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A. 433,333 C. 666,667

PROBLEMS B. 500,000 D. 708,333

Cost equation

1. Smart Company is relocating its facilities. The company estimates that it will take three trucks High-low method

to move office contents. If the per truck rental charge is $1,000 plus 25 cents per mile, what is 5. The Austin Manufacturing Company wants to develop a cost estimating equation for its

the expected cost to move 800 miles? monthly cost of electricity. It has the following data:

A. $1,000 C. $2,400 Month Cost of Electricity Direct Labor Hours

B. $1,200 D. $3,600 January $6,750 1,500

April 7,500 1,700

2. The following cost functions were developed for manufacturing overhead costs: July 8,500 2,000

Manufacturing Overhead Cost Cost Function October 7,250 1,600

Electricity $100 + $20 per direct labor hour Using the high-low method, what is the best equation?

Maintenance $200 + $30 per direct labor hour A. Y = $750 + $3.50X D. Y = $1,500 + $5.00X

Supervisors’ salaries $10,000 per month B. Y = $750 + $5.00X E. Y = $2,000 + $3.50X

Indirect materials $16 per direct labor hour C. Y = $1,500 + $3.50X

If July production is expected to be 1,000 units requiring 1,500 direct labor hours, estimated

manufacturing overhead costs would be 6. Total production costs of prior periods for a company are listed as follows. Assume that the

A. $10,366 C. $99,000 same cost behavior patterns can be extended linearly over the range of 3,000 to 35,000 units

B. $76,300 D. $109,300 and that the cost driver for each cost is the number of units produced.

Production in units per month 3,000 9,000 16,000 35,000

3. Bradley Co. budgets its total production costs at $220,000 for 75,000 units of output and Cost X $23,700 $52,680 $86,490 $178,260

$275,000 for 100,000 units of output. Since additional facilities are needed to produce 100,000 Cost Y 47,280 141,840 252,160 551,600

units, fixed costs are budgeted at 20% more than for 75,000 units. What is Bradley's budgeted What is the average cost per unit at a production level of 8,000 units for cost X?

fixed cost at 100,000 units? A. $4.83 C. $5.98

A. 16,500 C. 156,000 B. $5.85 D. $7.90

B. 66,000 D. 165,000

Regression analysis

7. Y = P575,000 + P8.50X represents the behavior of maintenance costs (Y) as a function of

4. Matias Corporation wishes to market a new product for P12.00 a unit. Fixed costs to machine hours (X). Thirty (30) monthly observations were used to develop the foregoing

manufacture this product are P800,000 for less than 500,000 units and P1,200,000 for 500,000 regression equation. The related coefficient of determination was 0.90. If 2,500 machine hours

or more units. Contribution margin is 20%. How many units must be sold to realize a net income are worked in one month, the related point estimate of total variable maintenance costs would

from this product of P500,000? be

MSQ-01 – COST BEHAVIOR & COST-VOLUME-PROFIT ANALYSIS Page 1 of 7

MANAGEMENT ADVISORY SERVICES HILARIO TAN

A. P19,125 C. P23,000 year. All sales are on credit. Determine the company’s break-even revenue.

B. P21,250 D. P25,250 A. P1,032,000 C. P2,106,122

B. P1,517,040 D. P3,096,000

8. Sago Co. uses regression analysis to develop a model for predicting overhead costs. Two

different cost drivers (machine hours and direct materials weight) are under consideration as the 11. Tonykinn Company is contemplating of marketing a new product. Fixed costs will be $800,000

independent variable. Relevant data were run on a computer using one of the standard for production of 75,000 units or less and $1,200,000 if production exceeds 75,000 units The

regression programs, with the following results: variable cost ratio is 60% for the first 75,000. Contribution margin percentage will increase to

Coefficient 50% for units in excess of 75,000. If the product is expected to sell for $25 per unit, how many

Machine hours Direct materials weight units must Tonykinn sell to breakeven?

