Deck 5: Cost-Volume-Profit Analysis

Question 1

The contribution margin ratio is simply the unit contribution margin divided by variable costs.

Answer 1

False

Question 2

When all other factors remain the same, if a firm decides to decrease the selling price of its product, its unit contribution margin also decreases.

Answer 2

True

Question 3

To have any chance of making a profit, a firm must have a positive unit contribution margin.

Answer 3

True

Question 4

If a firm decides to decrease the selling price of its product, the only way to increase overall profit is to offset the reduction in unit contribution margin by decreasing variable costs.

Question 5

In addition to planning profits, the CVP relation helps organizations make short-term decisions.

Question 6

Contribution margin is not an appropriate measure for evaluating short-term decisions.

Question 7

Over the short-term, fixed costs do not change with the number of units sold.

Question 8

Two common measures of operating risk are contribution margin and margin of safety.

Question 9

The contribution margin ratio is the portion of every sales dollar that contributes toward covering fixed costs and, ultimately, to profit.

Question 10

CVP analysis allows firms to evaluate the tradeoff between price and quantity, and their effect on profit.

Question 11

Unit contribution margin equals price less unit variable cost.

Question 12

Breakeven volume = Unit Fixed costs ÷ Total contribution margin.

Question 13

Even when there are no sales, total costs include only variable costs.

Question 14

For every unit sold, profit increases by an amount equal to the unit gross margin.

Question 15

Reducing price always increases demand of a product.

Question 16

Both revenues and variable costs are proportional to sales volume.

Question 17

For every unit sold, both contribution margin and profit increase at the same rate, by an amount equal to the unit contribution margin.

Question 18

Firms generally are reluctant to add fixed costs to their cost structure because fixed costs represent a sure outflow.

Question 19

If the breakeven point is reduced, the margin of safety is also reduced.

Question 20

The margin of safety allows firms to evaluate risk by considering the amount by which expected sales exceeds breakeven sales.

Question 21

The controller of Samson Electronics is evaluating the unit contribution margin for the GPS receivers for the first quarter of the year.If 20 GPS receivers are produced and sold during June at a unit selling price of $100, with a fixed cost per unit of $5, and variable costs totaling $800, how much is the unit contribution margin for the each GPS receiver?

A)$60
B)$100
C)$55
D)$40

Question 22

There are two equivalent methods for performing multi-product CVP analysis: the contribution margin method and the margin of safety method.

Question 23

If selling price is $25, unit contribution margin is $10, sales volume is 1,000 units, and fixed costs are $8,000, the profit is:

A)$2,000
B)$15,000
C)$10,000
D)$7,000
E)None of the above.

Question 24

CVP analysis is well suited for a setting in which available capacity is not sufficient to meet all demand.

Question 25

If selling price per unit and unit variable cost increase by 5% and fixed cost remain the same, which CVP relation is correct?

Question 26

If selling price is $25, unit contribution margin equals $15 and fixed costs are $12,000, then breakeven volume is:

A)300 units.
B)1,200 units.
C)800 units.
D)2,500 units.
E)1,500 units.

Question 27

The weighted unit contribution margin is defined as the unit contribution margin averaged across multiple products with each product's unit contribution margin being weighted by the product mix.

Question 28

Contribution margin is:

A)Sales revenue less variable expenses
B)Sales revenue less fixed and variable expenses
C)Fixed expenses less variable expenses
D)Sales revenue less cost of goods sold

Question 29

We can compute the weighted contribution margin ratio either from the segment contribution margin statement or from unit level data.

Question 30

Which of the following statements is not true?

A)Over the short run, unit variable costs remain constant.
B)Over the short run, fixed costs decrease as sales volume decreases.
C)Variable costs are proportional to sales volume.
D)Contribution margin is calculated by subtracting variable costs from revenue.
E)None of the above.

Question 31

Which of the following equations highlights the cost-volume-profit relation?

A)Profit before taxes = [(Price x Unit variable cost) ÷ Sales volume in units] - Fixed costs.
B)Profit before taxes = [(Price - Unit fixed cost) x Sales volume in units] - Variable costs.
C)Profit before taxes = [(Price - Total variable cost) x Sales volume in units] - Fixed costs.
D)Profit before taxes = [(Price - Unit variable cost) x Sales volume in units] - Fixed costs.
E)Profit before taxes = [Price - (Unit variable cost - Unit fixed cost)] x sales volume in units.

Question 32

CVP analysis with many products is essentially the same as for a single product.

Question 33

When a firm makes multiple products or many versions of the same product, it is not advisable to perform CVP analysis on a product-by-product basis.

Question 34

CVP analysis is a tool that helps managers improve profit by answering "what if" questions.

Question 35

An advantage of CVP analysis is that it takes into account the time value of money.

