Deck 7: Cost-Volume-Profit Analysis

Question 1

For any organization selling multiple products, the relative proportion of each type of product sold is called the sales mix.

Answer 1

True

Question 2

Sensitivity analysis has become relatively easy to perform with the advent of personal computers and spreadsheet software.

Answer 2

True

Question 3

Total contribution margin is an important assumption in multiproduct CVP analysis.

Answer 3

False

Question 4

The safety margin is another name for the breakeven point.

Question 5

Companies with advanced manufacturing technology tend to have lower fixed costs.

Question 6

Activity-based costing systems should not be used in conjunction with cost-volume-profit analyses.

Question 7

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

Question 8

On the CVP graph, the break-even point is determined by the intersection of the total-revenue line and the total-expense line.

Question 9

An ABC cost-volume-profit analysis recognizes that some costs that are fixed with respect to sales volume may not be fixed with respect to other important cost drivers.

Question 10

The difference between budgeted sales revenue and break-even sales revenue is the operating leverage.

Question 11

The relevant range is the range of activity in which management of a company expects to operate.

Question 12

The management functions of planning, control, and decision making all are facilitated by an understanding of cost-volume-profit relationships.

Question 13

Cost-volume-profit analysis is based on certain general assumptions. One of these assumptions is that product prices will remain constant as volume varies within the relevant range.

Question 14

Companies with advanced manufacturing technology tend to have higher break-even points.

Question 15

The break-even point is that level of activity where total revenue equals total cost.

Question 16

Total contribution margin is defined as total sales revenue plus total variable expenses.

Question 17

Many operating managers find the traditional income-statement format difficult to use, because it does not separate revenues and expenses.

Question 18

The extent to which an organization uses fixed costs in its cost structure is measured by financial leverage.

Question 19

The contribution margin ratio can also be expressed as a percentage.

Question 20

Cost structures differ widely among industries and among firms within an industry.

Question 21

At a volume of 20,000 units, Almount Industries reported sales revenues of $1,000,000, variable costs of $300,000, and fixed costs of $260,000. The company's break-even point in units is:

A) 7,027 (rounded).
B) 8,667 (rounded).
C) 9,286 (rounded).
D) 7,429 (rounded).
E) None of the answers is correct.

Question 22

Partner Industries sells a single product for $50 that has a variable cost of $30. Fixed costs amount to $5 per unit when anticipated sales targets are met. If the company sells one unit in excess of its break-even volume, profit will be:

A) $15.
B) $20.
C) $50.
D) an amount that cannot be derived based on the information presented.
E) an amount other than $15, $20, or $50 and one that can be derived based on the information presented.

Question 23

Which of the following occurs if a company experiences an increase in its fixed costs?

A) Net income would increase.
B) The break-even point would increase.
C) The contribution margin would increase.
D) The contribution margin would decrease.
E) More than one of the answers would occur.

Question 24

Which of the following would produce the largest increase in the contribution margin per unit?

A) A 7% increase in selling price.
B) A 15% decrease in selling price.
C) A 14% increase in variable cost.
D) A 17% decrease in fixed cost.
E) A 23% increase in the number of units sold.

Question 25

Use the following information to answer the following Questions
Narchie sells a single product for $50. Variable costs are 60% of the selling price, and the company has fixed costs that amount to $400,000. Current sales total 16,000 units.

-Each unit that Narchie sells will:

A) increase profit by $20.
B) increase profit by $30.
C) increase profit by $50.
D) increase profit by some other amount.
E) decrease profit by $5.

Question 26

A recent income statement of Benton Corporation reported the following data:


-
If these data are based on the sale of 20,000 units, the contribution margin per unit would be:

A) $40.
B) $150.
C) $290.
D) $360.
E) None of the answers is correct.

Question 27

Use the following information to answer the following Questions
Narchie sells a single product for $50. Variable costs are 60% of the selling price, and the company has fixed costs that amount to $400,000. Current sales total 16,000 units.

