Deck 3: Cost-Volume-Profit Analysis

Question 1

Which of the following statements about using the equation method to determine the break-even point is TRUE?

A) Operating income in the equation is set equal to the target income for the year.
B) Operating income in the equation assumes that fixed costs are nil.
C) Revenue in the equation includes only operating revenues plus fixed costs.
D) The number of units required to reach the break-even point tends to be higher (as it incorporates total costs) using this method than when using the contribution margin method.
E) Operating income in the equation is set equal to nil.

Answer 1

Operating income in the equation is set equal to nil.

Question 2

Which of the following formulae is correct when using the contribution margin method to determine the break-even point?

A) Revenues less operating income equal variable costs plus fixed costs.
B) Unit contribution margin times unit variable cost equals the break-even number of units.
C) Unit contribution margin times the break-even number of units equals total variable costs.
D) Selling price less unit contribution margin equals unit fixed cost for all values below or at the break-even number of units.
E) Unit contribution margin times the break-even number of units equals fixed costs.

Answer 2

Unit contribution margin times the break-even number of units equals fixed costs.

Question 3

Answer the following question(s) using the information below.
Kaiser's Kraft Korner sells a single product. 7,000 units were sold resulting in $70,000 of sales revenue, $28,000 of variable costs, and $12,000 of fixed costs.

-Contribution margin per unit is

A) $4.00
B) $4.29
C) $6.00
D) $10.00
E) $5.71

Answer 3

$6.00

Question 4

Answer the following question(s) using the information below.
Kaiser's Kraft Korner sells a single product. 7,000 units were sold resulting in $70,000 of sales revenue, $28,000 of variable costs, and $12,000 of fixed costs.

-Break-even point in units is

A) 2,000 units.
B) 3,000 units.
C) 5,000 units.
D) 7,000 units.
E) 2,797 units.

Question 5

Gilley Inc., sells a single product. The company's most recent income statement is given below.


Required:
a. Contribution margin per unit is $ ________
b. If sales are doubled to $240,000,
total variable costs will equal $ ________
c. If sales are doubled to $240,000,
total fixed costs will equal $ ________
d. If 10 more units are sold, profits will increase by $ ________
e. Compute how many units must be sold to break-even. ________
f. Compute how many units must be sold
to achieve profits of $20,000. ________

Question 6

Blankinship, Inc., sells a single product. The company's most recent income statement is given below.

Required:
a. Contribution margin ratio is ________ %
b. Break-even point in total sales dollars is $ ________
c. To achieve $40,000 in operating income, sales must total $ ________
d. If sales increase by $50,000, net income will increase by $ ________

Question 7

Black Pearl, Inc., sells a single product. The company's most recent income statement is given below.

Required:
a. Contribution margin ratio is ________ %
b. Breakeven point in total sales dollars is $ ________
c. To achieve $40,000 in net income, sales must total $ ________
d. If sales increase by $50,000, net income will increase by $ ________

Question 8

Symbol Manufacturing Inc. makes component parts for automobile navigation systems. For component A14 direct materials cost $47, and the assembly technicians are paid $42 per hour. A technician can produce two components per hour. Fixed manufacturing costs for A14 are $70,000 per unit based on current production of 12,000 units. Non-manufacturing costs are fixed at $120,000 per period. Each A14 component sells for $195.
Required:
a. Prepare an income statement in gross margin format.
b. Calculate the dollar sales required to generate an operating profit of $1,500,000 and prepare an income statement in contribution margin format.
c. What actions could Symbol Manufacturing Inc. management take to lower the required number of units sold necessary to generate the desired operating profit?

Question 9

Comparing contribution margin [CM] to gross margin [GM], which of the following is TRUE?

A) If Cost of goods sold includes fixed costs, then CM will exceed GM.
B) If Cost of goods sold does not include any fixed costs, then CM will equal GM.
C) In the merchandising sector, CM and GM are equivalent terms.
D) If CM and GM remain constant from one period to the next, operating income has to remain constant as well.
E) CM is computed after all variable costs are deducted, but GM is computed by deducting only cost of goods sold from revenues.

Question 10

Widget Company sells widgets for $20.00 each. The manufacturing costs, all variable, are $6 each. The company is planning on renting an exhibition booth, for both display and selling purposes, at the annual candy convention. The company's sales manager will earn a vacation bonus if she can earn a target net income of $150,000, for the sales operation at the convention. The convention organizers provide the advertising and guarantee a certain level of traffic, in exchange for 15% of the net income. The 15% surcharge operates like a tax on net income. The company absorbs all of the fixed costs of production for the sales made at the convention.
How many widgets does the sales manager have to sell to earn the vacation bonus?

