MANAGEMENT ADVISORY SERVICES

ACTIVITY COST AND CVP ANALYSIS

THEORY (1-15 1ST PART ; 16-35 2ND PART)

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

2. Variable costs are all costs

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

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

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

5. Which of the following decision-making tools would NOT be useful in determining the slope and
intercept of a mixed cost?
A. linear programming C. high-low method
B. least-squares method D. scatter diagrams

6. A cost that bears an observable and known relationship to a quantifiable activity base is a(n)
A. Engineered cost. B. Indirect cost. C. Target cost. D. Fixed cost.

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

8. When production levels are expected to increase within a relevant range and a flexible budget is
used. What effect would be anticipated with respect to each of the following costs?
A. B. C. D.
Fixed Costs per Unit Increase Increase Decrease Decrease
Variable Costs per Unit Increase No change Decrease No change

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

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

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10. The scatter diagram method of cost estimation

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

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

A. two B. three C. one D. more than three

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

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

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

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

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

15. The relevant range is

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

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PROBLEMS (1-22 ; 23-42)

1. Bradley Co. budgets its total production costs at P220,000 for 75,000 units of output and
P275,000 for 100,000 units of output. Since additional facilities are needed to produce 100,000
units, fixed costs are budgeted at 20% more than for 75,000 units. What is Bradley's budgeted
fixed cost at 100,000 units?
A. 165,000 B. 156,000 C. 66,000 D. 16,500

2. Smart Company is relocating its facilities. The company estimates that it will take three trucks
to move office contents. If the per truck rental charge is P1,000 plus 25 cents per mile, what is
the expected cost to move 800 miles?
A. P1,000 B. P1,200 C. P2,400 D. P3,600

3. The following cost functions were developed for manufacturing overhead costs:
Manufacturing Overhead Cost Cost Function
Electricity P100 + P20 per direct labor hour
Maintenance P200 + P30 per direct labor hour
Supervisors’ salaries P10,000 per month
Indirect materials P16 per direct labor hour
If July production is expected to be 1,000 units requiring 1,500 direct labor hours, estimated
manufacturing overhead costs would be
A. P109,300 B. P99,000 C. P76,300 D. P10,366

4. The Austin Manufacturing Company wants to develop a cost estimating equation for its monthly
cost of electricity. It has the following data:
Month Cost of Electricity Direct Labor Hours
January P6,750 1,500
April 7,500 1,700
July 8,500 2,000
October 7,250 1,600
Using the high-low method, what is the best equation?
A. Y = P750 + P5.00X D. Y = P2,000 + P3.50X
B. Y = P750 + P3.50X E. Y = P1,500 + P5.00X
C. Y = P1,500 + P3.50X

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

6. Total production costs of prior periods for a company are listed as follows. Assume that the
same cost behavior patterns can be extended linearly over the range of 3,000 to 35,000 units
and that the cost driver for each cost is the number of units produced.
Production in units per month 3,000 9,000 16,000 35,000
Cost X P23,700 P52,680 P86,490 P178,260
Cost Y 47,280 141,840 252,160 551,600
What is the average cost per unit at a production level of 8,000 units for cost X?
A. P5.98 B. P5.85 C. P7.90 D. P4.83

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

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8. Sago Co. uses regression analysis to develop a model for predicting overhead costs. Two
different cost drivers (machine hours and direct materials weight) are under consideration as
the independent variable. Relevant data were run on a computer using one of the standard
regression programs, with the following results:
Coefficient
Machine hours Direct materials weight
Y intercept 2,500 4,600
B 5.00 2.60
2
R 0.70 0.50
What regression equation should be used?
A. Y = 2,500 + 5.0X C. Y = 4,600 + 2.6X
B. Y = 2,500 + 3.5X D. Y = 4,600 +1.3X

9. Y = P575,000 + P8.50X represents the behavior of maintenance costs (Y) as a function of

machine hours (X). Thirty (30) monthly observations were used to develop the foregoing
regression equation. The related coefficient of determination was 0.90. If 2,500 machine hours
are worked in one month, the related point estimate of total variable maintenance costs would
be
A. P23,000 B. P21,250 C. P25,250 D. P19,125

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

11. A company manufactures a single product. Estimated cost data regarding this product and
other information for the product and the company are as follows:
Sales price per unit $40
Total variable production cost per unit $22
Sales commission (on sales) 5%
Fixed costs and expenses
Manufacturing overhead $5,598,720
General and administrative $3,732,480
Effective income tax rate 40%
The number of units the company must sell in the coming year in order to reach its breakeven
point is
A. 388,800 units B. 518,400 units C. 583,200 units D. 972,000 units

