ACCT&203 EXAM 2 FA 2016

Student Name: (Official Name Only)

INSTRUCTIONS
(i). Show ALL your work including (ii). Be neat and organized
formulas

1. MULTIPLE CHOICE QUESTIONS (1.5 Pts each = 15 Total Points): Circle the Correct Answer
a) Break-even analysis assumes that:
A. The variable cost per unit is constant. C. Variable expenses are linear.
B. The total fixed costs remain constant. D. All these answers are correct.

b) An increase in production levels within the relevant range would

A. Increase total costs. C. Not change fixed costs per unit.
B. Not change total variable costs. D. Change total fixed costs.

c) The most likely strategy to reduce the breakeven point would be to

A. Increase both the contribution margin and the fixed costs. •
B. Decrease both the contribution margin and the fixed costs.
C. Decrease the contribution margin and increase the fixed costs.
D. Increase the contribution margin and decrease the fixed costs.

d) Under variable costing, costs that are treated as period costs include:
A. All fixed costs. C. Both variable and fixed manufacturing costs.
B. Only fixed manufacturing costs. D. Only fixed selling and administrative costs

e) In an income statement segmented by product line, a fixed expense that cannot be allocated among
product lines on a cause-and-effect basis should be:
A. Allocated to the product lines on the basis of segment margin.
B. Classified as a traceable fixed expense and not allocated.
C. Allocated to the product lines on the basis of sales dollars.
D. Classified as a common fixed expense and not allocated.

f) A common cost that should not be assigned to a particular product on a segmented income statement is:
A. The salary of the chief executive officer. C. Direct materials costs.
B. The product’s advertising costs. D. The product manager's salary.

g) All other things being equal, if a division's traceable fixed expenses increase:
A. The division's segment margin will decrease.
B. The overall company profit will remain the same.
C. The division's contribution margin ratio will decrease.
D. The division's segment margin ratio will remain the same.
h) A company that produces 10,000 units has fixed costs of $300,000, variable costs of $50 per unit, and
a sales price of $85 per unit. After learning that its variable costs will increase by 20%, the company is

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You must be the change you wish to see in the world - Mahatma
Gandhi
ACCT&203 EXAM 2 FA 2016

considering an increase in production to 12,000 units. Which of the following statements is correct
regarding the company’s next steps?
A. If production remains at 10,000 units, profits will decrease by $100,000.
B. If production remains at 10,000 units, profits will decrease by $50,000.
C. If production is increased to 12,000 units, profits will increase by $100,000.
D. If production is increased to 12,000 units, profits will increase by $50,000.
i) A ceramics manufacturer sold cups last year for $7.50 each. Variable costs of manufacturing were
$2.25 per unit. The company needed to sell 20,000 cups to break even. Net income was $5,040. This
year, the company expects the following changes: sales price per cup to be $9.00, variable
manufacturing costs to increase 33.3%, fixed costs to increase 10%, and the income tax rate to
remain at 40%. Sales in the coming year are expected to be more than last year’s sales by 2,000
units. How many units does the company expect to sell this year?
A. 20,600 B. 21,600 C. 22,600 D. 23,600
j) Which of the following statements is correct regarding the difference between the absorption costing
and variable costing methods?
A. When production equals sales, absorption costing income is greater than variable costing
income.
B. When production equals sales, absorption costing income is less than variable costing income.
C. When production is greater than sales, absorption costing income is greater than variable
costing income.
D. When production is less than sales, absorption costing income is greater than variable costing
income.
k) When a firm prepares financial reports by using absorption costing,
A. Profits will always increase with increases in sales.
B. Profits will always decrease with decreases in sales.
C. Profits may decrease with increased sales even if there is no change in selling prices and
costs.
D. Decreased output and constant sales result in increased profits.
l) Fleet, Inc., manufactured 700 units of Product A, a new product, during the year. Product A’s variable
and fixed manufacturing costs per unit were $5.50 and $2.50, respectively. The inventory of Product A
on December 31 consisted of 100 units. There was no inventory of Product A on January 1. What
would be the change in the dollar amount of inventory on December 31 if variable costing were used
instead of absorption costing?
A. $800 decrease. C. $200 increase
B. $200 decrease. D. None of these.