Question 11

The Holiday Card Company, a producer of specialty cards, has asked you to complete several
calculations based upon the following information:


Required:
a. What is the break-even point in cards?
b. What sales volume is needed to earn an after-tax net income of $13,028.40?
c. How many cards must be sold to earn an after-tax net income of $18,480?

Question 12

Heady Company sells headbands to retailers for $5. The variable cost of goods sold per headband is $1, with a selling commission of 10 percent of sales. Fixed manufacturing costs total $25,000 per month, while fixed selling and administrative costs total $10,500. The income tax rate for Heady Company is 30 percent.
Required:
a. What is the break-even point in headbands?
b. What are target sales in headbands to generate a before-tax income of $3,000?
c. What are target sales in headbands to generate an after-tax income of $3,080?
d. What is net income assuming Heady sells total 15,000 headbands?

Question 13

Big Ben Golf Accessories makes novelty electronic equipment for golf enthusiasts. One of their most popular accessories is the "Putting Magician."
This electronic device analyses puts and provides instruction on the direction and pace of a put. Although not allowed under the rules amateur golfers have purchased or received as a gift 17,300 of these last year from a total production of 18,000 units. The recommended retail price is $139 and the wholesale price received by Big Ben Golf Accessories is $90.
The company's variable production costs are $62 per unit. Per unit fixed manufacturing costs are $7. Other fixed costs are $65,000 for rent; $290,000 in salaries; $75,000 for a product endorsement. The tax rate is 25%.
Required:
a. How many units must be sold to breakeven?
b. What is the amount of sales in dollars required to earn an after-tax profit of $300,000?

Question 14

The parent group of the local university football team organizes an end of training camp bar-b-que dinner each year. The 110 player roster and 12 coaches eat for free, and ticket sales are used along with a fixed amount subsidy to fund the event. Last season 250 meals were produced and served. The following financial statement was prepared by one of the team parents:


* The deficit was covered by a one-time donation from a parent whose son graduated and is consequently no longer on this years team.
Required:
Calculate the price per ticket that must be charged to breakeven based on the following assumptions:
- the number of players and coaches meals remain the same, but the number of meals sold increases by 20
-the fixed costs are the same as last year
-the variable costs per unit are the same as last year
-the subsidy will remain at $3,000

Question 15

Better Battery has been in the battery renewal business for four years. It rents a building but owns all of its equipment. All employees are paid a fixed salary except for the busy season (April - June), when temporary help is hired by the hour. Utilities and other operating charges remain fairly constant during each month, except those in the busy season.
Selling prices per battery average $100, except during the busy season. Because a large number of customers buy batteries prior to winter, discounts run above average during the busy season. A 15 percent discount is given when two batteries are purchased at one time. During the busy months selling prices per battery average $90.
The president of Better Battery is somewhat displeased with the company's management accounting system because the cost behaviour pattern displayed by the monthly break-even charts are inconsistent; the busy month's charts are different from the other months of the year. The president is never sure if the company has a satisfactory margin of safety or if it is just above the break-even point.
Required:
a. What is wrong with the accountant's computations?
b. How can the information be presented in a better format for the president?

Question 16

Chris Muss is going to sell Ad-hoc compact disks for $40 a box; one box is considered to be one unit. The disks cost Chris $10 a unit. She is planning to rent a booth at the up-coming Area Computer Show. She has three options for attending the show:
1) paying a fixed fee of $3,000;
2) paying a $1,000 fee plus 10% of her revenue made at the convention, or;
3) paying 25% of her revenue made at the convention.
Which of the following statements is TRUE?

A) CVP analysis can show that the risks are identical in each case.
B) The break-even point is the identical in each case.
C) Fixed costs are inherent in all of the options.
D) One of the options will allow Chris Muss to break-even, even if she doesn't sell any disks, assuming she can return any unsold disks for a full refund.
E) Operating income per unit is the same in each case, as both selling price and costs are the same.

Question 17

Which of the following statements is TRUE concerning operating leverage?

A) It summarizes the risk-return tradeoff across alternate revenue possibilities.
B) It measures the change in operating income when costs change proportionately with the change in the number of units sold.
C) The degree of operating leverage increases inversely to the number of units sold.
D) The degree of operating leverage remains constant (in the relevant range) when there is a change in the number of units sold.
E) The degree of operating leverage equals contribution margin divided by operating income, at any specific sales level.

