THEORY

Cost Behavior
1 Which of the following statements is false?
A. At zero production level, fixed costs is also zero.
B. At zero production level, fixed costs are positive.
C. At zero production level, variable costs are usually zero.
D. At zero production level, total costs equal total fixed costs.

2. Variable costs are all costs

A. Of manufacturing incurred to produce units of output.
B. That are associated with marketing, shipping, warehousing, and billing activities.
C. That fluctuate in total in response to small changes in the rate of utilization of
capacity.
D. That do not change in total for a given period and relevant range but become
progressively smaller on a per unit basis as volume increases.

3. NTQ, Inc.’s net sales in 1996 were 15% below the 1995 level. NTQ’s semi-variable
costs would
A. Increase in total and increase as a percentage of net sales.
B. Increase in total, but decrease as a percentage of net sales.
C. Decrease in total, but increase as a percentage of net sales.
D. Decrease in total and decrease as a percentage of net sales.

4. RST’s average cost per unit is the same at all levels of volume. Which of the
following is true?
A. RST must have only fixed costs.
B. RST must have only variable costs.
C. RST must have some fixed costs and some variable costs.
D. RST’s cost structure cannot be determined from this information.

5. Which of the following decision-making tools would NOT be useful in determining the
slope and intercept of a mixed cost?
A. high-low method C. linear programming
B. least-squares method D. scatter diagrams
6. A cost that bears an observable and known relationship to a quantifiable activity
base is a(n)
A. Engineered cost. C. Indirect cost.
B. Fixed cost. D. Target cost.

7. Costs that increase as the volume of activity decreases within the relevant range are
A. Average costs per unit. C. Total fixed costs.
B. Average variable costs per unit. D. Total variable costs.

8. When production levels are expected to increase within a relevant range and a
flexible budget is used. What effect would be anticipated with respect to each of the
following costs?
A. B. C. D.
Fixed Costs per Increase Increase Decrease Decrease
Unit

1
 Variable Costs per Increase No change No change Decrease
Unit

9. Weaknesses of the high-low method include all of the following except

A. the mathematical calculations are relatively complex.
B. the high and low activity levels may not be representative.
C. only two observations are used to develop the cost function.
D. the method does not detect if the cost behavior is nonlinear.

10. The scatter diagram method of cost estimation

A. requires the use of judgment
B. uses the least-squares method
C. is influenced by extreme observations
D. is superior to other methods in its ability to distinguish between discretionary and
committed fixed costs

11. Regression analysis is superior to other cost behavior techniques because it

A. Examines only one variable. C. Produces measures of probable error.
B. Is not a sampling technique. D. Proves a cause and effect relationship.

12. The number of variables used in simple regression analysis is:

A. one C. three
B.

two

D.

more than three

13. The first to be undertaken in a simple regression analysis approach is

A. To calculate the coefficient correlation.
B. To find the standard error of estimate.
C. To make the least squares computation.
D. To plot two variables in a scatter diagram.

14. If the coefficient of correlation between two variables is zero, how might a scatter
diagram of these variables appear?
A. Random points.
B. A least squares line that slopes up to the right.
C. A least squares line that slopes down to the right.
D. Under this condition a scatter diagram could not be plotted on a graph.

15. Cost-volume-profit analysis is most important for the determination of the

A. Volume of operation necessary to break-even.
B. Sales revenue necessary to equal variable costs.
C. Variable revenues necessary to equal fixed costs.
D. Relationship between revenues and costs at various levels of operations.

2
16. The relevant range is
A. a relatively wide range of sales where all costs remain the same
B. a relatively wide range of sales where total variable costs remain the same
C. a relatively narrow range of production where total variable costs remain the
same
D. a relatively wide span of production where total fixed costs are expected to
remain the same

17. Which of the following assumptions does NOT pertain to cost-volume-profit analysis?
A. Inventories are constant
B. The total revenues function is linear.
C. All costs are classified as fixed or variable
D. The units produced will equal the units sold
E. Sales mix may vary during the related period

18. The sum of the costs necessary to effect a one-unit increase in the activity level is
a(n)
A. Incremental cost. C. Marginal cost.
B. Margin of safety. D. Opportunity cost.