-Narchie:

A) will break-even by selling 8,000 units.
B) will break-even by selling 13,333 units.
C) will break-even by selling 20,000 units.
D) will break-even by selling 1,000,000 units.
E) cannot break-even because it loses money on every unit sold.

Question 28

A company has fixed costs of $900 and a per-unit contribution margin of $3. Which of the following statements is true?

A) Each unit "contributes" $3 toward covering the fixed costs of $900.
B) The situation described is not possible and there must be an error.
C) Once the break-even point is reached; the company will increase income at the rate of $3 per unit.
D) The firm will definitely lose money in this situation.
E) Each unit "contributes" $3 toward covering the fixed costs of $900 and once the break-even point is reached, the company will increase income at the rate of $3 per unit.

Question 29

Assuming no change in sales volume, an increase in company's per-unit contribution margin would:

A) increase income.
B) decrease income.
C) have no effect on income.
D) increase fixed costs.
E) decrease fixed costs.

Question 30

The unit contribution margin is calculated as the difference between:

A) selling price and fixed cost per unit.
B) selling price and variable cost per unit.
C) selling price and product cost per unit.
D) fixed cost per unit and variable cost per unit.
E) fixed cost per unit and product cost per unit.

Question 31

CVP analysis can be used to study the effect of:

A) changes in selling prices on a company's profitability.
B) changes in variable costs on a company's profitability.
C) changes in fixed costs on a company's profitability.
D) changes in product sales mix on a company's profitability.
E) All of the answers are correct.

Question 32

Use the following information to answer the following Questions
Narchie sells a single product for $50. Variable costs are 60% of the selling price, and the company has fixed costs that amount to $400,000. Current sales total 16,000 units.

-If Narchie sells 24,000 units, its safety margin will be:

A) $200,000.
B) $400,000.
C) $1,000,000.
D) $1,200,000.
E) None of the answers is correct.

Question 33

Which of the following occurs if a company experiences a decrease in its fixed costs?

A) Income would decrease.
B) The break-even point would decrease.
C) The contribution margin would increase.
D) The contribution margin would decrease.
E) More than one of the answers would occur.

Question 34

The break-even point is that level of activity where:

A) total revenue equals total cost.
B) variable cost equals fixed cost.
C) total contribution margin equals the sum of variable cost plus fixed cost.
D) sales revenue equals total variable cost.
E) profit is greater than zero.

Question 35

The break-even point is that level of activity where:

A) variable cost equals fixed cost.
B) contribution margin equals fixed cost.
C) total contribution margin equals the sum of variable cost plus fixed cost.
D) sales revenue equals total variable cost.
E) sales revenue equals fixed cost.

Question 36

The requirement that companies pay income taxes does not affect their cost-volume-profit relationships.

Question 37

Use the following information to answer the following Questions
Narchie sells a single product for $50. Variable costs are 60% of the selling price, and the company has fixed costs that amount to $400,000. Current sales total 16,000 units.

-In order to produce a target profit of $22,000, Narchie's dollar sales must total:

A) $8,440.
B) $21,100.
C) $1,000,000.
D) $1,055,000.
E) None of the answers is correct.

Question 38

When a firm is required to pay taxes on income, it is important to distinguish between after-tax (AT) income and before-tax (BT) income.

Question 39

At a volume of 20,000 units, Almount Industries reported sales revenues of $1,000,000, variable costs of $300,000, and fixed costs of $260,000. The company's contribution margin per unit is:

A) $22.
B) $28.
C) $35.
D) $37.
E) None of the answers is correct.

Question 40

A company that desires to lower its break-even point should strive to:

A) decrease selling prices.
B) reduce variable costs.
C) increase fixed costs.
D) sell more units.
E) achieve more than one of the answers listed.

Question 41

Use the following information to answer the following Questions


-Refer to the figure above. At a given sales volume, the vertical distance between the fixed cost line and the total cost line represents:

A) fixed cost.
B) variable cost.
C) profit or loss at that volume.
D) semivariable cost.
E) the safety margin.

