Deck 3: Cost-Volume-Profit Analysis and Planning

Question 1

Cost-volume-profit analysis is most useful for determining costs.

Answer 1

False

Question 2

Fixed costs, variable costs, and revenues are all included in profitability analysis?

Answer 2

True

Question 3

Cost-volume-profit analysis is not typically used to determine the break-even point.

Answer 3

False

Question 4

One of the basic assumptions underlying the cost-volume-profit analysis model is that the total revenue function is curvilinear, reflecting changing prices as volume changes.

Question 5

Functional income statements that classify expenses based on business function (production, sales, administration), and are typically found in corporate annual reports.

Question 6

A cost-volume-profit graph includes lines for total revenues, total fixed cost, total variable cost, and total profit.

Question 7

If prices are assumed to increase by 10%, the slope of the cost line will increase (be steeper) by 10%, but there will be no changes in the cost line.

Question 8

The break-even point for a company with multiple products cannot be determined using a unit contribution margin calculation since there are multiple products each of which has a different unit contribution margin.

Question 9

A company that has only fixed cost has no operating leverage.

Question 10

A basic assumption of the cost-volume-profit model is that:

A) All costs can be accurately classified as either fixed or variable
B) Cost drivers can be organized into unit-level, batch-level, product-level and facility-level factors
C) Higher volumes of product require lower prices
D) The mix of products changes over time

Question 11

Which of the following is an assumption used in cost-volume-profit analysis?

A) All costs are classified as fixed or variable
B) The total cost function is linear
C) The total revenue function is linear
D) All of the above

Question 12

A unit contribution margin measures:

A) The difference between unit selling price and variable cost per unit
B) The difference between sales and cost of goods sold on a unit basis
C) The difference between unit sales and total costs per unit
D) The percentage difference between sales and cost of goods sold

Question 13

The portion of each dollar that can be used to cover fixed costs and provide a profit is known as:

A) Contribution margin ratio
B) Gross margin percent
C) Margin of safety
D) Operating leverage

Question 14

In a contribution income statement:

A) All fixed costs are grouped together and subtracted from gross profit.
B) Net income plus all fixed expenses equal the contribution margin.
C) The contribution margin is computed as the difference between sales revenue and fixed costs.
D) The gross margin is computed as the difference between sales revenue and the cost of goods sold.

Question 15

Costs are classified according to behavior on a(n):

A) Abrams-Ingram cost grid
B) Contribution income statement
C) Functional income statement
D) Statement of financial position

Question 16

Herman's income statement is as follows:
What is the unit contribution margin?

A) $12.00
B) $ 7.20
C) $10.20
D) $ 5.10

Question 17

Herman's income statement is as follows:
What is the contribution margin ratio?

A) 167 percent
B) 68 percent
C) 40 percent
D) 60 percent

Question 18

Herman's income statement is as follows:
If sales increase by 1,000 units, profits will:

A) Increase by $10,200
B) Increase by $12,000
C) Increase by $2,400
D) Increase by $5,000

Question 19

Herman's income statement is as follows:
If sales increase by $10,000, profits will:

A) Increase by $500
B) Increase by $4,000
C) Increase by $3,000
D) Increase by $10,000

Question 20

A profit-volume graph:

A) Is most useful in situations where there are multiple cost drivers
B) Plots both revenue and total cost on the Y axis
C) Plots contribution margin on the Y axis and volume on the X axis
D) Plots total profit on the Y axis against total volume on the X axis

Question 21

A profit-volume graph differs from a cost-volume-profit graph in that:

A) A profit-volume graph ignores the effect of cost on profit
B) The cost-volume-profit graph is not as practical because it cannot be seen two-dimensionally
C) The cost-volume-profit graph shows revenues and costs separately
D) The profit-volume graph has only two lines: one for profit and one for volume

Question 22

The point where the total costs and the total revenues lines intersect provides information about the:

A) Budgeted income
B) Center point in the relevant range
C) Number of units that must be sold to break even
D) Profit maximizing sales volume

Question 23

The break-even point in sales dollars may be computed as:

A) Fixed costs divided by contribution margin per unit
B) The difference between total contribution margin and operating profit divided by the contribution margin ratio
C) Fixed costs divided by the difference in unit price and unit variable costs
D) Total contribution margin divided by the unit contribution margin per unit

Question 24

Adam Company sells one product at a price of $50 per unit. Variable expenses are 40 percent of sales, and fixed expenses are $50,000. The sales dollars level required to break even are:

A) $ 2,500
B) $10,000
C) $83,333
D) $41,667

Question 25

Determine the unit break-even point, assuming fixed costs are $30,000 per period, variable costs are $19.00 per unit, and the sales price is $25.00 per unit.

