Test Bank and Solutions
TEST BANK AND SOLUTIONS
1-1: Accounting and Control
The controller of a small private college is complaining about the amount of work
she is required to do at the beginning of each month. The president of the university
requires the controller to submit a monthly report by the fifth day of the following month.
The monthly report contains pages of financial data from operations. The controller was
heard saying, "Why does the president need all this information? He probably doesn't
read half of the report. He's an old English professor and probably doesn't know the
difference between a cost and a revenue."
Required:
a. What is the probable role of the monthly report?
b. What is the controller's responsibility with respect to a president who doesn't
know much accounting?
2-1: Fixed, Variable, and Average Costs
Midstate University is trying to decide whether to allow 100 more students into
the university. Tuition is $5000 per year. The controller has determined the following
schedule of costs to educate students:
Number of Students Total Costs
4000 $30,000,000
4100 30,300,000
4200 30,600,000
4300 30,900,000
The current enrollment is 4200 students. The president of the university has calculated
the cost per student in the following manner: $30,600,000/4200 students = $7286 per
student. The president was wondering why the university should accept more students if
the tuition is only $5000.
1
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
, Test Bank and Solutions
Required:
a. What is wrong with the president's calculation?
b. What are the fixed and variable costs of operating the university?
2-2: The Elements of Cost Volume Profit
The M Company’s variable costs are 75% of the sales price per unit and their fixed
costs are $240,000. If the company earned $60,000 in selling 150,000 units, what was
the sales price per unit?
2-3: Opportunity Costs
The First Church has been asked to operate a homeless shelter in part of the
church. To operate a homeless shelter the church would have to hire a full time
employee for $1,200/month to manage the shelter. In addition, the church would have to
purchase $400 of supplies/month for the people using the shelter. The space that would
be used by the shelter is rented for wedding parties. The church averages about 5
wedding parties a month that pay rent of $200 per party. Utilities are normally $1,000
per month. With the homeless shelter, the utilities will increase to $1,300 per month.
What is the opportunity cost to the church of operating a homeless shelter in the
church?
2-4: Fixed and Variable Costs
The university athletic department has been asked to host a professional
basketball game at the campus sports center. The athletic director must estimate the
opportunity cost of holding the event at the sports center. The only other event scheduled
for the sports center that evening is a fencing match that would not have generated any
additional costs or revenues. The fencing match can be held at the local high school, but
the rental cost of the high school gym would be $200. The athletic director estimates that
the professional basketball game will require 20 hours of labor to prepare the building.
Clean-up depends on the number of spectators. The athletic director estimates the time of
clean-up to be equal to 2 minutes per spectator. The labor would be hired especially for
the basketball game and would cost $8 per hour. Utilities will be $500 greater if the
basketball game is held at the sports center. All other costs would be covered by the
professional basketball team.
Required:
a. What is the variable cost of having one more spectator?
b. What is the opportunity cost of allowing the professional basketball team to use
the sports center if 10,000 spectators are expected?
2
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
, Test Bank and Solutions
c. What is the opportunity cost of allowing the professional basketball team to use
the sports center if 12,000 spectators are expected?
2-5: Opportunity Cost of Attracting Industry
The Itagi Computer Company From Japan is looking to build a factory for making
DVD burners in the United States. The company is concerned about the safety and well-
being of its employees and wants to locate in a community with good schools. The
company also wants the factory to be profitable and is looking for subsidies from
potential communities. Encouraging new business to create jobs for citizens is important
for communities, especially communities with high unemployment.
Wellville has not been very well since the shoe factory left town. The city
officials have been working on a deal with Itagi to get the company to locate in Wellville.
Itagi officials have identified a 20 acre undeveloped site. The city has tentatively agreed
to buy the site for $50,000 for Itagi and not require any payment of property taxes on the
factory by Itagi for the first five years of operation. The property tax deal will save Itagi
$3,000,000 in taxes over the five years. This deal was leaked to the local newspaper.
The headlines the next day were: "Wellville Gives Away $3,000,000+ to Japanese
Company".
Required:
a. Do the headlines accurately describe the deal with Itagi?
b. What are the relevant costs and benefits to the citizens of Wellville of making this
deal?