AS DISCUSSED IN CLASS, FOR THE NEXT TWO PROBLEMS …

(i). If you completed the take-home exam, please answer only one problem;
OR
(ii). If you did not complete the take-home exam, please answer both problems.

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You must be the change you wish to see in the world - Mahatma
Gandhi
 ACCT&203 EXAM 2 FA 2016

2. Sdròw-fò-tùònàrì manufactures and sells a single product. Cost data for the product follow:
Variable Costs per unit:

PLEASE SHOW ALL

Direct Materials $ 10.00
Show ALL Direct Labor 8.00

YOUR WORK
your work Variable Factory Overhead 6.00
including Variable selling and administrative 2.00
formulas Total Variable Costs per unit 26.00
Fixed Costs Per Year:
Fixed Manufacturing Overhead $250,000
Fixed selling and administrative $230,000
Total Fixed Cost per month $480,000
The product sells for $50 per unit, and the company currently sells 40,000 units.
REQUIRED:
(i). Compute the break-even point in both sales units and sales dollars. (2½ points)
(ii). The marketing manager, after some research and analysis, has proposed the following
simultaneous changes: lower the selling price by 10%; use a more appealing packaging that will
increase direct material costs by $2.00, and increase sales commissions by $1.00 per unit sold.
The manager believes that these changes will increase unit sales by 50%.
REQUIRED:
a.Compute the new break-even point in both units and dollars (4½ points)
b.Compute the change in net operating income as a result of the changes in (ii) above (5 points)
c.Using your answers from (a) and (b) above, advise the manager whether or not to proceed
with the proposal (5 pts) BE SURE TO CONSIDER ALL PLAUSIBLE / RELEVANT
FACTORS AND MAKE ASSUMPTIONS AS YOU DEEM FIT. BE DETAILED; FOUR FULL
SENTENCES ARE NOT SUFFICIENT – EXPLAIN DESCRIPTIVELY AND BE SPECIFIC.

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You must be the change you wish to see in the world - Mahatma
Gandhi
ACCT&203 EXAM 2 FA 2016

3. Wicsled-Nisi-Tshad Company has just completed its first year of operations where it produced 40,000
units and sold 35,000 units. The product costs associated with the product are shown below:

PLEASE SHOW ALL

Direct Materials $5.00 per unit

YOUR WORK
Direct Labor $6.00 per unit
Variable Manufacturing Overhead $1.00 per unit
Fixed Manufacturing Overhead $160,000 per year
The company’s absorption costing income statement for the year appears below:
WICSLED-NISI-TSHAD
INCOME STATEMENT – ABSORPTION COSTING
FOR THE YEAR ENDED DEC 31, 2015
Sales (35,000 units x $25 per unit) $ 875,000
Cost of Goods Sold (35,000 units x $16 per unit) 560,000
GROSS MARGIN 315,000
Selling and Administrative Expenses 280,000
NET OPERATING INCOME $ 35,000
The company’s selling and administrative expenses consist of $210,000 per year in fixed expenses and
$2.00 per unit sold in variable expenses.
REQUIRED:
(i). Compute the variable costing product cost (1½ points)
(ii). Compute the absorption costing product cost (1½ points)
(iii). Prepare a variable costing contribution format income statement for the company for the year (5
points)
(iv). Reconcile the absorption costing and variable costing net operating incomes (3 points)
(v). Explain the cause of the difference between the absorption costing net operating income and the
variable costing net operating income (2 points)
(vi). EXPLAIN two practical applications (importance / usefulness) of Segmental Reporting). (4 pts) BE
DETAILED AND USE RELEVANT EXAMPLES

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You must be the change you wish to see in the world - Mahatma
Gandhi