 The determination of cost behavior is called a cost prediction.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0601
Feedback True: This statement is incorrect regarding the relevant range.
Feedback False: Correct! The determination of cost behavior is called cost estimation.
 Cost estimation typically focuses on the future.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0601
Feedback True: This statement is incorrect because cost estimation often focuses on historical data.
Feedback False: Correct! Cost estimation often focuses on historical data; cost prediction focuses on the future.
 Variable costs change in direct proportion to a change in the activity level.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0602
Feedback True: Correct! Variable costs change in direct proportion to a change in the activity level.
Feedback False: It is true that variable costs change in direct proportion to a change in the activity level.
 Cost that are nearly variable, but increase in small steps instead of continuously are called stepvariable costs.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0602
Feedback True: Correct! Stepvariable costs include mostly variable inputs, but increase in small steps rather than continuously.
Feedback False: This statement is true and the definition of stepvariable costs.
 The relevant range is that range of activity where a company achieves its maximum efficiency.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0603
Feedback True: This statement is incorrect regarding the relevant range.
Feedback False: Correct! This statement is false regarding relevant range.
 If the organization operates at an activity level outside the relevant range, any cost predictions based on data from the relevant range may not be very accurate.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0603
Feedback True: Correct! Data outside the relevant range may not yield accurate cost predictions.
Feedback False: This statement is true regarding cost predictions with data outside the relevant range.
 A committed cost results from a management decision to spend a particular amount of money for some purpose.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0604
Feedback True: This statement is false.
Feedback False: Correct! A discretionary cost rather than a committed cost results from a management decision to spend a particular amount of money for some purpose.
 An example of a discretionary cost is the cost of research and development.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0604
Feedback True: Correct! Research and development costs are discretional costs.
Feedback False: This statement is true.
 The leastsquares regression method of cost estimation relies on only two data points.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0605
Feedback True: This does not describe leastsquares regression.
Feedback False: Correct! This statement about leastsquares regression is incorrect.
 In regression analysis, the variable that is being predicted is known as the independent variable.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0605
Feedback True: This variable is not the independent variable.
Feedback False: Correct! This variable is not the independent variable.
 Multiple regression is a statistical method that estimates a linear (straightline) relationship between one dependent variable and one independent variable.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0606
Feedback True: This statement is false because multiple regression estimates the relationship between one dependent variable and two or more independent variables.
Feedback False: Correct! Multiple regression is a statistical method that estimates a linear (straightline) relationship between one dependent variable and two or more independent variables.
 When the engineering method is applied to costs other than labor, it is referred to as the experience method.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0606
Feedback True: This statement is false.
Feedback False: Correct! When the learningcurve approach is applied to costs other than labor, it is referred to as the experiencecurve approach.
 Mismatched time periods are not issues in the collection of data for cost estimation.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 0607
Feedback True: This statement is incorrect.
Feedback False: Correct! Mismatched time periods is an issue in the collection of data for cost estimation.
 Outliers are a common data collection problem.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 0607
Feedback True: Correct! Outliers are a common data collection problem.
Feedback False: This statement is true.
 In the leastsquares regression method, the cost line is estimated so as to maximize the sum of the squared deviations between the cost line and the data points.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 0608
Feedback True: This statement is incorrect.
Feedback False: Correct! In the leastsquares regression method, the cost line is estimated so as to minimize the sum of the squared deviations between the cost line and the data points.
 The slope of a regression line measures how steeply the cost line rises as activity increases.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 0608
Feedback True: Correct! This statement provides an accurate description of the slope of a regression line.
Feedback False: This statement is true.
Multiple Choice Questions
 The relationship between cost and activity is known as:
A.cost estimation.
B. cost prediction.
C. cost behavior.
D. cost analysis.
E. cost approximation.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0601
Feedback A: Cost estimation is not the relationship between cost and activity.
Feedback B: Cost prediction is not the relationship between cost and activity.
Feedback C: Correct! Cost behavior is the relationship between cost and activity.
Feedback D: Cost analysis is not the relationship between cost and activity.
Feedback E: Cost approximation is not the relationship between cost and activity.
 A forecast of a cost at a particular level of activity is known as:
A.cost estimation.
B. cost prediction.
C. cost behavior.
D. cost analysis.
E. cost approximation.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0601
Feedback A: This is not the correct term for a forecast of a cost at a particular level of activity.
Feedback B: Correct! Cost prediction is a forecast of a cost at a particular level of activity.
Feedback C: This is not the correct term for a forecast of a cost at a particular level of activity.
Feedback D: This is not the correct term for a forecast of a cost at a particular level of activity.
Feedback E: This is not the correct term for a forecast of a cost at a particular level of activity.
 Which of the following costs changes in direct proportion to a change in the activity level?
A.Variable cost.
B. Fixed cost.
C. Semivariable cost.
D. Stepvariable cost.
E. Stepfixed cost.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0602
Feedback A: Correct! Variable cost changes in direct proportion to a change in activity level.
Feedback B: Fixed cost does not behave in this manner.
Feedback C: Semivariable cost does not behave in this manner.
Feedback D: Stepvariable cost does not behave in this manner.
Feedback E: Stepfixed cost does not behave in this manner.
 Macon Company has a variable selling cost. If sales volume increases, how will the total variable cost and the variable cost per unit behave?
 Total Variable Cost  Variable Cost Per Unit 
A.  Increase  Increase 
B.  Increase  Remain constant 
C.  Increase  Decrease 
D.  Remain constant  Decrease 
E.  Decrease  Increase 
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0602
Feedback A: This pair of relationships is incorrect.
Feedback B: Correct! If sales volume increases, total variable cost will increase and variable cost per unit will remain constant.
Feedback C: This pair of relationships is incorrect.
Feedback D: This pair of relationships is incorrect.
Feedback E: This pair of relationships is incorrect.
 What type of cost exhibits the behavior shown below?
Manufacturing Volume (Units)  Cost Per Unit 
50,000  $1.95 
70,000  1.95 
 Variable cost.
B.Fixed cost.
C. Semivariable cost.
D. Discretionary fixed cost.
E. Stepfixed cost.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0602
Feedback A: Correct! Variable costs are shown.
Feedback B: This is incorrect.
Feedback C: This is incorrect.
Feedback D: This is incorrect.
Feedback E: This is incorrect.
 Paige Corporation observed that when 25,000 units were sold, a particular cost amounted to $75,000, or $3.00 per unit. When volume increased by 10%, the cost totaled $82,500 (i.e., $3.00 per unit). The cost that Paige is studying can best be described as a:
A.variable cost.
B. fixed cost.
C. semivariable cost.
D. discretionary fixed cost.
E. stepfixed cost.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0602
Feedback A: Correct! This cost is a variable cost.
Feedback B: This is incorrect.
Feedback C: This is incorrect.
Feedback D: This is incorrect.
Feedback E: This is incorrect.
 When graphed, a typical variable cost appears as:
A.a horizontal line.
B. a vertical line.
C. a ushaped line.
D. a diagonal line that slopes downward to the right.
E. a diagonal line that slopes upward to the right.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0602
Feedback A: This is incorrect.
Feedback B: This is incorrect.
Feedback C: This is incorrect.
Feedback D: This is incorrect.
Feedback E: Correct! A typical variable cost appears as a diagonal line that slopes upward to the right.
 Norman Company pays a sales commission of 4% on each unit sold. If a graph is prepared, with the vertical axis representing perunit cost and the horizontal axis representing units sold, how would a line that depicts sales commissions be drawn?
A.As a straight diagonal line, sloping upward to the right.
B. As a straight diagonal line, sloping downward to the right.
C. As a horizontal line.
D. As a vertical line.
E. As a curvilinear line.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0602
Feedback A: This is incorrect.
Feedback B: This is incorrect.
Feedback C: Correct! The line that depicts sales commissions would be drawn as a horizontal line.
Feedback D: This is incorrect.
Feedback E: This is incorrect.
 A company observed a decrease in the cost per unit. All other things being equal, which of the following is most likely true?
A.The company is studying a variable cost, and total volume has increased.
B. The company is studying a variable cost, and total volume has decreased.
C. The company is studying a fixed cost, and total volume has increased.
D. The company is studying a fixed cost, and total volume has decreased.
E. The company is studying a fixed cost, and total volume has remained constant.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0602
Feedback A: This statement is incorrect.
Feedback B: This statement is incorrect.
Feedback C: Correct! The company is studying a fixed cost, and total volume has increased.
Feedback D: This statement is incorrect.
Feedback E: This statement is incorrect.
 Ralston has the following budgeted costs at its anticipated production level (expressed in hours): variable overhead, $165,000; fixed overhead, $250,000. If Ralston now revises its anticipated production slightly upward, it would expect:
A.total fixed overhead of $250,000 and a lower hourly rate for variable overhead.
B. total fixed overhead of $250,000 and the same hourly rate for variable overhead.
C. total fixed overhead of $250,000 and a higher hourly rate for variable overhead.
D. total variable overhead of less than $165,000 and a lower hourly rate for variable overhead.
E. total variable overhead of less than $165,000 and a higher hourly rate for variable overhead.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0602
Feedback A: This statement is incorrect.
Feedback B: Correct! If Ralston revises it anticipated production slightly upward, it would expect total fixed overhead of $250,000 and the same hourly rate for variable overhead.
Feedback C: This statement is incorrect.
Feedback D: This statement is incorrect.
Feedback E: This statement is incorrect.
 What type of cost exhibits the behavior shown below?
Manufacturing Volume (Units)  Total Cost  Cost Per Unit 
50,000  $150,000  $3.00 
80,000  150,000  1.88 
 Variable cost.
B.Fixed cost.
C. Semivariable cost.
D. Stepvariable cost.
E. Mixed cost.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0602
Feedback A: This is incorrect.
Feedback B: Correct! This is the cost behavior of a fixed cost.
Feedback C: This is incorrect.
Feedback D: This is incorrect.
Feedback E: This is incorrect.
 When graphed, a typical fixed cost appears as:
A.a horizontal line.
B. a vertical line.
C. a ushaped line.
D. a diagonal line that slopes downward to the right.
E. a diagonal line that slopes upward to the right.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0602
Feedback A: Correct! A typical fixed cost appears as a horizontal line when graphed.
