The range of activity over which the changes in the cost are of interest to mana
ID: 2435775 • Letter: T
Question
The range of activity over which the changes in the cost are of interest to management is called the relevant range. Total variable costs change as the level of activity changes. Rental charges of $40,000 per year plus $3 for each machine hour over 18,000 hours is an example of a fixed cost. The contribution margin ratio is the same as the profit volume ratio. The ratio that indicates the percentage of each sales dollar available to cover the fixed costs and to provide operating income is termed the contribution margin ratio. If fixed costs are $656,000 and the unit contribution margin is $30, the sales necessary to earn an operating income of $30,000 are 14,000 units. Cost-volume-profit analysis can be presented in both equation form and graphic form. If the unit selling price is $40, the volume of sales is $3,000,000, sales at the break-even point amount to $2,500,0000, and the maximum possible sales are $3,300, the margin of safety is 14,500 units. If the volume of sales is $7,000,000 and sales at the break-even point amount to $4,800,000, the margin of safety is 45.8%.Explanation / Answer
(80) The range of activity over which changes in cost are of interest to management is called the relevant range.
The range of activity within which a cost projection has validity forms the relevant range for that estimate;
For example: Fixed costs will not change only for a specified range of volume of activity, called the relevant range.
TRUE
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(81) Total Variable costs change as the level of activity changes.
TRUE
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(82) Rental charges of $40,000 per year plus $3 for each machine hour over 18,000 hours is an example of a fixed cost.
FALSE
Total Rental Charges = [18,000 * $3]
Total Rental Charges = $54,000
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(83) The contribution margin ratio is the same as the profit-volume ratio.
Contribution Margin Ratio = [(Sales – Variable Cost) / Sales]
Profit-volume Ratio = [Contribution / Sales]
Thus, both ratios are same.
TRUE
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(84) The ratio that indicates the percentage of each sales dollar available to cover the fixed costs and to provide operating income is termed the contribution margin ratio.
FALSE
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(85) If fixed costs are $650,000 and the unit contribution margin is $30, the sales necessary to earn an operating income of $30,000 are 14,000 units.
Fixed Cost = $650,000
Unit Contribution Margin = $30
Operating Income = $30,000
Break-even Sales (in units) = [(Fixed Cost + Operating Income) / Unit
Contribution Margin]
Break-even Sales (in units) = [($650,000 + $30,000) / $30]
Break-even Sales (in units) = 22,666.66 units
FALSE
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(86) Cost-volume profit analysis can be prescribed in both equation form and graphic form.
TRUE
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(87) If the unit selling price is $40, the volume of sales is $3,000,000 sales at the break-even point amount to $2,500,000, and the maximum possible sales are $3,300,000, the margin of safety is 14,500 units.
Unit Selling price = $40
Sales Volume = $3,000,000
Break-even point (amount) = $2,500,000
Maximum possible Sales = $3,300,000
Margin of Safety is 14,500 units
Margin of Safety = [Total budgeted or actual sales – Break even sales]
Margin of Safety = [$3,000,000 - $2,500,000]
Margin of Safety = $500,000
Margin of Safety (in units) = [$500,000 / $40]
Margin of Safety (in units) = 12,500 units
FALSE
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(88) If the volume of sales is $7,000,000 and sales at the break-even point amount to $4,800,000, the margin of safety is 45.8%
Sales Volume = $7,000,000
Break-even Sales (in dollars) = $4,800,000
Margin of Safety = 45.8%
[Margin of Safety = Total budgeted or actual sales – Break even sales]
[Margin of Safety = $7,000,000 - $4,800,000]
Margin of Safety = $2,200,000
The margin of safety can also be expressed in percentage form. This percentage is obtained by dividend the margin of safety in dollar terms by total sales. Following equation is used for this purpose.
[Margin of Safety = Margin of Safety in dollars / Total budgeted or actual sales]
Margin of Safety = [$2,200,000 / $7,000,000]
Margin of Safety = 31.43%
FALSE