LYCEUM OF THE PHILIPPINES UNIVERSITY MANAGEMENT SERVICES

PRELIM EXAM jjaur😊jrtcbic

1. To obtain the greatest gains from trade, a country should specialize in and ____ those goods for which it
has a comparative advantage and ____ those goods for which other countries have a comparative
advantage.
a. export; export
b. import; import
c. export; import
d. import; export
ANS: C PTS: 1

2. Specialization:
a. leads to greater self-sufficiency.
b. can lead to an increase in overall production.
c. is always the result of an inefficient use of resources.
d. allows workers to develop skills by working on a large number of tasks.
e. results in both a. and b.
ANS: B PTS: 1

3. The ability to produce at a lower opportunity cost than someone else is referred to as:
a. absolute advantage.
b. comparative advantage.
c. absolute superiority.
d. competitive disadvantage.
e. comparative disadvantage.
ANS: B PTS: 1

4. A system of economic organization in which the ownership and control of productive capital assets rests
with the state and resources are allocated through central planning and political decision making is called:
a. a market economy.
b. a command economy.
c. a corporate economy.
d. capitalism.
e. a unified economy.
ANS: B PTS: 1

5. The difference between a change in quantity demanded and a change in demand is that a change in:
a. quantity demanded is caused by a change in a good's own current price, while a change in
demand is caused by a change in some other variable, such as income, tastes, or
expectations.
b. demand is caused by a change in a good's own current price, while a change in quantity
demanded is caused by a change in some other variable, such as income, tastes, or
expectations.
c. quantity demanded is a change in the amount people actually buy, while a change in
demand is a change in the amount they want to buy.
d. A change in demand and a change in quantity demanded are the same thing.
 ANS: A PTS: 1
6. The difference between a change in quantity supplied and a change in supply is that a change in:
a. quantity supplied is caused by a change in a good's own, current price, while a change in
supply is caused by a change in some other variable, such as input prices, prices of related
goods, expectations, or taxes.
b. supply is caused by a change in a good's own, current price, while a change in the quantity
supplied is caused by a change in some other variable, such as input prices, prices of
related goods, expectations, or taxes.
c. quantity supplied is a change in the amount people want to sell, while a change in supply
is a change in the amount they actually sell.
d. supply and a change in the quantity supplied are the same thing.
ANS: A PTS: 1
7. A price ____ set ____ the equilibrium price will lead to a shortage.
a. ceiling; above
b. ceiling; below
c. floor; above
d. floor; below
ANS: B PTS: 1

8. When there is an excess quantity demanded of a product at the current price, then:
a. the price will tend to fall.
b. the price will tend to rise.
c. the price must be above the equilibrium price.
d. producers will reduce output and sales will fall.
ANS: B PTS: 1
9. The price of a new electronic toy increases from $16 to $24 and the quantity demanded decreases from
1,050 to 950 per month as a result. Based on this information, the price elasticity of demand (in absolute
terms) is estimated to be equal to:
a. 5.0.
b. 4.0.
c. 2.0.
d. 0.25.
e. 0.2.
ANS: D PTS: 1
10. A price cut will increase the total revenue a firm receives if the demand for its product is:
a. elastic.
b. inelastic.
c. unit elastic.
d. unit inelastic.
ANS: A PTS: 1
11. The difference between the value of a good to consumers and its price is known as:
a. demand.
b. marginal utility.
c. total utility.
d. opportunity cost
e. consumer surplus.
ANS: E PTS: 1
12. A corrective tax equal to the external cost imposed on third parties levied on polluters will:
a. eliminate all pollution.
b. increase the level of pollution.
c. force polluters to internalize the external cost resulting from their actions.
d. usually have no impact whatsoever on pollution levels, but will generate tax revenue for
the government.
ANS: C PTS: 1
13. A major macroeconomic goal of nearly every society is:
a. maintaining stability of prices.
b. maintaining high levels of employment.
c. achieving high rates of economic growth.
d. all of the above.
e. none of the above.
ANS: D PTS: 1
14. Real gross domestic product is the total value of all:
a. goods and services adjusted for inflation.
b. goods and services without an adjustment for inflation.
c. final goods and services adjusted for inflation.
d. final goods and services without adjustment for inflation.
e. intermediate goods and services without adjustment for inflation.
ANS: C PTS: 1
15. GDP equals $5 trillion. If consumption equals $3.5 trillion, investment equals $1 trillion, and government
spending equals $1.5 trillion, then:
a. exports exceed imports by $1 trillion.
b. imports exceed exports by $1 trillion.
c. net exports equal zero.
d. exports exceed imports by $1.5 trillion.
e. imports exceed exports by $1.5 trillion.
ANS: B PTS: 1
16. If a country's annual growth rate is 2%, then its output will double in approximately ____ years.
a. 2
b. 10
c. 25
d. 35
e. 50
ANS: D PTS: 1
17. Demand-pull inflation is caused by:
a. an increase in aggregate demand.
b. a decrease in aggregate demand.
c. an increase in short-run aggregate supply.
d. a decrease in short-run aggregate supply.
ANS: A PTS: 1
18. Cost-push inflation is caused by:
a. an increase in aggregate demand.
b. a decrease in aggregate demand.
c. an increase in aggregate supply.
d. a decrease in aggregate supply.
ANS: D PTS: 1
19. If Pat's income increased from $250,000 to $500,000 and his consumption increased from $200,000 to
$300,000, what was his marginal propensity to consume?
a. 0.4
b. 0.6
c. 0.8
d. 0.9
e. 1.0
ANS: A PTS: 1
20. The government's fiscal policy is its plan to regulate aggregate demand by manipulating:
a. the money supply.
b. taxation and spending.
c. the treasury.
d. the energy department.
ANS: B PTS: 1