Question 36

Gann Enterprises sells one product for $125.Unit variable cost is $85 and unit fixed cost is $20.Net income increases by what amount if one more unit is sold?

A)$20
B)$105
C)$40
D)$125
E)None of the above.

Question 37

It can be difficult to use CVP analysis when decisions deal with individual products, resources, or customers.

Question 38

Which of the following is not a use of the CVP relation?

A)To plan profit.
B)To evaluate a change in mix of fixed and variable costs.
C)To evaluate the time value of money on a business decision.
D)To evaluate the change in short-term prices.
E)All of the above are uses of the CVP relation.

Question 39

CVP analysis enables decision makers to assess how much volume they need to avoid a loss or to maintain a certain margin of safety.

Question 40

Because fixed costs generally do not change in the short term:

A)CVP is not appropriate if fixed costs are low.
B)They are generally not included as a component in CVP analysis.
C)Decreasing contribution margin increases profit by an identical amount.
D)Increasing contribution margin increases profit by an identical amount.
E)None of the above.

Question 41

The Hamilton Company has provided the following income statement for 2008: $\begin{array}{ll}\text { Sales }(24,000 \text { units) } & \$ 440,000 \\\text { Variable expenses } & 275,000\\\text { Contribution margin } & 165,000 \\\text { Fixed expenses } & 98,000\\\text { Net Income } &\$67,000\end{array}$ The company's contribution margin ratio (rounded) is:

A)37.5%
B)40.6%
C)59.4%
D)35.6%

Question 42

Glaus Company's break-even point in sales is $690,000 and its variable expenses are 60% of sales.If the company had a profit of $10,000 in 2008, its sales must have been:

A)$762,000
B)$665,000
C)$700,000
D)$715,000

Question 43

If unit variable cost is reduced and selling price and fixed cost remain the same, then:

A)Contribution margin will decrease.
B)Contribution margin will remain the same.
C)Sales volume will increase
D)Sales volume will decrease.
E)Overall profit will increase.

Question 44

Which of the following statements is correct about the relationship of the CVP factors?

A)Variable costs will always be more than fixed costs.
B)Demand will always be weaker at lower prices.
C)Sales volume contributes to more profit at higher volumes.
D)Sales price at lower volumes always contributes to higher contribution margins.

Question 45

The following information is being provided for the two products produced by the Stay-Dri Deodorant Company.For every 5 units sold, 3 of those units are from the men's line of product while 2 units are from the women's line of product. $$\begin{array} { l l l l } & \text { Men } & \text { Women } & \text { Total } \\\text { Expected product mix } & 3 & 2 & \\\text { Selling price per unit } & \$ 2.20 & 2.80 & \\\text { Variable cost per unit } & 1.50 & 1.10 & \\\text { Fixed Costs (total) } & & & \$ 88,000\end{array}$$ How many units of each product need to be sold in order to break-even in total?
Men Women

A)48,000 32,000
B)40,000 40,000
C)80,000 80,000
D)32,000 48,000

Question 46

If Company A is heavily labor-intensive and Company B is heavily capital-intensive which of the following is most likely to be true relative to the other company?

A)Company A's contribution margin per unit will be higher
B)Company B's contribution margin per unit will be higher
C)Company A's break-even point will be higher
D)Company B's contribution margin ratio will be lower

Question 47

A company can achieve an increase in contribution margin (given no other changes) if:

A)Fixed costs decrease
B)Selling price decreases
C)Fixed costs increase
D)Variable costs decrease

Question 48

Palmer's Custom Saddlery reported sales of $700,000 for the current year, fixed costs of $130,000 and a contribution margin ratio of 30%.Profit before taxes equals:

A)$80,000
B)$210,000
C)$360,000
D)$570,000
E)$171,000

Question 49

Assume University T-shirt Shop has a selling price of $25 and unit variable cost of $10 for its long-sleeve cotton shirts.Fixed costs total $1,000.University believes increasing its price to $27 its sales volume will drop by 5 percent.If University's sales volume for the month was estimated to be 300 shirts before the price increase, how will net profit be affected by the change in selling price?

A)$395 increase.
B)$345 increase.
C)$345 decrease.
D)$150 increase.
E)$150 decrease.

Question 50

The Wingo Company sells a single product for $21 per unit.If variable expenses are 70% of sales and fixed costs are $4,200, the break-even point in dollars will be:

A)$6,300
B)$14,000
C)$4,200
D)$6,000

Question 51

Debbie's Donut Shop has been the only donut shop in town.However, after Barry's Breakfast Treats opened up last month, Debbie's sales have dropped.Debbie decides to cut the selling price of her delicious donuts.The decrease in selling price will result in:

A)A reduction in the unit contribution margin.
B)An increase in the unit contribution margin.
C)A reduction in the unit variable costs.
D)An increase in the unit variable costs.
E)A reduction in fixed costs.

