Cost Accounting – Week 2

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Question 1

Swiss Chocolate Manufacturing Company manufactures boxes of truffles and peppermint bark for sales at various holidays throughout the year. The sales and variable costs are given below:

	Peppermint bark tins	Truffle boxes
	per unit	per unit

Sell price to retailer	$ 9.00	$ 15.00
Cost of raw materials (chocolate/sugar/etc.)	$ 2.00	$ 3.00
Cost of packaging (tin or heart-shaped box)	$ 3.00	$ 2.00
Cost of labor (manufacturing and packing)	$ 1.50	$ 2.50
Cost of selling commission (per tin/box)	$ 0.125	$ 0.50
Cost of shipping (per tin/box)	$ 0.25	$ 0.25

What are the contribution margins of each product?

$6.75 for peppermint bark tins and $2.125 for truffle boxes
Selected: $2.125 for peppermint bark tins and $6.75 for truffle boxesThis answer is correct.
$2.50 for peppermint bark tins and $8.50 for truffle boxes
$4.00 for peppermint bark tins and $10.00 for truffle boxes

Correct! Note calculation as shown:

	Pepper-mint bark Tins	Truffle boxes
	per unit	per unit

Sell price to retailer	$ 9.00	$ 15.00
Cost of raw materials (chocolate/sugar/etc.)	$ 2.00	$ 3.00
Cost of packaging	$ 3.00	$ 2.00
(tin or heart-shaped box)
Cost of labor	$ 1.50	$ 2.50
(manufacturing and packing)
Cost of selling commission (per tin/box)	$ 0.125	$ 0.50
Cost of shipping (per tin/box)	$ 0.25	$ 0.25
Contribution margin / unit	$ 2.125	$ 6.75

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Question 2

True or False: A limitation of CVP analysis is that it can only be applied when a firm produces one product and no others.

True
Selected:FalseThis answer is correct.

Correct! If a firm manufactures multiple products, the sales mix must be known, and then CVP analysis may be applied.

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Question 3

Sweet Charity Company manufactures candy bars for fundraising initiatives for children’s nonprofits. Candy bars are sold to organizations at $1.00 each. Variable costs of production and packaging are $.60 and company fixed costs are $700,000. The company’s current sales level is $2,000,000. What is Sweet Charity’s margin of safety in dollars?

$100,000
$144,000
Selected: $250,000This answer is correct.
$240,000

Correct! Contribution margin ratio = $1.00 – $.60 = $.40 or 40% and breakeven point in revenues = $700,000/40% = $1,750,000. $2,000,000 – $1,750,000 = $250,000.

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Question 4

True or False: Contribution margin does not include costs of fixed manufacturing overhead, and therefore, cannot be used for external GAAP reporting.

True
FalseThis answer is incorrect.

Reconsider your response. Review Module 2, page I again. Which type of financial statement and margin must be used for GAAP reporting?

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Question 5

Swiss Chocolate Manufacturing Company manufactures boxes of truffles and peppermint bark for sales at various holidays throughout the year. The sales and variable costs are given below:

	Peppermint bark tins	Truffle boxes
	per unit	per unit

Sell price to retailer	$ 9.00	$ 15.00
Cost of raw materials (chocolate/sugar/etc.)	$ 2.00	$ 3.00
Cost of packaging (tin or heart-shaped box)	$ 3.00	$ 2.00
Cost of labor (manufacturing and packing)	$ 1.50	$ 2.50
Cost of selling commission (per tin/box)	$ 0.125	$ 0.50
Cost of shipping (per tin/box)	$ 0.25	$ 0.25

The ratio of sales units is two peppermint bark tins for each truffle box sold. Swiss Chocolate Manufacturing Company’s fixed costs are $100,000. How many units of each product must be sold to achieve an operating profit of $10,000?

10,000 peppermint bark tins and 10,000 truffle boxes
Selected: 20,000 peppermint bark tins and 10,000 truffle boxesThis answer is correct.
10,000 peppermint bark tins and 20,000 truffle boxes
20,000 peppermint bark tins and 20,000 truffle boxes

Correct! Note calculation as shown:

	Peppermint bark tins	Truffle boxes
	per unit	per unit

Sell price to retailer	$ 9.00	$ 15.00
Cost of raw materials (chocolate/sugar/etc.)	$ 2.00	$ 3.00
Cost of packaging	$ 3.00	$ 2.00
(tin or heart-shaped box)
Cost of labor	$ 1.50	$ 2.50
(manufacturing and packing)
Cost of selling commission (per tin/box)	$ 0.125	$ 0.50
Cost of shipping (per tin/box)	$ 0.25	$ 0.25
Contribution margin / unit	$ 2.125	$ 6.75
Units / bundle	2	1	Total CM
Total contribution margin/bundle	$ 4.25	$ 6.75	$ 11.00