21. Expansionary fiscal policy consists of:

a. increased government purchases, increased taxes, increased transfer payments.
b. decreased government purchases, decreased taxes, decreased transfer payments.
c. increased government purchases, increased taxes, decreased transfer payments.
d. increased government purchases, decreased taxes, increased transfer payments.
ANS: D PTS: 1
22. If the Central Bank was trying to reduce demand-pull inflation, it might:
a. sell government securities, lower reserve requirements and lower the discount rate.
b. sell government securities, raise reserve requirements and raise the discount rate.
c. sell government securities, lower reserve requirements and raise the discount rate.
d. buy government securities, lower reserve requirements and raise the discount rate.
ANS: B PTS: 1
23. A price-taking firm and a monopoly firm are alike in that:
a. price equals marginal revenue for both.
b. both maximize profits by choosing an output where marginal revenue equals marginal
cost.
c. price exceeds marginal cost at the profit-maximizing level of output for both.
d. in the long run, both earn zero economic profits.
ANS: B PTS: 1
24. A cartel is a group of firms that:
a. agree to increase industry output in order to boost profits.
b. agree to restrict industry output in order to boost profits.
c. agree to differentiate their products from one another.
d. together control a significant portion of an industry's output, but fail to consider the
behavior of rivals when making decisions.
ANS: B PTS: 1
25. Which of the following is a correct listing of industry models ordered from most competitive to least
competitive?
a. perfect competition - monopolistic competition - oligopoly - monopoly
b. perfect competition - oligopoly - monopolistic competition - monopoly
c. perfect competition - oligopoly - monopoly - monopolistic competition
d. oligopoly - perfect competition -monopoly - monopolistic competition
ANS: A PTS: 1
26. In the long run, economic profits are:
a. possible both for a monopolist and for a perfectly competitive firm.
b. possible for a monopolist but not for a perfectly competitive firm.
c. possible for a perfectly competitive firms but not for a monopolist.
d. impossible for both a monopolist and for a perfectly competitive firm.
ANS: B PTS: 1 NOT: Revised
27. The crowding-out effect implies that:
a. increases in government purchases will reduce consumption purchases.
b. higher taxes reduce both consumption and saving.
c. fiscal policy effects on interest rates will be offset by monetary policy.
d. increases in government purchases may increase interest rates and thereby reduce
investment.
ANS: D PTS: 1
28. Unemployment caused by a contraction in the economy is called:
a. frictional unemployment.
b. cyclical unemployment.
c. structural unemployment.
d. seasonal unemployment.
ANS: B PTS: 1
29. With respect to a fixed cost, an increase in the activity level within the relevant range
results in:
A) an increase in fixed cost per unit.
B) a proportionate increase in total fixed costs.
C) an unchanged fixed cost per unit.
D) a decrease in fixed cost per unit.