Feedback B: This is incorrect.
Feedback C: This is incorrect.
Feedback D: This is incorrect.
Feedback E: This is incorrect.
 Straightline depreciation is a typical example of a:
A.variable cost.
B. stepvariable cost.
C. fixed cost.
D. mixed cost.
E. curvilinear cost.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0602
Feedback A: This is incorrect.
Feedback B: This is incorrect.
Feedback C: Correct! Straightline depreciation is a typical example of a fixed cost.
Feedback D: This is incorrect.
Feedback E: This is incorrect.
 Which of the following choices denotes the typical cost behavior of advertising and sales commissions?
 Advertising  Sales Commissions 
A.  Variable  Variable 
B.  Variable  Fixed 
C.  Fixed  Variable 
D.  Fixed  Fixed 
E.  Semivariable  Variable 
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0602
Feedback A: This relationship is incorrect.
Feedback B: This relationship is incorrect.
Feedback C: Correct! The typical cost behavior of advertising is fixed and sales commissions are variable.
Feedback D: This relationship is incorrect.
Feedback E: This relationship is incorrect.
 Costs that remain the same over a wide range of activity, but jump to a different amount outside that range, are known as:
A.stepfixed costs.
B. stepvariable costs.
C. semivariable costs.
D. curvilinear costs.
E. mixed costs.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0602
Feedback A: Correct! These are stepfixed costs.
Feedback B: This cost is incorrect.
Feedback C: This cost is incorrect.
Feedback D: This cost is incorrect.
Feedback E: This cost is incorrect.
 When graphed, a typical stepfixed cost appears as:
A.a horizontal line.
B. a vertical line.
C. a series of staggered horizontal lines
D. a diagonal line that slopes downward to the right.
E. a diagonal line that slopes upward to the right.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0602
Feedback A: This is incorrect.
Feedback B: This is incorrect.
Feedback C: Correct! A typical stepfixed cost appears as a series of staggered horizontal lines when graphed.
Feedback D: This is incorrect.
Feedback E: This is incorrect.
 Each of Boggart’s production managers (annual salary cost, $45,000) can oversee 60,000 machine hours of manufacturing activity. Thus, if the company has 50,000 hours of manufacturing activity, one manager is needed; for 75,000 hours, two managers are needed; for 125,000 hours, three managers are needed; and so forth. Boggart’s salary cost can best be described as a:
A.variable cost.
B. semivariable cost.
C. stepvariable cost.
D. fixed cost.
E. stepfixed cost.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0602
Feedback A: This is incorrect.
Feedback B: This is incorrect.
Feedback C: This is incorrect.
Feedback D: This is incorrect.
Feedback E: Correct! Boggart’s salary cost can best be described as a stepfixed cost.
 Sophie Corporation recently produced and sold 100,000 units. Fixed costs at this level of activity amounted to $50,000; variable costs were $100,000. How much cost would the company anticipate if during the next period it produced and sold 102,000 units?
A.$150,000.
B. $151,000.
C. $152,000.
D. $153,000.
E. None of the answers is correct.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0602
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: Correct! Variable cost per unit = $100,000 / 100,000 units = $1 per unit; $102,000 + $50,000 = $152,000.
Feedback D: This amount is incorrect.
Feedback E: This answer is wrong, because there is a correct amount listed.
 Organize, Inc. has only variable costs and fixed costs. A review of the company’s records disclosed that when 200,000 units were produced, fixed manufacturing costs amounted to $800,000 and the cost per unit manufactured totaled $11. On the basis of this information, how much cost would the firm anticipate at an activity level of 205,000 units?
A.$2,235,000.
B. $2,222,000.
C. $2,214,000.
D. $2,200,000.
E. None of the answers is correct.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0602
Feedback A: Correct! Variable cost per unit = (200,000 x $11) – $800,000 = $1,400,000 ÷ 200,000 = $7;
Anticipated level of 205,000 units: ($7 x 205,000) + $800,000 = $2,235,000.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: This amount is incorrect.
Feedback E: This answer is wrong, because there is a correct amount listed.
 A review of Parson Corporation’s accounting records found that at a volume of 90,000 units, the variable and fixed cost per unit amounted to $8 and $4, respectively. On the basis of this information, what amount of total cost would Parson anticipate at a volume of 85,000 units?
A.$1,020,000.
B. $1,040,000.
C. $1,060,000.
D. $1,080,000.
E. None of the answers is correct.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0602
Feedback A: This amount is incorrect.
Feedback B: Correct! Fixed costs = 90,000 x $4 = $360,000; Total cost = Total Variable + Total fixed = (85,000 x $8) + $360,000 = $1,040,000.
Feedback C: This amount is incorrect.
Feedback D: This amount is incorrect.
Feedback E: This answer is wrong, because there is a correct amount listed.
 A cost that has both a fixed and variable component is known as a:
A.stepfixed cost.
B. stepvariable cost.
C. semivariable cost.
D. curvilinear cost.
E. discretionary cost.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0602
Feedback A: This is incorrect.
Feedback B: This is incorrect.
Feedback C: Correct! A cost that is both fixed and variable is called semivariable.
Feedback D: This is incorrect.
Feedback E: This is incorrect.
 A mixed cost is also known as a:
A.semivariable cost.
B. stepfixed cost.
C. variable cost.
D. curvilinear cost.
E. discretionary cost.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0602
Feedback A: Correct! A mixed cost is also known as a semivariable cost.
Feedback B: This is incorrect.
Feedback C: This is incorrect.
Feedback D: This is incorrect.
Feedback E: This is incorrect.
 Brock Morton has a fastfood franchise and must pay a franchise fee of $45,000 plus 4% of gross sales. In terms of cost behavior, the fee is known as a:
A.variable cost.
B. fixed cost.
C. stepfixed cost.
D. semivariable cost.
E. curvilinear cost.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0602
Feedback A: This fee is not a variable cost.
Feedback B: This fee is not a fixed cost.
Feedback C: This fee is not a stepfixed cost.
Feedback D: Correct! This cost is known as a semivariable cost.
Feedback E: This fee is not a curvilinear cost.
 Which of the following is (are) example(s) of a mixed cost?
I. A building that is used for both manufacturing and sales activities.
II. An employee’s compensation, which consists of a flat salary plus a commission.
III. Depreciation that relates to five different machines.
IV. Maintenance cost that must be split between sales and administrative offices.
A.I only.
B. II only.
C. I and III.
D. I, III, and IV.
E. I, II, III, and IV.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0602
Feedback A: This is not a mixed cost.
Feedback B: Correct! An employee’s compensation, consisting of a flat salary plus a commission, is a mixed cost.
Feedback C: These are not mixed costs.
Feedback D: These are not mixed costs.
Feedback E: Not all of these are mixed costs.
 Which of the following costs exhibits both decreasing and increasing marginal costs over a specific range of activity?
A.Semivariable cost.
B. Curvilinear cost.
C. Stepfixed cost.
D. Stepvariable cost.
E. Fixed cost.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0602
Feedback A: This cost is incorrect.
Feedback B: Correct! Curvilinear costs exhibit both decreasing and increasing marginal costs over a specific range of activity.
Feedback C: This cost is incorrect.
Feedback D: This cost is incorrect.
Feedback E: This cost is incorrect.
 The relevant range is that range of activity:
A.where a company achieves its maximum efficiency.
B. where units produced equal units sold.
C. where management expects the firm to operate.
D. where the firm will earn a profit.
E. where expected results are abnormally high.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0603
Feedback A: This statement is incorrect.
Feedback B: This statement is incorrect.
Feedback C: Correct! The relevant range is that range of activity where management expects the firm to operate.
Feedback D: This statement is incorrect.
Feedback E: This statement is incorrect.
 Within the relevant range of activity, costs:
A.can be estimated with reasonable accuracy.
B. can be expected to change radically.
C. exhibit decreasing marginal cost patterns.
D. exhibit increasing marginal cost patterns.
E. cannot be estimated satisfactorily.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0603
Feedback A: Correct! Within the relevant range of activity, costs can be estimated with reasonable accuracy.
Feedback B: This statement is incorrect.
Feedback C: This statement is incorrect.
Feedback D: This statement is incorrect.
Feedback E: This statement is incorrect.
 Within the relevant range, a curvilinear cost function can sometimes be graphed as a:
A.sloping straight line.
B. jagged line.
C. vertical straight line.
D. curved line.
E. horizontal straight line.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0603
Feedback A: Correct! Within the relevant range a curvilinear cost function can sometime be graphed as a sloping straight line.
Feedback B: This statement is incorrect.
Feedback C: This statement is incorrect.
Feedback D: This statement is incorrect.
Feedback E: This statement is incorrect.
 A variable cost that has a definitive physical relationship to the activity measure is called a (n):
A.discretionary cost.
B. engineered cost.
C. managed cost.
D. programmed cost.
E. committed cost.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0604
Feedback A: This is an incorrect cost type.
Feedback B: Correct! A variable cost that has a definitive physical relationship to the activity measure is called an engineered cost.
Feedback C: This is an incorrect cost type.
Feedback D: This is an incorrect cost type.
Feedback E: This is an incorrect cost type.
 Costs that result from a company’s ownership or use of facilities and its basic organizational structure are known as:
A.discretionary fixed costs.
B. committed fixed costs.
C. discretionary variable costs.
D. committed variable costs.
E. engineered costs.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0604
Feedback A: This is an incorrect cost type.
Feedback B: Correct! Costs that result from a company’s ownership or use of facilities and its basic organization structure are known as committed fixed costs.
Feedback C: This is an incorrect cost type.
Feedback D: This is an incorrect cost type.
Feedback E: This is an incorrect cost type.
 Property taxes are an example of a (n):
A.committed fixed cost.
B. committed variable cost.
C. discretionary fixed cost.
D. discretionary variable cost.
E. engineered cost.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0604
Feedback A: Correct! Property taxes are an example of a committed fixed cost.
Feedback B: This is an incorrect cost type.
Feedback C: This is an incorrect cost type.
Feedback D: This is an incorrect cost type.
