Deck 3: Fundamentals of Cost-Volume-Profit Analysis

Question 1

If the fixed costs are $2,400,targeted before-tax operating profit is $1,200,tax rate is 25%,selling price per unit is $2,and contribution margin ratio is 40%,then the sales volume is 9,000 units.

Answer 1

False

Question 2

Cost-volume-profit (CVP)analysis is more complicated for organizations with multiple products because typically each product has a different contribution margin ratio.

Answer 2

True

Question 3

The JK Manufacturing Company sells two products,J and K.J has a higher contribution margin ratio than K.If the product mix shifts towards K,the company's break-even point in total units (i.e.,J plus K)will increase.

Answer 3

True

Question 4

An increase in the selling price per unit will decrease an organization's operating leverage,assuming sales unit volume doesn't change and there are no other changes in its cost structure.

Question 5

In multi-product cost-volume-profit (CVP)analysis,the fixed product mix method and the weighted average contribution margin method give different break-even points.

Question 6

If the average selling price is $.60 per unit,the average variable cost is $.36 per unit,and the total fixed costs are $1,500,then sales of 15,000 units will result in operating profits of $3,600.

Question 7

Operating profit is the unit contribution margin multiplied by the number of units minus the fixed component of the total costs (TC).

Question 8

An organization's operating leverage is high when it has a low proportion of variable costs in its total costs.

Question 9

An increase in an organization's tax rate will cause an increase in its break-even point.

Question 10

The contribution margin ratio is the contribution margin per unit divided by the selling price per unit.

Question 11

If an organization's fixed costs are $2,400,tax rate is 40%,and contribution margin is $5,200,then its after-tax operating profits are $1,680.

Question 12

The break-even point in sales dollars is fixed costs divided by the contribution margin ratio.

Question 13

The break-even point for an organization with a low operating leverage will be relatively higher than the break-even point for an organization with a high operating leverage.

Question 14

Both total revenues (TR)and total costs (TC)are likely to be affected by changes in the output.

Question 15

The total contribution margin is the unit contribution margin multiplied by the number of units minus the fixed component of the total costs (TC).

Question 16

If the fixed costs are $2,400,targeted operating profit is $1,200,selling price per unit is $2,and the contribution margin ratio is 40%,then the required sales volume is 9,000 units.

Question 17

Before-tax operating profits are equal to the after-tax operating profits divided by (1 - tax rate).

Question 18

An increase in an organization's fixed costs will result in a lower margin of safety,assuming all other costs and sales remain unchanged.

Question 19

Cost-volume-profit (CVP)analysis assumes that the production volume equals sales volume so that any changes in unit prices can be ignored.

Question 20

The average selling price is $.60 per unit,the average variable cost is $.36 per unit,and the total fixed costs are $1,500.If operating profits of $900 are desired,a sales volume of 2,500 units is necessary.

Question 21

You have been provided with the following information: If sales decrease by 500 units,how much will fixed expenses have to be reduced by to maintain the current operating profit of $6,000?

A)$9,000.
B)$7,500.
C)$6,000.
D)$3,000.

Question 22

At a break-even point of 400 units,variable costs were $400 and fixed costs were $200.What will the 401^st unit sold contribute to operating profits before income taxes?

A)$.50
B)$1.00
C)$1.50
D)$2.00

Question 23

XYZ Company's sales are $750,000 with operating profits of $130,000.If the contribution margin ratio is 40%,what did the fixed costs amount to?

A)$370,000.
B)$300,000.
C)$270,000.
D)$170,000.
E)$130,000.

Question 24

Which of the following would not cause the break-even point to change?

A)Sales price increases.
B)Fixed cost decreases.
C)Sales volume decreases.
D)Variable costs per unit increases.
E)Product mix shifts towards the cheaper products.

Question 25

Barnes Corporation manufactures skateboards and is in the process of preparing next year's budget.The pro forma income statement for the current year is presented below. The break-even point (rounded to the nearest dollar)for Barnes Corporation for the current year is

A)$146,341.
B)$636,364.
C)$729,730.
D)$181,818.
E)$658,537.

Question 26

Barnes Corporation manufactures skateboards and is in the process of preparing next year's budget.The pro forma income statement for the current year is presented below. For the coming year,the management of Barnes Corporation anticipates a 10 percent increase in sales,a 12 percent increase in variable costs,and a $45,000 increase in fixed expenses.
The break-even point for next year would be

A)$729,027.
B)$862,103.
C)$214,018.
D)$474,000.
E)$700,000.

Question 27

A decrease in the margin of safety would be caused by a(n):

A)increase in the total fixed costs.
B)increase in total revenue (sales).
C)decrease in the break-even point.
D)decrease in the variable cost per unit.