Desired operating income =	$ 10,000.00
Total fixed cost =	$ 100,000.00
Divide by contribution margin per bundle	$ 110,000.00
	$ 11.00
Total bundles to be sold	10,000
Peppermint bark tins	20,000	units
Truffle boxes	10,000	units

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Question 6

All else being equal, when sales revenue per unit increases, ________.

the breakeven point is unaffected
Selected: contribution margin per unit increasesThis answer is correct.
fixed costs will be more likely to increase
contribution margin per unit is unaffected

Correct! The contribution margin per unit will increase when the sales revenue per unit increases and the variable cost per unit remains the same.

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Question 7

Tasty Toffee Company’s total revenue is $400,000. Variable costs of manufacturing are $100,000 and fixed costs of manufacturing are $200,000. Variable costs of marketing are $10,000 and fixed costs of marketing are $50,000. What is Tasty Toffee’s total contribution margin?

$390,000
Selected: $290,000This answer is correct.
$300,000
$240,000

Correct! Revenue – variable costs = contribution margin. $400,000 – $100,000 -$10,000 = $290,000.

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Question 8

True or False: On a cost volume profit graph, if the revenue line is below the total cost line, a profit results.

True
Selected:FalseThis answer is correct.

Correct! If the revenue line is below the total cost line, a loss is experienced.

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Question 9

A company with higher operating leverage than a competitor ________.

will more easily achieve its breakeven level of sales volume
will be less sensitive to changes in variable cost and sales volume
will have more unused capacity as a result of changes in sales volume
Selected: will have operating income that is more sensitive to changes in sales volumeThis answer is correct.

Correct! When there is a high level of fixed costs in the operating structure, this is termed high operating leverage. For any level of sales exceeding the breakeven point, the contribution margin of each incremental unit sold will impact the operating income positively.

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Question 10

2,000,000
1,300,000
Selected: 1,750,000This answer is correct.
700,000

Correct! Contribution margin ratio = $1.00 – $.60 = $.40 and breakeven point in units = $700,000/.40 = 1,750,000.

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Question 1

A company with higher operating leverage than a competitor ________.

will more easily achieve its breakeven level of sales volume
will be less sensitive to changes in variable cost and sales volume
will have more unused capacity as a result of changes in sales volume
Selected: will have operating income that is more sensitive to changes in sales volumeThis answer is correct.

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Question 2

Swiss Chocolate Manufacturing Company manufactures boxes of truffles and peppermint bark for sales at various holidays throughout the year. The sales and variable costs are given below:

	Peppermint bark tins	Truffle boxes
	per unit	per unit

Sell price to retailer	$ 9.00	$ 15.00
Cost of raw materials (chocolate/sugar/etc.)	$ 2.00	$ 3.00
Cost of packaging (tin or heart-shaped box)	$ 3.00	$ 2.00
Cost of labor (manufacturing and packing)	$ 1.50	$ 2.50
Cost of selling commission (per tin/box)	$ 0.125	$ 0.50
Cost of shipping (per tin/box)	$ 0.25	$ 0.25

What are the contribution margins of each product?

$6.75 for peppermint bark tins and $2.125 for truffle boxes
Selected: $2.125 for peppermint bark tins and $6.75 for truffle boxesThis answer is correct.
$2.50 for peppermint bark tins and $8.50 for truffle boxes
$4.00 for peppermint bark tins and $10.00 for truffle boxes

Correct! Note calculation as shown:

	Pepper-mint bark Tins	Truffle boxes
	per unit	per unit

Sell price to retailer	$ 9.00	$ 15.00
Cost of raw materials (chocolate/sugar/etc.)	$ 2.00	$ 3.00
Cost of packaging	$ 3.00	$ 2.00
(tin or heart-shaped box)
Cost of labor	$ 1.50	$ 2.50
(manufacturing and packing)
Cost of selling commission (per tin/box)	$ 0.125	$ 0.50
Cost of shipping (per tin/box)	$ 0.25	$ 0.25
Contribution margin / unit	$ 2.125	$ 6.75

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Question 3

True or False: CVP analysis is used only in manufacturing environments; service businesses cannot benefit from CVP analysis as these companies do not store inventory.

No answer provided

True
False

Reconsider your response. Review Chapter 4 of your text. What types of firms benefit from CVP analysis?

