Question

1. ABC Company must sell 1,000 units to break even with its current contribution margin of $.50 per unit. How will breakeven change if the contribution margin increases?

A. The number of units needed to break even will decrease.

B. The number of units needed to break even will increase.

C. The number of units needed to break even will remain the same.

D. There is not enough information to know how break even units will change.

2. Segment margin is sales minus:

A.variable expenses.

B.traceable fixed expenses.

C. variable expenses and common fixed expenses.

D. variable expenses and traceable fixed expense

3. DC Construction has two divisions: Remodeling and New Home Construction. Each division has an on-site supervisor who is paid a salary of $82,000 annually and a salaried estimator who is paid $46,000 annually. The corporate office has two office administrative assistants who are paid salaries of $50,000 and $37,000 annually. The president's salary is $153,000. How much of these salaries are common fixed expenses?

A.    $153,000

B.    $87,000

C.    $308,000

D.    $240,000

4. ABC Company, which has only one product, has provided the following data concerning its most recent month of operations. It produced 6,200 units and sold 6,000 units. There was no beginning inventory.

	Variable (per unit)	Fixed (total)
Direct Materials	$15
Direct Labor	$5
Manufacturing Overhead	$8	$148,800
Selling & Administrative	$7	$81,840

What is the unit product cost under absorption costing?

A. $52.00

B. $52.80

C. $59.00

D. $28.00

5. Under variable costing, fixed manufacturing overhead costs

A. are deferred in inventory when production exceeds sales

B. are always treated as period costs

C. are released from inventory when production exceeds sales

D. are ignored

Answer 1

1. ABC Company

Determination of how the break-even would change if the contribution margin increases –

Break-even units = 1,000

Contribution margin per unit = $0.50

The formula to determine break-even units = fixed cost/contribution margin per unit

The information about fixed cost and contribution margin per unit are needed to determine the break-even units.

Hence, to determine how the break-even would change when the contribution margin increases, the information about the fixed cost is necessary.

The correct option for this question would be – D. There is not enough information to know how break-even units will change.

1. Segment margin is sales minus –

The correct option is -D. Variable expenses and traceable fixed expenses.

The other options are incorrect for the following reasons,

Option A – variable expenses;

Explanation - sales minus variable expenses results in contribution margin and not segment margin.

Option B – Traceable fixed expenses –

Explanation – Sales minus traceable fixed expenses is an incorrect approach to determine the segment margin, as all the direct costs (variable costs) are to be deducted from sales to derive contribution and margin. Subsequently, the traceable fixed expenses are deducted from contribution margin to result in segment margin. Hence, traceable fixed expenses are not to be directly deducted from sales.

Option C - – Variable expenses and common fixed expenses –

Explanation – sales minus variable expenses and common fixed expenses is incorrect. The approach to determine segment margin is to first deduct variable expenses from sales to derive contribution margin and subsequently deduct traceable fixed expenses to derive segment margin. Then the common (allocated) fixed expenses are deducted from segment margin to result in net income.

1. DC Construction

Determination of the amount of salaries that can be categorized as common fixed expenses –

The correct option is – D. $240,000

Explanation – Common fixed expenses (salaries) is derived at as follows,

Salaries of two administrative assistants in corporate office = $50,000 + $37,000 = $87,000

Salary of the President = $153,000

Total common fixed expenses = $87,000 + $153,000 = $240,000

The administrative assistants at corporate office provide services to both the departments and hence they are of common fixed expenses in nature.

Likewise, the President serves the company as a whole and not any single department and hence the salary of President is also of common fixed expense nature.

The other options are incorrect for the following reasons –

Option A - $153,000

Explanation – This option ignores the salaries of two administrative assistants at corporate office and considers only $153,000,the salary of the President and hence an incorrect answer.

Option B - $87,000

Explanation – this option ignores the salary of the President of the company and considers only the salaries of the two administrative assistants and hence an incorrect answer.

Option C - $308,000

Explanation – This option is incorrect as the salaries of department supervisor and estimator are also included along with additional common fixed expenses. The salaries of supervisor and estimator are to be added to respective department’s traceable fixed expenses and to be included in the common fixed expenses. Hence, an incorrect answer.

1. ABC Company

Determination of the unit product cost under absorption costing:

Unit product cost under absorption costing is $52

Computation -

Direct materials cost per unit$15

Direct labor cost per unit$5

Manufacturing overhead –

Variable overhead per unit$8

Fixed overhead per unit $24

unit manufacturing overhead$32

Total unit cost$52

Note –

Fixed manufacturing overhead per unit = (total fixed manufacturing overhead/number of units produced = $148,800/6,200 units = $24)

1. Under variable costing, fixed manufacturing overhead costs –

Correct answer is Option B – Are always treated as period costs