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Solution Guide / Answer Key:


Cost Accounting 13/e

Horngren, Foster, Datar, Rajan & Ittner




1.        Which of the following is not an assumption of cost-volume-profit analysis?


a.        The time value of money is incorporated in the analysis.

b.        Costs can be classified into variable and fixed components.

c.        The behavior of revenues and expenses is accurately portrayed as linear over the relevant range.

d.        The number of output units is the only driver.


2.        Contribution margin is calculated as


a.        total revenue – total fixed costs.

b.        total revenue – total manufacturing costs (CGS).

c.        total revenue – total variable costs.

d.        operating income + total variable costs.


Questions 3–5 are based on the following data:


       Tee Times, Inc., produces and sells the finest quality golf clubs in all of Clay County.  The company expects the following revenues and costs in 2003 for its Elite Quality golf club sets:


            Revenues (400 sets sold @ $600 per set)                        $240,000

            Variable costs                                                     160,000

            Fixed costs                                                            50,000


3.        How many sets of clubs must be sold for Tee Times, Inc., to reach their breakeven point?


a.  400                               b.  250                          c.  200                          d.  150


4.        How many sets of clubs must be sold to earn a target operating income of $90,000?


a.  700                               b.  500                          c.  400                          d.  300


5.        What amount of sales must Tee Times, Inc., have to earn a target net income of $63,000 if they have a tax rate of 30%?


a.  $489,000                        b.  $429,000                  c.  $420,000                  d.  $300,000


6.        One way for managers to cope with uncertainty in profit planning is to


a.       use CVP analysis because it assumes certainty.

b.       recommend management hire a futurist whose work it is to predict business trends.

c.       wait to see what does happen and prepare a report based on actual amounts.

d.       use sensitivity analysis to explore various what-if scenarios in order to analyze changes in revenues or costs or quantities.

7.        The Beta Mu Omega Chi (BMOC) fraternity is looking to contract with a local band to perform at its annual mixer.  If BMOC expects to sell 250 tickets to the mixer at $10 each, which of the following arrangements with the band will be in the best interest of the fraternity?


a.        $2500 fixed fee

b.        $1000 fixed fee plus $5 per person attending

c.        $10 per person attending

d.        $25 per couple attending


8.        Twin Products Company produces and sells two products.  Product M sells for $12 and has variable costs of $6.  Product W sells for $15 and has variable costs of $10.  Twin predicted sales of 25,000 units of M and 20,000 of W.  Fixed costs are $60,000 per month.  Assume that Twin achieved its sales goal of  $600,000 for September, but fell short of its expected operating income of $190,000.  Which of the following descriptions best describes the actual results reported of revenue of $600,000 and operating income of less than $190,000?


a.       Twin sold 50,000 of M and no product W.

b.       Twin sold more of both products M and W than expected.

c.       Twin sold more of product W and less of product M than expected.

d.       Twin sold more of product M and less of product W than expected.


9.        In the situation of multiple cost drivers, CVP analysis can be


a.       modified so that the various simple formulas can be used by applying them separately to each cost driver.

b.       used with the same formulas as used with a single cost driver.

c.       changed by incorporating all of the cost drivers into the breakeven formula to calculate the unique point of output at which the company would break even.

d.       adapted by incorporating the cost drivers into the calculation of the variable costs. 


10.     Which of the following statements is true?


a.       “Gross margin” can be used only in financial accounting income statements.

b.       “Gross margin” implies a different cost classification usage than the term “contribution margin” when used in income statements. 

c.       “Contribution margin” can be used in place of “gross margin” if management prefers that terminology in their financial statements.

d.       Only manufacturing-sector companies use the term “gross margin” in their income statements.





1.      Understand the assumptions underlying cost-volume-profit (CVP) analysis


How helpful is a model, such as CVP analysis, if the assumptions on which it is based seem too simplistic? 

2.      Explain the features of CVP analysis


Why is contribution margin such an important element in CVP analysis?


3.      Determine the breakeven point and output level needed to achieve target operating income using the equation, contribution margin, and graph methods


How can a company have more than one breakeven point? 

4.      Understand how income taxes affect CVP analysis


What changes to CVP analysis would have to be made if a company did have nonoperating revenues and expenses? 

5.      Explain CVP analysis in decision making and how sensitivity analysis can help managers cope with uncertainty


What ethical guidelines require a management cost accountant to use sensitivity analysis when supplying a decision maker with information obtained from CVP analysis?


6.      Use CVP analysis to plan fixed and variable costs


Can the use of CVP analysis change a cost from variable to fixed or vice versa? 

7.      Apply CVP analysis to a company producing different products


In his story of Don Quixote, Cervantes stated “Forewarned forearmed.”  How is this quote applicable to CVP analysis? 


8.      Adapt CVP analysis to situations in which a product has more than one cost driver


Does a company have multiple cost drivers because they have multiple products?


9.      Distinguish between contribution margin and gross margin


Is breakeven point calculation exclusive of the contribution margin approach to calculating income? 




Solution to Cases 1 and 2 Comparing income statements using two different costing methods





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