Question 52

Which one of the following correctly indicates how to calculate breakeven volume?

A)Variable costs divided by unit contribution margin.
B)Profit divided by sales volume.
C)Fixed costs divided by unit contribution margin.
D)Variable costs divided by fixed costs.

Question 53

The CEO of RV USA is trying to estimate sales based on a budgeted target profit before taxes of $150,000.If unit contribution margin is $5,000, total sales in June are estimated at $900,000 and fixed costs are $500,000, how many RVs must be sold to attain the target profit before taxes?

A)130
B)80
C)210
D)30

Question 54

Greenbrier Company had sales of $400,000, variable costs of $240,000, and fixed costs of $90,000.In order to break-even necessary sales would be:

A)$240,000
B)$225,000
C)$70,000
D)$250,000

Question 55

If selling price is $25, unit contribution margin equals $15 and fixed costs are $12,000, then breakeven revenues total:

A)$27,000
B)$22,000
C)$30,000
D)$20,000
E)$7,500

Question 56

Barry's Breakfast Treats has been selling only plain and cream-filled donuts.Barry believes he can increase his sales by adding a healthy-choice muffin to his menu.He will incur some additional costs such as ingredients, muffin pans and advertisement on the local TV station.Which of the following statements is false?

A)Barry's fixed costs will probably increase.
B)Barry's total variable costs will probably increase
C)Barry should add the muffin only if the increased contribution margin exceeds the increase in revenues.
D)Barry should add the muffin only if the increased contribution margin exceeds the increase in fixed costs.
E)All of the above statements are false.

Question 57

The Worxs Company wants to achieve a profit of $126,000.They currently sell 5,000 units at a price of $72 per unit with variable costs of $32 per unit.Fixed costs total $84,000.In order to achieve their target profit without increasing the selling price, the company will need to:

A)Increase sales by 250 units
B)Increase sales by 600 units
C)Keep sales at their current levels
D)Increase sales by $84,000

Question 58

How is the break-even point in units calculated?

A)Fixed costs divided by contribution margin ratio
B)net operating income divided by contribution margin per unit
C)fixed costs divided by contribution margin per unit
D)Net operating income divided by contribution margin ratio

Question 59

If selling price per unit and sales volume remain the same while variable costs per unit decrease and total fixed costs decrease, which of the following is false:

A)Contribution margin ratio will increase.
B)Contribution margin per unit will increase.
C)Net operating income will increase.
D)Net operating income will decrease.

Question 60

Assume University T-shirt Shop has a selling price of $25 and unit variable cost of $10 for its long-sleeve cotton shirts.Fixed costs total $1,000.University believes increasing its price to $27 will not cause a reduction in the number of shirts it will sell.If University's sales volume for the month is 300 shirts, how will net profit be affected by the change in selling price?

A)$1,600 increase.
B)$250 increase.
C)$600 increase.
D)$270 increase.
E)$1,600 decrease.

Question 61

Hill Toppers sells two types of hiking boots, the Voyager and the Traveler.The Voyager sells for $150 and has a contribution margin of $60.The Traveler sells for $100 and has a contribution margin of $60.Total revenue for the period is $300,000 and total fixed costs are $125,000.Each product contributes 50% to total revenue.Using the weighted contribution margin ratio, calculate profit before taxes.

A)$25,000
B)($53,000)
C)$89,000
D)$175,000
E)$150,000

Question 62

If the weighted contribution margin ratio for a multi-product manufacturing company is 45%, the weighted contribution margin per unit is $5, fixed costs are $100,000, and total revenues are $650,000, how much is profit before taxes?

A)$392,500
B)$292,500
C)$192,500
D)$247,500

Question 63

The proportion, expressed in units, in which products are expected to be sold is referred to as:

A)Product mix.
B)Weighted contribution.
C)Operating leverage.
D)Unit margin.
E)Proportionate contribution.

Question 64

Which of the following statements is true?

A)The lower the margin of safety, the lower the risk of a loss if actual sales do not meet expectations.
B)A good rule of thumb is that the margin of safety should be approximately 20%.
C)The higher the margin of safety, the lower the risk of a loss if actual sales do not meet expectations.
D)Firms that face highly variable demand conditions desire a lower margin of safety.
E)None of the above statements are true.

Question 65

Which of the following is true of operating leverage?

A)Operating leverage increases as profit increases.
B)Companies with higher operating leverage experience higher increases in profit when sales increase.
C)Operating leverage decreases as total variable costs decrease.
D)New technology generally decreases operating leverage.

Question 66

If sales volume increases and everything else remains constant, the:

A)Break-even point will decrease
B)Margin of safety will increase
C)Net operating income will decrease
D)Contribution margin ratio will increase

Question 67

Assume sales volume of 3,000 units, unit variable cost of $3, fixed costs of $15,000.What is operating leverage?

