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Homework answers / question archive / COST-VOLUME PROFIT ANALYSIS   1) SUN Company has the following data: Variable costs are 70% of the unit selling price

COST-VOLUME PROFIT ANALYSIS   1) SUN Company has the following data: Variable costs are 70% of the unit selling price

Accounting

COST-VOLUME PROFIT ANALYSIS
 

1) SUN Company has the following data:

Variable costs are 70% of the unit selling price.

The contribution margin ratio is 30%.

The contribution margin per unit is $500.

The fixed costs are $500,000.
 

Which of the following does not express the break-even point?

O $500,000 ÷ $500 = X

O $500,000 ÷ 0.30 = X

O $500,000 + 0.70X = X

O $500.000 + 0.30X = X
 

2) Which of the following is not an underlying assumption of CVP analysis?

O There are no changes in inventory levels

O Cost classifications are reasonably accurate.

O Sales mix is constant.

O Changes in activity are the only factors that affect costs.
 

3) ABC Company provided the information below from its accounting records for 2009:
 

Expected production                      30 000 labor hours

Actual production                            28 000 labor hours

Budgeted overhead                        $1 500 000

Actual overhead                               $1 450 000
 

How much is the overhead application rate if ABC Company bases it on direct labor hours?

O $46.67 per hour

O $48.33 per hour

O $50 per hour

O $51.79 per hour
 

4) For an activity base to be useful in explaining cost behavior,

O the activity should always be stated in dollars

O there should be a correlation between changes in the level of activity and changes in costs.

O the activity be related to direct labor or machine hours.

O the activity level should be constant over a period of time

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  1. $500,000 + 0.30X = X
  2. Changes in activity are the only factors that affect costs.
  3. 50 per hour
  4. there should be a correlation between changes in the level of activity and changes in costs.

Step-by-step explanation

  • 1) Breakeven point can be computed either by:
    • Dividing the fixed expenses by the CM ratio
    • Dividing the fixed expenses by the CM per unit
      • Choice 1 and 2 are correct as mentioned above. Choice 3 is correct because breakeven can also be expressed as the sum of variable % of itself and the fixed costs. Choice 4 does not determine breakeven. CM = Contribution margin
  • 2) Choice 1 is an assumption because it assumed that products produced are also sold. Choice 2 is an assumption because costs must be properly classified based on their nature. Choice 3 is an assumption because sales mix directly moves with that of the products sold and correlated with the product ratio. Choice 4 is not an assumption because other factors such as relevant range, and cost classification affect CVP analysis.
  • 3) The overhead application rate is determine way before the actual production of products. In many cases, it is based on the expected activity and the budgeted amount:
Budgeted overhead 1,500,000
Divided by: Expected activity 30,000 hours
Overhead application rate 50 per hour
  • 4) Choice 1 is incorrect because currency is irrelevant in determining activity base. Choice 3 is incorrect because any activity can be a base for what drives the cost. Choice 4 is incorrect because activity level may increase or decrease from period to period. Choice 2 is correct as it should be determined that a correlation is present.

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