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True-False

1. T F Managers use their knowledge of cost behavior to estimate the impact of changes in operations (such as changing output volume) on future profitability.

2. T F The traditional definition of variable cost assumes a linear relationship between cost and some measure of volume or output.

3. T F Both total fixed costs and fixed cost per unit are assumed to remain constant within the relevant range.

4. T F The high-low method is useful in identifying the fixed and variable components of a mixed cost.

5. T F Although the long-term goal in a just-in-time operating environment is to approach theoretical capacity, companies never operate at this level.

7. T F Contribution margin per unit is selling price per unit minus fixed costs per unit.

Multiple Choice

8. As production decreases, one would expect the variable cost per unit to

a. decrease.

b. increase.

c. remain unchanged.

d. decrease and then increase.

e. do none of the above.

9. The difference between fixed costs and variable costs is that

a. variable costs per unit vary within the relevant range, while fixed costs per unit remain constant within the relevant range.

b. variable costs per unit are constant (remain unchanged) within the relevant range, while fixed costs per unit vary within the relevant range.

c. variable costs per unit change in direct proportion to changes in activity, while total fixed costs change in direct proportion to changes in activity.

d. variable costs per unit and fixed costs per unit remain constant within the relevant range.

e. none of the above.

10. A good example of a mixed cost is

a. direct materials cost.

b. indirect materials cost.

c. utilities cost.

d. depreciation.

e. none of the above.

11. Assume total costs are represented on the vertical (y) axis and volume of activity is represented on the horizontal (x) axis. If the graph shows a line that is parallel to the horizontal axis, then the graph best illustrates

a. fixed costs per unit.

b. total direct materials cost.

c. equipment maintenance cost.

d. factory supervisory salaries.

e. none of the above.

12. Data for Cost A and Cost B are as follows:

Number of Units Produced

Total Cost

Number of Units Produced

Per Unit Cost

Cost A

1

\$ 10

Cost B

1

\$3,000

10

100

10

300

100

1,000

100

30

Which of the following best describes the behavior of Costs A and B?

a. Cost A is fixed; Cost B is variable.

b. Cost A is variable; Cost B is fixed.

c. Both Cost A and Cost B are variable.

d. Both Cost A and Cost B are fixed.

e. None of the above

13. In the month of lowest production volume, 500 units were produced, and total utilities costs were \$2,800. In the month of highest production volume, 850 units were produced, and total utilities costs were \$4,200. Using the high-low method, what is the fixed cost?

a. \$400.00

b. \$800.00

c. \$2,675.00

d. \$3,987.50

e. None of the above

14. In the month of highest telephone activity, 3,400 calls were placed, and total telephone costs were \$1,050. In the month of lowest activity, 2,000 calls were placed, and total telephone costs were \$700. Using the high-low method, what is the variable cost per call?

a. \$4.00

b. \$2.00

c. \$.50

d. \$.25

e. None of the above

15. The following information represents an annual income statement for a company that manufactures laser printers:

Sales revenue (1,600 units @ \$400)

\$640,000

Less variable costs

384,000

Contribution margin

\$256,000

Less fixed costs

400,000

Operating loss

(\$144,000)

What is the breakeven point in units?

a. 1,000

b. 1,960

c. 2,500

d. 2,800

e. None of the above

16. If a product has a selling price of \$35 per unit, variable costs of \$15 per unit, and total fixed costs of \$240,000 per year, how many units must be sold during the year to generate a profit of \$80,000?

a. 32,000

b. 16,000

c. 14,000

d. 8,000

e. None of the above

17. Z Company manufactures two products, X and Y. The selling price is \$12 per unit for X and \$16 per unit for Y. The variable cost is \$8 per unit for X and \$10 per unit for Y. Fixed costs total \$35,000 per month. Each product is half of Z Company s sales mix. How many units of Y must the company sell to break even?

a. 3,500

b. 7,000

c. 8,750

d. 14,000

e. None of the above