19. As an accountant, the most useful information you can get from break-even chart is
the
A. Volume or output level at which the enterprise breaks even.
B. Amount of sales revenue needed to cover enterprise fixed costs.
C. Amount of sales revenue needed to cover enterprise variable costs.
D. Relationship among revenues, variable costs, and fixed costs at various levels of
activity.

20. In a cost-volume-profit graph

A. the total revenue line crosses the horizontal axis at the breakeven point.
B. an increase in unit variable costs would decrease the slope of the total cost line.
C. an increase in the unit selling price would shift the breakeven point in units to the
left.
D. an increase in the unit selling price would shift the breakeven point in units to the
right.
E. beyond the breakeven sales volume, profits are maximized at the sales volume
where total revenues equal total costs.

21. In a cost-volume-profit graph, the slope of the total revenue curve represents
A. total contribution margin D. the selling price per unit.
B. total revenues. E. the variable cost per unit
C. the contribution margin per unit

22. In a profit-volume graph, the slope of the profit curve represents

A. the contribution margin per unit D. total contribution margin
B. the selling price per unit E. total revenues.
C. the variable cost per unit
23. If a company’s variable costs are 70% of sales, which formula represents the

3
 computation of dollar sales that will yield a profit equal to 10% of the contribution
margin when S equals sales in dollars for the period and FC equals total fixed costs
from the period?
A. S = FC 0.2 C. S = 0.2 FC
B. S = FC 0.27 D. S = 0.27 FC

24. Cost-volume-profit analysis is a key factor in many decisions, including choice of

product lines, pricing of products, marketing strategy, and utilization of productive
facilities. A calculation used in CVP analysis is the break-even point. Once the
break-even point has been reached operating income will increase by the
A. Fixed cost per unit for each additional unit sold.
B. Sales price per unit for each additional unit sold.
C. Gross margin per unit for each additional unit sold.
D. Contribution margin per unit for each additional unit sold.

25. When used in cost-volume-profit analysis, sensitivity analysis

A. Determines the most profitable mix of products to be sold.
B. Allows the decision maker to introduce probabilities in the evaluation of decision
alternatives.
C. Is limited because in cost-volume-profit analysis, costs are not separated into
fixed and variable components.
D. Is done through various possible scenarios and computes the impact on profit of
various predictions of future events.

26. At its present level of operations, a small manufacturing firm has total variable costs
equal to 75 percent of sales and total fixed costs equal to 15 percent of sales. Based
on variable costing, if sales change by $1.00, income will change by
A. $0.10.
B. $0.25.
C. $0.75.
D. can't be determined from the information given.

27. A company’s breakeven point in sales dollars may be affected by equal percentage
increases in both selling price and variable costs per unit (assume all other factors
are constant within the relevant range.) The equal percentage changes in selling
price and variable cost per unit will cause the breakeven point in sales dollars to
A. Remain unchanged.
B. Increase by the percentage change in variable cost per unit.
C. Decrease by less than the percentage increase in selling price.
D. Decrease by more than the percentage increase in the selling price.

28. The most likely strategy to reduce the breakeven point would be to
A. Increase both the fixed costs and the contribution margin.
B. Decrease both the fixed cost and the contribution margin.
C. Increase the fixed costs and decrease the contribution margin.
D. Decrease the fixed costs and increase the contribution margin.

29. A company increased the selling price of its product from $1.00 to $1.10 a unit when
total fixed costs increased from $400,000 to $480,000 and variable cost per unit

4
 remained unchanged. How will these changes affect the breakeven point?
A. The breakeven point in units will be increased.
B. The breakeven point in units will be decreased.
C. The breakeven point in units will remain unchanged.
D. The effect cannot be determined from the information given.