Question 28

If the fixed costs for a product decrease and the variable costs (as a percentage of sales dollars)decrease,what will be the effect on the contribution margin ratio and the break-even point respectively?

A)a
B)b
C)c
D)d

Question 29

Fowler Manufacturing Company has a fixed cost of $225,000 for the production of tubes.Estimated sales are 150,000 units.A before tax profit of $125,000 is desired by the controller.If the tubes sell for $5 each,what unit contribution margin is required to attain the profit target?

A)$3.00.
B)$2.33.
C)$1.47.
D)$.90.

Question 30

If both the variable cost per unit and the selling price per unit decrease,the new contribution margin ratio in relation to the old contribution margin ratio will be:

A)Lower.
B)Higher.
C)Unchanged.
D)Not enough information to tell.

Question 31

JJ Motors Inc.employs 45 sales personnel to market their line of luxury automobiles.The average car sells for $23,000,and a 6 percent commission is paid to the salesperson.JJ Motors is considering a change to the commission arrangement where the company would pay each salesperson a salary of $2,000 per month plus a commission of 2 percent of the sales made by that salesperson.The amount of total monthly car sales at which JJ Motors would be indifferent as to which plan to select is

A)$2,250,000.
B)$3,000,000.
C)$1,500,000.
D)$1,250,000.
E)$4,500,000.

Question 32

Given the following information: What would expected net income be if the company experienced a 10 percent increase in fixed costs and 10 percent increase in sales volume?

A)$1,750.
B)$1,550.
C)$1,250.
D)$1,375.

Question 33

Operating leverage refers to the extent to which an organization's cost structure is made up of:

A)differential costs.
B)opportunity costs.
C)fixed costs.
D)relevant costs.
E)product costs.

Question 34

The following costs have been estimated based on sales of 30,000 units: What selling price will yield a contribution margin of 40%?

A)$59.38
B)$43.75
C)$39.58
D)$33.25

Question 35

Cost-volume-profit (CVP)analysis is a simple but powerful tool to assist management make operating decisions.Which of the following does not represent a potential use of CVP analysis?

A)Ability to compute the break-even point.
B)Ability to determine optimal sales volumes.
C)Aids in evaluating tax planning alternatives.
D)Aids in determining optimal pricing policies.

Question 36

Which of the following changes to a company's contribution income statement will always lower the break-even point (either in units or in dollars)?

A)Sales price increases by 10%.
B)Sales price decreases by 5%.
C)Variable costs increase by 10% and fixed costs decrease by 5%.
D)Variable costs decrease by 5% and fixed costs increase by 10%.

Question 37

Expense A is a fixed cost expense,B is a variable cost.During the current year the volume of output has decreased.In terms of cost per unit of output,we would expect that

A)expense A has remained unchanged.
B)expense B has decreased.
C)expense A has decreased.
D)expense B has remained unchanged.

Question 38

A company's break-even point will not be increased by:

A)an increase in total fixed costs.
B)a decrease in the selling price per unit.
C)an increase in the variable cost per unit.
D)a decrease in the contribution margin ratio.
E)an increase in the number of units produced and sold.

Question 39

Given the following data: If sales decrease by 500 units,by what % would fixed expenses have to be reduced by to maintain current net income?

A)50.0%.
B)33.3%.
C)25.0%.
D)16.7%.

Question 40

The Blue Company is currently selling its single product for $15.Variable costs are estimated to remain at 70% of the current selling price and fixed costs are estimated to be $4,800 per month.If Blue increases its selling price by 10%,its variable cost ratio will

A)not change
B)decrease
C)increase $15(.70)= $10.50
$15(1.10)= $16.50
$10)50/$16.50 = 63.6% (vs.70%)

Question 41

RedTail Mfg has the following data: What dollar sales volume does RedTail need to achieve a $50,000 operating profit per month?

A)$1,400,000
B)$7,560,000
C)$933,333
D)$1,233,333

Question 42

RedTail Mfg has the following data: If RedTail has actual monthly sales of $1,500,000 and desires an operating profit of $50,000 per month,what is the margin of safety?

A)$100,000
B)$266,667
C)$50,000
D)$1,130,000

Question 43

On January 1,2006,Lake Co.increased its direct labor wage rates.All other budgeted costs and revenues were unchanged.How did this increase affect Lake's budgeted break-even point and budgeted margin of safety? (CPA adapted)

A)a
B)b
C)c
D)d

Question 44

KR Sales had $1,200,000 in sales last month.The variable cost ratio was 60% and operating profits were $80,000.What sales volume does KR's need to yield a $200,000 operating profit?