Y intercept 2,500 4,600 A. 80,000 C. 111,000

B 5.00 2.60 B. 96,000 D. 120,000

R 2 0.70 0.50

What regression equation should be used? 12. A company manufactures a single product. Estimated cost data regarding this product and other

A. Y = 2,500 + 3.5X C. Y = 4,600 +1.3X information for the product and the company are as follows:

B. Y = 2,500 + 5.0X D. Y = 4,600 + 2.6X Sales price per unit $40

Total variable production cost per unit $22

Contribution margin income statement Sales commission (on sales) 5%

9. A retail company determines its selling price by marking up variable costs 60%. In addition, the Fixed costs and expenses

company uses frequent selling price markdowns to stimulate sales. If the markdowns average Manufacturing overhead $5,598,720

10%, what is the company’s contribution margin ratio? General and administrative $3,732,480

A. 27.5% C. 37.5% Effective income tax rate 40%

B. 30.6% D. 41.7% The number of units the company must sell in the coming year in order to reach its breakeven

point is

A. 388,800 units C. 583,200 units

B. 518,400 units D. 972,000 units

10. Ultra Vogue Co. sells 50,000 units of “yo” a top-of-the-line garden sprinkler. These were taken 13. Merchandisers, Inc. sells Product O to retailers for P200. The unit variable cost is P40 with a

from the company’s records: selling commission of 10%. Fixed manufacturing costs total P1,000,000 per month while fixed

selling and administrative costs total P420,000. The income tax rate is 30%. The target sales

Accounts receivable, P129,000. Contribution margin ratio, 49%.

if after tax income is P123,200 would be

Days sales outstanding, 15 days. Profit for the period was P485,040.

A. 10,950 units. C. 13,750 units.

The ending receivables balance is the average balance during the year. Assume a 360-day

MSQ-01 – COST BEHAVIOR & COST-VOLUME-PROFIT ANALYSIS Page 2 of 7

MANAGEMENT ADVISORY SERVICES HILARIO TAN

B. 11,400 units. D. 15,640 units. and an operating loss of P20,000. By how much would Nette need to increase its sales in order

to achieve a target operating income of 10% of sales?

14. NCB, Inc. manufactures computer tables. It has an investment of P1,750,000 in assets and A. P400,000 C. P500,000

expects a 25% return on investment. Its total fixed production costs for 2,000 units is P550,000 B. P462,000 D. P800,000

plus an additional P150,000 for selling and administrative expenses. The variable cost to

manufacture is P1,500 per table. The selling price per table should be 19. Sari-Sari Grocery is currently open only on Monday to Saturday. It is considering opening on

A. P1,850.00 C. P2,531.25 Sundays. The annual incremental costs of Sunday opening is estimated at P124,800. Its gross

B. P2,068.75 D. P2,725.00 margin is 20%. It estimates that 60% of Sunday sales to customers would be on other days if

its stores were not open on Sundays. The Sunday sales that would be necessary for Sari-sari

15. Story Manufacturing incurs annual fixed costs of $250,000 in producing and selling "Tales." to attain the same weekly operating income is

Estimated unit sales for 2001 are 125,000. An after-tax income of $75,000 is desired by A. P19,500. C. P29,250.

management. The company projects its income tax rate at 40 percent. What is the maximum B. P20,000. D. P30,000.

amount that Story can expend for variable costs per unit and still meet its profit objective if the

sales price per unit is estimated at $6? 20. ABC Company breaks even at $300,000 sales and earns $30,000 at $350,000 sales. Which of

A. $3.00 C. $3.59 the following is true?

B. $3.37 D. $3.70 A. Fixed costs are $20,000.

B. The selling price per unit is $3.

Incremental analysis C. Contribution margin is 60% of sales.

16. A company is concerned about its operating performance, as summarized below: D. Profit at sales of $400,000 would be $80,000.

Sales ($12.50 per unit) $300,000

Variable costs 180,000 Sensitivity analysis

Net operating loss (40,000) 21. A product has a selling price of P5 and variable cost of P3.50 per unit. The effect of a P0.50 per

How many additional units should have been sold in order for the company to break even in unit increase in cost is to increase the break-even level of activity by

1992? A. P1.50 per unit. C. 33-1/3%

A. 8,000 C. 16,000 B. 14.3% D. 50%

B. 12,800 D. 32,000

17. Scottso Enterprises has fixed costs of $120,000. At a sales volume of $400,000, return on sales 22. A company has sales of $500,000, variable costs of $300,000, and pretax profit of $150,000. If

is 10%. At a $600,000 volume, return on sales is 20%. What is the break-even volume? 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,

MANAGEMENT ADVISORY SERVICES HILARIO TAN

23. Singsing, Inc. manufactures and sells key rings embossed with college names and slogans. B. P135. D. P240.

Last year, the key rings sold for P75 each, and the variable costs to manufacture them were