Question 42

Use the following information to answer the following Questions


-Refer to the figure above. Assume that the company whose cost structure is depicted in the figure expects to produce a loss for the upcoming period. The loss would be shown on the graph:

A) by the area immediately above the break-even point.
B) by the area immediately below the total cost line.
C) by the area diagonally to the right of the break-even point.
D) by the area diagonally to the left of the break-even point.
E) none of the answers is correct.

Question 43

Use the following information to answer the following Questions


-Refer to the figure above. The slope of line A is equal to the:

A) fixed cost per unit.
B) selling price per unit.
C) profit per unit.
D) variable cost per unit.
E) unit contribution margin.

Question 44

Which of the following expressions can be used to calculate break-even sales revenue with the contribution-margin ratio (CMR)?

A) CMR/fixed costs.
B) CMR * fixed costs.
C) Fixed costs/ CMR.
D) (Fixed costs + variable costs) *CMR.
E) (Sales revenue - variable costs) /CMR.

Question 45

Use the following information to answer the following Questions


-Refer to the figure above. Line A is the:

A) fixed cost line.
B) variable cost line.
C) total cost line.
D) total revenue line.
E) profit line.

Question 46

A recent income statement of Benton Corporation reported the following data:


-
If these data are based on the sale of 20,000 units, the break-even point would be:

A) 9,565 units (rounded).
B) 11,000 units (rounded).
C) 7,586 units (rounded).
D) 14,667 units (rounded).
E) None of the answers is correct.

Question 47

Use the following information to answer the following Questions


-Refer to the figure above. Line C represents the level of:

A) fixed cost.
B) variable cost.
C) semivariable cost.
D) total cost.
E) mixed cost.

Question 48

The contribution-margin ratio is:

A) the difference between the selling price and the variable cost per unit.
B) fixed cost per unit divided by variable cost per unit.
C) variable cost per unit divided by the selling price.
D) unit contribution margin divided by the selling price.
E) unit contribution margin divided by fixed cost per unit.

Question 49

A recent income statement of Safety Corporation reported the following data:

If these data are based on the sale of 20,000 units, the break-even point would be:

A) 7,500 units.
B) 11,628 units.
C) 12,500 units.
D) 33,333 units.
E) None of the answers is correct.

Question 50

Use the following information to answer the following Questions


-Refer to the figure above. Line A is the:

A) total revenue line.
B) fixed cost line.
C) variable cost line.
D) total cost line.
E) profit line.

Question 51

A recent income statement of Carson Corporation reported the following data:

If these data are based on the sale of 5,000 units, the break-even sales would be:

A) $2,000,000.
B) $2,206,000.
C) $2,500,000.
D) $10,000,000.
E) None of the answers is correct.

Question 52

Bargain Town recently reported sales revenues of $800,000, a total contribution margin of $300,000, and fixed costs of $180,000. If sales volume amounted to 10,000 units, the company's variable cost per unit must have been:

A) $12.
B) $32.
C) $50.
D) $92.
E) None of the answers is correct.

Question 53

Sarafine, Inc. sells a single product for $20. Variable costs are $8 per unit and fixed costs total $120,000 at a volume level of 5,000 units. Assuming that fixed costs do not change, Sarafine's break-even sales would be:

A) $160,000.
B) $200,000.
C) $300,000.
D) $480,000.
E) None of the answers is correct.

Question 54

Hsu, Inc. sells a single product for $12. Variable costs are $8 per unit and fixed costs total $360,000 at a volume level of 60,000 units. Assuming that fixed costs do not change, Hsu's break-even point would be:

A) 30,000 units.
B) 45,000 units.
C) 90,000 units.
D) negative because the company loses $2 on every unit sold.
E) a positive amount other than the specific amounts given.

Question 55

Use the following information to answer the following Questions


-Refer to the figure above. The triangular area between the horizontal axis and Line A, to the right of 4,000, represents:

A) fixed cost.
B) variable cost.
C) profit.
D) loss.
E) sales revenue.