Question 18

Use the information below to answer the following question(s).
Dr. Mickey Finn performs a certain procedure for $400.00. The fixed costs are $8,000 and variable costs are $200.00 per procedure.

-What is the budgeted revenue assuming the procedure is performed 200 times?

A) $40,000
B) $80,000
C) $120,000
D) $160,000
E) $320,000

Question 19

Mrs. Tisdale is going to sell Christmas tree lights for $40 a box. The lights cost Mrs. Tisdale $10 a box and any unsold lights can be returned for a full refund. She is planning to rent a booth at the upcoming Happy Holidays Convention, which offers three options:
1) paying a fixed fee of $3,000, or
2) paying a $1,000 fee plus 10% of revenues made at the convention, or
3) paying 25% of revenues made at the convention.

Which of the following statements is FALSE?

A) Her decision will determine the risk she faces.
B) Contribution margin will vary depending upon the option chosen.
C) One of the options will allow Mrs. Tisdale to break even, even if she doesn't sell any lights.
D) Operating income will always be the greatest for Option 3.
E) Option 3 has the lowest operating leverage.

Question 20

You have just been hired as the new management accountant for a pool chemical wholesaler. The company sells packages of pool chemicals to retail stores, consisting of all of the chemicals a typical pool would need for a week, for a price of $25, and a variable cost of $8. The company has fixed costs of $125,000. The previous accountant was promoted to an associated company but has left you her working papers for a project she was working on. The project involves advising management whether to accept an advertising arrangement with an industry publication. The arrangement being offered is a contract calling for a set payment per month (amount to be negotiated) for 6 months. The industry is cyclical and has no sales for 4 months [16 weeks] of the year. The previous accountant notes show her projection that this would result in an increase of 50 units per week, above the normal 1,000 units per week that the company sells currently. The increased demand would arise from more customers to existing outlets, and from new outlets as well. The advertiser is suggesting a monthly fee of $1,800.

What is your advice, based on the previous accountant's notes and your own analysis?

Question 21

Auto Tires Inc. sells tires to service stations for an average of $45 each. The variable costs of each tire are $30 and monthly fixed manufacturing costs total $15,000. Other monthly fixed costs of the company total $12,000.
Required:
a. What is the break-even level in tires?
b. What is the margin of safety assuming sales total $90,000?
c. What is the break-even level in tires assuming variable costs increase by 20 percent?
d. What is the break-even level in tires assuming the selling price goes up by 10 percent, fixed manufacturing costs decline by 10 percent and other fixed costs decline by $150?

Question 22

Query Company sells pillows for $25.00 each. The manufacturing cost, all variable, is $10 per pillow. The company is planning on renting an exhibition booth at the annual crafts and art convention. The convention coordinator allows three options for each participating company. They are:
1. paying a fixed booth fee of $5,010, or;
2. paying an $4,000 fee plus 10% of revenue made at the convention, or;
3. paying 20% of revenue made at the convention.
Required:
a. Compute the break-even sales in pillows of each option.
b. Which option should Query Company choose, assuming sales are expected to be 800 pillows?
c. Calculate the margin of safety for Option 1 if sales are expected to be 300 pillows.

Question 23

Karen Hefner, a florist, operates retail stores in several shopping malls. The average selling price of an arrangement is $30 and the average cost of each sale is $18. A new mall is opening where Karen wants to locate a store, but the location manager is not sure about the rent method to accept. The mall operator offers the following three options for its retail store rentals:
1. paying a fixed rent of $15,000 a month, or
2. paying a base rent of $9,000 plus 10% of revenue received, or
3. paying a base rent of $4,800 plus 20% of revenue received up to a maximum rent of $25,000.
Required:
a. For each option, compute the break-even sales and the monthly rent paid at break-even.
b. Beginning at zero sales, show the sales levels at which each option is preferable up to 5,000 units.

Question 24

Snowmobile Inc. manufactures two colours of snowmobiles: White and Black. Marketing believes that it can sell between 12,000 and 18,000 of either product during the upcoming year. Due to the overall economic slowdown, the company is preparing to produce only one model for next year. The following information has been provided by the accounting department:

For next year, fixed costs will total $9,450,000 if White is produced and $11,640,000 if Black is produced. Plant capacity allows up to 107,800 direct manufacturing hours. White takes 9.8 hours to produce and Black requires 11 hours. The company is subject to a 30 percent income tax rate.
Required:
Which model should Snowmobile Inc. produce, assuming the marketing manager believes annual demand of either model will exceed production capacity? Why?