30. According to CVP analysis, a company could never incur a loss that exceeded its
total
A. contribution margin. C. fixed costs.
B. costs. D. variable costs.

31. Two companies produce and sell the same product in a competitive industry. Thus,
the selling price of the product for each company is the same. Company 1 has a
contribution margin ratio of 40% and fixed costs of $25 million. Company 2 is more
automated, making its fixed costs 40% higher than those of Company 1. Company 2
also has a contribution margin ratio that is 30% greater than that of Company 1. By
comparison, Company 1 will have the <List A> breakeven point in terms of dollar
sales volume and will have the <List B> dollar profit potential once the indifference
point in dollar sales volume is exceeded.
A. B. C. D.
List A Lower Lower Higher Higher
List B Lesser Greater Lesser Greater

32. Which of the following is a true statement about sales mix?

A. Profits will remain constant with an increase in total dollars of sales if the total
sales in units remains constant.
B. Profits will remain constant with a decrease in total dollars of sales if the sales
mix also remains constant.
C. Profits may decline with an increase in total dollars of sales if the sales mix shifts
to sell more of the high contribution margin product.
D. Profits may decline with an increase in total dollars of sales if the sales mix shifts
to sell more of the lower contribution margin product.

33. Saints Co. sells three chemicals: Simpol, Plutex, and Coplex. Simpol is the most
profitable product while Coplex is the least profitable. Which one of the following
events will definitely decrease the firm’s overall B.E.P. for the upcoming accounting
period?
A. A decrease in Coplex’s selling price.
B. An increase in Simpol raw materials cost.
C. An increase in the overall market of Plutex.
D. An increase in anticipated sales of Simpol relative to the sales of Plutex and
Coplex.

34. A very high degree of operating leverage indicates a firm

A. has high fixed costs
B. has a high net income
C. has high variable costs
D. is operating close to its breakeven point

5
35. Love Corp. is operationally a highly leveraged company, that is, it has high fixed
costs and low variable costs. As such, small changes in sales volume result in
A. Large changes in net income. C. No change in net income.
B. Negligible change in net income. D. Proportionate change in net income.

PROBLEMS
Cost equation
1. Smart Company is relocating its facilities. The company estimates that it will take
three trucks to move office contents. If the per truck rental charge is $1,000 plus 25
cents per mile, what is the expected cost to move 800 miles?
A. $1,000 C. $2,400
B. $1,200 D. $3,600

2. The following cost functions were developed for manufacturing overhead costs:
Manufacturing Overhead Cost Cost Function
Electricity $100 + $20 per direct labor hour
Maintenance $200 + $30 per direct labor hour
Supervisors’ salaries $10,000 per month
Indirect materials $16 per direct labor hour
If July production is expected to be 1,000 units requiring 1,500 direct labor hours,
estimated manufacturing overhead costs would be
A. $10,366 C. $99,000
B. $76,300 D. $109,300

3. Bradley Co. budgets its total production costs at $220,000 for 75,000 units of output
and $275,000 for 100,000 units of output. Since additional facilities are needed to
produce 100,000 units, fixed costs are budgeted at 20% more than for 75,000 units.
What is Bradley's budgeted fixed cost at 100,000 units?
A. 16,500 C. 156,000
B. 66,000 D. 165,000

4. Matias Corporation wishes to market a new product for P12.00 a unit. Fixed costs to
manufacture this product are P800,000 for less than 500,000 units and P1,200,000
for 500,000 or more units. Contribution margin is 20%. How many units must be
sold to realize a net income from this product of P500,000?
A. 433,333 C. 666,667
B. 500,000 D. 708,333

High-low method
5. The Austin Manufacturing Company wants to develop a cost estimating equation for
its monthly cost of electricity. It has the following data:
Month Cost of Electricity Direct Labor Hours
January $6,750 1,500
April 7,500 1,700
July 8,500 2,000

