BA213 Review for test # 2 Key
1. Contribution margin can be defined as:
a. the amount of sales revenue necessary to cover variable expenses.
b. sales revenue minus fixed expenses.
c. the amount of sales revenue necessary to cover fixed and variable expenses.
D. sales revenue minus variable expenses.
2. If both the fixed and variable expenses associated with a product decrease, what will be the effect on the
contribution margin ratio and the break-even point, respectively?
a.
B.
c.
d.
3. The margin of safety can be calculated by:
A. Sales - (Fixed expenses/Contribution margin ratio).
b. Sales - (Fixed expenses/Variable expense per unit).
c. Sales - (Fixed expenses + Variable expenses).
d. Sales - Net operating income.
4. Sorin Inc., a company that produces and sells a single product, has provided its contribution format income
statement for January.
If the company sells 4,600 units, its total contribution margin should be closest to:
a. $54,600
B. $59,800
c. $69,400
d. $13,362
Current contribution margin
Current sales in units = Contribution margin per unit
$54,600
4,200 = $13 contribution margin per unit
If 4,600 units are sold, the total contribution margin will be 4,600 × $13, or $59,800.
5. Decaprio Inc. produces and sells a single product. The company has provided its contribution format income
statement for June.
If the company sells 9,200 units, its net operating income should be closest to:
a. $27,077
b. $49,900
C. $36,700
d. $25,900
Current sales dollars
Current sales in units = Sales price per unit
8,800 = $60 sales price per unit
$528,000
Current variable expenses
Current sales in units = Variable expense per unit
$290,400
8,800 = $33 variable expense per unit
6. Jilk Inc.'s contribution margin ratio is 58% and its fixed monthly expenses are $36,000. Assuming that the
fixed monthly expenses do not change, what is the best estimate of the company's net operating income in a
month when sales are $103,000?
A. $23,740
b. $59,740
c. $67,000
d. $7,260
7. Data concerning Kardas Corporation's single product appear below:
The company is currently selling 8,000 units per month. Fixed expenses are $719,000 per month. The marketing
manager believes that a $20,000 increase in the monthly advertising budget would result in a 180 unit increase
in monthly sales. What should be the overall effect on the company's monthly net operating income of this
change?
a. decrease of $160
b. increase of $20,160
c. decrease of $20,000
D. increase of $160
Increase in net operating income: $177,160 - $177,000 = $160
8. Hartl Corporation is a single product firm with the following selling price and cost structure for next year:
How many units will Hartl have to sell next year in order to break-even?
a. 121,500
b. 202,500
C. 303,750
d. 546,750
Variable cost per unit = $1.80 × (1 - 40%)
Variable cost per unit = $1.08
Sales = Variable expenses + Fixed expenses + Profit
$1.80Q = $1.08Q + $218,700 + $0
$0.72Q = $218,700
$0.72 per unit = 303,750 units
Q = $218,700
9. Data concerning Buchenau Corporation's single product appear below:
The break-even in monthly unit sales is closest to:
a. 3,111
b. 6,892
C. 4,040
d. 13,525
Sales = Variable expenses + Fixed expenses + Profit
$150.00Q = $34.50Q + $466,620 + $0
$115.50Q = $466,620
Q = $466,620
$115.50 per unit = 4,040 units
10. Data concerning Follick Corporation's single product appear below:
The break-even in monthly dollar sales is closest to:
a. $1,148,400
b. $638,851
c. $321,552
D. $446,600
Sales = Variable expenses + Fixed expenses + Profit
$110.00Q = $30.80Q + $321,552 + $0
$79.20Q = $321,552
Q = $321,552
$79.20 per unit = 4,060 units
4,060 units × $110.00 selling price = $446,600
11. Caneer Corporation produces and sells a single product. Data concerning that product appear below:
The unit sales to attain the company's monthly target profit of $44,000 is closest to:
a. 7,896
b. 12,769
C. 6,578
d. 4,341
Sales = Variable expenses + Fixed expenses + Target profit
$240.00Q = $81.60Q + $997,920 + $44,000
$158.40Q = $1,041,920
Q = $1,041,920
$158.40 per unit = 6,578 units (rounded)
12. Ensley Corporation has provided the following data concerning its only product:
The margin of safety as a percentage of sales is closest to:
a. 61%
B. 28%
c. 72%
d. 39%
Margin of safety in dollars:
Break-even sales = $200 per unit × 21,816 = $4,363,200
Current sales = $200 per unit × 30,300 = $6,060,000
Margin of safety in dollars = Sales - Break-even sales
= $6,060,000 - $4,363,200 = $1,696,800
Margin of safety as a percentage of sales = Margin of safety in dollars
$6,060,000 = 28% (rounded)