Question 25

Alex Miller, Inc., sells car batteries to service stations for an average of $30 each. The variable cost of each battery is $20 and monthly fixed manufacturing costs total $10,000. Other monthly fixed costs of the company total $8,000.
Required:
a. What is the breakeven point in batteries?
b. What is the margin of safety, assuming sales total $60,000?
c. What is the breakeven level in batteries, assuming variable costs increase by 20%?
d. What is the breakeven level in batteries, assuming the selling price goes up by 10%, fixed manufacturing costs decline by 10%, and other fixed costs decline by $100?

Question 26

Samuel Linkletter is an importer of clay gardening pots. He has a six-month agreement with a local gardening store, West City Gardening, to set up a display to sell his product. Samuel can return any unsold items at no cost. The average selling price for the pots is $18 and on average, they cost Samuel $7 each. The owner of West City Gardening has proposed two options:
1. A fixed payment of $375 per month
2. A fixed payment of $125 per month; and, 20% of sales revenues earned during the term of the agreement
Required:
a. Calculate the degree of operating leverage for both options at sales of 540 units
b. Explain the results from part a. in terms of risk
c. What number of units must be sold to generate the same operating income for both options? Which option is favourable below this point, and which option is favourable above this point?

Question 27

Bonnie and Clyde started the BC Restaurant a few years ago. They rented a building, bought equipment, and hired two employees to work full time at a fixed monthly salary. Utilities and other operating charges remain fairly constant during each month.
During the past two years the business has grown with average sales increasing one percent a month. This situation pleases both Bonnie and Clyde, but they do not understand how sales can grow by one percent a month while profits are increasing at an even faster pace. They are afraid that one day they will wake up to increasing sales but decreasing profits.
Required:
Explain why the profits have increased at a faster rate than sales.

Question 28

What would be the expected monetary value for the following data using the probability method?

A) $535,000
B) $250,000
C) $121,750
D) $200,000
E) $30,000

Question 29

Joan Perry has three booth rental options at the bridal fair where she plans to sell her new product. The booth rental options are:
Option 1: $4,000 fixed fee
Option 2: $3,000 fixed fee + 5% of all revenues generated at the fair
Option 3: 20% of all revenues generated at the fair.
The product sells for $150 per unit. She is able to purchase the units for $50.00 each.
Which option should Joan choose in order to maximize income assuming there is a 40% probability that 70 units will be sold and a 60% probability that 40 units will be sold?

A) Option 1 with expected operating income of $1,200
B) Option 2 with expected operating income of $1,810
C) Option 3 with expected operating income of $3,640
D) Option 3 with expected operating income of $4,160
E) Option 2 with expected operating income of $4,060

Question 30

ABC Grocery needs to know the kilograms of bananas to have on hand each day. Each kilogram of bananas costs $0.25 and can be sold for $0.40. Unsold bananas are worthless at the end of the day. The following demands were found after studying the last six month's sales:
200 kilograms of bananas one-fourth of the time
300 kilograms of bananas one-half of the time
400 kilograms of bananas one-fourth of the time
Required:
Determine whether ABC Grocery should order 200, 300, or 400 kilograms of bananas.

Question 31

Use the information below to answer the following question(s).
The following information is for Winnie Company:


-What is the break-even point assuming the sales mix consists of two units of Product A and one unit of Product B?

A) 2,000 units of B and 4,000 units of A
B) 2,025 units of B and 4,050 units of A
C) 4,025 units of B and 8,050 units of A
D) 4,000 units of B and 4,000 units of A
E) 4,000 units of B and 8,000 units of A

Question 32

A hospital receives $1,000,000 monthly in funding from various sources. Annual fixed costs are projected to be $5,000,000 and the variable cost per patient, across all departments is projected to be $534.80. Last year they treated 11,500 patients. The hospital expects a 5% increase in patients this year. A governing bylaw requires that the hospital be run as a non-profit organization.
What is the maximum number of patients the hospital can expect to be able to treat assuming the operating income is zero?

A) 11,500
B) 12,079
C) 13,000
D) more than 13,000
E) CVP analysis is not relevant for non-profit organizations.

Question 33

A social agency receives a budget appropriation of $11,000 monthly from the municipality. Annual fixed costs are projected to be $20,000 and the variable cost per client was $238.50 last year. Although the agency projects its case load to increase by the usual 15% this year (as it has done historically), the municipality appropriated funds based on last year's case load. Which of the following strategies would be ineffective in dealing with the expected shortfall in budget appropriation for the agency?