Feedback E: This is an incorrect cost type.
 Which of the following is not an example of a committed fixed cost?
A.Property taxes.
B. Depreciation on buildings.
C. Salaries of management personnel.
D. Outlays for advertising programs.
E. Equipment rental costs.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0604
Feedback A: This is a committed fixed cost.
Feedback B: This is a committed fixed cost.
Feedback C: This is a committed fixed cost.
Feedback D: Correct! This is not an example of a committed fixed cost.
Feedback E: This is a committed fixed cost.
 Committed fixed costs would include:
A.advertising.
B. research and development.
C. depreciation on buildings and equipment.
D. contributions to charitable organizations.
E. expenditures for direct labor.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0604
Feedback A: This is not a committed fixed cost.
Feedback B: This is not a committed fixed cost.
Feedback C: Correct! Depreciation on buildings and equipment is a committed fixed cost.
Feedback D: This is not a committed fixed cost.
Feedback E: This is not a committed fixed cost.
 Amounts spent for charitable contributions are an example of a (n):
A.committed fixed cost.
B. committed variable cost.
C. discretionary fixed cost.
D. discretionary variable cost.
E. engineered cost.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0604
Feedback A: This is not a committed fixed cost.
Feedback B: This is not a committed variable cost.
Feedback C: Correct! Charitable contributions are an example of a discretionary fixed cost.
Feedback D: This is not a discretionary variable cost.
Feedback E: This is not an engineered cost.
 Which of the following would not typically be classified as a discretionary fixed cost?
A.Equipment depreciation.
B. Employee development (education) programs.
C. Advertising.
D. Outlays for research and development.
E. Charitable contributions.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0604
Feedback A: Correct! Equipment depreciation would not typically be classified as a discretionary fixed cost.
Feedback B: This would typically be classified as a discretionary fixed cost.
Feedback C: This would typically be classified as a discretionary fixed cost.
Feedback D: This would typically be classified as a discretionary fixed cost.
Feedback E: This would typically be classified as a discretionary fixed cost.
 Which of the following choices correctly classifies a committed fixed cost and a discretionary fixed cost?
 Committed  Discretionary 
A.  Promotion  Management salaries 
B.  Building depreciation  Charitable contributions 
C.  Management training  Property taxes 
D.  Equipment rentals  Equipment depreciation 
E.  Research and development  Advertising 
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0604
Feedback A: This pair of costs is incorrect.
Feedback B: Correct! Building depreciation is classified as a committed fixed cost and charitable contributions are discretionary fixed costs.
Feedback C: This pair of costs is incorrect.
Feedback D: This pair of costs is incorrect.
Feedback E: This pair of costs is incorrect.
 Which type of fixed cost (1) tends to be more longterm in nature and (2) can be cut back more easily in bad economic times without doing serious harm to organizational goals and objectives?
 Long Term in Nature  Can be Cut Back More Easily In Bad Economic Times 
A.  Committed  Committed 
B.  Committed  Discretionary 
C.  Discretionary  Committed 
D.  Discretionary  Discretionary 
E.  Committed  No difference between committed and discretionary 
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0604
Feedback A: These costs do not match the definitions given.
Feedback B: Correct! Fixed costs that are longterm in nature are committed and those that can be cut back more easily in bad economic times are discretionary.
Feedback C: These costs do not match the definitions given.
Feedback D: These costs do not match the definitions given.
Feedback E: These costs do not match the definitions given.
 Which of the following techniques is not used to analyze cost behavior?
A.Leastsquares regression.
B. Highlow method.
C. Visualfit method.
D. Linear programming.
E. Multiple regression.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0605
Learning Objective: 0606
Feedback A: This technique is used to analyze cost behavior.
Feedback B: This technique is used to analyze cost behavior.
Feedback C: This technique is used to analyze cost behavior.
Feedback D: Correct! Linear programming is not used to analyze cost behavior.
Feedback E: This technique is used to analyze cost behavior.
 The highlow method and leastsquares regression are used by accountants to:
A.evaluate divisional managers for purposes of raises and promotions.
B. choose among alternative courses of action.
C. maximize output.
D. estimate costs.
E. control operations.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0605
Feedback A: This is not a correct used of these two techniques.
Feedback B: This is not a correct used of these two techniques.
Feedback C: This is not a correct used of these two techniques.
Feedback D: Correct! Both of these techniques are used by accountants to estimate costs.
Feedback E: This is not a correct used of these two techniques.
 Which of the following statements about the visualfit method is (are) true?
I. The method results in the creation of a scatter diagram.
II. The method is not totally objective because of the manner in which the cost line is determined.
III. The method is especially helpful in the determination of outliers.
A.I only.
B. II only.
C. I and II.
D. I and III.
E. I, II, and III.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0605
Feedback A: While this statement is true, there is a better answer.
Feedback B: While this statement is true, there is a better answer.
Feedback C: While these statements are true, there is a better answer.
Feedback D: While these statements are true, there is a better answer.
Feedback E: Correct! All of these statement are true regarding the visualfit method.
 The nonstatistical method of cost estimation that calls for the creation of a scatter diagram is the:
A.leastsquares regression method.
B. highlow method.
C. visualfit method.
D. account analysis method.
E. multiple regression method.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0605
Feedback A: This is not the definition of this method.
Feedback B: This is not the definition of this method.
Feedback C: Correct! The nonstatistical method of cost estimation that calls for the creation of a scatter diagram is the visualfit method.
Feedback D: This is not the definition of this method.
Feedback E: This is not the definition of this method.
 Which of the following methods of cost estimation relies on only two data points?
A.Leastsquares regression.
B. The highlow method.
C. The visualfit method.
D. Account analysis.
E. Multiple regression.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0605
Feedback A: This method uses more than two data points.
Feedback B: Correct! The highlow method relies on only two data points.
Feedback C: This method uses more than two data points.
Feedback D: This method uses more than two data points.
Feedback E: This method uses more than two data points.
Use the following information to answer Questions 5961.
Fulton and Sons, Inc. presently leases a copy machine under an agreement that calls for a fixed fee each month and a charge for each copy made. Fulton made 7,000 copies and paid a total of $360 in March; in May, the firm paid $280 for 5,000 copies. The company uses the highlow method to analyze costs.
 Fulton’s variable cost per copy is:
A.$0.040.
B. $0.051.
C. $0.053.
D. $0.056.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0605
Feedback A: Correct! The variable cost per unit is (High – Low costs) ÷ (High – Low Units) = ($360 – $280) ÷ (7,000 – 5,000) = $0.04 per copy.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: This amount is incorrect.
Feedback E: This answer is wrong, because there is a correct amount listed.
 Fulton’s monthly fixed fee is:
A.$80.
B. $102.
C. $106.
D. $112.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0605
Feedback A: Correct! Variable costs (using the low level) = 5,000 x $0.040 = $200; Total costs – variable costs = fixed costs (or $280 – $200 = $80); alternatively, Variable costs (using the high level): 7,000 x $0.04 = $280; Total costs – variable costs = fixed costs (or $360 – $280 = $80.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: This amount is incorrect.
Feedback E: This answer is wrong, because there is a correct amount listed.
 How much would Fulton pay if it made 5,500 copies?
A.$382.50.
B. $322.
C. $300.
D. $292.50
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0605
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: Correct! The variable cost per unit is (High – Low costs) ÷ (High – Low Units) = ($360 – $280) ÷ (7,000 – 5,000) = $0.04 per copy. Variable costs (using the low level) = 5,000 x $0.040 = $200; Total costs – variable costs = fixed costs (or $280 – $200 = $80)
Units x Variable cost per unit + Fixed costs = (5,500 x $0.04) + $80 = $300.
Feedback D: This amount is incorrect.
Feedback E: This answer is wrong, because there is a correct amount listed.
Use the following information to answer Questions 6264.
Barkoff Enterprises, which uses the highlow method to analyze cost behavior, has determined that machine hours best explain the company’s utilities cost. The company’s relevant range of activity varies from a low of 600 machine hours to a high of 1,100 machine hours, with the following data being available for the first six months of the year:
Month  Utilities  Machine Hours 
January  $8,700  800 
February  8,360  720 
March  8,950  810 
April  9,360  920 
May  9,625  950 
June  9,150  900 
 The variable utilities cost per machine hour for Barkoff is:
A.$0.18.
B. $4.50.
C. $5.00.
D. $5.50.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0605
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: Correct! (High – Low costs) ÷ (High – Low Units) = ($9,625 – $8,360) ÷ (950720) = $1,265 ÷ 230 = $5.50 variable cost per unit
Feedback E: This answer is wrong, because there is a correct amount listed.
 The fixed utilities cost per month for Barkoff is:
A.$3,764.
B. $4,400.
C. $4,760.
D. $5,100.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0605
Feedback A: This amount is incorrect.
Feedback B: Correct!
(High – Low costs) ÷ (High – Low Units) = ($9,625 – $8,360) ÷ (950720) = $1,265 ÷ 230 = $5.50 variable cost per unit
Variable costs (using the high level) = 950 x $5.50 = $5,225; Total costs – variable costs = fixed costs (or $9,625 – $5,225 = $4,400).
Feedback C: This amount is incorrect.
Feedback D: This amount is incorrect.
Feedback E: This answer is wrong, because there is a correct amount listed.
 Using the highlow method, the utilities cost for Barkoff associated with 980 machine hours would be:
A.$9,510.
B. $9,660.
C. $9,700.
D. $9,790.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0605
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: Correct!
(High – Low costs) ÷ (High – Low Units) = ($9,625 – $8,360) ÷ (950720) = $1,265 ÷ 230 = $5.50 variable cost per unit
Variable costs (using the high level) = 950 x $5.50 = $5,225; Total costs – variable costs = fixed costs (or $9,625 – $5,225 = $4,400).
At the anticipated 980 machine hours: (980 x $5.50) + $4,400 = $5,390 + $4,400 = $9,790.
Feedback E: This answer is wrong, because there is a correct amount listed.
Use the following information to answer Questions 6567.
Swan, Inc. uses the highlow method to analyze cost behavior. The company observed that at 22,000 machine hours of activity, total maintenance costs averaged $33.40 per hour. When activity jumped to 25,000 machine hours, which was still within the relevant range, the average total cost per machine hour was $30.40.