P22.50 per unit. The company needed to sell 20,000 key rings to break-even. The net income 26. Lindsay Company reported the following results from sales of 5,000 units of Product A for

last year was P50,400. The company expects the following for the coming year: June:

The selling price of the key rings will be P90. Sales $200,000

Variable manufacturing costs per unit will increase by one-third. Variable costs (120,000)

Fixed costs will increase by 10%. Fixed costs (60,000)

The income tax rate will remain unchanged. Operating income $ 20,000

For the company to break-even the coming year, the company should sell Assume that Lindsay increases the selling price of Product A by 10 percent in July. How many

A. 2,600 units. C. 21,250 units. units of Product A would have to be sold in July to generate an operating income of $20,000?

B. 19,250 units. D. 21,600 units. A. 4,000 C. 4,500

B. 4,300 D. 5,000

24. Austin Manufacturing, which is subject to a 40% income tax rate, had the following operating

data for the period just ended. 27. CGW Corporation sells Product T at a unit price of P5 deriving annual gross sales of P50,000.

Selling price per unit $ 60 The variable cost to produce T is P4.50 per unit and total fixed costs is P10,000. If it increases

Variable cost per unit 22 T’s unit price to P8, a decrease of sales to only 4,000 units would result. The effect of the price

Fixed costs 504,000 increase on CGW’s net income from the sales of Product T will be a:

Management plans to improve the quality of its sole product by: (1) replacing a component that A. No effect. C. P9,000 increase.

costs $3.50 with a higher-grade unit that costs $5.50 and (2) acquiring a $180,000 packing B. P4,000 increase. B. P18,000 decrease.

machine. Austin will depreciate the machine over a 10-year life with no estimated salvage value

28. Planners have determined that sales will increase by 25% next year, and that the profit margin

by the straight-line method of depreciation. If the company wants to earn after-tax income of

will remain at 15% of sales. Which of the following statements is correct?

$172,800 in the upcoming period, it must sell

A. Profit will grow by 25%.

A. 19,300 units. C. 22,500 units.

B. The profit margin will grow by 15%.

B. 21,316 units. D. 23,800 units.

C. Profit will grow proportionately faster than sales.

D. Ten percent of the increase in sales will become net income.

29. LXQ Turo Turo stores are open for 15 hours a day (from 6:00 a.m. to 9:00 p.m.). It sells

25. During 1996, RPS Corporation supplied hospitals with a comprehensive diagnostic kit for P120.

packaged meals at a price of P40 per meal. Variable cost per meal is P30 while total fixed costs

At a volume of 80,000 kits, RPS has fixed cost of P1,000,000 and a profit before income taxes

for operation of all the stores amounted to 200,000 monthly. It is thinking to reduce its store

of P200,000. Due to an adverse legal decision, RPS’s 1997 liability insurance increased by

hours to only 12 hours a day as this would reduce fixed costs (utilities and wages) by P60,000

P1,200,000 over 1996. Assuming the volume and other costs are unchanged, what should be

a month. It is expected that the reduced store hours would result in loss of 1,500 packed meals

the 1997 price be if RPS is to make the same P200,000 profit before income taxes?

monthly sales. The reduction in store hours would result in

A. P120. C. P150.

A. No change in monthly operating income.

MSQ-01 – COST BEHAVIOR & COST-VOLUME-PROFIT ANALYSIS Page 4 of 7

MANAGEMENT ADVISORY SERVICES HILARIO TAN

C. A prospective increase in monthly operating income of P45,000. 32. For the same Hennessy Co., in the immediately preceding number, what is the additional volume

D. A prospective increase in monthly operating income of P60,000. required after the price cut to get the same contribution margin before the price cut? Round off

to the nearest whole unit.

30. The Machan Manufacturing Company’s year-end income statement is as follows: A. 409 units C. 704 units

Sales (20,000 units) $360,000 B. 500 units D. 1,000 units

Variable costs 220,000

Contribution margin $140,000 Multiple products

Fixed costs 105,000 33. A company with $280,000 of fixed costs has the following data:

Net income $ 35,000 Product A Product B

Management is unhappy with the results and plans to make some changes for next year. Sales price per unit $5 $6

If management implements a new marketing program, fixed costs are expected to increase by Variable costs per unit $3 $5

$19,200 and variable costs to increase by $1 per unit. Unit sales are expected to increase by 15 Assume three units of A are sold for each unit of B sold. How much will sales be in dollars of

percent. What is the effect on income? product B at the breakeven point?