A) 6,000
B) 6,667
C) 5,000
D) 12,000

Question 26

The following information pertains to Oliwander's 2017 operations:
Oliwander's break-even point in units is:

A) 2,000 units
B) 3,333 units
C) 1,334 units
D) 1,375 units

Question 27

The following information pertains to Oliwander's 2017 operations:
The sales dollars required to obtain a target pretax profit of $17,000 is:

A) $75,000
B) $104,333
C) $90,000
D) $133,333

Question 28

The following information pertains to Jackie's 2017 operations:
Jackie's break-even point in sales dollars is:

A) $320,500
B) $125,000
C) $312,500
D) $500,000

Question 29

The following information pertains to Napa Valley Inc.:
The sales volume required to obtain a target after-tax profit of $54,000 is:

A) 15,125 units
B) 4,572 units
C) 6,500 units
D) 5,000 units

Question 30

The following information pertains to Napa valley Inc.:
The pretax break-even point in sales dollars is:

A) $531,205
B) $427,000
C) $600,000
D) $700,00

Question 31

Sales mix refers to:

A) The portion of unit variable costs that are consumed by each product
B) The absolute portion of total variable costs consumed by each product
C) The relative portion of unit or dollar sales that are derived from each product
D) None of the above

Question 32

Which of the following statements regarding sales mix is true?

A) A shift in the sales mix can have a significant impact on the bottom line.
B) One of the limiting assumptions of the basic cost-volume-profit model is that the analysis is for a single product or the sales mix is constant.
C) Sales mix analysis is important in multiple-product or service organizations.
D) All of the above are true

Question 33

Operating leverage is best described as:

A) A measure of the extent to which an organization's costs are fixed
B) A measure of the extent to which an organization's contribution margin is sensitive to levels of debt
C) A measure of the extent to which an organization's operations are financed by debt
D) A measure of the extent to which an organization's profits contribute to reductions in debt

Question 34

Operating leverage is computed as:

A) Contribution margin divided by income before taxes
B) Fixed costs divided by income before taxes
C) Income before taxes divided by total debt
D) Operating income divided by total debt

Question 35

All else being equal, this is true about a firm with high operating leverage relative to a firm with low operating leverage:

A) A higher percentage of the high operating leverage firm's costs are fixed
B) The debt payments limit the high operating leverage firm's opportunities to turn a big profit
C) The high operating leverage firm has more debt
D) The high operating leverage firm is exposed to less risk

Question 36

The best way to reduce operating leverage is to:

A) Substitute direct materials for direct labor
B) Substitute direct labor for automated equipment
C) Substitute equity for debt
D) Substitute in-house direct labor with outsourced labor

Question 37

Dunkin Bread Corporation had the following income statement for 2017:
Dunkin Bread's 2017 operating leverage is:

A) 0.333
B) 2.500
C) 3.667
D) 5.000

Question 38

The Halo Corporation has the following data for 2017:
Halo's 2017 operating leverage is:

A) 0.50
B) 6.00
C) 4.00
D) 1.71

Question 39

Profitability analysis involves examining the relationships among all of the following except:

A) Revenues
B) Costs
C) Profits
D) Products

Question 40

A basic assumption of the cost-volume-profit model is that:

A) All costs are classified as mixed costs
B) The total cost function is linear outside of the relevant range
C) The sales mix of multiple products remains constant
D) More than one cost driver is required

Question 41

Which of the following would be classified as a variable manufacturing cost?

A) Depreciation
B) Sales commissions
C) Property taxes
D) Lubricants for machinery

Question 42

Which of the following would be classified as a fixed selling and administrative cost?

A) Sales Commissions
B) Depreciation on office equipment
C) Depreciation on factory equipment
D) Wages of production supervisor

Question 43

The following costs relate to Salad Box Company for a relevant range of up to 10,000 units annually:
Salad Box sells each unit for $10.00.
Which of the following equations best describes the equation to determine total profit for a sales volume of 8,000 units?

A) Profit = $10.00X - ($30,000 + $4.00X)
B) Profit = $30,000 + $4.00X
C) Profit = $10.00X - ($10,000 - $4.00X)
D) Profit = $10X

Question 44

The following costs related to Wintertime Company for a relevant range of up to 20,000 units annually:
The selling price per unit of product is $15.00.
At a sales volume of 15,000 units, what is the total cost for Wintertime Company?