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Question 4

Tasty Toffee Company’s total revenue is $400,000. Variable costs of manufacturing are $100,000 and fixed costs of manufacturing are $200,000. Variable costs of marketing are $10,000 and fixed costs of marketing are $50,000. Its corporate tax rate is 50%. How much must total revenue increase if Tasty Toffee wishes to achieve a net income of $100,000?

$120,690
Selected: $220,690This answer is correct.
$620,690
$420,690

Correct! Revenue – variable costs = contribution margin. $400,000 – $100,000 – $10,000 = $290,000. Contribution margin ratio = $290,000/$400,000 = .725. Net income/1-tax rate = $100,000/.5 = $200,000 operating income requirement. Add to fixed costs = $200,000 +$200,000 +$50,000 = $450,000. $450,000 / .725 = $620,690 – original sales $400,000 = $220,690.

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Question 5

All else being equal, as fixed costs of a business increase, the margin of safety ________.

decreases since the units sold will decrease
increases as variable costs will increase as well
Selected: decreases since the breakeven point will increaseThis answer is correct.
increases since contribution margin will increase

Correct! The margin of safety is the difference between the breakeven point and the current or budgeted level of sales. If fixed costs increase, the breakeven point will increase, and hence, the margin of safety will decrease, all else being equal.

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Question 6

True or False: All else being equal, as variable costs rise, the breakeven point decreases.

True
Selected:FalseThis answer is correct.

Correct! Whenever variable costs or fixed costs change and selling prices do not change, the breakeven point will increase. More units will have to be sold to generate enough total contribution margin to offset the fixed costs.

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Question 7

True or False: On a cost volume profit graph, if the revenue line is below the total cost line, a profit results.

True
Selected:FalseThis answer is correct.

Correct! If the revenue line is below the total cost line, a loss is experienced.

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Question 8

$100,000
$144,000
Selected: $250,000This answer is correct.
$240,000

Correct! Contribution margin ratio = $1.00 – $.60 = $.40 or 40% and breakeven point in revenues = $700,000/40% = $1,750,000. $2,000,000 – $1,750,000 = $250,000.

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Question 9

Swiss Chocolate Manufacturing Company manufactures boxes of truffles and peppermint bark for sales at various holidays throughout the year. The sales and variable costs are given below:

	Peppermint bark tins	Truffle boxes
	per unit	per unit

Sell price to retailer	$ 9.00	$ 15.00
Cost of raw materials (chocolate/sugar/etc.)	$ 2.00	$ 3.00
Cost of packaging (tin or heart-shaped box)	$ 3.00	$ 2.00
Cost of labor (manufacturing and packing)	$ 1.50	$ 2.50
Cost of selling commission (per tin/box)	$ 0.125	$ 0.50
Cost of shipping (per tin/box)	$ 0.25	$ 0.25

10,000 peppermint bark tins and 10,000 truffle boxes
Selected: 20,000 peppermint bark tins and 10,000 truffle boxesThis answer is correct.
10,000 peppermint bark tins and 20,000 truffle boxes
20,000 peppermint bark tins and 20,000 truffle boxes

Correct! Note calculation as shown:

	Peppermint bark tins	Truffle boxes
	per unit	per unit

Sell price to retailer	$ 9.00	$ 15.00
Cost of raw materials (chocolate/sugar/etc.)	$ 2.00	$ 3.00
Cost of packaging	$ 3.00	$ 2.00
(tin or heart-shaped box)
Cost of labor	$ 1.50	$ 2.50
(manufacturing and packing)
Cost of selling commission (per tin/box)	$ 0.125	$ 0.50
Cost of shipping (per tin/box)	$ 0.25	$ 0.25
Contribution margin / unit	$ 2.125	$ 6.75
Units / bundle	2	1	Total CM
Total contribution margin/bundle	$ 4.25	$ 6.75	$ 11.00

Desired operating income =	$ 10,000.00
Total fixed cost =	$ 100,000.00
Divide by contribution margin per bundle	$ 110,000.00
	$ 11.00
Total bundles to be sold	10,000
Peppermint bark tins	20,000	units
Truffle boxes	10,000	units

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Question 10

2,000,000
1,300,000
Selected: 1,750,000This answer is correct.
700,000

Correct! Contribution margin ratio = $1.00 – $.60 = $.40 and breakeven point in units = $700,000/.40 = 1,750,000.

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Question 1

$100,000
Selected: $40,000This answer is correct.
$60,000
$0

Correct! Revenue – variable costs – fixed costs = operating income. $400,000 – $100,000 -$10,000 – $200,000 – $50,000 = $40,000.

