1. True False (15 points) 1 2 3 4 5 6 7 8 9 10 1. The range over which a company expects to operate during a year is called the relevant range of the activity index. 2. The contribution margin ration is computed by dividing contribution margin by unit selling price. 3. Target net income is an income objective for individual product lines set by management. 4. Opportunity cost is a cost that cannot be changed by any present or future decision. 5. When a company has limited resources, management must decide which products to make and sell in order to maximize sales. 6. Under variable costing, the fixed manufacturing overhead is charged as an expense in the current period 7. Net income computed under variable costing is unaffected by changes in production levels. 8. Mixed costs change proportionately with changes in the activity level. 9. The contribution margin ration is computed by dividing contribution margin by unit selling price. 10. Target net income is an income objective for individual product lines set by management. 11. A flexible budget projects budget data for one level of activity. 12. Controllable margin is the excess of contribution margin over total fixed costs. 13. Budgeting facilitates the coordination of activities within the business by correlating the goals of each segment with overall company objectives. 14. The master budget is a set of interrelated budgets that constitutes a plan of action for a specified time period. 15. The budgeted income statement is the starting point in preparing financial budgets. Multiple choice questions (25 points) 1 2 3 4 5 6 7 10 2. 8 9 2.1. Walton Manufacturing Company gathered the following data for the month. Cost of goods sold: $35,000; Sales: $89,000; selling expenses: $16,000; Administrative expenses: $21,000. How much net operating income will be reported for the period? A. $54,000 B. $17,000 C. $52,000 D. Cannot be determined. 2.2. Two costs at Simpson, Inc. appear below for specific months of operation. Month Amount Units Produced: Delivery costs January $ 40,000 40,000 February 55,000 60,000 Utilities January $ 84,000 40,000 February 126,000 60,000 Which type of costs are these? A. Delivery costs and utilities are both B. Delivery costs and utilities are both mixed. 2.8. variable. C. Utilities are mixed and delivery costs are D. Delivery costs are mixed and utilities are variable. variable. 2.3. Kendra Corporation's total utility costs during the past year were $1,200 during its highest month and $600 during its lowest month. These costs corresponded with 10,000 units of production during the high month and 2,000 units during the low month. What are the fixed and variable components of its utility costs using the high-low method? A. S0.075 variable and S450 fixed B. $0.120 variable and So fixed C. $0.300 variable and $0 fixed D. $0.060 variable and $600 fixed 2.4. Gabriel Corporation has fixed costs of $180,000 and variable costs of $8.50 per unit. It has a target income of $268,000. How many units must it sell at $12 per unit to achieve its target net income? A. 1,429 units B. 128,000 units C. 76,571 units D. 21,176 units 2.5. Costs that change in total but not proportionately with changes in the activity level are: A. Fixed Cost B. Mixed cost C. semifixed cost D. variable cost 2.6. Contribution margin is: A. The amount of revenue remaining after B. Available to cover fixed costs and contribute deducting fixed costs to income for the company C. Sales less fixed costs D. Unit selling price less unit fixed costs 2.7. Williams Company expects to sell 500,000 units for $6 per unit. The contribution margin ratio is 30%. If Williams will break even at this level of sales, fixed costs are: A. $150,000 B. $300,000 C.$900,000 D.$2,100,000 A company has required sales of $1,700,000 to meets its target net income. It has fixed costs of $300,000 and the contribution margin is 30%. The company's target net income is: A. $90,000 B.$210,000 C.$420,000 D.$510,000 2.9. It costs a company $14 of variable costs and $6 of fixed costs to produce product A that sells for $30. A foreign buyer offers to purchase 3,000 units at $18 each. If the special offer is accepted and produced when capacity is fully utilized, net income will: A. Increase $6,000. B. Decrease $36,000 D. Decrease $6,000 ease $42,000 2.10. If the contribution margin per unit is $15 and it takes 3.0 machine hours to produce the unit, the contribution margin per unit (hour) of limited resource is: A. S25 B.SS C.