A. no change D. increase of $14,800 A. $200,000 C. $280,000

B. increase of $1,800 E. decrease of $21,200 B. $240,000 D. $840,000

C. increase of $13,800

Questions 34 and 35 are based on the following information.

Questions 31 and 32 are based on the following information. A company sells two products, X and Y. The sales mix consists of a composite unit of two units of

The marketing department of Hennessy Co. proposed a price cut on its leading brand, a product X for every five units of Y (2:5). Fixed costs are $49,500. The unit contribution margins for X and Y

called “Henry.” From the accounting records these are available: are $2.50 and $1.20, respectively.

Price per unit P 92.00

Discount to customers 10% 34. Considering the company as a whole, the number of composite units to break even is

Direct cost per unit P 52.60 A. 1,650 C. 8,250

Variable operating expense per unit P 5.60 B. 4,500 D. 22,500

Proposed price cut per unit P 10.00 35. If the company had a profit of $22,000, the unit sales must have been

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

MSQ-01 – COST BEHAVIOR & COST-VOLUME-PROFIT ANALYSIS Page 5 of 7

MANAGEMENT ADVISORY SERVICES HILARIO TAN

P690,000 and a 6% commission is paid to the sales person. It is considering changing the A. $21,600 C. $84,000

scheme to a commission arrangement that would pay each person a package of P30,000 plus B. $36,000 D. $60,000

a commission of 2% of the sales made by the person. The amount of total monthly car sales at

which Wheels Corp. would be indifferent (answer may be rounded off) as to which plan to select Comprehensive

is Questions 40 through 42 are based on the following information.

A. P22,500,000 C. P36,500,000 Almo Company manufactures and sells adjustable canopies that attach to motor homes and trailers.

B. P33,750,000 D. P45,000,000 The market covers both new unit purchasers as well as replacement canopies. Almo developed its

business plan based on the assumption that canopies would sell at a price of $400 each. The variable

37. Two companies are expected to have annual sales of 1,000,000 decks of playing cards next costs for each canopy were projected at $200, and the annual fixed costs were budgeted at

year. Estimates for next year are presented below: $100,000. Almo's after-tax profit objective was $240,000; the company's effective tax rate is 40%.

Company 1 Company 2 While Almo's sales usually rise during the second quarter, the May financial statements reported that

Selling price per deck $ 3.00 $3.00 sales were not meeting expectations. For the first 5 months of the year, only 350 units had been sold

Cost of paper deck 0.62 0.65 at the established price, with variable costs as planned, and it was clear that the after-tax profit

Printing ink per deck 0.13 0.15 projection would not be reached unless some actions were taken. Almo's president assigned a

Labor per deck 0.75 1.25 management committee to analyze the situation and develop an alternative course of action. The

Variable overhead per deck 0.30 0.35 following was presented to the president.

Fixed costs $960,000 $252,000 Reduce the sales price by $40. The sales organization forecasts that with the significantly reduced

Given these data, which of the following responses is correct? sales price, 2,700 units can be sold during the remainder of the year. Total fixed and variable unit

(In units) A. B. C. D. costs will stay as budgeted.

Breakeven point for Co. 1 533,334 533,334 800,000 800,000 40. Assuming no changes were made to the selling price or cost structure, how many units must

Breakeven point for Co. 2 105,000 105,000 420,000 420,000 Almo sell to break even?

Volume at which profits of Co. 1 and A. 167 C. 500

Co. 2 are equal 1,000,000 1,180,000 1,000,000 1,180,000 B. 250 D. 1,700

41. Assuming no changes were made to the selling price or cost structure, how many units must

Margin of safety Almo sell to achieve its after-tax profit objective?

38. Product Cott has sales of $200,000, a contribution margin of 20%, and a margin of safety of A. 1,250 C. 2,000

$80,000. What is Cott’s fixed cost? B. 1,700 D. 2,500

A. $16,000 C. $80,000

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?

A. $157,200 C. $241,200

39. Bell Company has a 25% margin of safety. Its before-tax return on sales is 6%, and its tax rate B. $160,800 D. $301,200

is 40%. Assuming that current sales are $120,000, what is Bell’s total fixed costs.

MSQ-01 – COST BEHAVIOR & COST-VOLUME-PROFIT ANALYSIS Page 6 of 7

MANAGEMENT ADVISORY SERVICES HILARIO TAN

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