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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.
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
Expert Solution
- $500,000 + 0.30X = X
- Changes in activity are the only factors that affect costs.
- 50 per hour
- 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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