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Question 2

True or False: A limitation of CVP analysis is that it can only be applied when a firm produces one product and no others.

True
Selected:FalseThis answer is correct.

Correct! If a firm manufactures multiple products, the sales mix must be known, and then CVP analysis may be applied.

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Question 3

Twisty Taffy Company manufactures low-carb saltwater taffy in 8 oz. plastic bags for sale in year-round tourist locations along South Beach. Variable cost per bag is $1.50, and factory fixed overhead in total is $90,000. If the bags sell to outlets for $4.00 each, what is the dollar amount of sales revenue required for Twisty Taffy to break even?

$90,500
Selected: $144,000This answer is correct.
$135,000
$240,000

Correct! The contribution margin per unit is: $4.00 sales per unit – $1.50 variable cost per unit = $2.50 per unit contribution margin. Contribution margin ratio is: $2.50/$4.00 = 62.5%. Fixed costs $90,000/ 62.5% contribution margin ratio = $144,000 of revenues

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Question 4

Sweet Charity Company manufactures candy bars for fundraising initiatives for children’s nonprofits. Candy bars are sold to organizations at $1.00 each. Variable costs of production and packaging are $.60 and company fixed costs are $700,000. The company’s current sales level is $2,000,000. If Sweet Charity’s sales price is increased by $.30 per unit and all costs remain the same, what are Sweet Charity’s original and new breakeven points in units, respectively?

Selected: 1,000,000 and 750,000This answer is incorrect.
750,000 and 1,000,000
1,750,000 and 1,000,000
1,000,000 and 1,750,000

Reconsider your response. Review Module 2, Page IV. What must be divided into fixed costs to calculate the breakeven point?

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Question 5

True or False: On a cost volume profit graph, the breakeven point is depicted at the intersection of the revenue and total cost lines.

Selected:TrueThis answer is correct.
False

Correct! At the point where revenue and total cost are equal, the breakeven point occurs. On a graph, the revenue and total cost lines will intersect at this point.

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Question 6

True or False: On a cost volume profit graph, if the revenue line is below the total cost line, a profit results.

True
Selected:FalseThis answer is correct.

Correct! If the revenue line is below the total cost line, a loss is experienced.

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Question 7

Tasty Toffee Company’s total revenue is $400,000. Variable costs of manufacturing are $100,000 and fixed costs of manufacturing are $200,000. Variable costs of marketing are $10,000 and fixed costs of marketing are $50,000. Its corporate tax rate is 50%. How much must total revenue increase if Tasty Toffee wishes to achieve a net income of $100,000?

$120,690
Selected: $220,690This answer is correct.
$620,690
$420,690

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Question 8

True or False: Contribution margin does not include costs of fixed manufacturing overhead, and therefore, cannot be used for external GAAP reporting.

Selected:TrueThis answer is correct.
False

Correct! It is not permissible to publish external financial statements that reflect a contribution margin; gross margin must be reflected for external financial statements to be GAAP compliant.

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Question 9

All else being equal, when sales revenue per unit increases, ________.

the breakeven point is unaffected
Selected: contribution margin per unit increasesThis answer is correct.
fixed costs will be more likely to increase
contribution margin per unit is unaffected

Correct! The contribution margin per unit will increase when the sales revenue per unit increases and the variable cost per unit remains the same.

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Question 10

Which of the following costs would not be deducted from the revenue per unit to arrive at contribution margin?

cost of ink for a printing company
Selected: cost of property insurance for a cell phone manufacturerThis answer is correct.
cost of steel for an automobile manufacturing company
cost of direct labor for a pharmaceutical company

Correct! The cost of property insurance does not vary according to the amount of units produced; it is a fixed cost. Only variable costs are deducted from revenues to arrive at contribution margin.

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Question 1

True or False: A limitation of CVP analysis is that it can only be applied when a firm produces one product and no others.

True
Selected:FalseThis answer is correct.

Correct! If a firm manufactures multiple products, the sales mix must be known, and then CVP analysis may be applied.

1/1

Question 2

True or False: CVP analysis is used only in manufacturing environments; service businesses cannot benefit from CVP analysis as these companies do not store inventory.

True
Selected:FalseThis answer is correct.

Correct! All types of firms may benefit from CVP analysis; there are variable and fixed costs of services as well as products which, in combination, affect the total profitability of a business.

1/1

Question 3

All else being equal, when sales revenue per unit increases, ________.

the breakeven point is unaffected
Selected: contribution margin per unit increasesThis answer is correct.
fixed costs will be more likely to increase
contribution margin per unit is unaffected

Correct! The contribution margin per unit will increase when the sales revenue per unit increases and the variable cost per unit remains the same.