Current sales = $1,696,800
13. Ostler Company's net operating income last year was $10,000 and its contribution margin was $50,000.
Using the operating leverage concept, if the company's sales increase next year by 8 percent, net operating
income can be expected to increase by:
a. 20%
b. 16%
c. 160%
D. 40%
Degree of operating leverage = Contribution margin
Net operating income
Degree of operating leverage = $50,000
$10,000 = 5
Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 8% × 5 = 40%
14. E.D. Manufacturing, Inc. produces and sells ice skates. The current net operating income is $40,000, with a
degree of operating leverage of 3. If sales increase by 10%, how much total net operating income should be
expected?
a. $12,000
B. $52,000
c. $44,000
d. None of these.
Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 10% × 3 = 30%
Current net operating income × Percent increase = Increase in net operating income
$40,000 × 30% = $12,000 Increase in net operating income
Current net operating income + Increase in net operating income = Expected net operating income = $40,000 +
$12,000 = $52,000
15. The Garry Corporation's most recent contribution format income statement is shown below:
Required:
Prepare a new contribution format income statement under each of the following conditions (consider each case
independently):
a. The sales volume increases by 10% and the price decreases by $0.50 per unit.
b. The selling price decreases $1.00 per unit, fixed expenses increase by $15,000, and the sales volume
decreases by 5%.
c. The selling price increases by 25%, variable expense increases by $0.75 per unit, and the sales volume
decreases by 15%.
d. The selling price increases by $1.50 per unit, variable cost increases by $1.00 per unit, fixed expenses
decrease by $15,000, and sales volume decreases by 12%.
a.
b.
c.
d.
16. A budget committee helps provide consistency in the budgeting process because it prepares all of the
budgets for the various segments of the organization.
FALSE
17. When using the self-imposed budget approach, it is generally best for top management to accept all budget
estimates without question in order to minimize adverse behavioral responses from employees.
FALSE
18. The direct labor budget begins with sales in units from the sales budget.
FALSE
19. Which of the following budgets are prepared before the sales budget?
a.
b.
c.
D.
20. All of Gaylord Company's sales are on account. Thirty-five percent of the credit sales are collected in the
month of sale, 45% in the month following sale, and the rest are collected in the second month following sale.
Bad debts are negligible and should be ignored. The following are budgeted sales data for the company:
What is the amount of cash that should be collected in March?
a. $39,000
b. $37,000
c. $27,500
D. $51,000
21. Betz Company's sales budget shows the following projections for next year:
Inventory at the beginning of the year was 18,000 units. The finished goods inventory at the end of each quarter
is to equal 30% of the next quarter's budgeted unit sales. How many units should be produced during the first
quarter?
a. 24,000
b. 48,000
C. 66,000
d. 72,000
Units produced = Ending inventory + Units sold + Beginning inventory
80,000) + 60,000 - 18,000
= (30%
= 24,000 + 60,000 - 18,000 = 66,000
22. Pooler Corporation is working on its direct labor budget for the next two months. Each unit of output
requires 0.15 direct labor-hours. The direct labor rate is $7.00 per direct labor-hour. The production budget calls
for producing 6,500 units in April and 6,200 units in May. The company guarantees its direct labor workers a
40-hour paid work week. With the number of workers currently employed, that means that the company is
committed to paying its direct labor work force for at least 1,000 hours in total each month even if there is not
enough work to keep them busy. What would be the total combined direct labor cost for the two months?
a. $13,825.00
b. $13,335.00
C. $14,000.00
d. $13,510.00
Direct labor-hours needed for production in April = 0.15
6,500 = 975
Direct labor-hours needed for production in May = 0.15
6,200 = 930
Even though both months' production needs would require less than 1,000 hours, the company has committed to
paying a minimum of 1,000 hours per month.