A) $155,000
B) $150,000
C) $100,000
D) $105,000

Question 45

The following costs related to Wintertime Company for a relevant range of up to 20,000 units annually:
The selling price per unit of product is $15.00.
At a sales volume of 15,000 units, what is the total profit for Wintertime Company?

A) $ 130,000
B) $ 120,000
C) $225,000
D) $150,000

Question 46

Costs are classified according to behavior on which of the following?

A) Contribution Income Statement
B) Functional Income Statement
C) Cost of Goods Sold
D) Cost of Goods Manufactured

Question 47

Contribution margin measures:

A) The difference between total sales and total cost of goods sold
B) The difference between total sales and total costs
C) The difference between sales and variable manufacturing costs
D) The difference between total sales and total variable costs

Question 48

The contribution margin ratio is:

A) The difference between price and variable cost per unit
B) The percentage difference between sales and cost of goods sold
C) The portion (or percent) of revenues available for covering fixed costs and providing a profit
D) The percentage difference between total revenues and total costs

Question 49

The following information is available for Redwood Corporation for a sales volume of 500 stereo speakers for the past month:
What is the contribution margin ratio?

A) 54.4%
B) 32.2%
C) 40.0%
D) 64.4%

Question 50

The following information is available for Redwood Corporation for a sales volume of 500 stereo speakers for the past month:
If sales increase by $51,750, net income will increase by what amount?

A) $ 22,000
B) $30,000
C) $20,000
D) $33,350

Question 51

Bloomington Corporation reported the following on their contribution format income statement:
What is the unit contribution margin?

A) $17.00
B) $10.00
C) $ 6.25
D) $ 6.75

Question 52

Bloomington Corporation reported the following on their contribution format income statement:
What is the contribution margin ratio?

A) 38.57%
B) 42.86%
C) 57.14%
D) 43.30%

Question 53

Bloomington Corporation reported the following on their contribution format income statement:
For each additional unit of sales, net operating income will increase by:

A) $17.50
B) $ 6.25
C) $ 7.50
D) $ 5.00

Question 54

Bloomington Corporation reported the following on their contribution format income statement:
If sales increase by 10%, net operating income will increase by what amount?

A) $-0-
B) $ 1,500
C) $ 7,500
D) $30,000

Question 55

A cost-volume-profit graph:

A) Plots both revenue and total cost on the Y-axis
B) Plots both revenue and total cost on the X-axis
C) Plots contribution margin on the Y-axis and volume on the X-axis
D) Plots contribution margin on the X-axis and volume on the Y-axis

Question 56

Flower Company sells a single product. If the selling price per unit and the variable expense per unit both increase by 10% and fixed expenses do not change, then:

A) Contribution margin per unit increases
B) Contribution margin per unit decreases
C) Breakeven-even in units increase
D) Contribution margin decreases

Question 57

Sally Company sells a single product at a selling price of $32 per unit. Variable expenses are $12 per unit and fixed expenses are $41,400.
Sally's break-even point is:

A) 1,380 units
B) 2,300 units
C) 2,070 units
D) 6,900 units

Question 58

The following information pertains to XM Sirius Company:
XM Sirius's break-even point in number of units is:

A) 4,900
B) 5,000
C) 5,900
D) 9,200

Question 59

The following monthly data are available for the Winfast Company and its only product:
The margin of safety for the company during March was:

A) $12,000
B) $22,500
C) $ 5,000
D) $15,000

Question 60

Sandy Company sells a single product. The product has a selling price of $45 per unit and variable expenses of $15 per unit. The company's fixed expenses total $15,000 per year.
The company's break-even point in terms of total sales dollars is:

A) $22,500
B) $45,000
C) $15,000
D) $48,000

Question 61

Watson Company sells its product for $10 a unit. Next year, fixed expenses are expected to be $200,000 and variable expenses are estimated at $6 per unit.
How many units must Watson sell to generate net operating income of $50,000?

A) 50,000 units
B) 60,000 units
C) 62,500 units
D) 120,000 units

Question 62

Last year, Pamela Company reported a profit of $70,000 when sales totaled $520,000 and the contribution margin ratio was 35%.
If fixed expenses increase by $20,000 next year, what will sales have to be for the company to earn a profit of $80,000?

A) $562,500
B) $570,000
C) $605,714
D) $577,143

Question 63

In calculating the break-even point for a multi-product company, which of the following assumptions are commonly made?
1) Sales volume equals production volume
2) Variable expenses are constant per unit.
3) A given sales mix is maintained for all volume changes.