6
 October 7,250 1,600
Using the high-low method, what is the best equation?
A. Y = $750 + $3.50X D. Y = $1,500 + $5.00X
B. Y = $750 + $5.00X E. Y = $2,000 + $3.50X
C. Y = $1,500 + $3.50X

6. Total production costs of prior periods for a company are listed as follows. Assume
that the same cost behavior patterns can be extended linearly over the range of
3,000 to 35,000 units and that the cost driver for each cost is the number of units
produced.
Production in units per 3,000 9,000 16,000 35,000
month
Cost X $23,700 $52,680 $86,490 $178,260
Cost Y 47,280 141,840 252,160 551,600
What is the average cost per unit at a production level of 8,000 units for cost X?
A. $4.83 C. $5.98
B. $5.85 D. $7.90

Regression analysis
7. Y = P575,000 + P8.50X represents the behavior of maintenance costs (Y) as a
function of machine hours (X). Thirty (30) monthly observations were used to
develop the foregoing regression equation. The related coefficient of determination
was 0.90. If 2,500 machine hours are worked in one month, the related point
estimate of total variable maintenance costs would be
A. P19,125 C. P23,000
B. P21,250 D. P25,250

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 independent variable. Relevant data were run on a computer
using one of the standard regression programs, with the following results:
Coefficient
Machine hours Direct materials weight
Y intercept 2,500 4,600
B 5.00 2.60
R2 0.70 0.50
What regression equation should be used?
A. Y = 2,500 + 3.5X C. Y = 4,600 +1.3X
B. Y = 2,500 + 5.0X D. Y = 4,600 + 2.6X

Contribution margin income statement

9. A retail company determines its selling price by marking up variable costs 60%. In
addition, the company uses frequent selling price markdowns to stimulate sales. If
the markdowns average 10%, what is the company’s contribution margin ratio?
A. 27.5% C. 37.5%
B. 30.6% D. 41.7%

7
Breakeven analysis
10. Ultra Vogue Co. sells 50,000 units of “yo” a top-of-the-line garden sprinkler. These
were taken from the company’s records:
Accounts receivable, P129,000. Contribution margin ratio, 49%.
Days sales outstanding, 15 Profit for the period was P485,040.
days.
The ending receivables balance is the average balance during the year. Assume a
360-day year. All sales are on credit. Determine the company’s break-even
revenue.
A. P1,032,000 C. P2,106,122
B. P1,517,040 D. P3,096,000

11. Tonykinn Company is contemplating of marketing a new product. Fixed costs will be
$800,000 for production of 75,000 units or less and $1,200,000 if production exceeds
75,000 units The variable cost ratio is 60% for the first 75,000. Contribution margin
percentage will increase to 50% for units in excess of 75,000. If the product is
expected to sell for $25 per unit, how many units must Tonykinn sell to breakeven?
A. 80,000 C. 111,000
B. 96,000 D. 120,000

12. A company manufactures a single product. Estimated cost data regarding this
product and other information for the product and the company are as follows:
Sales price per unit $40
Total variable production cost per unit $22
Sales commission (on sales) 5%
Fixed costs and expenses
Manufacturing overhead $5,598,720
General and administrative $3,732,480
Effective income tax rate 40%
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

Profit planning
13. Merchandisers, Inc. sells Product O to retailers for P200. The unit variable cost is
P40 with a 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 if after tax income is P123,200 would be
A. 10,950 units. C. 13,750 units.
B. 11,400 units. D. 15,640 units.