Total direct labor-hours = 1,000 + 1,000 = 2,000
$7 = $14,000
Direct labor cost = 2,000
23. Schuepfer Inc. bases its selling and administrative expense budget on budgeted unit sales. The sales budget
shows 1,300 units are planned to be sold in March. The variable selling and administrative expense is $4.20 per
unit. The budgeted fixed selling and administrative expense is $19,240 per month, which includes depreciation
of $3,380 per month. The remainder of the fixed selling and administrative expense represents current cash
flows. The cash disbursements for selling and administrative expenses on the March selling and administrative
expense budget should be:
a. $15,860
b. $5,460
c. $24,700
D. $21,320
(1,300
$4.20) + ($19,240 - $3,380) = $5,460 + $15,860 = $21,320
24. Francis Manufacturing Company is currently preparing its cash budget for next month and has gathered the
following information:
The beginning cash balance will be $6,000 and the company requires a minimum cash balance at the end of the
month of $5,000. How much will Francis Manufacturing need to borrow to meet its cash needs for the month?
a. $9,100
B. $14,100
c. $20,100
d. None of these.
Actual ending cash balance = Beginning cash balance + Cash receipts - Cash disbursements = $6,000 + $39,400
- ($12,000 + $9,000 + $11,500 + $22,000)
= $45,400 - $54,500 = ($9,100)
Amount borrowed = Desired ending cash balance - Actual ending cash balance
= $5,000 - ($9,100) = $14,100
Varughese Inc. is working on its cash budget for March. The budgeted beginning cash balance is $33,000.
Budgeted cash receipts total $182,000 and budgeted cash disbursements total $191,000. The desired ending
cash balance is $40,000.
25. The excess (deficiency) of cash available over disbursements for March will be:
a. $215,000
b. $42,000
C. $24,000
d. ($9,000)
Excess cash available over disbursements = Beginning cash balance + Budgeted cash receipts - Budgeted cash
disbursements = $33,000 + $182,000 - $191,000 = $24,000
26. To attain its desired ending cash balance for March, the company needs to borrow:
a. $40,000
b. $0
C. $16,000
d. $64,000
Excess cash available over disbursements = Beginning cash balance + Budgeted cash receipts - Budgeted cash
disbursements = $33,000 + $182,000 - $191,000 = $24,000
Borrowing = Desired ending cash balance - Excess cash available over disbursements = $40,000 - $24,000 =
$16,000
27. The manufacturing overhead budget of Reigle Corporation is based on budgeted direct labor-hours. The
February direct labor budget indicates that 5,800 direct labor-hours will be required in that month. The variable
overhead rate is $4.60 per direct labor-hour. The company's budgeted fixed manufacturing overhead is $82,360
per month, which includes depreciation of $16,820. All other fixed manufacturing overhead costs represent
current cash flows.
Required:
a. Determine the cash disbursement for manufacturing overhead for February. Show your work!
b. Determine the predetermined overhead rate for February. Show your work!
a.
b.
28. In developing a direct material price standard, the expected freight cost on the materials should be included.
TRUE
29. The production department should generally be responsible for material price variances that resulted from:
a. purchases made in uneconomical lot-sizes.
B. rush orders arising from poor scheduling.
c. purchase of the wrong grade of materials.
d. changes in the market prices of raw materials.
30. Mayall Corporation is developing standards for its products. Each unit of output of the product requires 0.92
kilogram of a particular input. The allowance for waste and spoilage is 0.02 kilogram of this input for each unit
of output. The allowance for rejects is 0.11 kilogram of this input for each unit of output. The standard quantity
in kilograms of this input per unit of output should be:
a. 0.90
b. 0.92
c. 0.79
D. 1.05
31. The following materials standards have been established for a particular product:
The following data pertain to operations concerning the product for the last month:
What is the materials price variance for the month?
a. $6,250 U
B. $4,030 U
c. $8,679 U
d. $6,575 U
Materials price variance = Actual quantity × (Actual price - Standard price)
= $81,530 - (6,200 × $12.50)
= $81,530 - $77,500
= $4,030 unfavorable
32. (Appendix) Warmuth Corporation has provided the following data concerning its direct labor costs for
September:
The Labor Efficiency Variance for September would be recorded as a:
a. credit of $120,480.
B. debit of $120,480.
c. debit of $125,500.
d. credit of $125,500.
