Survey Of Accounting 5th Edition By Edmonds – Test Bank

Chapter 11 Cost Behavior, Operating Leverage, and Profitability Analysis

1) Java Joe operates a chain of coffee shops. The company pays rent of $20,000 per year for each shop. Supplies (napkins, bags and condiments) are purchased as needed. The manager of each shop is paid a salary of $3,000 per month, and all other employees are paid on an hourly basis. Relative to the number of customers for a shop, the cost of supplies is which kind of cost?
A) Fixed cost
B) Variable cost
C) Mixed cost
D) Relevant cost

Answer: B
Explanation: When the volume increases, the total cost of supplies increases; when volume decreases, the total decreases; as such, the cost of supplies is a variable cost.
Difficulty: 2 Medium
Topic: Fixed Cost Behavior
Learning Objective: 11-01 Identify and describe fixed, variable, and mixed cost behavior.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: BB Industry; FN Decision Making

2) Select the correct statement regarding fixed costs.
A) Because they do not change, fixed costs should be ignored in decision making.
B) The fixed cost per unit decreases when volume increases.
C) The fixed cost per unit increases when volume increases.
D) The fixed cost per unit does not change when volume decreases.

Answer: B
Explanation: The total amount of a fixed cost does not change when volume changes. In contrast, fixed cost per unit is not fixed. It changes as the volume changes. The fixed cost per unit decreases when volume increases and the fixed cost per unit increases when volume decreases.
Difficulty: 1 Easy
Topic: Fixed Cost Behavior
Learning Objective: 11-01 Identify and describe fixed, variable, and mixed cost behavior.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: BB Industry; FN Decision Making

3) Larry’s Lawn Care incurs significant gasoline costs. This cost would be classified as a variable cost if the total gasoline cost:
A) varies inversely with the number of hours the lawn equipment is operated.
B) is not affected by the number of hours the lawn equipment is operated.
C) increases in direct proportion to the number of hours the lawn equipment is operated.
D) none of the above.

Answer: C
Explanation: The gasoline cost would be classified as variable if the total gasoline cost increases when the volume increases and the total gasoline cost decreases when the volume decreases.
Difficulty: 2 Medium
Topic: Fixed Cost Behavior
Learning Objective: 11-01 Identify and describe fixed, variable, and mixed cost behavior.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: BB Industry; FN Decision Making

4) Select the correct statement regarding fixed costs.
A) There is a contradiction between the term “fixed cost per unit” and the behavior pattern implied by the term.
B) Fixed cost per unit is not fixed.
C) Total fixed cost remains constant when volume changes.
D) All of these are correct statements.

Answer: D
Explanation: The total amount of a fixed cost does not change when volume changes. In contrast, fixed cost per unit is not fixed. It changes as the volume changes. The fixed cost per unit decreases when volume increases and the fixed cost per unit increases when volume decreases.
Difficulty: 1 Easy
Topic: Fixed Cost Behavior
Learning Objective: 11-01 Identify and describe fixed, variable, and mixed cost behavior.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: BB Industry; FN Decision Making

5) Rock Creek Bottling Company pays its production manager a salary of $6,000 per month. Salespersons are paid strictly on commission, at $1.50 for each case of product sold.

For Rock Creek Bottling Company, the production manager’s salary is an example of:
A) a variable cost.
B) a mixed cost.
C) a fixed cost.
D) none of these

Answer: C
Explanation: The total amount of a fixed cost does not change when volume changes.
Difficulty: 2 Medium
Topic: Fixed Cost Behavior
Learning Objective: 11-01 Identify and describe fixed, variable, and mixed cost behavior.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: BB Industry; FN Decision Making

6) Rock Creek Bottling Company pays its production manager a salary of $6,000 per month. Salespersons are paid strictly on commission, at $1.50 for each case of product sold.