A)$1,000,000
B)$1,200,000
C)$1,500,000
D)$2,000,000

Question 45

Sanfran has the following data: If Sanfran produces and sells 30,000 units,what is the margin of safety?

A)5,000 units
B)7,500 units
C)22,500 units
D)30,000 units

Question 46

Breakeven analysis assumes that over the relevant range (CPA adapted):

A)Total Fixed Costs are nonlinear.
B)Total Costs are unchanged.
C)Unit Variable Costs are unchanged.
D)Unit Revenues are nonlinear.

Question 47

KR Sales had $1,200,000 in sales last month.The variable cost ratio was 60% and operating profits were $80,000.What is KR's break-even sales volume?

A)$800,000
B)$1,000,000
C)$1,200,000
D)$2,000,000

Question 48

During 2006,Thor Lab supplied hospitals with a comprehensive diagnostic kit for $120.At a volume of 80,000 kits,Thor had fixed costs of $1,000,000 and a profit before income taxes of $200,000.Due to an adverse legal decision,Thor's 2007 liability insurance increased by $1,200,000 over 2006.Assuming the volume and other costs are unchanged,what should the 2007 price be if Thor is to make the same $200,000 profit before income taxes? (CPA adapted)

A)$122.50
B)$135.00
C)$152.50
D)$240.00

Question 49

The Dooley Co.manufactures two products,Baubles and Trinkets.The following are projections for the coming year: How many Baubles will be sold at the break-even point,assuming that the facilities are jointly used and the sales mix will remain constant?

A)9,900
B)8,800
C)6,600
D)5,000
E)3,300

Question 50

At the break-even point the total contribution margin equals total: (CPA adapted)

A)Variable costs
B)Sales revenues
C)Selling and administrative costs
D)Fixed costs

Question 51

The number of T-shirts Donnelly Corporation must sell to break even in the coming year is

A)17,000 units.
B)19,250 units.
C)20,000 units.
D)22,000 units.

Question 52

The following information pertains to Syl Co.: What is Syl's break-even point in sales dollars? (CPA adapted)

A)$200,000
B)$160,000
C)$50,000
D)$40,000

Question 53

The selling price that would maintain the same contribution margin ratio as last year is

A)$9.00.
B)$8.25.
C)$10.00.
D)$9.50.

Question 54

RedTail Mfg has the following data: What dollar sales volume does RedTail need to break-even?

A)$822,222
B)$833,333
C)$900,000
D)$1,233,333

Question 55

If Donnelly Corporation wishes to earn $22,500 in after tax net income for the coming year,the company's sales volume in dollars must be

A)$213,750.
B)$257,625.
C)$207,000.
D)$229,500.

Question 56

Sales for the coming year are expected to exceed last year's by 1,000 units.If this occurs,Donnelly's sales volume in the coming year will be

A)22,600 units.
B)21,960 units.
C)23,400 units.
D)21,000 units.

Question 57

Kator Inc.manufactures industrial components.One of its products used as a subcomponent in auto manufacturing is KB-96.The selling price and cost per unit data for 9,000 units of KB-96 is as follows. During the next year,sales of KB-96 are expected to be 10,000 units.All costs will remain the same except for fixed manufacturing overhead,which will increase 20%,and material,which will increase 10%.The selling price per unit for next year will be $160.Based on this data,Kator Inc.'s total contribution margin for next year will be: (CMA adapted)

A)$882,000
B)$980,000
C)$972,000
D)$1,080,000

Question 58

Sanfran has the following data: How many units must Sanfran produce and sell in order to break-even?

A)8,333 units
B)12,500 units
C)15,000 units
D)22,500 units

Question 59

Sanfran has the following data: How many units must Sanfran produce and sell in order to achieve a profit of $30,000 per month?

A)10,000 units
B)8,824 units
C)25,000 units
D)15,000 units

Question 60

The following pertains to Clove Co.for the year ending December 31,2008: Clove's margin of safety is: (CPA adapted)

A)$300,000
B)$400,000
C)$500,000
D)$800,000

Question 61

You have been provided with the following information: If sales decrease by 10%,what level of fixed expenses will maintain the current operating profit?

A)$12,000.
B)$20,400.
C)$21,600.
D)$24,000.

Question 62

A company's break-even point will not be changed by:

A)a change in total fixed costs.
B)a change in the selling price per unit.
C)a change in the variable cost per unit.
D)a change in the contribution margin ratio.
E)a change in the income tax rate.

Question 63

Misa Corporation manufactures circuit boards and is in the process of preparing next year's budget.The pro forma income statement for the current year is presented below. For the coming year,the management of Misa Corporation anticipates a 5 percent decrease in sales,a 10 percent increase in variable costs,and a $45,000 increase in fixed expenses.
The break-even point for next year would be

A)$3,022,500.
B)$2,947,500.
C)$2,668,750.
D)$2,168,225.