14. NCB, Inc. manufactures computer tables. It has an investment of P1,750,000 in

assets and expects a 25% return on investment. Its total fixed production costs for
2,000 units is P550,000 plus an additional P150,000 for selling and administrative

8
 expenses. The variable cost to manufacture is P1,500 per table. The selling price
per table should be
A. P1,850.00 C. P2,531.25
B. P2,068.75 D. P2,725.00

15. Story Manufacturing incurs annual fixed costs of $250,000 in producing and selling
"Tales." Estimated unit sales for 2001 are 125,000. An after-tax income of $75,000
is desired by management. The company projects its income tax rate at 40 percent.
What is the maximum 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?
A. $3.00 C. $3.59
B. $3.37 D. $3.70

Incremental analysis
16. A company is concerned about its operating performance, as summarized below:
Sales ($12.50 per unit) $300,000
Variable costs 180,000
Net operating loss (40,000)
How many additional units should have been sold in order for the company to break
even in 1992?
A. 8,000 C. 16,000
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 is 10%. At a $600,000 volume, return on sales is 20%. What is the
break-even volume?
A. $160,000 C. $300,000
B. $210,000 D. $420,000

18. Nette & Co. has sales of P400,000 with variable costs of P300,000, fixed costs of
P120,000, 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?
A. P400,000 C. P500,000
B. P462,000 D. P800,000

19. Sari-Sari Grocery is currently open only on Monday to Saturday. It is considering

opening on Sundays. The annual incremental costs of Sunday opening is estimated
at P124,800. Its gross 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 to attain the same weekly
operating income is
A. P19,500. C. P29,250.
B. P20,000. D. P30,000.

20. ABC Company breaks even at $300,000 sales and earns $30,000 at $350,000 sales.
Which of the following is true?
A. Fixed costs are $20,000.
B. The selling price per unit is $3.
C. Contribution margin is 60% of sales.
D. Profit at sales of $400,000 would be $80,000.

9
Sensitivity analysis
21. A product has a selling price of P5 and variable cost of P3.50 per unit. The effect of
a P0.50 per unit increase in cost is to increase the break-even level of activity by
A. P1.50 per unit. C. 33-1/3%
B. 14.3% D. 50%

22. A company has sales of $500,000, variable costs of $300,000, and pretax profit of
$150,000. If the company increased the sales price per unit by 10%, reduced fixed
costs by 20%, and left variable cost per unit unchanged, what would be the new
breakeven point in sales dollars?
A. $88,000 C. $110,000
B. $100,000 D. $125,000

23. Singsing, Inc. manufactures and sells key rings embossed with college names and
slogans. 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 last year was P50,400. The company expects
the following for the coming year:
⦁ The selling price of the key rings will be P90.
⦁ Variable manufacturing costs per unit will increase by one-third.
⦁ Fixed costs will increase by 10%.
⦁ The income tax rate will remain unchanged.
For the company to break-even the coming year, the company should sell
A. 2,600 units. C. 21,250 units.
B. 19,250 units. D. 21,600 units.

24. Austin Manufacturing, which is subject to a 40% income tax rate, had the following
operating data for the period just ended.
Selling price per unit $ 60
Variable cost per unit 22
Fixed costs 504,000
Management plans to improve the quality of its sole product by: (1) replacing a
component that costs $3.50 with a higher-grade unit that costs $5.50 and (2)
acquiring a $180,000 packing machine. Austin will depreciate the machine over a
10-year life with no estimated salvage value by the straight-line method of
depreciation. If the company wants to earn after-tax income of $172,800 in the
upcoming period, it must sell
A. 19,300 units. C. 22,500 units.
B. 21,316 units. D. 23,800 units.

25. During 1996, RPS Corporation supplied hospitals with a comprehensive diagnostic
kit for P120. At a volume of 80,000 kits, RPS has fixed cost of P1,000,000 and a
profit before income taxes of P200,000. Due to an adverse legal decision, RPS’s
1997 liability insurance increased by P1,200,000 over 1996. Assuming the volume
and other costs are unchanged, what should be the 1997 price be if RPS is to make
the same P200,000 profit before income taxes?
A. P120. C. P150.