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

30. In the standard cost formula Y = a + bX, what does the “Y” represent?
A) total cost
B) total fixed cost
C) total variable cost
D) variable cost per unit

Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy
31. In the standard cost formula Y = a + bX, what does the “a” represent?
A) total cost
B) total fixed cost
C) total variable cost
D) variable cost per unit

Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

32. In the standard cost formula Y = a + bX, what does the “b” represent?
A) total cost
B) total fixed cost
C) total variable cost
D) variable cost per unit

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Medium

33. In the standard cost formula Y = a + bX, what does the “X” represent?
A) total cost
B) total fixed cost
C) units of activity
D) variable cost per unit

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy
Johnson Company has provided the following data for the first five months of the year:

Machine Hours Lubrication Cost

January................... 120 $750
February................. 160 $800
March..................... 200 $870
April....................... 150 $790
May........................ 170 $840

34. Using the high-low method of analysis, the estimated variable lubrication cost per
machine hour is closest to:
A) $1.40
B) $1.25
C) $0.67
D) $1.50

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Medium

Solution:
 Variable cost = Change in cost ÷ Change in activity
= ($870 – $750) ÷ (200 – 120) = $1.50

35. Using the high-low method of analysis, the estimated monthly fixed component of
lubrication cost is closest to:
A) $570
B) $560
C) $585
D) $565

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Medium

Solution:

Variable cost = Change in cost ÷ Change in activity

= ($870 − $750) ÷ (200 − 120) = $1.50

Fixed cost element = Total cost − Variable cost element

= $870 − ($1.50 × 200) = $570

36. Using the least-squares regression method of analysis, the estimated variable lubrication
cost per machine hour is closest to:
A) $0.80
B) $1.56
C) $1.40
D) $1.28

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
Appendix: 5A LO: 5 Level: Hard

Solution:

The solution using Microsoft Excel functions is:

slope = $1.56 per machine-hour
37. Using the least-squares regression method of analysis, the estimated monthly fixed
component of lubrication cost is closest to:
A) $561
B) $580
C) $525
D) $572

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting Appendix: 5A LO: 5 Level: Hard

Solution:

The solution using Microsoft Excel functions is:

intercept = $561 per month
38. Iacono Corporation is a wholesaler that sells a single product. Management has provided
the following cost data for two levels of monthly sales volume. The company sells the
product for $127.20 per unit.

Sales volume (units)................................... 5,000 6,000

Cost of sales............................................... $419,000 $502,800
Selling and administrative costs................. $186,500 $202,200

The best estimate of the total contribution margin when 5,300 units are sold is:
A) $230,020
B) $51,410
C) $146,810
D) $32,330

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
LO: 1,3,4 Level: Hard

Solution:

Variable component of cost of goods sold:

Variable cost = Change in costs/Change in units
Variable cost = ($502,800 − $419,000)/(6,000 − 5,000)
Variable cost = $83.80 per unit

Variable component of selling and administrative expenses:

Variable cost = Change in costs/Change in units
Variable cost = ($202,200 − $186,500)/(6,000 − 5,000)
Variable cost = $15.70 per unit

Sales revenue ($127.20 × 5,300)......................... $674,160

Variable expenses:
Variable cost of goods sold ($83.80 × 5,300). . $444,14
 0
Variable selling and administrative expense 83,210 527,350
($15.70 × 5,300)...........................................
Contribution margin............................................ $ 146,810
39. Utility costs at Service, Inc. are a mixture of fixed and variable components. Records
indicate that utility costs are an average of $0.40 per hour at an activity level of 9,000
machine hours and $0.25 per hour at an activity level of 18,000 machine hours.
Assuming that this activity is within the relevant range, what is the expected total utility
cost if the company works 13,000 machine hours?
A) $4,225
B) $5,200
C) $4,000
D) $3,250

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
LO: 1,3 Level: Hard

Solution:
Average Total Utility Cost
Machine- Cost per (machine-hours ×
Hours Hour average cost per hour)
High activity level...... 18,000 $0.25 $4,500
Low activity level...... 9,000 $0.40 $3,600

Variable cost = Change in cost ÷ Change in activity

= ($4,500 − $3,600) ÷ (18,000 – 9,000) = $0.10

Fixed cost element = Total cost − Variable cost element

= $4,500 − ($0.10 × 18,000) = $2,700

Therefore, the cost formula for total utility cost is $2,700 per period plus $0.10 per
machine-hour, or Y = $2,700 + $0.10X.