For Rock Creek Bottling Company, the cost of the salespersons’ commissions is an example of:
A) a fixed cost.
B) a variable cost.
C) a mixed cost.
D) none of these

Answer: B
Explanation: Since the salespersons are paid strictly on commission, at $1.50 for each case of product sold, the total cost of the salespersons’ commissions would increase as the sales volume increases. As such, this cost would be classified as a variable cost.
Difficulty: 2 Medium
Topic: Fixed Cost Behavior
Learning Objective: 11-01 Identify and describe fixed, variable, and mixed cost behavior.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: BB Industry; FN Decision Making

7) Based on the following cost data, what conclusions can you make about the costs of Product A and Product B?

Total Cost
Production: Product A Product B
10 units $ 100 ?
100 units $ 1,000 ?
1,000 units $ 10,000 ?
Unit Cost
Production: Product A Product B
10 units ? $ 10,000
100 units ? $ 1,000
1,000 units ? $ 100

A) The cost of Product A is a fixed cost and the cost of Product B is a variable cost.
B) The cost of Product A is a variable cost and the cost of Product B is a fixed cost.
C) The costs of Product A and Product B are both variable costs.
D) The costs of Product A and Product B are both mixed costs.

Answer: B
Explanation: When the volume increases, the total cost of Product A increases; as such, the cost of Product A is a variable cost. The fixed cost per unit of Product B decreases when volume increases; as such, the cost of Product B is a fixed cost.
Difficulty: 2 Medium
Topic: Fixed Cost Behavior
Learning Objective: 11-01 Identify and describe fixed, variable, and mixed cost behavior.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: BB Industry; FN Decision Making

8) Based on the following cost data, items labeled (a) and (b) in the table below are which of the following amounts, respectively?

Number of units: 1,500 3,000
Total cost:
Variable $ 7,500 $ 15,000
Fixed $ 6,000 $ 6,000
Cost per unit:
Variable $ 5 (a)
Fixed $ 4 (b)

A) (a) = $3.00; (b) = $3.00
B) (a) = $5.00; (b) = $4.00
C) (a) = $2.50; (b) = $2.00
D) (a) = $5.00; (b) = $2.00

Answer: D
Explanation: (a) Total cost of $15,000 ÷ 3,000 units = $5 per unit
(b) Total cost of $6,000 ÷ 3,000 units = $2 per unit
Difficulty: 3 Hard
Topic: Fixed Cost Behavior
Learning Objective: 11-01 Identify and describe fixed, variable, and mixed cost behavior.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Industry; FN Decision Making

9) Two different costs incurred by Ruiz Company exhibit the following behavior pattern per unit:

Units Sold
50 100 150 200
Cost #1 $ 300 per unit $ 150 per unit $ 100 per unit $ 75 per unit
Cost #2 $ 2 per unit $ 2 per unit $ 2 per unit $ 2 per unit

Cost #1 and Cost #2 exhibit which of the following cost behavior patterns, respectively?
A) Fixed and variable
B) Variable and variable
C) Fixed and fixed
D) Variable and fixed

Answer: A
Explanation: The cost per unit of Cost #1 decreases when volume increases; as such, Cost #1 is a fixed cost. When the volume increases, the cost per unit of Cost #2 stays the same; as such, Cost #2 is a variable cost.
Difficulty: 2 Medium
Topic: Fixed Cost Behavior
Learning Objective: 11-01 Identify and describe fixed, variable, and mixed cost behavior.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: BB Industry; FN Decision Making
10) Wu Company incurred $40,000 of fixed cost and $50,000 of variable cost when 4,000 units of product were made and sold.

If the company’s volume doubles, the total cost per unit will:
A) stay the same.
B) decrease.
C) double as well.
D) increase but will not double.

Answer: B
Explanation: Current cost per unit:
Total cost per unit = (Fixed cost + Variable cost) ÷ Number of units
Total cost per unit = ($40,000 + $50,000) ÷ 4,000 units = $22.50 per unit
Cost per unit when volume doubles:
Total cost per unit = [$40,000 + ($50,000 × 2)] ÷ (4,000 units × 2) = $17.50 per unit
Difficulty: 3 Hard
Topic: Fixed Cost Behavior
Learning Objective: 11-01 Identify and describe fixed, variable, and mixed cost behavior.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Industry; FN Decision Making