10
 B. P135. D. P240.

26. Lindsay Company reported the following results from sales of 5,000 units of Product
A for June:
Sales $200,000
Variable costs (120,000)
Fixed costs (60,000)
Operating income $ 20,000
Assume that Lindsay increases the selling price of Product A by 10 percent in July.
How many units of Product A would have to be sold in July to generate an operating
income of $20,000?
A. 4,000 C. 4,500
B. 4,300 D. 5,000

27. CGW Corporation sells Product T at a unit price of P5 deriving annual gross sales of
P50,000. The variable cost to produce T is P4.50 per unit and total fixed costs is
P10,000. If it increases T’s unit price to P8, a decrease of sales to only 4,000 units
would result. The effect of the price increase on CGW’s net income from the sales of
Product T will be a:
A. No effect. C. P9,000 increase.
B. P4,000 increase. B. P18,000 decrease.
28. Planners have determined that sales will increase by 25% next year, and that the
profit margin will remain at 15% of sales. Which of the following statements is
correct?
A. Profit will grow by 25%.
B. The profit margin will grow by 15%.
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 packaged meals at a price of P40 per meal. Variable cost per meal is P30
while total fixed costs for operation of all the stores amounted to 200,000 monthly. It
is thinking to reduce its store hours to only 12 hours a day as this would reduce fixed
costs (utilities and wages) by P60,000 a month. It is expected that the reduced store
hours would result in loss of 1,500 packed meals monthly sales. The reduction in
store hours would result in
A. No change in monthly operating income.
B. A prospective decrease in monthly operating income.
C. A prospective increase in monthly operating income of P45,000.
D. A prospective increase in monthly operating income of P60,000.

30. The Machan Manufacturing Company’s year-end income statement is as follows:

Sales (20,000 units) $360,000
Variable costs 220,000
Contribution margin $140,000
Fixed costs 105,000
Net income $ 35,000
Management is unhappy with the results and plans to make some changes for next
year.

11
 If management implements a new marketing program, fixed costs are expected to
increase by $19,200 and variable costs to increase by $1 per unit. Unit sales are
expected to increase by 15 percent. What is the effect on income?
A. no change D. increase of $14,800
B. increase of $1,800 E. decrease of $21,200
C. increase of $13,800

Questions 31 and 32 are based on the following information.

The marketing department of Hennessy Co. proposed a price cut on its leading brand, a
product called “Henry.” From the accounting records these are available:
Price per unit P 92.00
Discount to customers 10%
Direct cost per unit P 52.60
Variable operating expense per unit P 5.60
Proposed price cut per unit P 10.00
Estimated sales volume before price cut 1,220 pcs.

31. How much is the estimated contribution margin that will be lost due to price cut,
assuming the same pre-price cut sales volume?
A. P10,980 C. P17,990
B. P13,000 D. P18,000

32. For the same Hennessy Co., in the immediately preceding number, what is the
additional volume required after the price cut to get the same contribution margin
before the price cut? Round off to the nearest whole unit.
A. 409 units C. 704 units
B. 500 units D. 1,000 units

Multiple products
33. A company with $280,000 of fixed costs has the following data:
Product A Product B
Sales price per unit $5 $6
Variable costs per unit $3 $5
Assume three units of A are sold for each unit of B sold. How much will sales be in
dollars of product B at the breakeven point?
A. $200,000 C. $280,000
B. $240,000 D. $840,000

Questions 34 and 35 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 X for every five units of Y (2:5). Fixed costs are $49,500. The unit
contribution margins for X and Y are $2.50 and $1.20, respectively.

34. Considering the company as a whole, the number of composite units to break even
is
A. 1,650 C. 8,250
B. 4,500 D. 22,500
35. If the company had a profit of $22,000, the unit sales must have been
A. B. C. D.