At an activity level of 13,000 machine-hours, total cost is estimated to be:

Y = $2,700 + ($0.10 × 13,000) = $4,000
40. Clerical costs in the billing department of Craig Company are a mixture of variable and
fixed components. Records indicate that average unit processing costs are $0.50 per
account processed at an activity level of 32,000 accounts. When only 22,000 accounts are
processed, the total cost of processing is $12,500. Assuming that this activity is within
the relevant range, at a budgeted level of 25,000 accounts:
A) processing costs are expected to total $8,750.
B) fixed processing costs are expected to be $10,400.
C) the variable processing costs are expected to be $0.35 per account processed.
D) processing costs are expected to total $14,975.

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
LO: 1,3 Level: Hard

Solution:
Average Total Utility Cost
Cost per (accounts × average
Account cost per account
Accounts Processed processed)
High activity level...... 32,000 $0.50 $16,000
Low activity level...... 22,000 $12,500*
*Given

Variable cost = Change in cost ÷ Change in activity

= ($16,000 − $12,500) ÷ (32,000 – 22,000) = $0.35

Fixed cost element = Total cost − Variable cost element

= $16,000 − ($0.35 × 32,000) = $4,800

Therefore, the cost formula for total utility cost is $4,800 per period plus $0.35 per
account processed, or Y = $4,800 + $0.35X.

At an activity level of 25,000 accounts, total cost is estimated to be:

Y = $4,800 + ($0.35 × 25,000) = $13,550
41. Shipping cost at Junk Food Imports is a mixed cost with variable and fixed components.
Past records indicate total shipping cost was $18,000 for 16,000 pounds shipped and
$22,500 for 22,000 pounds shipped. Assuming that this activity is within the relevant
range, if the company plans to ship 18,000 pounds next month, the expected shipping
cost is:
A) $18,500
B) $20,400
C) $19,500
D) $24,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
LO: 1,3 Level: Medium

Solution:
Shipping
Pounds Shipped Cost
High activity level...... 22,000 $22,500
Low activity level...... 16,000 $18,000

Variable cost = Change in cost ÷ Change in activity

= ($22,500 − $18,000) ÷ (22,000 − 16,000) = $0.75

Fixed cost element = Total cost − Variable cost element

= $22,500 − ($0.75 × 22,000) = $6,000

Therefore, the cost formula for total shipping cost is $6,000 per period plus $0.75 per
pound shipped, or Y = $6,000 + $0.75X.

At an activity level of 18,000 pounds shipped, total cost is estimated to be:

Y = $6,000 + ($0.75 × 18,000) = $19,500
42. Larson Brothers, Inc., used the high-low method to derive its cost formula for electrical
power cost. According to the cost formula, the variable cost per unit of activity is $3 per
machine-hour. Total electrical power cost at the high level of activity was $7,600 and at
the low level of activity was $7,300. If the high level of activity was 1,200 machine
hours, then the low level of activity was:
A) 800 machine hours
B) 900 machine hours
C) 1,000 machine hours
D) 1,100 machine hours

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1,3 Level: Hard

Solution:

Variable cost = Change in cost ÷ Change in activity

= ($7,600 − $7,300) ÷ (1,200 − X) = $3, where X = low level of activity
=> $300 ÷ (1,200 – X) = $3
=> $300 = $3 × (1,200 – X)
=> $100 = $1,200 – X
=> X = $1,100
43. Contribution margin can be defined as:
A) the amount of sales revenue necessary to cover variable expenses.
B) sales revenue minus fixed expenses.
C) the amount of sales revenue necessary to cover fixed and variable expenses.
D) sales revenue minus variable expenses.

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

44. Which of the following statements is correct with regard to a CVP graph?
A) A CVP graph shows the maximum possible profit.
B) A CVP graph shows the break-even point as the intersection of the total sales
revenue line and the total expense line.
C) A CVP graph assumes that total expense varies in direct proportion to unit sales.
D) A CVP graph shows the operating leverage as the gap between total sales revenue
and total expense at the actual level of sales.

Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Easy
45. If both the fixed and variable expenses associated with a product decrease, what will be
the effect on the contribution margin ratio and the break-even point, respectively?

Contribution margin ratio Break-even point

A) Decrease Increase
B) Increase Decrease
C) Decrease Decrease
D) Increase Increase

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
LO: 3; 5 Level: Medium Source: CMA; adapted

46. Which of the following is true regarding the contribution margin ratio of a single product
company?
A) As fixed expenses decrease, the contribution margin ratio increases.
B) The contribution margin ratio multiplied by the selling price per unit equals the
contribution margin per unit.
C) The contribution margin ratio will decline as unit sales decline.
D) The contribution margin ratio equals the selling price per unit less the variable
expense ratio.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
LO: 3 Level: Medium

47. If a company is operating at the break-even point:

A) its contribution margin will be equal to its variable expenses.
B) its margin of safety will be equal to zero.
C) its fixed expenses will be equal to its variable expenses.
D) its selling price will be equal to its variable expense per unit.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
LO: 5; 7 Level: Medium

48. At the break-even point:

A) sales would be equal to contribution margin.
B) contribution margin would be equal to fixed expenses.
C) contribution margin would be equal to net operating income.
D) sales would be equal to fixed expenses.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
LO: 5 Level: Medium
 49. The break-even point would be increased by:
A) a decrease in total fixed expenses.
B) a decrease in the ratio of variable expenses to sales.
C) an increase in the contribution margin ratio.
D) none of these.

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 5 Level: Medium
Use the following to answer questions 50-53:

Next year, Rad Shirt Company expects to sell 32,000 shirts. Rad is budgeting the following
operating results for next year:

Sales............................................... $800,000
Variable expenses.......................... 288,000
Contribution margin....................... 512,000
Fixed expenses............................... 192,000
Net operating income..................... $320,000

50. What is Rad's margin of safety for next year?

A) $480,000
B) $500,000
C) $512,000
D) $608,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
LO: 7 Level: Medium
 Solution:
Percent of
Total Sales
Sales................................................................ $800,000 100.0%
Variable expenses............................................ 288,000 36%
Contribution margin and contribution margin
ratio.............................................................. $ 512,000 64%

Break-even in total sales dollars = Fixed expenses/CM ratio

= $192,000/0.64 = $300,000

Margin of safety in dollars = Sales − Break-even sales

= $800,000 − $300,000 = $500,000

51. What is Rad's degree of operating leverage for next year?

A) 1.50
B) 1.56
C) 1.60
D) 2.50

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
LO: 8 Level: Easy

Solution:

Degree of operating leverage = Contribution margin/Net operating income

= $512,000/$320,000 = 1.60
52. How many shirts would Rad have to sell next year in order to generate $480,000 of net
operating income?
A) 38,400
B) 48,000
C) 60,000
D) 42,000

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 6 Level: Medium

Solution:

Sales price = $800,000 ÷ 32,000 units = $25

Variable expense per unit = $288,000 ÷ 32,000 units = $9
Sales = Variable expenses + Fixed expenses + Target profit
$25Q = $9Q + $192,000 + $480,000
$16Q = $672,000
Q = $672,000 ÷ $16 per unit = 42,000 units

53. Rad is considering increasing its advertising by $48,000 next year. By how much would
sales have to increase in order for Rad to still generate a $320,000 net operating income?
A) $48,000
B) $75,000
C) $76,800
D) $120,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
LO: 4 Level: Hard
 Solution:

Current Proposed
Sales............................................... $800,000
Variable expenses.......................... 288,000
Contribution margin....................... 512,000 $560,000 *
Fixed expenses............................... 192,000 240,000
Net operating income..................... $320,000 $320,000
*Work backwards to obtain the number.
Sales price = $800,000 ÷ 32,000 units = $25
Variable expense per unit = $288,000 ÷ 32,000 units = $9
Contribution margin per unit = $25 − $9 = $16
$560,000 ÷ $16 = 35,000 units
35,000 − 32,000 = 3,000 unit increase
3,000 × $25 = $75,000 increase in sales
Data concerning Lemelin Corporation's single product appear below:

