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Chapter 4 Solutions

# Chapter 4 Solutions - Chapter 4 Cost Behavior and Relevant...

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Chapter 4 Cost Behavior and Relevant Costs Multiple Choice 1. (LO 1 – Fixed cost behavior) Answer: A 2. (LO 1 – Variable cost behavior) Answer: B 3. (LO1- Variable cost behavior) Answer: B The cost is a variable cost. It varies in direct proportion to the volume and is fixed when expressed on a per unit basis (\$15 per unit) 4. (LO1 – Mixed cost behavior) Answer: C The cost is a mixed cost. It is not a fixed cost because the total costs change as volume changes. It is also not a variable cost. Students should note that while the total cost changes as volume increases, it does not increase in direct proportion to the change in volume. The fixed and variable components of the cost can be determined using high low analysis. 5. (LO1 – Relevant range) Answer: C 6. (LO 1 – Fixed and variable cost behavior) Answer: C (\$5 x 5,000 units) + \$4,800 = \$29,800 7. (LO 1 – Fixed and variable cost behavior) Answer: D (\$5 x 25,000 units) + \$5,500 = \$130,500 8. (LO 1 – Variable cost behavior) Answer: C 4 - 1

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Solutions Manual 9. (LO 1 – Variable cost behavior) Answer: D 10. (LO 2 – Basic regression analysis) Answer: D 11. (LO 2 – Mixed cost behavior) Answer: C 12. (LO 2 – Mixed cost analysis using the high/low method) Answer: B High activity level = 12,500 pairs (April) Low activity level = 10,500 pairs (Jan) Calculation of variable cost: \$45,250 - \$40,250 12,500 – 10,500 = \$2.50 per pair Calculation of total fixed cost: TC = FC + VC, or Y = a + bx \$40,250 = a + (\$2.50 x 10,500) \$14,000 = a So, Y = \$14,000 + \$2.50x 13. (LO 2 - Mixed cost analysis using the high/low method) Answer: B Y = \$14,000 + \$2.50x Y = \$14,000 + \$2.50(10,850) Y = \$41,125 14. (LO2 – The high/low method) Answer: A 15. (LO 3 – Variable cost behavior and relevancy) Answer: C 16. (LO 3 – Fixed cost behavior and relevancy) Answer: C 4 - 2
Chapter 4: Cost Behavior and Relevant Costs 17. (LO 4 – Impact of income taxes on cash expenditure) Answer: A 18. (LO 4 – Impact of income taxes on sales revenue) Answer: B Concept Questions 19. (LO 1 – Cost behavior of direct material) Direct materials are a variable cost and increase (decrease) in total as production increases (decreases), while remaining constant when expressed on a per unit basis. 20. (LO 1 – Cost behavior and the relevant range) The relevant range of production is the normal range over which production varies. Within this range, fixed and variable cost relationships will hold true. 21. (LO 1 – Cost behavior of fixed costs) When volume increases, fixed costs per unit will decrease. Likewise, when volume decreases, the unit cost will increase. This is called an inverse or reciprocal relationship. 22. (LO 1 – Equation for mixed costs) TC = FC + VC(x); where x = the volume of activity 23. (LO 2 – Regression analysis) When used to estimate the fixed and variable components of a mixed cost, the dependent variable in regression analysis is the total cost (represented by the “y” element of the equation y = a + bx. The independent variable is the activity

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Chapter 4 Solutions - Chapter 4 Cost Behavior and Relevant...

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