Question 56

At a volume level of 500,000 units, Sullivan reported the following information:

The company's contribution-margin ratio is closest to:

A) 0.33.
B) 0.40.
C) 0.60.
D) 0.67.
E) None of the answers is correct.

Question 57

Starlight Co. makes and sells only one product. The unit contribution margin is $6 and the break-even point in unit sales is 24,000. The company's fixed costs are:

A) $4,000.
B) $14,400.
C) $40,000.
D) $144,000.
E) None of the answers is correct.

Question 58

Dane Company has a break-even point of 120,000 units. If the firm's sole product sells for $40 and fixed costs total $480,000, the variable cost per unit must be:

A) $4.
B) $36.
C) $44.
D) an amount that cannot be derived based on the information presented.
E) an amount other than $4, $36, or $44, but one that can be derived based on the information presented.

Question 59

Use the following information to answer the following Questions


-Refer to the figure above. The slope of line B is equal to the:

A) fixed cost per unit.
B) selling price per unit.
C) variable cost per unit.
D) profit per unit.
E) unit contribution margin.

Question 60

Use the following information to answer the following Questions


-Refer to the figure above. The vertical distance between the total cost line (Line B) and the total revenue line (Line A) represents:

A) fixed cost.
B) variable cost.
C) profit or loss at that volume.
D) semivariable cost.
E) the safety margin.

Question 61

All other things being equal, a company that sells multiple products should attempt to structure its sales mix so the greatest portion of the mix is composed of those products with the highest:

A) selling price.
B) variable cost.
C) contribution margin.
D) fixed cost.
E) gross margin.

Question 62

If a company desires to increase its safety margin, it should:

A) increase fixed costs.
B) decrease the contribution margin.
C) decrease selling prices, assuming the price change will have no effect on demand.
D) stimulate sales volume.
E) attempt to raise the break-even point.

Question 63

McGuire Corporation sells three products: R, S, and T. Budgeted information for the upcoming accounting period follows.

The company's weighted-average unit contribution margin is:

A) $3.00.
B) $3.55.
C) $4.00.
D) $19.35.
E) None of the answers is correct.

Question 64

Finn's budget for the upcoming year revealed the following figures:

If the company's break-even sales total $750,000, Finn's safety margin would be:

A) $(90,000).
B) $90,000.
C) $246,000.
D) $336,000.
E) $696,000.

Question 65

Santa Fe Production sells a single product to wholesalers. The company's budget for the upcoming year revealed anticipated unit sales of 31,600, a selling price of $20, variable cost per unit of $8, and total fixed costs of $360,000. Santa Fe's safety margin in units is:

A) (13,400).
B) 0.
C) 1,600.
D) 13,600.
E) None of the answers is correct.

Question 66

Cost-volume-profit analysis is based on certain general assumptions. Which of the following is not one of these assumptions?

A) Product prices will remain constant as volume varies within the relevant range.
B) Costs can be categorized as fixed, variable, or semivariable.
C) The efficiency and productivity of the production process and workers will change to reflect manufacturing advances.
D) Total fixed costs remain constant as activity changes.
E) Unit variable cost remains constant as activity changes.

Question 67

The assumptions on which cost-volume-profit analysis is based appear to be most valid for businesses:

A) over the short run.
B) over the long run.
C) over both the short run and the long run.
D) in periods of sustained profits.
E) in periods of increasing sales.

Question 68

Which of the following does not typically appear on an income statement prepared by using a traditional format?

A) Cost of goods sold.
B) Contribution margin.
C) Gross margin.
D) Selling expenses.
E) Administrative expenses.

Question 69

Markham Industries is studying the profitability of a change in operation and has gathered the following information:

Should Markham Industries make the change?

A) Yes, the company will be better off by $6,000.
B) No, because sales will drop by 3,000 units.
C) No, because the company will be worse off by $4,000.
D) No, because the company will be worse off by $22,000.
E) It is impossible to judge because additional information is needed.