 On the basis of this information, the variable cost per machine hour for Swan was:
A.$8.40.
B. $22.00.
C. $25.00.
D. $30.40.
E. $33.40.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0605
Feedback A: Correct! Variable cost per machine hour = (High level cost – Low level cost) ÷ (High units – Low units) = [($30.40 x 25,000) – ($33.40 x 22,000)] ÷ (25,000 – 22,000) = ($760,000 – $734,800) ÷ 3,000 = $8.40.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: This amount is incorrect.
Feedback E: This amount is incorrect.
 On the basis of this information, the fixed cost for Swan was:
A.$184,800.
B. $210,000.
C. $550,000.
D. $734,800.
E. $760,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0605
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: Correct!
Variable cost per machine hour = (High level cost – Low level cost) ÷ (High units – Low units) = [($30.40 x 25,000) – ($33.40 x 22,000)] ÷ (25,000 – 22,000) = ($760,000 – $734,800) ÷ 3,000 = $8.40.
Total variable costs (using the low level): 22,000 x $8.40 = $184,800;
Total costs – Variable costs = Fixed costs; $734,800 – $184,800 = $550,000.
Feedback D: This amount is incorrect.
Feedback E: This amount is incorrect.
 On the basis of this information, what were total maintenance costs when Swan experienced 23,000 machine hours?
A.$193,200.
B. $550,000.
C. $734,800.
D. $743,200.
E. $760,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0605
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: Correct!
Variable cost per machine hour = (High level cost – Low level cost) ÷ (High units – Low units) = [($30.40 x 25,000) – ($33.40 x 22,000)] ÷ (25,000 – 22,000) = ($760,000 – $734,800) ÷ 3,000 = $8.40.
Total variable costs (using the low level): 22,000 x $8.40 = $184,800;
Total costs – Variable costs = Fixed costs; $734,800 – $184,800 = $550,000.
Using the cost equation at the 23,000 machine hour level: (23,000 x $8.40) + $550,000 = $743,200.
Feedback E: This amount is incorrect.
 Tallequah, Inc. uses the highlow method to analyze cost behavior. The company observed that at 20,000 machine hours of activity, total maintenance costs averaged $10.50 per hour. When activity jumped to 24,000 machine hours, which was still within the relevant range, the average total cost per machine hour was $9.75. On the basis of this information, the company’s fixed maintenance costs were:
A.$24,000.
B. $90,000.
C. $210,000.
D. $234,000.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0605
Feedback A: This amount is incorrect.
Feedback B: Correct! Variable cost per unit = (High level cost – Low level cost) ÷ (High units – Low units);
[(24,000 x $9.75) – ($10.50 x 20,000)] ÷ (24,000 – 20,000) = $6 per unit variable cost per unit;
Calculate Variable cost at High level= 24,000 x $6 = $144,000;
Total cost – Variable cost = Fixed cost;
$234,000 – $144,000 = $90,000.
Feedback C: This amount is incorrect.
Feedback D: This amount is incorrect.
Feedback E: This answer is wrong, because there is a correct amount listed.
 The following data relate to the Torrence Company for May and August of the current year:
 May  August 
Maintenance hours  25,000  29,000 
Maintenance cost  $1,175,000  $1,247,000 
May and August were the lowest and highest activity levels, and Torrence uses the highlow method to analyze cost behavior. Which of the following statements is true?
A. The variable maintenance cost is $43 per hour.
B. The variable maintenance cost is $45 per hour.
C. The variable maintenance cost is $47 per hour.
D. The fixed maintenance cost is $725,000 per month.
E. More than one of the other answers is true.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0605
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: Correct! Variable cost per unit = (High level cost – Low level cost) ÷ (High units – Low units);
($1,247,000 – $1,175,000) ÷ (29,000 – 25,000) = $18 variable per unit;
Calculating Fixed cost at high level: $1,247,000 – (29,000 x $18) = $725,000 fixed cost.
Feedback E: This answer is wrong, because there is only one correct answer listed.
 Data below relate to the Torrence Company for May and August of the current year:
 May  August  
Maintenance hours  25,000  29,000  
Maintenance cost  $1,175,000  $1,247,000  
May and August were the lowest and highest activity levels, and Torrence uses the highlow method to analyze cost behavior. Which of the following statements is true?
A. The variable maintenance cost is $18 per hour. B. The variable maintenance cost is $22 per hour. C. The variable maintenance cost is $24 per hour. D. The fixed maintenance cost is $72,000 per month. E. More than one of the other answers is true.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 0605
Feedback A: Correct! Variable cost per unit = (High level cost – Low level cost) ÷ (High units – Low units);
($1,247,000 – $1,175,000) ÷ (29,000 – 25,000) = $18 variable cost per unit
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: This amount is incorrect.
Feedback E: This answer is wrong, because there is only one correct answer listed. 
 The following data relate to the Torrence Company for May and August:
 May  August 
Maintenance hours  25,000  29,000 
Maintenance cost  $1,175,000  $1,247,000 
May and August were the lowest and highest activity levels, and Torrence uses the highlow method to analyze cost behavior. If maintenance hours are estimated to be 26,000 hours in October, which of the following statements is true?
A. The variable maintenance cost is $18 per hour.
B. The variable maintenance cost is $22 per hour.
C. The variable maintenance cost is $24 per hour.
D. The fixed maintenance cost is $72,000 per month.
E. More than one of the other answers is true.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0605
Feedback A: Correct! Variable cost per unit = (High level cost – Low level cost) ÷ (High units – Low units);
($1,247,000 – $1,175,000) ÷ (29,000 – 25,000) = $18 variable cost per unit
Feedback B: This is not the variable maintenance cost.
Feedback C: This is not the variable maintenance cost.
Feedback D: This is not the fixed maintenance cost.
Feedback E: This answer is wrong, because there is only one correct answer listed.
 The following data relate to the Torrence Company for May and August:
 May  August 
Maintenance hours  25,000  29,000 
Maintenance cost  $1,175,000  $1,247,000 
May and August were the lowest and highest activity levels, and Torrence uses the highlow method to analyze cost behavior. If maintenance hours are estimated to be 26,000 hours in October, which of the following statements is true?
A. Total maintenance costs will be $1,175,000.
B. Total maintenance costs will be $1,182,000.
C. Total maintenance costs will be $1,193,000.
D. Total maintenance costs will be $1,221,000.
E. Total maintenance costs will be $1,247,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0605
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: Correct! Variable cost per unit = (High level cost – Low level cost) ÷ (High units – Low units);
($1,247,000 – $1,175,000) ÷ (29,000 – 25,000) = $18 variable per unit; Calculating Fixed cost at high level: $1,247,000 – (29,000 x $18) = $725,000 fixed cost. Total maintenance costs (calculated at estimated 26,000 hours): $1,193,000= (26,000 x $18) + $725,000).
Feedback D: This amount is incorrect.
Feedback E: This amount is incorrect.
Use the following information to answer Questions 7375.
Shum Manufacturing, which uses the highlow method, makes a product called Kwan. The company incurs three different cost types (A, B, and C) and has a relevant range of operation between 2,500 units and 10,000 units per month. Perunit costs at two different activity levels for each cost type are presented below.
 Type A  Type B  Type C  Total 
5,000 units  $4  $9  $4  $17 
7,500 units  4  6  3  13 
 The cost types shown above are identified by behavior as:
 Type A  Type B  Type C 
A.  Fixed  Variable  Semivariable 
B.  Fixed  Semivariable  Variable 
C.  Variable  Semivariable  Fixed 
D.  Variable  Fixed  Semivariable 
E.  Semivariable  Variable  Fixed 
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0602
Learning Objective: 0605
Feedback A: This answer shows incorrect cost classifications.
Feedback B: This answer shows incorrect cost classifications.
Feedback C: This answer shows incorrect cost classifications.
Feedback D: Correct! Based on the per unit costs, Type A is variable, Type B is fixed, and Type C is semivariable.
Feedback E: This answer shows incorrect cost classifications.
 If Shum produces 10,000 units, the total cost would be:
A.$90,000.
B. $100,000.
C. $110,000.
D. $125,000.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0605
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: Correct! Variable cost = $4 x 10,000 = $40,000; Fixed = $45,000; Semivariable = ($22,500 – $20,000) ÷ (5,000 – 2,500) = $1 variable portion;
Fixed portion: $20,000 – ($1 x 5,000) = $15,000; $40,000 + $45,000 + ($1 x 10,000) + $15,000 = $110,000.
Feedback D: This amount is incorrect.
Feedback E: This answer is wrong, because there is a correct amount listed.
 The cost formula that expresses the behavior of Shum’s total cost is:
A.Y = $0 + $17X.
B. Y = $20,000 + $13X.
C. Y = $40,000 + $9X.
D. Y = $45,000 + $4X.
E. Y = $60,000 + $5X.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0605
Feedback A: This equation is incorrect.
Feedback B: This equation is incorrect.
Feedback C: This equation is incorrect.
Feedback D: This equation is incorrect.
Feedback E: Correct! $4 variable + $1 from semivariable = $5 x variable; $45,000 fixed + $15,000 fixed from semivariable = $60,000.
 In regression analysis, the variable that is being predicted is known as the:
A.independent variable.
B. dependent variable.
C. explanatory variable.
D. interdependent variable.
E. functional variable.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0605
Feedback A: This is incorrect.
Feedback B: Correct! The variable that is being predicted is the dependent variable.
Feedback C: This is incorrect.
Feedback D: This is incorrect.
Feedback E: This is incorrect.
 Almed Products has determined that the number of machine hours worked (MH) drives the amount of manufacturing overhead incurred (MOH). On the basis of this relationship, a staff analyst has constructed the following regression equation:
MOH = 240,000 + 8MH
Which of the choices correctly depicts the nature of Almed’s variables?
 Dependent  Independent 
A.  MOH  MOH 
B.  MOH  MH 
C.  MH  MOH 
D.  MH  MH 
E.  8  240,000 
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0605
Feedback A: This is an incorrect choice.
Feedback B: Correct! Since MOH is being predicted it is the dependent variable and MH is the independent variable.
Feedback C: This is an incorrect choice.
Feedback D: This is an incorrect choice.
Feedback E: This is an incorrect choice.
 Focus, Inc. operates a small package delivery service in the Atlanta suburbs. If the company uses a regression equation to forecast total operating costs, the equation’s intercept would correspond to the:
A.variable operating cost per delivery.
B. fixed operating costs.
C. number of deliveries.
D. total variable operating costs.
E. total operating costs.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0605
Feedback A: This is an incorrect choice.
Feedback B: Correct! The fixed operating costs correspond to the intercept.
Feedback C: This is an incorrect choice.
Feedback D: This is an incorrect choice.
Feedback E: This is an incorrect choice.
 Rushmont, Inc. operates a small package delivery service in the Nashville suburbs. If the company uses a regression equation to forecast total operating costs, the coefficient of the equation’s independent variable would correspond to the:
A.variable operating cost per delivery.
B. fixed operating costs.
C. number of deliveries.
D. total variable operating costs.
E. total operating costs.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0605
Feedback A: Correct! The coefficient of the equation’s independent variable is variable operating cost per delivery.
Feedback B: This is an incorrect choice.
Feedback C: This is an incorrect choice.
Feedback D: This is an incorrect choice.
Feedback E: This is an incorrect choice.
 Corrine Corporation, which uses leastsquares regression analysis, has derived the following regression equation for estimates of manufacturing overhead: Y = 495,000 + 5.65X. Which of the following statements is true if the primary cost driver is machine hours?
A.Total manufacturing overhead is represented by the variable “X.”
B. The company anticipates $495,000 of fixed manufacturing overhead.
C. “X” is commonly known as the dependent variable.
D. “X” represents the number of machine hours.
E. The company anticipates $495,000 of fixed manufacturing overhead and “X” represents the number of machine hours.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0605
Feedback A: This is an incorrect choice.
Feedback B: This is an incorrect choice.
Feedback C: This is an incorrect choice.
Feedback D: This is an incorrect choice.
Feedback E: Correct! The company anticipates $495,000 of fixed manufacturing overhead and “X” represents the number of machine hours.
 Blaster, Inc. recently conducted a leastsquares regression analysis to predict selling expenses. The company has constructed the following regression equation: Y = 329,000 + 7.80X. Which of the following statements is false if the primary cost driver is number of units sold?
A.The company anticipates $329,000 of fixed selling expenses.
B. “Y” represents total selling expenses.
C. The company expects both variable and fixed selling expenses.
D. For each unit sold, total selling expenses will increase by $7.80.
E. “X” represents the number of hours worked during the period.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0602
Learning Objective: 0605
Feedback A: This is a true statement.
Feedback B: This is a true statement
Feedback C: This is a true statement
Feedback D: This is a true statement
Feedback E: Correct! X is the number of units sold, not hours worked.
 Trey, Inc. is studying marketing cost and sales volume, and has generated the following information by use of a scatter diagram and a leastsquares regression analysis:
 Scatter Diagram  Regression Analysis 
Variable cost per unit sold  $6.50  $6.80 
Total monthly fixed cost  $45,000  $42,500 
Trey is now preparing an estimate for monthly sales of 18,000 units. On the basis of the data presented, compute the most accurate sales forecast possible.
A. $159,500.
B. $162,000.
C. $164,900.
D. $167,400.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0605
Feedback A: This is an incorrect choice.
Feedback B: This is an incorrect choice.
Feedback C: Correct! Regression is more accurate than a scatter diagram, so the answer is: (18,000 x $6.80) + $42,500 = $164,900.
Feedback D: This is an incorrect choice.
Feedback E: This answer is wrong, because there is a correct amount listed.
 Bogata Enterprises has determined that three variables play a key role in determining company revenues. To arrive at an objective forecast of revenues for the next accounting period, Bogata should use:
A.simple regression.
B. multiple regression.
C. a scatter diagram.
D. complex regression.
E. the highlow method.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0606
Feedback A: This tool is incorrect.
Feedback B: Correct! To arrive at an objective forecast of revenues for the next accounting period, multiple regression should be used.
Feedback C: This tool is incorrect.
Feedback D: This tool is incorrect.
Feedback E: This tool is incorrect.
 Which of the following tools is not associated with cost estimation?
A.Leastsquares regression.
B. Multiple regression.
C. Inversion equations.
D. Time and motion (engineering) studies.
E. Learning curves.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 0605
Learning Objective: 0606
Feedback A: This tool is associated with cost estimation.
Feedback B: This tool is associated with cost estimation.
Feedback C: Correct! Inversion equations are not associated with cost estimation.
Feedback D: This tool is associated with cost estimation.
Feedback E: This tool is associated with cost estimation.
 A staff assistant at Warrington Corporation recently determined that the first five units completed in a new manufacturing process took 500 hours to complete, or an average of 100 hours per unit. The assistant also found that when the cumulative output produced doubles, the average labor time declines by 20%. On the basis of this information, how many total hours would Warrington use if it produces a cumulative amount of 40 units?
A.128.
B. 160.
C. 1,280.
D. 2,048.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0606
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: Correct! See Exhibit 611 in text.
Feedback E: This answer is wrong, because there is a correct amount listed.
 Which of the following is not an issue in the collection of data for cost estimation?
A.Outliers.
B. Missing data.
C. Mismatched time periods.
D. Inflation.
E. All of the answers are issues in data collection.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0607
Feedback A: This is a data collection issue, but there is a better answer.
Feedback B: This is a data collection issue, but there is a better answer.
Feedback C: This is a data collection issue, but there is a better answer.
Feedback D: This is a data collection issue, but there is a better answer.
Feedback E: Correct! All of the answers are issues in data collection.
Essay Questions
 Consider the graphs that follow (the horizontal axis represents activity; the vertical axis represents total dollars).Required:
For items AI that follow, choose the graph that best represents the cost behavior pattern described. Note: Graphs can be used more than once.
A. Straightline depreciation on machinery.
B. The cost of chartering a private airplane. The cost is $800 per hour for the first 6 hours of a flight; it then drops to $600 per hour.
C. The wages of table service personnel in a restaurant. The employees are parttime workers who can be called upon for as little as 4 hours at a time.
D. Weekly wages of store clerks who work 40 hours each week. One clerk is hired for every 125 sales made during the month.
E. The cost of tires used in the production of trucks.
F. Outbound shipping charges that increase at a decreasing rate as sales rise because the firm can use more efficient modes of transportation (e.g., full trailer loads, full rail cars, etc.). Gradually, however, at high levels of sales, freight costs start to increase at an increasing rate, which reflects more transactions made to customers in faraway locations.
G. Equipment leasing costs that are computed at $2 per machine hour worked. The company pays a maximum of $120,000 per month.
H. The monthly cost of a franchise fee for a fastfood restaurant. The franchisee must pay $20,000 plus 5% of gross dollar sales.
I. The cost of electricity during peak demand periods, which is based on the following schedule:
Up to 20,000 kilowatt hours (KWH): $4,000
Above 20,000 kilowatt hours: $4,000 + $0.02 per KWH
Solution:
 2 B. 4 C. 7 D. 5 E. 1 F. 8 G. 9 H. 6 I. 3
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0602
 Consider the six costs that follow.
1. Advertising and promotion costs of a doityourself retailer
2. Surgical supplies used in a hospital’s operating room
3. Aircraft depreciation charges of an airline
4. Utility charges that include a minimumuse fee, for a small business
5. Annual business licensing fee paid by a daycare center
6. Truck fuel consumed by a road construction company
Required:
A. Classify each of these costs as variable, committed fixed, discretionary fixed, or semivariable.
B. Briefly describe the behavior of a perunit variable cost as activity changes.
C. What elements are present in a semivariable cost that cause it to behave in a semivariable manner?
D. Generally speaking, does management have more flexibility when dealing with committed fixed costs or discretionary fixed costs?
Solution:
 1. Discretionary fixed
2. Variable
3. Committed fixed
4. Semivariable
5. Committed fixed
6. Variable
B. Perunit variable costs remain constant as activity levels change.
C. Semivariable, or mixed costs, contain both a variable and fixed component.
D. Discretionary fixed costs.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0602
Learning Objective: 0604
 Rolling Hills Bistro produces one of the best sausage products in Tennessee. The company’s controller compiled the following information by analyzing the accounting records:
1. Meat costs the company $3.25 per pound of sausage produced.
2. Compensation of production employees is $2.25 per pound of sausage produced.
3. Supervisory salaries total $23,000 per month.
4. The company incurs utility costs of $9,000 per month plus $0.35 per pound of sausage produced.
5. Insurance and property taxes average $6,400 per month.
Required:
A. Classify each cost as variable, fixed, or semivariable.
B. Write a formula to express the behavior of the firm’s production costs. (Use the form Y = a + bX, where X denotes the quantity of sausage produced.)
Solution:
 1. Variable
2. Variable
3. Fixed
4. Semivariable
5. Fixed
B.
Supervision  $23,000  Meat  $3.25 
Fixed utilities  9,000  Labor  2.25 
Insurance and property taxes  6,400  Variable utilities  0.35 
Total fixed  $38,400  Total variable  $5.85 
Production cost per month: Y = $38,400 + $5.85 X 
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0602
Learning Objective: 0605
 Vargis Corporation has a machining capacity of 200,000 hours per year. Utilization of capacity is normally 75%; it has been as low as 40% and as high as 90%. An analysis of the accounting records revealed the following selected costs:
 At a 40% Utilization Rate  At a 90% Utilization Rate 
Cost A:   
Total  $440,000  $440,000 
Per hour  $5.50  ? 
Cost B:   
Total  ?  $1,944,000 
Per hour  $10.80  $10.80 
Cost C:   
Total  $680,000  $1,330,000 
Per hour  $8.50  $7.39 
Vargis uses the highlow method to analyze cost behavior.