A)60%
B)37.5%
C)20%
D)62.5%
E)1.6%

Question 68

Williams Company has a selling price of $2.50 and a break-even sales volume of 8,000 units.Current revenue is $25,000.What is Williams' margin of safety?

A)20%.
B)$2.00
C)62.5%
D)$6.25
E).03%

Question 69

Water Sports, Inc.sells two types of canoes, the Deluxe model and the Super model.The following segmented contribution margin statement shows the results of the most recent period. Water Sports, Inc.
Segmented Contribution Margin Statement
Current Period
$\begin{array}{lrrr}\hline&\text { Deluxe }& \text { Super } & \text { Total }\\\hline\text { Sales volume } & 10,000 & 6,030 & 16,030 \\\text { Revenues } & \$ 153,000 & \$ 147,000 & \$ 300,000 \\\text { Variable costs } & 91.800 & 58,800 & 150.600\\\text { Contribution margin } & \$ 61,200 & \$ 88,200 & \$ 149,400 \\\text { Common Fixed Costs } & & & 125,000\\\text { Profit before Taxes }&&&\$24,400\end{array}$ What is Water Sport's breakeven volume?

A)6,024 units.
B)16,030 units.
C)16,159 units.
D)13,412 units.
E)None of the above.

Question 70

The controller of Nationwide Bicycle Parts is evaluating the sensitivity of changes in profit as it relates to proposed adjustments to sales volume and margin of safety.If sales volume is estimated to decrease by 10%, the contribution margin ratio is 35%, and the margin of safety is 25%, by how much will profit before taxes decrease?

A)40%
B)250%
C)28.5%
D)2.5%

Question 71

Rocky Company sells a single product.If both the selling price and variable cost per unit increase by 5% and fixed costs remain steady then:

Question 72

RAM Auto Parts' CEO wants to obtain additional financing from the company's bank.The banker wants to know the company's margin of safety.If revenues of the company for the current year total $4 million, widgets are sold at $20 per unit, the variable cost per unit is $16, fixed costs are $500,000, how much is the margin of safety?

A)12.5%
B)80.0%
C)96.9%
D)37.5%

Question 73

The Hernandez Brothers Company wants to earn an AFTER-tax profit of $180,000.The company sells each unit for $100 and variable costs represent 60% of sales.If fixed costs total $62,000 and the company's tax rate is 40%, how many units does the company need to sell in order to meet their goal?

A)9,050 units
B)12,800 units
C)11,250 units
D)7,500 units

Question 74

Water Sports, Inc.sells two types of canoes, the Deluxe model and the Super model.The following segmented contribution margin statement shows the results of the most recent period.
What is the weighted unit contribution margin?

A)49.8%
B)$9.32
C)10,7%
D)83.6%
E)$2.00

Question 75

If fixed costs for Watts Corporation for the current year total $800,000, widgets are sold at $25 per unit, total variable costs are $1,200,000, how much is operating leverage?

A)40.0%
B)66.7%
C)25.0%
D)60.0%

Question 76

The Norman Company recorded net operating income of $51,000 on sales of $280,000.If the company's variable costs were 60% of sales, fixed costs must have been:

A)$117,000
B)$112,000
C)$61,000
D)$137,400

Question 77

Which of the following products should be produced to maximize profit?

A)Product A: Sales volume of 10,000 units, unit contribution margin of $20, fixed costs of $120,000.
B)Product B: Sales volume of 9,000, unit contribution margin of $22, fixed costs of $150,000.
C)Product C: Sales volume of 8,000, unit contribution margin of $21, fixed costs of $110,000.
D)Product D: Sales volume of 11,000, unit contribution margin of $23, fixed costs of $170,000.

Question 78

Hill Toppers sells two types of hiking boots, the Voyager and the Traveler.The Voyager sells for $150 and has a contribution margin of $60.The Traveler sells for $100 and has a contribution margin of $60.Total revenue for the period is $300,000 and total fixed costs are $125,000.Each product contributes 50% to total revenue.Using the weighted contribution margin ratio, calculate break-even sales volume.

A)$300,000
B)$25,000
C)$175,000
D)$250,000
E)$150,000

Question 79

Operating leverage is used as:

A)A measure of risk arising from having a sales volume which differs from breakeven volume.
B)A measure of risk arising from having less margin of safety than anticipated.
C)A measure of risk arising from having more fixed costs.
D)A measure of risk arising from having more variable costs.
E)None of the above.

Question 80

Assume current sales are 10,000 units, selling price is $2.50 and margin of safety is 20%.If sales increase by 5%, what is the percent change in profits before taxes?

A)40%
B)25%
C)250%
D)12.5%
E)50%