$45 D. No correct answer is given 2.11. Variable costs are costs that A. Vary in total directly and proportionately B. Remain the same per unit at every activity with changes in the activity level level. C. Neither of the above D. Both A) and B) above 2.12. Cournot Company sells 100,000 wrenches for $12 a unit. Fixed costs are $300,000, and net income is $200,000. What should be reported as variable expenses in the CVP income statement? A. S700,000 B.$900,000 C.$500,000 D. $1,000,000 2.13. The break-even point can be: A. Computed only from a mathematical B. Computed only by using contribution equation margin C. Derived only from a cost-volume-profit D. All of the options are correct graph 2.14. Direct materials inventories are kept in pounds in Byrd Company, and the total pounds of direct materials needed for production is 9,500. If the beginning inventory is 1,000 pounds and the desired ending inventory is 2,200 pounds, the total pounds to be purchased is: A.9,400 B. 9,500 C. 9,700 D. 10.700 2.15. In a responsibility report for a profit center, controllable margin is: D. A. sales less variable costs B. Sales less controllable fixed costs. C. Contribution margin less controllable fixed D. Contribution margin less noncontrollable costs. fixed costs. 3. Problem series (55 points) 3.1. Rosenthal Manufacturing produces and sells three kinds of products: basic, basic plus and premium based on the main material. Information regarding its three models is shown below: Basic Basic Plus Premium Unit 60,000 60,000 80,000 sales mixed 30% 30% 40% Variable cost percentage 25% 30% 35% 2017 is its bad year with a loss for the first time in its history. The company's income statement showed the following results from selling all three products: net sales $2,000,000; total cost and expenses $2,150,000 and net loss $150,000. Costs and expenses consisted of the following: Total Variable Fixed Cost of goods sold 1,225,000 $925,000 $300,000 Selling expenses 625,000 375,000 250,000 Administrative expenses 300,000 100,000 200,000 Total $2,150,000 $1,400,000 $750,000 Management is considering the following independent alternatives for 2018 1. Increase units selling price 30% with no change in cost and expenses, 2. Change the compensation of sales persons from fixed annual salaries totaling $170,000 to total salaries of $50,000 plus a 6% commission on net sales. 3. Purchased new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to 40:60. Instructions 1. Compute the break-even point in dollars and beak-even point in units for 2018 2. Compute the break-even point in dollars under each of the alternative courses of action. Which course of action do you recommend? 3. If sales increase by 10,000 units (with same sale mixed rate), by how much should net operating income increase? 4. How many units would the company have to sell to attain the target profit of $150,000? 5. What is the company's margin of safety in dollars? 3.2. Buncombe Company manufactures sails for sailboats. The company has the capacity to produce 2,500 sails per year, but is currently producing and selling 2,000 sails per year. The following information relates to current production: Sale price per unit $1,500 Variable costs per unit: Manufacturing $550 Marketing and administrative $250 Total fixed costs: Manufacturing $540,000 Marketing and administrative $280,000 1) If a special sales order is accepted for 500 sails at a price of $1200 per unit, and fixed costs remain unchanged, how would operating income be affected? Assume regular sales are not affected by the special order. 2) If a special sales order is accepted for 300 sails at a price of $800 per unit, fixed costs remain unchanged, and there are no additional variable marketing and administrative costs for this order, how would operating income be affected? Assume regular sales are not affected by the special order 3) If a special sales order is accepted for 250 sails at a price of $700 per unit, fixed costs increase by $10,000, and variable marketing and administrative costs for that order decrease by $50 per unit, how would operating income be affected? Assume regular sales are not affected by the special order? 2) If a special sales order is accepted for 300 sails at a price of $800 per unit, fixed costs remain unchanged, and there are no additional variable marketing and administrative costs for this order, how would operating income be affected? Assume regular sales are not affected by the special order 3) If a special sales order is accepted for 250 sails at a price of $700 per unit, fixed costs increase by $10,000, and variable marketing and administrative costs for that order decrease by $50 per unit, how would operating income be affected? Assume regular sales are not affected by the special order