Required:
A. Classify each of the costs as being either variable, fixed, or semivariable.
B. Calculate amounts for the two unknowns in the preceding table.
C. Calculate the total amount that Vargis would expect at a 75% utilization rate for Cost A, Cost B, and Cost C.
D. Develop an equation that Vargis can use to predict total cost for any level of hours within its range of operation.
Solution:
 Cost A: Fixed (same total amount at each level of activity)
Cost B: Variable (constant perhour figures)
Cost C: Semivariable (changing total and perhour figures)
B. Cost A: $440,000 ¸ (200,000 hours ´ 90%) = $2.44
Cost B: (200,000 hours ´ 40%) ´ $10.80 = $864,000
C. Analysis of Cost C (variable portion):
($1,330,000 – $680,000) ¸ [(200,000 ´ 90%) – (200,000 ´ 40%)] = $6.50 per hour
Analysis of Cost C (fixed portion):  
Total cost at 40% utilization  $680,000 
Variable cost (200,000 x 40% x $6.50)  520,000 
Fixed cost  $160,000 
 
75% utilization: 200,000 x 75% = 150,000 hours  
 
Cost A  $440,000 
Cost B (150,000 x $10.80)  1,620,000 
Cost C:  
Variable portion (150,000 x $6.50)  975,000 
Fixed portion  160,000 
Total cost  $3,195,000 
 Variable cost per hour: $10.80 + $6.50 = $17.30
Fixed cost: $440,000 + $160,000 = $600,000
Equation: Y = $600,000 + $17.30X
where Y = total cost and X = number of hours
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0602
Learning Objective: 0605
 Cheyenne Corporation operates a small medical lab in Wyoming that conducts minor medical procedures (including blood tests and xrays) for a number of doctors. The lab consumes various medical supplies and is staffed by two technicians, both of whom are paid a monthly salary. In addition, there is an onsite office manager who is also paid by the month.
Required:
A. If the lab’s patient count increases by 15%, will the lab’s total operating costs increase by 15%? Explain.
B. Cheyenne is considering opening an additional lab in a new suburban medical building. What will likely happen to the lab’s level of fixed cost incurrence? Why?
C. What analysis methods would be available to the office manager and/or Cheyenne management if a close look at the lab’s cost behavior is desired?
Solution:
 No. The lab has a mixture of both variable and fixed costs. Variable costs (such as supplies) will increase, directly paralleling the increase in clients. The salaries of the technicians and office manager are stepfixed in nature, meaning that a 15% hike in client load will likely do nothing to these expenditures. A possibility exists, though, that an increase in patient load could create the need for an added technician.
B. Fixed costs typically do not change when activity changes. However, the opening of a new branch will create the need for added technicians and presumably another office manager, thus causing costs to rise. In addition, facility rental charges will increase and there will be an added cost if the firm leases and/or depreciates equipment. Note: This answer assumes that the original facility will continue with existing personnel and not implement a jobsharing arrangement through a cutback in operating hours.
C. Possible methods include account classification, visual fit, highlow, and leastsquares regression.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0602
Learning Objective: 0605
 The following selected data were taken from the accounting records of Colorado Enterprises:
Month  Machine Hours  Manufacturing Overhead 
May  46,000  $889,000 
June  60,000  1,130,000 
July  68,000  1,274,000 
August  52,000  980,000 
Manufacturing overhead consists of three different costs; (1) machine supplies (variable), (2) property taxes (fixed), and (3) plant maintenance (semivariable). July’s overhead costs were $170,000 for machine supplies, $24,000 for property taxes, and $1,080,000 for plant maintenance.
Required: A. Determine the machine supplies and property taxes for May. B. By using the highlow method, analyze Colorado’s plant maintenance cost and calculate the monthly fixed portion and the variable cost per machine hour. C. Assume that present cost behavior patterns continue into future months. Estimate the total amount of manufacturing overhead the company can expect in September if 56,000 machine hours are worked.

Solution:
 Machine supplies: $170,000 ¸ 68,000 hours = $2.50 per hour; 46,000 hours ´ $2.50 = $115,000
Property taxes: Fixed at $24,000
B. Plant maintenance in May: $889,000 – $115,000 – $24,000 = $750,000
Variable plant maintenance: ($1,080,000 – $750,000) ¸ (68,000 – 46,000) = $15 per hour
Fixed plant maintenance:
Total plant maintenance for 68,000 hours  $1,080,000 
Less: Variable plant maintenance (68,000 x $15)  1,020,000 
Fixed cost  $60,000 
C. Manufacturing overhead at 56,000 hours:  
Machine supplies at $2.50 per hour  $140,000 
Property Taxes  24,000 
Plant maintenance:  
Variable at $15 per hour  840,000 
Fixed  60,000 
Total  $1,064,000 
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0602
Learning Objective: 0605
 Lichtenstein Imports needs to determine the variable utilities rate per machine hour in order to estimate cost for August. Relevant information is as follows.
Month  Machine Hours Worked  Utilities Cost 
April  4,500  $9,560 
May  4,200  9,440 
June  6,500  10,725 
July  7,000  11,400 
Lichtenstein anticipates producing 5,000 units in August, each unit requiring 1.5 hours of machine time. The company uses the highlow method to analyze costs.
Required:
A. Calculate the variable and fixed components of the utilities cost.
B. Using the data calculated above, estimate the utilities cost for August.
C. Compare the highlow method versus the visualfit method with respect to (1) number of data observations used in the analysis and (2) objectivity of the results.
Solution:
 Variable cost:
($11,400 – $9,440) ¸ (7,000 – 4,200) = $0.70 per hour
Total cost for 7,000 hours  $11,400 
Less: Variable cost (7,000 x $0.70)  4,900 
Fixed cost  $6,500 
B.
Variable cost (5,000 x 1.5 x $0.70)  $5,250  
Fixed cost  6,500  
Total cost  $11,750  
C. The highlow method uses only two data observations, the highest and the lowest, whereas the visualfit method utilizes all data points that have been gathered (except outliers). Many analysts would say the visualfit method is advantageous in this regard.
However, the visualfit method lacks total objectivity because of the manner in which the cost line is fit through the data points (drawn by “visual approximation”). The highlow method is therefore said to be more objective.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 0605 
 Trane Medical Clinic offers a number of specialized medical services. A review of data for the year just ended revealed variable costs of $32 per patient day; annual fixed costs of $480,000, which are incurred evenly throughout the year; and semivariable costs that displayed the following behavior at the “peak” and “valley” of activity:
January (2,400 patient days): $258,400
August (2,900 patient days): $278,900
Required:
A. Calculate the total cost for an upcoming month (2,800 patient days) if current cost behavior patterns continue. Trane uses the highlow method to analyze cost behavior.
B. There is a high probability that Trane’s volume will increase in forthcoming months as patients take advantage of new scientific advances. Can the data and methodology used in part (a) for predicting the costs of 2,800 patient days be employed to estimate the costs for, say, 3,800 patient days? Why or why not?
Solution:
 Analysis of semivariable cost (variable portion) :
($278,900 – $258,400) ¸ (2,900 – 2,400) = $41 per patient day
Analysis of semivariable cost (fixed portion):  
Total cost for 2,900 patient days  $278,900 
Less:Variable cost (2,900 x $41)  118,900 
Fixed cost  $160,000 
 
Variable cost (2,800 x $32)  $89,600 
Fixed cost ($480,000 ÷ 12 months)  40,000 
Semivariable cost:  
Variable portion (2,800 x $41)  114,800 
Fixed portion  160,000 
Total cost  $404,400 
B. No. The “peak” and “valley” of operation were 2,900 patient days and 2,400 patient days, respectively. The 3,800patientday data point is well outside this range of observed cost relationships and recent activity (i.e., the relevant range). Costs can change outside of this range (e.g., fixed costs may be higher), and the lack of past experience will likely create unknowns for the analyst.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 0602 Learning Objective: 0603 Learning Objective: 0605 
 Hogan Mining extracts ore for eight different companies in South Dakota. The firm anticipates variable costs of $65 per ton along with annual fixed overhead of $840,000, which is incurred evenly throughout the year. These costs exclude the following semivariable costs, which are expected to total the amounts shown for the high and low points of ore extraction activity: March (850 tons): $39,900
August (1,300 tons): $46,200
Hogan uses the highlow method to analyze cost behavior.
Required:
A. Calculate the semivariable cost for an upcoming month when 875 tons will be extracted.
B. Calculate the total cost for that same month.
C. Hogan uses Martinez Trucking to haul extracted ore. Martinez’s monthly charges are as follows:
800 to 1,099 tons  $ 70,000 
1,100 to 1,399 tons  90,000 
1,400 + tons  110,000 
 From a cost behavior perspective, what type of cost is this?
2. If Hogan plans to extract 875 tons, is the company being very “cost effective” with respect to Martinez’s billing rates? Briefly discuss.
Solution:
A. Analysis of semivariable cost (variable portion):  
($46,200 – 39,900) ÷ (1,300 – 850) = $14 per ton  
Analysis of semivariable cost (fixed portion):  
Total cost for 1,300 tons  $46,200 
Less:Variable cost (1,300 x $14)  18,200 
Fixed cost  $28,000 
 
Variable Portion (875 x $14)  $12,250 
Fixed Portion  28,000 
Total  $40,250 
 
B.  
Semivariable cost:  $40,250 
Variable cost (875 x $65)  56,875 
Fixed cost ($840,000 ÷ 12 months)  70,000 
Total cost  $167,125 
C. 1. Stepfixed. 2. No. Notice that the bill will be $70,000 for Hogan’s tonnage, and the company could have Martinez haul up to 1,099 tons for the same cost. Ideally, Hogan should try to move to the right side of the step to get a better return on its investment.AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 0602Learning Objective: 0605 
 T.L. Franklin Corporation has three costs: A, which is variable; B, which is fixed; and C, which is semivariable. The company uses the highlow method and extracted the following data from its accounting records:
· At 180,000 hours of activity, Cost A totaled $2,610,000.
· At 140,000 hours, the low point during the period, Cost C totaled $1,498,000; at 200,000 hours, the high point, Cost C’s fixed portion amounted to $1.75 per hour.
· At 160,000 hours of activity, the sum of Costs A, B, and C amounted to $8,162,000.
