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

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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.

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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.
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