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(ACCT102)2006quiz3solution.pdf
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Quiz 3

NAME: STUDENT ID: Mark:

True of False Questions: (Please indicate as T or F) (12 marks)
1. If a company has the capacity to produce either 10,000 units of Product X or 10,000 units of Product Y, and the markets for both products are unlimited, the company should commit 100% of its capacity to the product that has the higher contribution margin.

Answer: True

2. The decision to accept an additional volume of business should be based on a comparison of the revenue from the additional business with the sunk costs of producing that revenue.

Answer: False
3. An out-of-pocket cost benefits a business, but is paid by an outside party.

Answer: False

4.If two projects have the same risks, the same payback periods, and the same initial investments, they are equally attractive.

Answer: False

5. A sunk cost has already been incurred and cannot be avoided or changed, so it is irrelevant to decision making. ( T )

6. Degree of operating leverage (DOL) is defined as total contribution margin in dollars divided by pretax income.

Answer: True

7. Cost-volume-profit analysis can be used to predict the effects of reduced selling prices, increased fixed costs, and reduced variable costs on break-even points. ( T )

8. The contribution margin per unit is equal to the sales price per unit minus the fixed costs per unit. ( F )

9. Use of the internal rate of return method cannot be used with uneven cash flows.

Answer: False

10. An important assumption in the analysis of a multiproduct situation is that the sales mix is known and remains constant. ( T )

Multiple Choice Questions: (8 marks)
1. An opportunity cost is: ( B )
A) An uncontrollable cost.
B) A cost of potential benefit lost.
C) A change in the cost of a component.
D) A direct cost.
E) A sunk cost.
2. Classifying costs by behavior involves: ( A )
A) Identifying fixed cost and variable cost.
B) Identifying cost of goods sold and operating costs.
C) Identifying all costs.
D) Identifying costs in a physical manner.
E) Identifying both quantitative and qualitative cost factors.

3. A product sells for $30 per unit and has variable costs of $18 per unit. The fixed costs are $720,000. If the variable costs per unit were to decrease to $15 per unit and fixed costs increase to $900,000, and the selling price does not change, break-even point in units would: ( E )
A) Increase by 20,000.
B) Equal 6,000.
C) Increase by 6,000.
D) Decrease by 20,000.
E) Not change.

4. The excess of expected sales over the sales level at the break-even point is known as the:

A) Sales turnover.
B) Profit margin.
C) Contribution margin.
D)