Question 70

Which of the following does not typically appear on a contribution income statement?

A) Net income.
B) Gross margin.
C) Contribution margin.
D) Total variable costs.
E) Total fixed costs.

Question 71

The contribution income statement differs from the traditional income statement in which of the following ways?

A) The traditional income statement separates costs into fixed and variable components.
B) The traditional income statement subtracts all variable costs from sales to obtain the contribution margin.
C) Cost-volume-profit relationships can be analyzed more easily from the contribution income statement.
D) The effect of sales volume changes on profit is readily apparent on the traditional income statement.
E) The contribution income statement separates costs into product and period categories.

Question 72

The difference between budgeted sales revenue and break-even sales revenue is the:

A) contribution margin.
B) contribution-margin ratio.
C) safety margin.
D) target net profit.
E) operating leverage.

Question 73

Use the following information to answer the following Questions


-Refer to the figure above. The triangular area between the horizontal axis and Line A, to the left of 4,000, represents:

A) fixed cost.
B) variable cost.
C) profit.
D) loss.
E) sales revenue.

Question 74

Santa Fe Production sells a single product to wholesalers. The company's budget for the upcoming year revealed anticipated unit sales of 31,600, a selling price of $20, variable cost per unit of $8, and total fixed costs of $360,000. If Santa Fe's unit sales are 300 units more than anticipated, its break-even point will:

A) increase by $12 per unit sold.
B) decrease by $12 per unit sold.
C) increase by $8 per unit sold.
D) decrease by $8 per unit sold.
E) not change.

Question 75

Which of the following underlying assumptions form(s) the basis for cost-volume-profit analysis?

A) Revenues and costs behave in a linear manner.
B) Costs can be categorized as variable, fixed, or semivariable.
C) Worker efficiency and productivity remain constant.
D) In multiproduct organizations, the sales mix remains constant.
E) All the answers are assumptions that underlie cost-volume-profit analysis.

Question 76

A recent income statement of McClennon Corporation reported the following data:

If the company desired to earn a target profit of $1,270,000, it would have to sell:

A) 5,778 units.
B) 8,600 units.
C) 10,160 units.
D) 11,908 units.
E) None of the answers is correct.

Question 77

Elise Corporation has the following sales mix for its three products: A, 20%; B, 35%; and C, 45%. Fixed costs total $400,000 and the weighted-average contribution margin is $100. How many units of product A must be sold to break-even?

A) 800.
B) 4,000.
C) 20,000.
D) None of the answers is correct.
E) Cannot be determined based on the information presented.

Question 78

Flower Depot, Inc. sells a single product for $10. Variable costs are $4 per unit and fixed costs total $120,000 at a volume level of 10,000 units. What dollar sales level would Flower Depot have to achieve to earn a target profit of $240,000?

A) $400,000.
B) $500,000.
C) $600,000.
D) $750,000.
E) $900,000.

Question 79

Morgan Technologies sells a single product at $20 per unit. The firm's most recent income statement revealed unit sales of 100,000, variable costs of $800,000, and fixed costs of $400,000. If a $4 drop in selling price will boost unit sales volume by 20%, the company will experience:

A) no change in profit because a 20% drop in sales price is balanced by a 20% increase in volume.
B) an $80,000 drop in profit.
C) a $240,000 drop in profit.
D) a $400,000 drop in profit.
E) None of the answers is correct.

Question 80

Santa Fe Production sells a single product to wholesalers. The company's budget for the upcoming year revealed anticipated unit sales of 31,600, a selling price of $20, variable cost per unit of $8, and total fixed costs of $360,000. If Santa Fe's unit sales are 200 units less than anticipated, its break-even point will:

A) increase by $12 per unit sold.
B) decrease by $12 per unit sold.
C) increase by $8 per unit sold.
D) decrease by $8 per unit sold.
E) not change.