Per Unit Percent of Sales

Selling price................................... $230 100%
Variable expenses.......................... 115 50%
Contribution margin....................... $115 50%

The company is currently selling 7,000 units per month. Fixed expenses are $581,000 per month.
Consider each of the following questions independently.
54. This question is to be considered independently of all other questions relating to Lemelin
Corporation. Refer to the original data when answering this question.
Management is considering using a new component that would increase the unit variable
cost by $3. Since the new component would increase the features of the company's
product, the marketing manager predicts that monthly sales would increase by 200 units.
What should be the overall effect on the company's monthly net operating income of this
change?
A) decrease of $22,400
B) decrease of $1,400
C) increase of $22,400
D) increase of $1,400

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 4 Level: Easy

Solution:

7,000 units 7,200 units

Sales (7,000 units × $230, 7,200 units × $230). . $1,610,000 $1,656,000
Variable expenses (7,000 units × $115, 7,200
units × $118).................................................... 805,000 849,600
Contribution margin............................................ 805,000 806,400
Fixed expenses.................................................... 581,000 581,000
Net operating income.......................................... $ 224,000 $ 225,400

Increase in net operating income: $225,400 − $224,000 = $1,400

55. This question is to be considered independently of all other questions relating to Lemelin
Corporation. Refer to the original data when answering this question.
The marketing manager believes that a $11,000 increase in the monthly advertising
budget would result in a 100 unit increase in monthly sales. What should be the overall
effect on the company's monthly net operating income of this change?
A) decrease of $11,000
B) increase of $11,500
C) decrease of $500
D) increase of $500

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 4 Level: Easy
 Solution:

7,000 units 7,100 units

Sales (7,000 units × $230, 7,100 units × $230). $1,610,000 $1,633,000
Variable expenses (7,000 units × $115, 7,100
units × $115).................................................. 805,000 816,500
Contribution margin.......................................... 805,000 816,500
Fixed expenses................................................... 581,000 592,000
Net operating income........................................ $ 224,000 $ 224,500

Increase in net operating income: $224,500 − $224,000 = $500

56. This question is to be considered independently of all other questions relating to Lemelin
Corporation. Refer to the original data when answering this question.
The marketing manager would like to introduce sales commissions as an incentive for the
sales staff. The marketing manager has proposed a commission of $20 per unit. In
exchange, the sales staff would accept a decrease in their salaries of $113,000 per month.
(This is the company's savings for the entire sales staff.) The marketing manager predicts
that introducing this sales incentive would increase monthly sales by 300 units. What
should be the overall effect on the company's monthly net operating income of this
change?
A) decrease of $224,500
B) increase of $107,000
C) increase of $1,500
D) increase of $806,500

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
LO: 4 Level: Medium

Solution:

7,000 units 7,300 units

Sales (7,000 units × $230, 7,300 units × $230). . $1,610,000 $1,679,000
Variable expenses (7,000 units × $115, 7,300
units × $135).................................................... 805,000 985,500
Contribution margin............................................ 805,000 693,500
Fixed expenses.................................................... 581,000 468,000
Net operating income.......................................... $ 224,000 $ 225,500

Increase in net operating income: $225,500 − $224,000 = $1,500

57. Net operating income under absorption costing may differ from net operating income
determined under variable costing. How is this difference calculated?
A) change in the quantity of units in inventory times the fixed manufacturing overhead
rate per unit.
B) number of units produced during the period times the fixed manufacturing
overhead rate per unit.
 C) change in the quantity of units in inventory times the variable manufacturing cost
per unit.
D) number of units produced during the period times the variable manufacturing cost
per unit.