Standard hours = Standard hours per unit × Actual output
= 8.8 × 6,600 = 58,080
Labor efficiency variance = Standard rate × (Actual hours - Standard hours)
= $12 × (68,120 - 58,080)
= $120,480 unfavorable
33. The following labor standards have been established for a particular product:
The following data pertain to operations concerning the product for the last month:
What is the labor rate variance for the month?
a. $687 F
b. $2,106 F
C. $1,410 F
d. $2,106 U
Actual rate = Labor cost
Actual hours
= $107,630
9,400 = $11.45
Labor rate variance = Actual hours × (Actual rate - Standard rate)
= 9,400 × ($11.45 - $11.60) = $1,410 favorable
Kouri Corporation is developing standards for its products. One product requires an input that is purchased for
$85.00 per kilogram from the supplier. By paying cash, the company gets a discount of 4% off this purchase
price. Shipping costs from the supplier's warehouse amount to $4.62 per kilogram. Receiving costs are $0.55
per kilogram. Each unit of output of the product requires 0.74 kilogram of this input. The allowance for waste
and spoilage is 0.03 kilogram of this input for each unit of output. The allowance for rejects is 0.13 kilogram of
this input for each unit of output.
Brewer - Chapter 008
34. The standard price per kilogram of this input should be:
a. $85.00
B. $86.77
c. $83.23
d. $93.57
35. The standard quantity in kilograms of this input per unit of output should be:
a. 0.71
b. 0.58
C. 0.90
d. 0.74
Garrigus Corporation is developing direct labor standards. The basic direct labor wage rate is $14.00 per hour.
Employment taxes are 10% of the basic wage rate. Fringe benefits are $3.53 per direct labor-hour. A particular
product requires 0.74 direct labor-hours per unit. The allowance for breaks and personal needs is 0.05 direct
labor-hours per unit. The allowance for cleanup, machine downtime, and rejects is 0.13 direct labor-hours per
unit.
Brewer - Chapter 008
36. The standard rate per direct labor-hour should be:
a. $9.07
b. $14.00
C. $18.93
d. $4.93
37. The standard direct labor-hours per unit should be:
a. 0.69
b. 0.56
c. 0.74
D. 0.92
Longview Hospital performs blood tests in its laboratory. The following standards have been set for each
blood test performed:
During May, the laboratory performed 1,500 blood tests. On May 1 there were no direct materials (plates) on
hand; after a plate is used for a blood test it is discarded. Variable overhead is assigned to blood tests on the
basis of direct labor hours. The following events occurred during May:
• 3,600 plates were purchased for $9,540
• 3,200 plates were used for blood tests
• 340 actual direct labor hours were worked at a cost of $5,550
Brewer - Chapter 008
38. The materials price variance for May is:
A. $360 F
b. $360 U
c. $740 F
d. $740 U
Materials price variance = (Actual quantity purchased × Actual price) - (Purchase quantity × Standard price) =
$9,540 - (3,600 × $2.75) = $360 favorable
39. The materials quantity variance for May is:
a. $1,650 F
b. $1,650 U
C. $550 U
d. $720 F
Standard quantity = Standard quantity per unit × Actual output
= 2 × 1,500 = 3,000
Materials quantity variance = Standard price × (Actual quantity - Standard quantity) = $2.75 × (3,200 - 3,000) =
$550 unfavorable
40. The labor rate variance for May is:
a. $225 F
b. $225 U
c. $450 F
D. $450 U
Labor rate variance = (Actual hours × Actual rate) - (Actual hours × Standard rate)
= $5,550 - (340 × $15) = $450 unfavorable
41. The labor efficiency variance for May is:
a. $600 F
B. $600 U
c. $515 U
d. $515 F
Standard hours = Standard hours per unit × Actual output
= 0.2 × 1,500 = 300
Labor efficiency variance = Standard rate × (Actual hours - Standard hours)
= $15 × (340 - 300) = $600 unfavorable
42. The variable overhead efficiency variance for May is
a. $350 F
b. $350 U
C. $280 U
d. $280 F
Standard hours = Standard hours per unit × Actual output
= 0.2 × 1,500 = 300
Variable overhead efficiency variance = Standard rate × (Actual hours - Standard hours) = $7 × (340 - 300) =
$280 unfavorable