ch23 - CHAPTER 23 Cost-Volume-Profit Relationships ANSWERS...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 23 Cost-Volume-Profit Relationships ANSWERS TO QUESTIONS 0 1. (a) Cost behavior analysis is the study of how specific costs respond to changes in the level of activity within a company. (b) Cost behavior analysis is important to management in planning business operations and in deciding between alternative courses of action. 0 2. (a) The activity index identifies the activity that causes changes in the behavior of costs. Once the index is determined, it is possible to classify the behavior of costs in response to changes in activity levels into three categories: variable, fixed, or mixed. (b) Variable costs may be defined in total or on a per-unit basis. Variable costs in total vary directly and proportionately with changes in the activity level. Variable costs per unit remain the same at every level of activity. 0 3. Fixed costs remain the same in total regardless of changes in the activity level. In contrast, fixed costs per unit vary inversely with activity. As volume increases, fixed costs per unit decline and vice versa. 0 4. (a) The relevant range is the range of activity that a company expects to operate during the year. (b) Disagree. The behavior of both fixed and variable costs are linear only over a certain range of activity. 0 5. This is true. Most companies operate within the relevant range. Within this range, it is possible to establish a linear (straight-line) relationship for both variable and fixed costs. If a relevant range cannot be established, segregation of costs into fixed and variable becomes extremely difficult. 0 6. Apartment rent is fixed because the cost per month remains the same regardless of how much Bill uses the apartment. Hertz rental truck is a mixed or semivariable cost because the cost usually includes a per diem charge (a fixed cost) plus an activity charge based on miles driven (a variable cost). 0 7. For CVP analysis, mixed costs must be classified into their fixed and variable elements. One approach to the classification of mixed costs is the high-low method. 0 8. Variable cost per unit is $1.00 ($50,000 ¸ 50,000). At any level of activity, fixed costs are $60,000 per month [$150,000 – (90,000 X $1)]. 0 9. No. Only two of the basic components of cost-volume-profit (CVP) analysis, unit selling prices and variable cost per unit, relate to unit data. The other components, volume and total fixed costs, are not based on per-unit amounts.
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
10. There is no truth in Patty's statement. Contribution margin is sales less variable costs. It is the revenue that remains to cover fixed costs and to produce income (profit) for the company. 11. Contribution margin is $18 ($40 – $22). The contribution margin ratio is 45% ($18 ¸ $40). 12. Disagree. Knowledge of the breakeven point is useful to management in deciding whether to introduce new product lines, change sales prices on established products, and enter new market areas.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern