20 chap

Which of the following costs is an example of a cost that remains the same in total as the number of units produced changes?

• Direct labor

• Units of production depreciation on factory equipment

• Direct materials

• Factory rent

Answer explanation

Factory rent is a fixed cost, meaning it remains constant in total regardless of the number of units produced. In contrast, direct labor, direct materials, and units of production depreciation vary with production levels.

Costs that are constant in total and vary per unit based on the level of activity changes are called __________ costs.

• fixed

• opportunity

• variable

• mixed

Answer explanation

Fixed costs remain constant in total regardless of the level of activity, but the cost per unit varies with changes in activity levels. Therefore, the correct answer is fixed costs.

If sales are $420,000, variable costs are 60% of sales, and operating income is $71,000, what is the contribution margin ratio?

• 83%

• 60%

• 40%

• 17%

Answer explanation

To find the contribution margin ratio, first calculate variable costs: 60% of $420,000 = $252,000. Operating income is $71,000, so total contribution margin = $71,000 + $252,000 = $323,000. Contribution margin ratio = $323,000 / $420,000 = 0.40 or 40%.

Unit contribution margin is

• fixed cost per unit minus variable cost per unit.

• variable cost per unit minus fixed cost per unit.

• sales price minus fixed cost per unit.

• sales price per unit minus variable cost per unit.

Answer explanation

Unit contribution margin is calculated as sales price per unit minus variable cost per unit. This represents the amount each unit contributes to covering fixed costs and generating profit.

Contribution margin is

• sales revenue minus variable costs.

• profit minus fixed costs.

• the same as sales revenue.

• sales revenue minus fixed costs.

Answer explanation

Contribution margin is calculated as sales revenue minus variable costs, which reflects the amount available to cover fixed costs and generate profit. The other options do not accurately define this financial metric.

If fixed costs are $310,000 and the unit contribution margin is $20, how many units must be sold in order to realize an operating income of $290,000?

• 30,000

• 15,500

• 1,000

• 44,500

Answer explanation

To find the number of units needed to achieve an operating income of $290,000, use the formula: (Fixed Costs + Desired Income) / Unit Contribution Margin. Thus, (310,000 + 290,000) / 20 = 30,000 units.

Which of the following conditions would cause the break-even point to increase?

• Unit variable cost decreases

• Unit selling price increases

• Total fixed costs decrease

• Unit variable cost increases

Answer explanation

An increase in unit variable cost raises the total cost per unit, which means more units must be sold to cover fixed costs, thus increasing the break-even point.

Target profit

• equals differential costs.

• can be calculated by modifying the break-even equation.

• cannot be calculated in cost-volume-profit analysis.

• is when sales and costs are exactly equal.

Answer explanation

Target profit can be calculated by modifying the break-even equation, which allows businesses to determine the sales needed to achieve a specific profit level, making this choice correct.

The point where the sales line and the total costs line intersect on the cost-volume-profit chart represents the

• maximum possible operating loss.

• total fixed costs.

• point where total sales equal total costs.

• maximum possible operating income.

Answer explanation

The intersection of the sales line and total costs line indicates the break-even point, where total sales equal total costs. At this point, the business neither makes a profit nor incurs a loss.

In a cost-volume-profit graph, the

• sales line is plotted by beginning at zero on the left corner of the graph.

• total revenue line typically begins at a required minimum level.

• intersection of the sales line and the total costs line is equal to fixed costs.

• total costs line normally begins at zero on the left corner of the graph.

Answer explanation

The sales line in a cost-volume-profit graph starts at zero, representing no sales at the origin. This is the correct choice, as it illustrates the relationship between sales volume and revenue.