 = $30 per unit Then, determine the impact of the increase in sales on net income as follows. Increase in net income = Increase in sales (in units) x CM per unit  Increase in net income = 200 units x $30 per unit = $6,000| | 5 CORRECT| | Astair, Inc. reported sales of $8,000,000 for the month and incurred variable expenses totaling $5,600,000 and fixed expenses totaling $1,440,000. The company has no beginning or ending inventories. A total of 80,000 units were produced and sold last month. (Note that this is the same data that was provided for the previous question. How many units would the company have to sell to achieve a desired profit of $1,200,000? | | | A)| 88,000| | | B)| 100,000| | | C)| 106,668| | | D)| 150,000| | | | | | Feedback:The correct answer is A (Learning Objectives 1 and 5): First, determine the contribution margin (CM) per unit as follows. Total contribution margin/Number of units sold = CM per unit $2,400,000/80,000 = $30 per unit Then, the total unit sales required to achieve the desired targeted profit is determined as follows. Break-even point in units = (Fixed expenses + Desired targeted profit) ?

CM per unit Break-even point (in units) = ($1,440,000 + $1,200,000) ? $30 per unit = 88,000 units| | 6 INCORRECT| | Astair, Inc. reported sales of $8,000,000 for the month and incurred variable expenses totaling $5,600,000 and fixed expenses totaling $1,440,000. The company has no beginning or ending inventories. A total of 80,000 units were produced and sold last month. (Note that this is the same data that was provided for the previous question. ) What is the company’s break-even in units? | | | A)| 0 units| | | B)| 48,000 units| | | C)| 72,000 units| | | D)| 80,000 units| | | | | |

Feedback:The correct answer is B (Learning Objectives 1 and 6): First, determine the contribution margin (CM) per unit as follows. CM per unit = (Sales – Variable expenses) ? Number of units sold  CM per unit = ($8,000,000 – $5,600,000) ? 80,000 = $30 per unit Then, the break-even point (in units) is determined as follows. Break-even point in units = Fixed expenses ? CM per unit Break-even point in units = $1,440,000 ? $30 per unit = 48,000 units| | 7 INCORRECT| | Astair, Inc. reported sales of $8,000,000 for the month and incurred variable expenses totaling $5,600,000 and fixed expenses totaling $1,440,000.

The company has no beginning or ending inventories. A total of 80,000 units were produced and sold last month. (Note that this is the same data that was provided for the previous question. ) What is the company’s margin of safety in dollars? | | | A)| $480,000| | | B)| $2,400,000| | | C)| $3,200,000| | | D)| $3,520,000| | | | | | Feedback:The correct answer is C (Learning Objectives 3, 6, and 7): The company’s contribution margin (CM) ratio is determined as follows. CM ratio = (Sales – Variable expenses) ? Sales CM ratio = ($8,000,000 – $5,600,000) ? $8,000,000 = 30%

Then, determine the break-even point (in sales dollars) as follows. Break-even point in sales dollars = Fixed expenses ? CM ratio  Break-even point in sales dollars = $1,440,000 ? 30% = $4,800,000 Finally, determine the margin of safety as follows. Margin of safety (in dollars) = Sales – Break-even sales Margin of safety (in dollars) = $8,000,000 – $4,800,000 = $3,200,000| | 8 INCORRECT| | Astair, Inc. reported sales of $8,000,000 for the month and incurred variable expenses totaling $5,600,000 and fixed expenses totaling $1,440,000. The company has no beginning or ending inventories.

A total of 80,000 units were produced and sold last month. (Note that this is the same data that was provided for the previous question. ) What is the company’s degree of operating leverage? | | | A)| 0. 12| | | B)| 0. 4| | | C)| 2. 5| | | D)| 3. 3| | | | | | Feedback:The correct answer is C (Learning Objective 8): The company’s degree of operating leverage is determined as follows. Degree of operating leverage = Contribution margin ? Net operating income Degree of operating leverage = $2,400,000 ? $960,000 = 2. 5| | 9 INCORRECT| | Grant Company sells a single product.

The product has a selling price of $50 per unit and variable expenses of 80% of sales. If the company’s fixed expenses total $150,000 per year, then it will have a break-even point in sales dollars of:| | | A)| $750,000| | | B)| $187,500| | | C)| $15,000| | | D)| $3,750| | | | | | Feedback:The correct answer is A (Learning Objectives 1 and 6): First, determine the contribution margin (CM) ratio as follows. CM ratio = Sales percentage – Variable expenses percentage CM ratio = 100% – 80% = 20% Then, the break-even point in sales dollars is determined as follows.