12. A company is concerned about its operating performance, as summarized below:

Sales ($12.50 per unit) $300,000
Variable costs 180,000
Net operating loss (40,000)
How many additional units should have been sold in order for the company to break even in
1992?
A. 32,000 B. 16,000 C. 12,800 D. 8,000

13. Scottso Enterprises has fixed costs of $120,000. At a sales volume of $400,000, return on sales
is 10%. At a $600,000 volume, return on sales is 20%. What is the break-even volume?
A. $160,000 B. $210,000 C. $300,000 D. $420,000

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

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

16. Singsing, Inc. manufactures and sells key rings embossed with college names and slogans. Last
year, the key rings sold for P75 each, and the variable costs to manufacture them were P22.50
per unit. The company needed to sell 20,000 key rings to break-even. The net income last year
was P50,400. The company expects the following for the coming year:
 The selling price of the key rings will be P90.
 Variable manufacturing costs per unit will increase by one-third.
 Fixed costs will increase by 10%.
 The income tax rate will remain unchanged.
For the company to break-even the coming year, the company should sell
A. 21,600 units. B. 2,600 units. C. 21,250 units. D. 19,250 units.

17. Sari-Sari Grocery is currently open only on Monday to Saturday. It is considering opening on
Sundays. The annual incremental costs of Sunday opening is estimated at P124,800. Its gross
margin is 20%. It estimates that 60% of Sunday sales to customers would be on other days if its
stores were not open on Sundays. The Sunday sales that would be necessary for Sari-sari to
attain the same weekly operating income is
A. P19,500. B. P30,000. C. P29,250. D. P20,000.

18. NCB, Inc. manufactures computer tables. It has an investment of P1,750,000 in assets and
expects a 25% return on investment. Its total fixed production costs for 2,000 units is P550,000
plus an additional P150,000 for selling and administrative expenses. The variable cost to
manufacture is P1,500 per table. The selling price per table should be
A. P2,068.75 B. P1,850.00 C. P2, 531.25 D. P2,725.00

19. Nette & Co. has sales of P400,000 with variable costs of P300,000, fixed costs of P120,000, and
an operating loss of P20,000. By how much would Nette need to increase its sales in order to
achieve a target operating income of 10% of sales?
A. P400,000 B. P462,000 C. P500,000 D. P800,000

20. During 1996, RPS Corporation supplied hospitals with a comprehensive diagnostic kit for P120.
At a volume of 80,000 kits, RPS has fixed cost of P1,000,000 and a profit before income taxes of
P200,000. Due to an adverse legal decision, RPS’s 1997 liability insurance increased by
P1,200,000 over 1996. Assuming the volume and other costs are unchanged, what should be
the 1997 price be if RPS is to make the same P200,000 profit before income taxes?
A. P135. B. P150. C. P120. D. P240.

21. Merchandisers, Inc. sells Product O to retailers for P200. The unit variable cost is P40 with a
selling commission of 10%. Fixed manufacturing costs total P1,000,000 per month while fixed
selling and administrative costs total P420,000. The income tax rate is 30%. The target sales if
after tax income is P123,200 would be
A. 10,950 units. B. 15,640 units. C. 13,750 units. D. 11,400 units.

22. Story Manufacturing incurs annual fixed costs of $250,000 in producing and selling "Tales."
Estimated unit sales for 2001 are 125,000. An after-tax income of $75,000 is desired by
management. The company projects its income tax rate at 40 percent. What is the maximum
amount that Story can expend for variable costs per unit and still meet its profit objective if the
sales price per unit is estimated at $6?
A. $3.37 B. $3.59 C. $3.00 D. $3.70

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ANSWER KEY
Theory Problems
1. D 21. A 1. A 21. D 41. D
2. D 22. B 2. D 22. C 42. C
3. D 23. D 3. A 23. A
4. A 24. B 4. C 24. C
5. A 25. C 5. D 25. A
6. A 26. A 6. A 26. A
7. A 27. D 7. A 27. A
8. D 28. C 8. A 28. A
9. D 29. D 9. B 29. D
10. B 30. C 10. B 30. A
11. A 31. A 11. C 31. A
12. C 32. B 12. D 32. C
13. B 33. C 13. C 33. A
14. A 34. D 14. B 34. B
15. D 35. B 15. B 35. B
16. B 16. D 36. B
17. C 17. B 37. B
18. D 18. A 38. B
19. D 19. A 39. C
20. A 20. A 40. C

REFERENCE:
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila

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