Question

Costs that change abruptly at different levels of activity because the resources are available only in indivisible chunks are called ________.

A) mixed costs

B) variable costs

C) fixed costs

D) step costs

Answer:

A compensation plan where the sales force is paid salary plus commission is a ________.

A) purely variable cost

B) mixed cost

C) step cost

D) fixed cost

Answer:

The break-even point on the cost-volume-profit graph is where the ________.

A) total cost line intersects the net profit line

B) total cost line intersects the net loss line

C) revenue line intersects the total cost line

D) revenue line intersects the variable cost line

Answer:

Suppose a hotel has annual fixed costs applicable to its rooms of $2.0 million for its 300-room hotel. Average daily room rents are $50 per room and average variable costs are $10 for each room rented. It operates 365 days per year. If the hotel is completely full throughout the year, what is net income for one year?

A) $1,280,000

B) $2,380,000

C) $3,180,000

D) $4,380,000

Answer:

Murphy Company produces dolls. Each doll sells for $20.00. Variable costs per unit are $14.00 and total fixed costs for the period are $435,000. What is the break-even point in units?

A) 21,750

B) 31,071

C) 51,176

D) 72,500

Answer 1

Answers

• All working forms part of the answer
• Costs that change abruptly at different levels of activity because the resources are available only in indivisible chunks are called Step Cost.

Correct answer: D) step costs

Step Costs are those cost that remains same for a particular interval of time and till a certain level of activity. As soon as that level is achieved or exceeded, they are increased.

• A compensation plan where the sales force is paid salary plus commission is a Mixed Cost.

Correct Answer: B) mixed cost

Mixed Costs are those costs that have characteristics of both variable and fixed costs. Salary is fixed and hence is a fixed cost while commission is based on sales revenues and is of variable nature. Hence, compensation plan = Mixed Cost.

• The break-even point on the cost-volume-profit graph is where the revenue line intersects the total cost line.

Correct Answer: C) revenue line intersects the total cost line

This is because, at Break Even point, there are neither any losses nor any gains, which means Revenues are EQUAL to Costs.

• Suppose a hotel has annual fixed costs applicable to its rooms of $2.0 million for its 300-room hotel. Average daily room rents are $50 per room and average variable costs are $10 for each room rented. It operates 365 days per year. If the hotel is completely full throughout the year, what is net income for one year?

Correct Answer: B) $2,380,000

A	Rent per room	$                                 50.00
B	Variable cost per room	$                                 10.00
C = A - B	Contribution margin per room	$                                 40.00
D	No. of rooms	300
E = C x D	Total contribution margin per day	$                         12,000.00
F	No. of days	365
G = E x F	Total contribution margin for the year	$                   4,380,000.00
H	Fixed cost (annual)	$                   2,000,000.00
I = G - H	Net Income	$                   2,380,000.00
	Correct Answer	Option 'B' $ 2,380,000

• Murphy Company produces dolls. Each doll sells for $20.00. Variable costs per unit are $14.00 and total fixed costs for the period are $435,000. What is the break-even point in units?

Correct Answer: D) 72,500 units

A	Sale price per doll	$                                 20.00
B	Variable cost per doll	$                                 14.00
C = A - B	Contribution margin per doll	$                                   6.00
D	Fixed Cost	$435,000
E = D/C	Break Even in Units	72,500