A) reducing the number of clients served
B) reducing the variable cost of serving a client
C) reducing the total fixed costs
D) increasing funding from other sources
E) changing the measure of output used to calculate service

Question 34

Mount Carmel Company sells only two products, Product A and Product B.
Mount Carmel sells two units of Product A for each unit it sells of Product B. Mount Carmel faces a tax rate of 30%. Mount Carmel desires a net after-tax income of $73,500. The number of units needed to be sold to achieve the desired after-tax profit would be

A) 21,750 units of Product A and 43,500 units of Product B.
B) 22,500 units of Product A and 22,500 units of product B.
C) 43,500 units of Product A and 21,750 units of Product B.
D) 45,000 units of Product A and 22,500 units of Product B.
E) 64,616 units of Product A and 32,308 units of Product B.

Question 35

Determine the breakeven point in units based on the following information:

Assume a constant mix of 3 units of Small for every 1 unit of Large.
Total fixed costs: $48,000

A) 4,800 units of Small and 1,600 units of Large.
B) 1,200 units of Small and 400 units of Large.
C) 1,600 units of Small and 4,800 units of Large.
D) 8,000 units of Small and 2,667 units of Large.
E) 1,600 units of Small and 1,600 units of Large.

Question 36

Karen's Klothes sells blouses for women and girls. The average selling price and variable cost for each product are as follows:
?
Required:
a. What is the break-even point in units for each type of blouse assuming the sales mix is 2:1 in favour of women's blouses? Total sales cannot exceed 7,000 units due to space constraints.
b. What is the operating income assuming the sales mix is 2:1 in favour of women's blouses, and sales total 9,900 blouses?

Question 37

Popcorn Inc. currently sells plain popcorn at the ballpark. During a typical month the stand reports a profit of $18,000 with sales of $100,000 and fixed costs of $42,000 and variable costs of $0.64 per box.
Next year the company plans to start selling candy-coated popcorn for $3 a box. The candy-coated popcorn will have a variable cost of $0.72. The new equipment and personnel to handle the popcorn will increase monthly fixed costs by $17,616. Two boxes of candy-coated popcorn are expected to sell for every box of plain popcorn.
Required:
a. Determine the monthly break-even sales in units before adding the candy-coated popcorn product.
b. Determine the monthly break-even sales in units of each product during the first year of candy-coated popcorn sales assuming a constant sales mix.

Question 38

Yurus Manufacturing Company produces two products, X and Y. The following information is presented for both products:

Required:
a. Calculate the contribution margin for each product.
b. Calculate break-even point in units of both X and Y if the sales mix is 3 units of X for every unit of Y.
c. Calculate break-even volume in total dollars if the sales mix is 2 units of X for every 3 units of Y.

Question 39

Atlanta Radio Supply sells only two products, Product X and Product Y.
Atlanta Radio Supply sells three units of Product X for each two units it sells of Product Y; the tax rate is 25%.
Required:
a. What is the break-even point in units for each product, assuming the sales mix is 3 units of Product X for each two units of Product Y?
b. How many units of each product would be sold if Atlanta Radio Supply desired an after-tax net income of $210,000, using its tax rate of 25%?

Question 40

Mount Carmel Company sells only two products, Product A and Product B.
Mount Carmel sells two units of Product A for each unit it sells of Product B. Mount Carmel faces a tax rate of 30%.
Required:
a. What is the breakeven point in units for each product assuming the sales mix is 2 units of Product A for each unit of Product B?
b. What is the breakeven point if Mount Carmel's tax rate is reduced to 25%, assuming the sales mix is 2 units of Product A for each unit of Product B?
c. How many units of each product would be sold if Mount Carmel desired an after-tax net income of $73,500, facing a tax rate of 30%?

Question 41

Ballpark Concessions currently sells hot dogs. During a typical month, the stand reports a profit of $9,000 with sales of $50,000, fixed costs of $21,000, and variable costs of $0.64 per hot dog.
Next year, the company plans to start selling nachos for $3 per unit. Nachos will have a variable cost of $0.72 and new equipment and personnel to produce nachos will increase monthly fixed costs by $8,808. Initial sales of nachos should total 5,000 units. Most of the nacho sales are anticipated to come from current hot dog purchasers, therefore, monthly sales of hot dogs are expected to decline to $20,000.
After the first year of nacho sales, the company president believes that hot dog sales will increase to $33,750 a month and nacho sales will increase to 7,500 units a month.
Required:
a. Determine the monthly break-even sales in dollars before adding nachos.
b. Determine the monthly break-even sales during the first year of nachos sales, assuming a constant sales mix of 1 hotdog and 2 units of nachos.
c. What is the expected monthly operating income for the second year that nachos are sold?