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Question 4

$100,000
Selected: $40,000This answer is correct.
$60,000
$0

Correct! Revenue – variable costs – fixed costs = operating income. $400,000 – $100,000 -$10,000 – $200,000 – $50,000 = $40,000.

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Question 5

True or False: On a cost volume profit graph, the breakeven point is depicted at the intersection of the revenue and total cost lines.

True
FalseThis answer is incorrect.

Reconsider your response. Review the CVP graph in Chapter 3, exhibit 3-5 of your text.

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Question 6

$90,500
Selected: $144,000This answer is correct.
$135,000
$240,000

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Question 7

Selected: 8This answer is correct.
6
2
4

Correct! Contribution margin = $1.00 – $.60 = $.40 X 2,000,000 units sold = $800,000
Operating income = $800,000 – $700,000=$100,000. Degree of operating leverage = $800,000/$100,000 = 8.

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Question 8

Which of the following costs would not be deducted from the revenue per unit to arrive at contribution margin?

cost of ink for a printing company
Selected: cost of property insurance for a cell phone manufacturerThis answer is correct.
cost of steel for an automobile manufacturing company
cost of direct labor for a pharmaceutical company

Correct! The cost of property insurance does not vary according to the amount of units produced; it is a fixed cost. Only variable costs are deducted from revenues to arrive at contribution margin.

1/1

Question 9

True or False: Contribution margin does not include costs of fixed manufacturing overhead, and therefore, cannot be used for external GAAP reporting.

Selected:TrueThis answer is correct.
False

Correct! It is not permissible to publish external financial statements that reflect a contribution margin; gross margin must be reflected for external financial statements to be GAAP compliant.

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Question 10

$390,000
Selected: $290,000This answer is correct.
$300,000
$240,000

Correct! Revenue – variable costs = contribution margin. $400,000 – $100,000 -$10,000 = $290,000.

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Question 1

Selected: 8This answer is correct.
6
2
4

Correct! Contribution margin = $1.00 – $.60 = $.40 X 2,000,000 units sold = $800,000
Operating income = $800,000 – $700,000=$100,000. Degree of operating leverage = $800,000/$100,000 = 8.

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Question 2

True or False: On a cost volume profit graph, if the revenue line is below the total cost line, a profit results.

True
Selected:FalseThis answer is correct.

Correct! If the revenue line is below the total cost line, a loss is experienced.

1/1

Question 3

All else being equal, as fixed costs of a business increase, the margin of safety ________.

decreases since the units sold will decrease
increases as variable costs will increase as well
Selected: decreases since the breakeven point will increaseThis answer is correct.
increases since contribution margin will increase

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Question 4

$390,000
Selected: $290,000This answer is correct.
$300,000
$240,000

Correct! Revenue – variable costs = contribution margin. $400,000 – $100,000 -$10,000 = $290,000.

1/1

Question 5

True or False: CVP analysis is used only in manufacturing environments; service businesses cannot benefit from CVP analysis as these companies do not store inventory.

True
Selected:FalseThis answer is correct.

Correct! All types of firms may benefit from CVP analysis; there are variable and fixed costs of services as well as products which, in combination, affect the total profitability of a business.

1/1

Question 6

True or False: A limitation of CVP analysis is that it can only be applied when a firm produces one product and no others.

True
Selected:FalseThis answer is correct.

Correct! If a firm manufactures multiple products, the sales mix must be known, and then CVP analysis may be applied.

1/1

Question 7

A company with higher operating leverage than a competitor ________.

will more easily achieve its breakeven level of sales volume
will be less sensitive to changes in variable cost and sales volume
will have more unused capacity as a result of changes in sales volume
Selected: will have operating income that is more sensitive to changes in sales volumeThis answer is correct.

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Question 8

Tasty Toffee Company’s total revenue is $400,000. Variable costs of manufacturing are $100,000 and fixed costs of manufacturing are $200,000. Variable costs of marketing are $10,000 and fixed costs of marketing are $50,000. Its corporate tax rate is 50%. How much must total revenue increase if Tasty Toffee wishes to achieve a net income of $100,000?

$120,690
Selected: $220,690This answer is correct.
$620,690
$420,690

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Question 9

True or False: All else being equal, as variable costs rise, the breakeven point decreases.

True
Selected:FalseThis answer is correct.

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Question 10

2,000,000
1,300,000
Selected: 1,750,000This answer is correct.
700,000

Correct! Contribution margin ratio = $1.00 – $.60 = $.40 and breakeven point in units = $700,000/.40 = 1,750,000.

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