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Hard Source: CMA, adapted
Use the following to answer questions 58-61:

Abdi Company, which has only one product, has provided the following data concerning its most
recent month of operations:

Selling price............................................... $81

Units in beginning inventory..................... 0

Units produced........................................... 7,300
Units sold................................................... 7,000
Units in ending inventory........................... 300

Variable costs per unit:

Direct materials....................................... $20
Direct labor............................................. $30
Variable manufacturing overhead........... $7
Variable selling and administrative........ $11

Fixed costs:
Fixed manufacturing overhead............... $65,700
Fixed selling and administrative............. $21,000

58. What is the unit product cost for the month under variable costing?
A) $77
B) $66
C) $68
D) $57

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Direct materials + Direct labor + Variable manufacturing overhead

= $20 + $30 + $7 = $57
59. What is the unit product cost for the month under absorption costing?
A) $66
B) $77
C) $57
D) $68

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit fixed manufacturing overhead = $65,700 ÷ 7,300 = $9

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead +
Fixed manufacturing overhead = $20 + $30 + $7 + $9 = $66

60. The total contribution margin for the month under the variable costing approach is:
A) $91,000
B) $168,000
C) $105,000
D) $25,300

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Unit selling price.................................................... $81

Less unit variable costs:
Direct materials................................................... $20
Direct labor......................................................... 30
Variable manufacturing overhead....................... 7
Variable selling and administrative.................... 11 68
Contribution margin............................................... $13
Total contribution margin = $13 × 7,000 = $91,000
61. The total gross margin for the month under the absorption costing approach is:
A) $105,000
B) $124,800
C) $7,000
D) $91,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Unit fixed manufacturing overhead = $9

Unit product cost under absorption costing = $20 + $30 + $7 + $9 = $66
Sales revenue ($81 × 7,000)................................... $567,000
Cost of goods sold ($66 × 7,000)........................... 462,000
Gross margin.......................................................... $105,000

62. What is the total period cost for the month under the variable costing approach?
A) $65,700
B) $163,700
C) $98,000
D) $86,700

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
LO: 2 Level: Hard

Solution:

Variable selling and administrative cost + Fixed costs

= ($11 × 7,000) + ($65,700 + $21,000)
= $77,000 + $86,700 = $163,700
63. What is the total period cost for the month under the absorption costing approach?
A) $98,000
B) $65,700
C) $21,000
D) $163,700

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Hard

Solution:

Variable selling and administrative cost + Fixed selling and administrative cost
= $11 × 7,000 + $21,000
= $77,000 + $21,000 = $98,000

64. What is the net operating income for the month under variable costing?
A) $2,700
B) $4,300
C) $7,000
D) $(12,800)

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
LO: 2 Level: Medium

Solution:

Sales revenue ($81 × 7,000)................................... $567,000

Variable costs:
Product cost ($57 × 7,000).................................. $399,000
Variable selling and administrative ($11 ×
7,000)............................................................... 77,000 476,000
Contribution margin............................................... 91,000
Fixed costs:
Fixed manufacturing overhead........................... $ 65,700
Fixed selling and administrative......................... 21,000 86,700
Contribution margin............................................... $ 4,300
65. What is the net operating income for the month under absorption costing?
A) $7,000
B) $4,300
C) $(12,800)
D) $2,700

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Sales revenue ($81 × 7,000)................................... $567,000

Cost of goods sold ($66 × 7,000)........................... 462,000
Gross margin.......................................................... 105,000
Selling and administrative expenses:
Variable selling and administrative ($11 ×
7,000)............................................................... $77,000
Fixed selling and administrative......................... 21,000 98,000
Net operating income............................................. $ 7,000
66. When sales are constant, but the production level fluctuates, net operating income
determined by the variable costing method will:
A) fluctuate in direct proportion to changes in production.
B) remain constant.
C) fluctuate inversely with changes in production.
D) be greater than net operating income under absorption costing.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
LO: 2 Level: Medium

67. Under the variable costing method, which of the following is always expensed in its
entirety in the period in which it is incurred?
A) fixed manufacturing overhead cost
B) fixed selling and administrative expense
C) variable selling and administrative expense
D) all of the above

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Hard
68. Which of the following will usually be found on an income statement prepared using the
absorption costing method?

Contribution
Margin Gross Margin
A) Yes Yes
B) Yes No
C) No Yes
D) No No

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Easy

69. Net operating income under variable and absorption costing will generally:
A) always be equal.
B) never be equal.
C) be equal only when production and sales are equal.
D) be equal only when production exceeds sales.

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
LO: 3 Level: Medium

70. When production exceeds sales, net operating income reported under variable costing
generally will be:
A) greater than net operating income reported under absorption costing.
B) less than net operating income reported under absorption costing
C) equal to net operating income reported under absorption costing.
D) higher or lower because no generalization can be made.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
LO: 3 Level: Medium