Required:
A. Compute the variable portion (total) of Cost C at 140,000 hours of activity.
B. Compute Cost C (total) at 160,000 hours of activity.
C. Compute Cost B (total) at 160,000 hours of activity.
Solution:
 Cost C’s fixed portion will total the same amount, $350,000 (200,000 hours ´ $1.75), at both 200,000 hours and 140,000 hours. Thus, the variable portion of C at 140,000 hours will be $1,148,000 ($1,498,000 – $350,000).
B. The variable portion of Cost C is $8.20 per hour ($1,148,000 ¸ 140,000 hours). Cost C will therefore total $1,662,000 [(160,000 hours ´ $8.20) + $350,000].
C. At 160,000 hours, Cost A equals $2,320,000 [($2,610,000 ¸ 180,000 hours) ´ 160,000 hours]. Thus:
Total cost (A + B + C)   $8,162,000 
Less: Cost A  $2,320,000  
Cost C  1,662,000  3,982,000 
Cost B   $4,180,000 
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0602
Learning Objective: 0605
 Shortly after being hired as an analyst with Hidden Cove Rentals in Coastal North Carolina, Matt Loman was asked to prepare a report that focused on the company’s order processing costs—a cost driven largely by the number of rental invoices written. Matt knew that he could use several different tools to analyze cost behavior, including scatter diagrams, leastsquares regression, and the highlow method. In addition, he knew that he could present the results of his analysis in the form of algebraic equations. Those equations follow.
Scatter diagram: OP = $56,000 + $6.80RI
Leastsquares regression: OP = $59,000 + $6.75RI
Highlow method: OP = $53,500 + $7.25RI
where OP = total order processing costs and RI = number of rental invoices written
Matt had analyzed data over the past 12 months and built equations based on these data, purposely including the slowest month of the year and the busiest month so that things would “tend to even out.” He observed that February was especially slow because of a paralyzing ice storm, one that forced the company to close for four days.
Required:
A. Will scatter diagrams, leastsquares regression, and the highlow method normally result in the same equation? Why?
B. Assuming the use of leastsquares regression, explain what the $59,000 and $6.75 figures represent.
C. Assuming the use of a scatter diagram, predict the order processing cost of an upcoming month when Hidden Cove expects to write 2,500 rental invoices.
D. Did Matt err in constructing the equations on data of the past 12 months? Briefly discuss. If “yes,” determine which of the three tools is likely to be affected the most and explain why.
Solution:
 No. The three methods produce equations by different means. Scatter diagrams and leastsquares regression rely on an examination of all data points. The scatter diagram, however, requires an analyst to fit a line through the points by visual approximation, or “eyeballing.” In contrast, leastsquares regression involves the use of statistical formulas to derive the best possible fit of the line through the points. Finally, the highlow method is based on an analysis of only two data points: the highest and the lowest.
B. These amounts represent the fixed and variable elements of the company’s order processing cost. Fixed cost totals $59,000, and Hidden Cove incurs $6.75 of variable cost for each invoice written.
C. OP = $56,000 + $6.80RI; OP = $56,000 + ($6.80 ´ 2,500); OP = $73,000
D. Yes, he did err by including February data. February is not representative because of the effects of the ice storm. The month is an outlier and should be eliminated from the data set.
The equation constructed by using the highlow method is likely to be affected the most since the equation is based on only two data points. One of those two points should have been excluded from the analysis.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0605
Learning Objective: 0607
 Duke Corporation uses leastsquares regression to analyze a variety of operating costs. A staff assistant determined that monthly machine hours (MH) have a strong causeandeffect relationship with total maintenance costs, and generated the following statistics:
Intercept: $170,000
b coefficient: $3.80
Total machine hours for the year: 36,500
Required:
A. Construct the company’s regression equation.
B. Based on your answer in part “A,” identify Duke’s dependent variable and independent variable.
C. What does the b coefficient really represent?
D. Predict the company’s maintenance cost in a month when 3,200 machine hours are worked.
Solution:
 Y = $170,000 + $3.80MH
B. Y (total maintenance cost) is the dependent variable; MH (machine hours) is the independent variable.
C. The b coefficient represents both the slope of the regression line and the variable maintenance cost per machine hour.
D. Y = $170,000 + $3.80MH
Y = $170,000 + ($3.80 ´ 3,200)
Y = $182,160
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0605
 Townson Company is making plans for the introduction of a new product, which has a target selling price of $7 per unit. The following estimates of manufacturing costs have been derived for 6 million units, to be produced during the first year:
Direct material: $6,000,000
Direct labor: $2,100,000 (at $14 per hour)
Overhead costs have not yet been estimated, but monthly data on total production and overhead for the past 12 months have been analyzed by using leastsquares regression. The major overhead cost driver is direct labor hours, with the following results:
Computed values:
Fixed overhead cost: $3,200,000
Coefficient of independent variable: $2.25
Required:
A. Prepare the company’s regression equation (Y = a + bX) to estimate overhead.
B. Calculate the predicted overhead cost at an activity level of 6,300,000 units.
C. What is Townson’s dependent variable in this case?
Solution:
 Y = $3,200,000 + $2.25X
B. Direct labor:
For 6 million units, direct labor totals 150,000 hours ($2,100,000 ¸ $14).
For 1 unit, direct labor totals 0.025 hours (150,000 ¸ 6,000,000).
For 6,300,000 units, direct labor totals 157,500 hours (6,300,000 ´ 0.025).
Y = $3,200,000 + (157,500 ´ $2.25) = $3,554,375
C. The dependent variable is Y, or total overhead cost.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0605
Learning Objective: 0608
 Compare and contrast the following types of costs: (1) variable and stepvariable and (2) fixed and stepfixed.
Solution:
(1) A variable cost changes in direct proportion to a change in an activity level or cost driver, with a typical example being direct material. A stepvariable cost is nearly variable, but it increases in small steps rather than continuously (e.g., additional direct labor).
(2) A fixed cost remains unchanged as the activity level varies (e.g., rent). In contrast, a stepfixed cost remains fixed over a sizable range of activity, but jumps to a different amount for activities outside that range (e.g., the salaries of new employees who are needed because of volume changes).
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0602
 Define the term “relevant range” and explain its importance in understanding cost behavior.
Solution:
The relevant range is the range of activity within which management expects a company to operate. This can be based on past experience and/or sales projections.
This concept is important because management need not concern itself with extremely high or low levels of activity that are unlikely to occur. Also, observed cost relationships are typically valid within the relevant range and can therefore be used for purposes of estimation at other levels within that range.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0603
 Differentiate between committed costs and discretionary costs. Be sure to present two examples of each and explain which of the two cost types would likely be cut should a company encounter financial difficulties.
Solution:
A committed cost is a fixed amount that stems from an organization’s ownership or use of facilities, and its basic organizational structure. Property taxes, rent, and salaries of top management are examples of committed costs.
A discretionary cost, also a fixed amount, occurs as a result of a management decision to spend a particular amount of money for some purpose. Examples are advertising, training, promotion, and contributions to charitable organizations.
The distinction between committed and discretionary costs is that committed costs can be changed only by major decisions with longterm implications. Discretionary costs can be changed in the short run and, thus, are costcutting targets should an organization encounter financial difficulties.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0604
 Both the visualfit and highlow methods of cost estimation have inherent limitations. Briefly identify the major deficiency associated with each method.
Solution:
The visualfit method suffers from a lack of objectivity. Given that the cost line is created by visual approximation or “eyeballing,” different cost analysts will likely produce different lines. The highlow method, on the other hand, is objective. However, it uses only two data points and ignores the rest, thus generalizing about cost behavior by relying on only a very small percentage of possible data observations.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0605
 Distinguish between leastsquares regression and multiple regression as cost estimation methods.
Solution:
In the leastsquares regression (LSR) method, the cost line is positioned to minimize the sum of the squared deviations between the cost line and the data points. The cost line fit to the data using LSR is called a regression line. The statistical equation for this line is represented by the formula: Y = a + bX, with X denoting activity level (independent variable) and Y denoting the total cost (dependent variable).
The multipleregression line has all the same properties of the simple LSR line, but more than one independent variable is taken into consideration. The use of more independent variables can better explain accompanying changes in cost.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0605
Learning Objective: 0606
Chapter 7
CostVolumeProfit Analysis
Answer Key
True / False Questions
 The breakeven point is that level of activity where total revenue equals total cost.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0701
Feedback True: Correct! The breakeven point is that level of activity where total revenue equals total cost.
Feedback False: This is a correct statement about the breakeven point.
 Total contribution margin is defined as total sales revenue plus total variable expenses.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0701
Feedback True: This is not the definition of total contribution margin.
Feedback False: Correct! This is not the definition of total contribution margin.
 The contributionmargin ratio is calculated as unit contribution margin divided by the selling price per unit.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0702
Feedback True: Correct! The contributionmargin ratio is calculated as unit contribution margin divided by the selling price per unit.
Feedback False: This is a correct statement about the contributionmargin ratio.
 The contribution margin ratio can also be expressed as a percentage.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0702
Feedback True: Correct! The contribution margin ratio can be expressed as a percentage.
Feedback False: This is a correct statement about the contribution margin ratio.
 The relevant range is the range of activity in which management of a company expects to operate.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0703
Feedback True: Correct! The relevant range is the range of activity in which management of a company expects to operate.
Feedback False: This is a true statement about relevant range.
 On the CVP graph, the breakeven point is determined by the intersection of the totalrevenue line and the totalexpense line.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0703
Feedback True: Correct! On the CVP graph, the breakeven point is determined by the intersection of the totalrevenue line and the totalexpense line.
Feedback False: This is a true statement.
 The difference between budgeted sales revenue and breakeven sales revenue is the operating leverage.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0704
Feedback True: This statement is false.
Feedback False: Correct! The difference between budgeted sales revenue and breakeven sales revenue is not the operating leverage.
 The safety margin is another name for the breakeven point.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0704
Feedback True: This is not a true statement.
Feedback False: Correct! Safety margin is not another name for the breakeven point.
 For any organization selling multiple products, the relative proportion of each type of productsoldis called the sales mix.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0705
Feedback True: Correct! For any organization selling multiple products, the relative proportion of each type of product sold is called the sales mix.