12
 Product X 5,000 13,000 23,800 32,500
Product Y 12,500 32,500 59,500 13,000

Point of Indifference
36. Wheels Corp. employs 45 sales personnel to market its sedan cars. The average
car sells for P690,000 and a 6% commission is paid to the sales person. It is
considering changing the scheme to a commission arrangement that would pay each
person a package of P30,000 plus 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 is
A. P22,500,000 C. P36,500,000
B. P33,750,000 D. P45,000,000

37. Two companies are expected to have annual sales of 1,000,000 decks of playing
cards next year. Estimates for next year are presented below:
Company 1 Company 2
Selling price per deck $ 3.00 $3.00
Cost of paper deck 0.62 0.65
Printing ink per deck 0.13 0.15
Labor per deck 0.75 1.25
Variable overhead per 0.30 0.35
deck
Fixed costs $960,000 $252,000
Given these data, which of the following responses is correct?
(In units) A. B. C. D.
Breakeven point for Co. 1 533,334 533,334 800,000 800,000
Breakeven point for Co. 2 105,000 105,000 420,000 420,000
Volume at which profits of Co.
1 and Co. 2 are equal 1,000,00 1,180,00 1,000,00 1,180,00
0 0 0 0

Margin of safety
38. Product Cott has sales of $200,000, a contribution margin of 20%, and a margin of
safety of $80,000. What is Cott’s fixed cost?
A. $16,000 C. $80,000
B. $24,000 D. $96,000

39. Bell Company has a 25% margin of safety. Its before-tax return on sales is 6%, and
its tax rate is 40%. Assuming that current sales are $120,000, what is Bell’s total
fixed costs.
A. $21,600 C. $84,000
B. $36,000 D. $60,000

Comprehensive
Questions 40 through 42 are based on the following information.
Almo Company manufactures and sells adjustable canopies that attach to motor homes
and trailers. The market covers both new unit purchasers as well as replacement
canopies. Almo developed its business plan based on the assumption that canopies

13
would sell at a price of $400 each. The variable costs for each canopy were projected at
$200, and the annual fixed costs were budgeted at $100,000. Almo's after-tax profit
objective was $240,000; the company's effective tax rate is 40%.
While Almo's sales usually rise during the second quarter, the May financial statements
reported that sales were not meeting expectations. For the first 5 months of the year,
only 350 units had been sold at the established price, with variable costs as planned,
and it was clear that the after-tax profit projection would not be reached unless some
actions were taken. Almo's president assigned a management committee to analyze the
situation and develop an alternative course of action. The following was presented to the
president.
Reduce the sales price by $40. The sales organization forecasts that with the
significantly reduced sales price, 2,700 units can be sold during the remainder of the
year. Total fixed and variable unit costs will stay as budgeted.
40. Assuming no changes were made to the selling price or cost structure, how many
units must Almo sell to break even?
A. 167 C. 500
B. 250 D. 1,700
41. Assuming no changes were made to the selling price or cost structure, how many
units must Almo sell to achieve its after-tax profit objective?
A. 1,250 C. 2,000
B. 1,700 D. 2,500

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
B. $160,800 D. $301,200
ANSWER KEY
Theory Problems
1. A 21. D 1. D 21. D 41. D
2. C 22. A 2. D 22. A 42. C
3. C 23. B 3. D 23. B
4. B 24. D 4. D 24. C
5. C 25. D 5. C 25. B
6. A 26. B 6. C 26. A
7. A 27. A 7. B 27. C
8. C 28. D 8. B 28. A
9. A 29. D 9. B 29. C
10. A 30. B 10. C 30. E
11. D 31. A 11. C 31. A
12. B 32. D 12. C 32. C
13. C 33. D 13. B 33. B
14. A 34. D 14. B 34. B
15. D 35. A 15. A 35. B
16. D 16. A 36. B
17. E 17. C 37. D
18. C 18. A 38. B

14
19. D 19. D 39. A
20. C 20. C 40. C

15