2-6: Cost, Volume, Profit Analysis
With the possibility of the US Congress relaxing restrictions on cutting old
growth, a local lumber company is considering an expansion of its facilities. The
company believes it can sell lumber for $0.18/board foot. A board foot is a measure of
lumber. The tax rate for the company is 30 percent. The company has the following two
opportunities:
• Build Factory A with annual fixed costs of $20 million and variable costs of
$0.10/board foot. This factory has an annual capacity of 500 million board feet.
• Build Factory B with annual fixed costs of $10 million and variable costs of
$0.12/board foot. This factory has an annual capacity of 300 million board feet.
Required:
a. What is the break-even point in board feet for Factory A?
3
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
, Test Bank and Solutions
b. If the company wants to generate an after tax profit of $2 million with Factory B,
how many board feet would the company have to process and sell?
c. If demand for lumber is uncertain, which factory is riskier?
d. At what level of board feet would the after-tax profit of the two factories be the
same?
2-7: Cost, Volume, Profit Analysis
Leslie Mittelberg is considering the wholesaling of a leather handbag from Kenya.
She must travel to Kenya to check on quality and transportation. The trip will cost
$3000. The cost of the handbag is $10 and shipping to the United States can occur
through the postal system for $2 per handbag or through a freight company which will
ship a container that can hold up to a 1000 handbags at a cost of $1000. The freight
company will charge $1000 even if less than 1000 handbags are shipped. Leslie will try
to sell the handbags to retailers for $20. Assume there are no other costs and benefits.
Required:
a. What is the break-even point if shipping is through the postal system?
b. How many units must be sold if Leslie uses the freight company and she wants to
have a profit of $1000?
c. At what output level would the two shipping methods yield the same profit?
d. Suppose a large discount store asks to buy an additional 1000 handbags beyond
normal sales. Which shipping method should be used and what is the minimum
sales price Leslie should consider in selling those 1000 handbags?
2-8: Multiple Product Cost Volume Profit
A company sells three products as shown below:
Product X Product Y Product Z Total
Units 60,000 140,000 50,000 250,000
Sales $90,000 $150,000 $60,000 $300,000
Variable Costs $63,000 $93,000 $19,000 $175,000
Contribution $125,000
Margin
Fixed Costs $100,000
4
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
TEST BANK AND SOLUTIONS
1-1: Accounting and Control
The controller of a small private college is complaining about the amount of work
she is required to do at the beginning of each month. The president of the university
requires the controller to submit a monthly report by the fifth day of the following month.
The monthly report contains pages of financial data from operations. The controller was
heard saying, "Why does the president need all this information? He probably doesn't
read half of the report. He's an old English professor and probably doesn't know the
difference between a cost and a revenue."
Required:
a. What is the probable role of the monthly report?
b. What is the controller's responsibility with respect to a president who doesn't
know much accounting?
2-1: Fixed, Variable, and Average Costs
Midstate University is trying to decide whether to allow 100 more students into
the university. Tuition is $5000 per year. The controller has determined the following
schedule of costs to educate students:
Number of Students Total Costs
4000 $30,000,000
4100 30,300,000
4200 30,600,000
4300 30,900,000
The current enrollment is 4200 students. The president of the university has calculated
the cost per student in the following manner: $30,600,000/4200 students = $7286 per
student. The president was wondering why the university should accept more students if
the tuition is only $5000.
1
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
, Test Bank and Solutions
Required:
a. What is wrong with the president's calculation?
b. What are the fixed and variable costs of operating the university?
2-2: The Elements of Cost Volume Profit
The M Company’s variable costs are 75% of the sales price per unit and their fixed
costs are $240,000. If the company earned $60,000 in selling 150,000 units, what was
the sales price per unit?
2-3: Opportunity Costs
The First Church has been asked to operate a homeless shelter in part of the
church. To operate a homeless shelter the church would have to hire a full time
employee for $1,200/month to manage the shelter. In addition, the church would have to
purchase $400 of supplies/month for the people using the shelter. The space that would
be used by the shelter is rented for wedding parties. The church averages about 5
wedding parties a month that pay rent of $200 per party. Utilities are normally $1,000
per month. With the homeless shelter, the utilities will increase to $1,300 per month.
What is the opportunity cost to the church of operating a homeless shelter in the
church?