Break-even point in sales dollars = Fixed costs ? CM ratio  Break-even point in sales dollars = $150,000 ? 20% = $750,000| | 10 INCORRECT| | Lange Company sells three products: X, Y and Z. Product X’s unit contribution margin is higher than Product Y’s and Product Y’s is higher than Products Z’s. Which one of the following events is most likely to increase the company’s overall break-even point? | | | A)| The installation of new automated equipment and subsequent lay-off of factory workers. | | | B)| A decrease in Product Z’s selling price. | | | C)| An increase in the overall market demand for Product Y. | | D)| A change in the relative market demand for the products, with the increase favoring Product Z relative to Product Y and Product X. | | | | | | Feedback:The correct answer is D | Variable costing is also known as:| | | A)| Direct costing. | | | B)| Indirect costing. | | | C)| Marginal costing. | | | D)| Both (A) and (C). | | | | | | Feedback:The correct answer is D (Learning Objective 1): Variable costing is also known as direct costing and marginal costing. | | 2 INCORRECT| | Using absorption costing, a unit of product includes what costs? | | A)| Direct materials and direct labor. | | | B)| Direct materials, direct labor, and fixed overhead. | | | C)| Direct materials, direct labor, and variable overhead. | | | D)| Direct materials, direct labor, variable overhead, and fixed overhead. | | | | | | Feedback:The correct answer is D (Learning Objective 1): Using absorption costing, a unit of product includes direct materials, direct labor, variable overhead, and fixed overhead costs. | | 3 INCORRECT| | Using the following data, determine the unit product cost under absorption costing. | | | A)| $22| | | B)| $24| | C)| $28| | | D)| $30| | | | | | Feedback:The correct answer is C (Learning Objective 1): The unit product cost under absorption costing is determined as follows. | | 4 CORRECT| | Using variable costing, a unit of product includes which costs? | | | A)| Only direct materials and direct labor. | | | B)| Direct materials, direct labor, and fixed overhead. | | | C)| Direct materials, direct labor, and variable overhead. | | | D)| Direct materials, direct labor, variable overhead, and fixed overhead| | | | | | Feedback:The correct answer is C (Learning Objective 1):

Using variable costing, a unit of product includes direct materials, direct labor, and variable overhead costs. | | 5 INCORRECT| | Using the following data, determine the unit product cost under variable costing. | | | A)| $22| | | B)| $24| | | C)| $28| | | D)| $30| | | | | | Feedback:The correct answer is A (Learning Objective 1): The unit product cost under variable costing is determined as follows. | | 6 INCORRECT| | Product cost under absorption costing is characteristically:| | | A)| Higher than under variable costing. | | | B)| Lower than under variable costing. | | C)| Equal to variable costing. | | | D)| Higher sometimes and lower sometimes than variable costing. | | | | | | Feedback:The correct answer is A (Learning Objective 1): Product cost under absorption costing is characteristically higher than under variable costing because the fixed overhead costs are included in product costs when absorption costing is used but not when variable costing is used. | | 7 INCORRECT| | Variable costing is attractive to managers as an alternative to absorption costing because:| | | A)| Absorption costing makes distinctions between fixed and variable product costs. | | B)| Absorption costing is well suited to CVP analysis techniques. | | | C)| Absorption costing provides useful tools to managers for planning and control. | | | D)| To generate data for CVP analysis, considerable time would have to be invested to rework income statements constructed under absorption costing. | | | | | | Feedback:The correct answer is D (Learning Objective 2): Variable costing is attractive to managers as an alternative to absorption costing because to generate data for CVP analysis, considerable time would have to be invested to rework income statements constructed under absorption costing| | INCORRECT| | When production is equal to sales, which of the following is true? | | | A)| No change occurs to inventories for either absorption costing or variable costing methods. | | | B)| The use of absorption costing produces a higher net income than the use of variable costing. | | | C)| The use of absorption costing produces a lower net income than the use of variable costing. | | | D)| The use of absorption costing causes inventory value to increase more than they would through the use of variable costing. | | | | | | Feedback:The correct answer is A (Learning Objective 3):

When production is equal to sales, there are no inventories on hand at the beginning or end of the period. As a result, the same amount for ending inventories (zero) is reported whether absorption costing or variable costing methods are used. In addition, there would no difference in the amount of net income reported using the two methods. | | 9 INCORRECT| | Which of the following statements is (are) true? | | | A)| Net operating income is not affected by changes in production under absorption costing. | | | B)| Net operating income is not affected by changes in production under variable costing. | | C)| Both of the above statements are true. | | | D)| Neither of the above statements is true. | | | | | | Feedback:The correct answer is B (Learning Objective 3): Net operating income is not affected by changes in production under variable costing. On the other hand, net operating income is affected by changes in production under absorption costing. | | 10 INCORRECT| | A segment of a business responsible for both revenues and expenses would be referred to as:| | | A)| a cost center. | | | B)| an investment center. | | | C)| a profit center. | | | D)| residual income. | | | | | | Feedback:The correct answer is C |