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) 1, 2, and 3

Question 64

Sandy Corporation has provided the following cost data for last year when 50,000 units were produced and sold:
All costs are variable except for $100,000 of manufacturing overhead and $100,000 of selling and administrative expense.
If the selling price is $12 per unit, the net operating income from producing and selling 120,000 units would be:

A) $460,000
B) $160,000
C) $85,000
D) $105,000

Question 65

Vermont Company's break-even point in sales is $950,000, and its variable expenses are 60% of sales. If the company lost $34,000 last year, sales must have amounted to:

A) $628,000
B) $772,000
C) $814,000
D) $865,000

Question 66

Salvador Company sells two products, as follows:
Fixed expenses total $500,000 annually. The expected sales mix in units is 60% for Product Y and 40% for Product Z.
How much is Salvador Company's expected break-even sales in dollars?

A) $920,000
B) $414,000
C) $900,000
D) $555,882

Question 67

Sales mix refers to:

A) The portion of unit variable costs that are consumed by each product
B) The relative portion of unit or dollar sales that are derived from each product
C) The portion of manufacturing costs allocated to each product
D) The portion of selling and general administrative costs allocated to each product

Question 68

Peak Company sells three different products that are similar, but are differentiated by various product features. Budgeted sales by product and in total for the coming year are shown below:
The break-even point in sales dollars for Peak Company is:

A) $250,000
B) $225,000
C) $449,231
D) $500,000

Question 69

Peak Company sells three different products that are similar, but are differentiated by various product features. Budgeted sales by product and in total for the coming year are shown below:
If the actual percentage of sales for the year were Standard, 50%; Deluxe, 40%; and Premium, 10%, than:

A) The overall contribution margin would decrease and break-even sales would increase
B) The overall contribution margin would increase and break-even sales would decrease.
C) The overall contribution margin would increase and break-even sales would increase.
D) The overall contribution margin would decrease and break-even sales would decrease.

Question 70

Peak Company sells three different products that are similar, but are differentiated by various product features. Budgeted sales by product and in total for the coming year are shown below:
If customers are indifferent to which of the products to purchase from Peak Company, which product line should sales personnel recommend to customers that would most improve overall operating income?

A) Product line with the highest sales price
B) Product line with the lowest variable cost
C) Product line with the highest percentage of total budgeted sales
D) Product line with the highest contribution margin ratio

Question 71

Operating leverage is best described as:

A) A measure of the extent to which an organization's costs are financed by equity
B) A measure of the extent to which an organization's contribution margin is affected by sales mix of products
C) A measure of the extent to which an organization's operations are financed by debt
D) A measure of the extent to which an organization's costs are fixed

Question 72

Operating leverage is computed as:

A) Contribution margin divided by before-tax profit
B) Contribution margin divided by net income
C) Fixed costs divided by before-tax profit
D) Operating income divided by total debt

Question 73

Hamilton Company has sales of 2,000 units at $30 per unit. Variable expenses are 40% of the selling price. If total fixed expenses are $20,000, the degree of operating leverage is:

A) 2.25
B) 3.16
C) 2.50
D) 5.00

Question 74

White Company's contribution margin ratio is 30%. If the degree of operating leverage is 6 at the $250,000 sales level, before-tax profit at the $125,000 sales level must equal:

A) $1,500
B) $6,250
C) $3,125
D) $2,700

Question 75

George Company has sales of 1,500 units at $35 per unit. Variable expenses are 40% of the selling price. If total fixed expenses are $27,000, the degree of operating leverage is:

A) 1.75
B) 3.00
C) 7.00
D) 3.50

Question 76

A firm can reduce is operating leverage by substituting:

A) Direct materials for direct labor
B) Direct labor for robotic equipment
C) Equity for debt
D) Debt for equity

Question 77

Justin Company's contribution margin ratio is 30%. If the degree of operating leverage is 12 at the $125,000 sales level, before-tax profit at the $125,000 sales level must equal:

A) $3,125
B) $3,000
C) $4,167
D) $6,750

Question 78

Vince Corporation's variable expenses are 60% of sales. At a $200,000 sales level, the degree of operating leverage is 5. If sales increased by $20,000, the new degree of operating leverage will be (rounded):

A) 2.86
B) 3.67
C) 1.83
D) 4.20

Question 79

Other things being equal, the higher the degree of operating leverage, the _________ profit opportunity with increased sales and __________ risk of loss with a decrease in sales.

A) Lower; higher
B) Higher; lower
C) Lower; lower
D) Higher; higher

Question 80

At its current level of sales, a company has a degree of operating leverage of 6. This means that a 10% increase in sales would result in a:

A) 6% Increase in before-tax profit
B) 10% Increase in before-tax profit
C) 60% Increase in before-tax profit
D) 60% Increase in contribution margin