2-4: Fixed and Variable Costs
The university athletic department has been asked to host a professional
basketball game at the campus sports center. The athletic director must estimate the
opportunity cost of holding the event at the sports center. The only other event scheduled
for the sports center that evening is a fencing match that would not have generated any
additional costs or revenues. The fencing match can be held at the local high school, but
the rental cost of the high school gym would be $200. The athletic director estimates that
the professional basketball game will require 20 hours of labor to prepare the building.
Clean-up depends on the number of spectators. The athletic director estimates the time of
clean-up to be equal to 2 minutes per spectator. The labor would be hired especially for
the basketball game and would cost $8 per hour. Utilities will be $500 greater if the
basketball game is held at the sports center. All other costs would be covered by the
professional basketball team.
Required:
a. What is the variable cost of having one more spectator?
b. What is the opportunity cost of allowing the professional basketball team to use
the sports center if 10,000 spectators are expected?
2
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
, Test Bank and Solutions
c. What is the opportunity cost of allowing the professional basketball team to use
the sports center if 12,000 spectators are expected?
2-5: Opportunity Cost of Attracting Industry
The Itagi Computer Company From Japan is looking to build a factory for making
DVD burners in the United States. The company is concerned about the safety and well-
being of its employees and wants to locate in a community with good schools. The
company also wants the factory to be profitable and is looking for subsidies from
potential communities. Encouraging new business to create jobs for citizens is important
for communities, especially communities with high unemployment.
Wellville has not been very well since the shoe factory left town. The city
officials have been working on a deal with Itagi to get the company to locate in Wellville.
Itagi officials have identified a 20 acre undeveloped site. The city has tentatively agreed
to buy the site for $50,000 for Itagi and not require any payment of property taxes on the
factory by Itagi for the first five years of operation. The property tax deal will save Itagi
$3,000,000 in taxes over the five years. This deal was leaked to the local newspaper.
The headlines the next day were: "Wellville Gives Away $3,000,000+ to Japanese
Company".
Required:
a. Do the headlines accurately describe the deal with Itagi?
b. What are the relevant costs and benefits to the citizens of Wellville of making this
deal?
2-6: Cost, Volume, Profit Analysis
With the possibility of the US Congress relaxing restrictions on cutting old
growth, a local lumber company is considering an expansion of its facilities. The
company believes it can sell lumber for $0.18/board foot. A board foot is a measure of
lumber. The tax rate for the company is 30 percent. The company has the following two
opportunities:
• Build Factory A with annual fixed costs of $20 million and variable costs of
$0.10/board foot. This factory has an annual capacity of 500 million board feet.
• Build Factory B with annual fixed costs of $10 million and variable costs of
$0.12/board foot. This factory has an annual capacity of 300 million board feet.
Required:
a. What is the break-even point in board feet for Factory A?
3
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
, Test Bank and Solutions
b. If the company wants to generate an after tax profit of $2 million with Factory B,
how many board feet would the company have to process and sell?
c. If demand for lumber is uncertain, which factory is riskier?
d. At what level of board feet would the after-tax profit of the two factories be the
same?
2-7: Cost, Volume, Profit Analysis
Leslie Mittelberg is considering the wholesaling of a leather handbag from Kenya.
She must travel to Kenya to check on quality and transportation. The trip will cost
$3000. The cost of the handbag is $10 and shipping to the United States can occur
through the postal system for $2 per handbag or through a freight company which will
ship a container that can hold up to a 1000 handbags at a cost of $1000. The freight
company will charge $1000 even if less than 1000 handbags are shipped. Leslie will try
to sell the handbags to retailers for $20. Assume there are no other costs and benefits.
Required:
a. What is the break-even point if shipping is through the postal system?
b. How many units must be sold if Leslie uses the freight company and she wants to
have a profit of $1000?
c. At what output level would the two shipping methods yield the same profit?
d. Suppose a large discount store asks to buy an additional 1000 handbags beyond
normal sales. Which shipping method should be used and what is the minimum
sales price Leslie should consider in selling those 1000 handbags?
2-8: Multiple Product Cost Volume Profit
A company sells three products as shown below:
Product X Product Y Product Z Total
Units 60,000 140,000 50,000 250,000
Sales $90,000 $150,000 $60,000 $300,000
Variable Costs $63,000 $93,000 $19,000 $175,000
Contribution $125,000
Margin
Fixed Costs $100,000
4
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