Question 64

Acme Sales has two store locations.Store A has fixed costs of $125,000 per month and a variable cost ratio of 60%.Store B has fixed costs of $200,000 per month and a variable cost ratio of 30%.What is the break-even sales volume for Store B?

A)$666,667
B)$325,000
C)$285,714
D)Cannot determine with the information given.

Question 65

Misa Corporation manufactures circuit boards and is in the process of preparing next year's budget.The pro forma income statement for the current year is presented below. For the coming year,the management of Misa Corporation anticipates a 5 percent decrease in sales,a 10 percent increase in all variable costs,and a $45,000 increase in fixed expenses.
The operating profit for next year would be

A)$477,500.
B)$492,500.
C)$552,500.
D)$831,250.

Question 66

Misa Corporation manufactures circuit boards and is in the process of preparing next year's budget.The pro forma income statement for the current year is presented below. The break-even point (rounded to the nearest dollar)for Misa Corporation for the current year is

A)$2,625,000.
B)$1,865,672.
C)$1,724,138.
D)$2,155,172.

Question 67

KR Sales had $1,200,000 in sales last month.The variable cost ratio was 60% and operating profits were $80,000.What is KR's margin of safety?

A)$200,000
B)$300,000
C)$500,000
D)Cannot determine with the information given.

Question 68

A company's break-even point will not be increased by:

A)an increase in the number of units produced and sold.
B)a decrease in the selling price per unit.
C)an increase in the variable cost per unit.
D)an increase in the variable cost ratio.
E)an increase in total fixed costs.

Question 69

Genco Sales has two store locations.Carslberg has fixed costs of $250,000 per month and a contribution margin ratio of 35%.Tuborg has fixed costs of $400,000 per month and a contribution margin ratio of 65%.At what sales volume would the two stores have equal profits?

A)$500,000
B)$650,000
C)$1,300,000
D)Cannot determine with the information given.

Question 70

If both the variable cost per unit and the selling price per unit increase,the new contribution margin ratio in relation to the old contribution margin ratio will be:

A)Lower.
B)Higher.
C)Unchanged.
D)Not enough information to tell.

Question 71

Which of the following would not cause the break-even point to change?

A)Sales price increases.
B)Sales volume increases.
C)Fixed cost increases.
D)Variable costs per unit decreases.
E)Product mix shifts towards the cheaper products.

Question 72

Acme Sales has two store locations.Store A has fixed costs of $125,000 per month and a variable cost ratio of 60%.Store B has fixed costs of $200,000 per month and a variable cost ratio of 30%.At what sales volume would the two stores have equal profits?

A)$250,000
B)$325,000
C)$361,111
D)Cannot determine with the information given.

Question 73

Misa Corporation manufactures circuit boards and is in the process of preparing next year's budget.The pro forma income statement for the current year is presented below. The contribution margin ratio for the current year is

A)53.6%
B)49.3%
C)46.4%
D)25%

Question 74

You have been provided with the following information: If sales increase by 10%,what level of fixed expenses will yield a 20% increase in profits?

A)$14,400.
B)$19,200.
C)$25,200.
D)$26,400.

Question 75

A company's break-even point will not be changed by:

A)a change in total fixed costs.
B)a change in the number of units produced and sold.
C)a change in the variable cost ratio.
D)a change in the contribution margin ratio.
E)a change in the product mix.

Question 76

You have been provided with the following information: If unit sales decrease by 10%,how much will fixed expenses have to be reduced by to maintain the current operating profit?

A)$12,000.
B)$4,500.
C)$6,000.
D)$1,800.

Question 77

EM Sales had $2,200,000 in sales last month.The contribution margin ratio was 30% and operating profits were $180,000.What is EM's break-even sales volume?

A)$660,000
B)$1,540,000
C)$1,600,000
D)$2,020,000

Question 78

Acme Sales has two store locations.Store A has fixed costs of $125,000 per month and a variable cost ratio of 60%.Store B has fixed costs of $200,000 per month and a variable cost ratio of 30%.What is the break-even sales volume for Store A?

A)$208,333
B)$312,500
C)$325,000
D)Cannot determine with the information given.

Question 79

Which of the following would not cause the break-even point to change?

A)Variable costs per unit increases.
B)Fixed costs increases.
C)Product mix shifts towards the more expensive products.
D)Sales volume decreases.

Question 80

If the fixed costs for a product increase and the variable costs (as a percentage of sales dollars)increase,what will be the effect on the contribution margin ratio and the break-even point respectively?

A)a
B)b
C)c
D)d