Feedback False: This statement is true.
 Total contribution margin is an important assumption in multiproduct CVP analysis.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0705
Feedback True: This statement is false.
Feedback False: Correct! Total contribution margin is not an important assumption in multiproduct CVP analysis.
Costvolumeprofit analysis is based on certain general assumptions. One of these assumptions is that product prices will remain constant as volume varies within the relevant range.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0706
Feedback True: Correct! Costvolumeprofit analysis is based on certain general assumptions. One of these assumptions is that product prices will remain constant as volume varies within the relevant range.
Feedback False: This assumption is true.
 Sensitivity analysis has become relatively easy to perform with the advent of personal computers and spreadsheet software.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0706
Feedback True: Correct! Sensitivity analysis has become relatively easy to perform with the advent of personal computers and spreadsheet software.
Feedback False: This statement is true.
 Many operating managers find the traditional incomestatement format difficult to use, because it does not separate revenues and expenses.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0707
Feedback True: This statement regarding the traditional income statement format is false.
Feedback False: Correct! This statement regarding the traditional income statement format is false.
 The management functions of planning, control, and decision making all are facilitated by an understanding of costvolumeprofit relationships.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0707
Feedback True: Correct! The management functions of planning, control, and decision making all are facilitated by an understanding of costvolumeprofit relationships.
Feedback False: This is a true statement.
 The extent to which an organization uses fixed costs in its cost structure is measured by financial leverage.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0708
Feedback True: This statement about financial leverage is false.
Feedback False: Correct! The extent to which an organization uses fixed costs in its cost structure is not measured by financial leverage.
 Cost structures differ widely among industries and among firms within an industry.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0708
Feedback True: Correct! Cost structures differ widely among industries and among firms within an industry.
Feedback False: This statement about cost structures is true.
 Activitybased costing systems should not be used in conjunction with costvolumeprofit analyses.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0709
Feedback True: An activity based costing system can be used in conjunction with CVP analysis.
Feedback False: Correct! An activity based costing system can be used in conjunction with CVP analysis.
 An ABC costvolumeprofit analysis recognizes that some costs that are fixed with respect to sales volume may not be fixed with respect to other important cost drivers.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0709
Feedback True: Correct! An ABC costvolumeprofit analysis recognizes that some costs that are fixed with respect to sales volume may not be fixed with respect to other important cost drivers.
Feedback False: This is a true statement.
 Companies with advanced manufacturing technology tend to have lower fixed costs.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0710
Feedback True: This statement is false concerning lower fixed costs.
Feedback False: Correct! Companies with advanced manufacturing technology do not tend to have lower fixed costs.
 Companies with advanced manufacturing technology tend to have higher breakeven points.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0710
Feedback True: Correct! Companies with advanced manufacturing technology tend to have higher breakeven points.
Feedback False: This statement about higher breakeven is true.
 The requirement that companies pay income taxes does not affect their costvolumeprofit relationships.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0711
Feedback True: This statement is false.
Feedback False: Correct! The requirement that companies pay income taxes affects their costvolumeprofit relationships.
 When a firm is required to pay taxes on income, it is important to distinguish between aftertax (AT) income and beforetax (BT) income.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0711
Feedback True: Correct! When a firm is required to pay taxes on income, it is important to distinguish between aftertax (AT) income and beforetax (BT) income.
Feedback False: This is a true statement.
Multiple Choice Questions
Use the following information to answer Questions 2326.
Narchie sells a single product for $50. Variable costs are 60% of the selling price, and the company has fixed costs that amount to $400,000. Current sales total 16,000 units.
 Narchie:
A.will breakeven by selling 8,000 units.
B. will breakeven by selling 13,333 units.
C. will breakeven by selling 20,000 units.
D. will breakeven by selling 1,000,000 units.
E. cannot breakeven because it loses money on every unit sold.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0701
Feedback A: This is not the breakeven point.
Feedback B: This is not the breakeven point.
Feedback C: Correct! Breakeven in units = Total Fixed costs ÷ Fixed cost per unit; $400,000 ÷ [$50 – ($50 x 60%)] = 20,000 units
Feedback D: This is not the breakeven point.
Feedback E: This statement is not true.
 Each unit that Narchie sells will:
A.increase profit by $20.
B. increase profit by $30.
C. increase profit by $50.
D. increase profit by some other amount.
E. decrease profit by $5.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0701
Feedback A: Correct! Revenue per unit – Variable cost per unit = Marginal increase in profit per unit; $50 – (60% x 50) = $20.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: There is a correct amount listed.
Feedback E: This amount is incorrect.
 In order to produce a target profit of $22,000, Narchie’s dollar sales must total:
A.$8,440.
B. $21,100.
C. $1,000,000.
D. $1,055,000.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0704
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: Correct! (Total Fixed cost + Target profit) ÷ Margin percentage = Total Sales Dollars; ($400,000 + $22,000) ÷ ($20 /$50) = $1,055,000.
Feedback E: There is a correct answer listed.
 If Narchie sells 24,000 units, its safety margin will be:
A.$200,000.
B. $400,000.
C. $1,000,000.
D. $1,200,000.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 0704
Feedback A: Correct! Breakeven in units = Total Fixed costs ÷ Fixed cost per unit = $400,000 ÷ [$50 – ($50 x 60%)] = 20,000 units; Margin of Safety = (Current units – Breakeven units) x Sales price per unit; (24,000 – 20,000) x $50 = $200,000
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: This amount is incorrect.
Feedback E: There is a correct answer listed.
 CVP analysis can be used to study the effect of:
A.changes in selling prices on a company’s profitability.
B. changes in variable costs on a company’s profitability.
C. changes in fixed costs on a company’s profitability.
D. changes in product sales mix on a company’s profitability.
E. All of the answers are correct.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0701
Feedback A: This statement is correct, but there is a better answer.
Feedback B: This statement is correct, but there is a better answer.
Feedback C: This statement is correct, but there is a better answer.
Feedback D: This statement is correct, but there is a better answer.
Feedback E: All of these statements correctly describe CVP analysis.
 The breakeven point is that level of activity where:
A.total revenue equals total cost.
B. variable cost equals fixed cost.
C. total contribution margin equals the sum of variable cost plus fixed cost.
D. sales revenue equals total variable cost.
E. profit is greater than zero.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0701
Feedback A: Correct! The breakeven point is the level of activity where total revenue equals total cost.
Feedback B: This is not the correct definition of the breakeven point.
Feedback C: This is not the correct definition of the breakeven point.
Feedback D: This is not the correct definition of the breakeven point.
Feedback E: This is not the correct definition of the breakeven point.
 The breakeven point is that level of activity where:
A.variable cost equals fixed cost.
B. contribution margin equals fixed cost.
C. total contribution margin equals the sum of variable cost plus fixed cost.
D. sales revenue equals total variable cost.
E. sales revenue equals fixed cost.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0701
Feedback A: This is not the correct definition of the breakeven point.
Feedback B: Correct! The breakeven point is that level of activity where contribution margin equals fixed cost.
Feedback C: This is not the correct definition of the breakeven point.
Feedback D: This is not the correct definition of the breakeven point.
Feedback E: This is not the correct definition of the breakeven point.
 The unit contribution margin is calculated as the difference between:
A.selling price and fixed cost per unit.
B. selling price and variable cost per unit.
C. selling price and product cost per unit.
D. fixed cost per unit and variable cost per unit.
E. fixed cost per unit and product cost per unit.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 0701
Feedback A: This is not the correct calculation of the unit contribution margin.
Feedback B: Correct! This is the correct calculation of the unit contribution margin.
Feedback C: This is not the correct calculation of the unit contribution margin.
Feedback D: This is not the correct calculation of the unit contribution margin.
Feedback E: This is not the correct calculation of the unit contribution margin.
 Which of the following would produce the largest increase in the contribution margin per unit?
A.A 7% increase in selling price.
B. A 15% decrease in selling price.
C. A 14% increase in variable cost.
D. A 17% decrease in fixed cost.
E. A 23% increase in the number of units sold.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0701
Feedback A: Correct! An increase in selling price will increase the contribution margin per unit.
Feedback B: A decrease in selling price will decrease the contribution margin per unit.
Feedback C: An increase in cost will decrease the contribution margin per unit.
Feedback D: A decrease in fixed cost will not affect the per unit contribution margin.
Feedback E: An increase in the number sold will not affect the per unit contribution margin.
 Which of the following occurs if a company was able to reduce its variable cost per unit?
 Contribution Margin  Breakeven Point 
A.  Increase  Increase 
B.  Increase  Decrease 
C.  Decrease  Increase 
D.  Decrease  Decrease 
E.  Increase  No effect 
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0701
Feedback A: This is not the correct relationship if a company reduces its variable cost per unit.
Feedback B: Correct! If a company reduces its variable cost per unit, then its contribution margin increases and its breakeven point decreases.
Feedback C: This is not the correct relationship if a company reduces its variable cost per unit.
Feedback D: This is not the correct relationship if a company reduces its variable cost per unit.
Feedback E: This is not the correct relationship if a company reduces its variable cost per unit.
 Which of the following would occur if a company increases its variable cost per unit?
 Contribution Margin  BreakEven Point 
A.  Increase  Increase 
B.  Increase  Decrease 
C.  Decrease  Increase 
D.  Decrease  Decrease 
E.  Increase  No effect 
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0701
Feedback A: This relationship is incorrect.
Feedback B: This relationship is incorrect.
Feedback C: Correct! If a company increases its variable cost per unit, then contribution margin decreases and breakeven point increases.
Feedback D: This relationship is incorrect.
Feedback E: This relationship is incorrect.
 Which of the following occurs if a company experiences an increase in its fixed costs?
A.Net income would increase.
B. The breakeven point would increase.
C. The contribution margin would increase.
D. The contribution margin would decrease.
E. More than one of the answers would occur.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 0701
Feedback A: This relationship is incorrect if fixed costs increase.
Feedback B: Correct! If fixed costs increase, the breakeven point will increase.
Feedback C: This relationship is incorrect if fixed costs increase.
Feedback D: This relationship is incorrect if fixed costs increase.
Feedback E: There is only one correct answer listed.