Deck 6: Cost-Volume-Profit Relationships

Question 1

A shift in the sales mix from high-margin items to low-margin items can cause total profits to decrease even though total sales may increase.

Answer 1

True

Question 2

For a given level of sales, a low contribution margin ratio will produce more net operating income than a high contribution margin ratio.

Answer 2

False

Question 3

To estimate what the profit will be at various levels of activity, multiply the number of units to be sold above or below the break-even point by the unit contribution margin.

Answer 3

True

Question 4

If the variable expense per unit decreases, and all other factors remain the same, the contribution margin ratio will increase.

Question 5

In a CVP graph, the anticipated profit or loss at any given level of sales is measured by the vertical distance between the total revenue line (sales)and the total fixed expense line.

Question 6

The total volume in sales dollars that would be required to attain a given target profit is determined by dividing the target profit by the contribution margin ratio.

Question 7

The break-even point in units can be obtained by dividing total fixed expenses by the unit contribution margin.

Question 8

If fixed expenses increase by $10,000 per year, then the sales needed to break even will generally increase by more than $10,000.

Question 9

In two companies making the same product and with the same total sales and total expenses, the contribution margin ratio will be lower in the company with a higher proportion of fixed expenses in its cost structure.

Question 10

A shift in the sales mix from low-margin items to high-margin items will decrease total profits even though total sales increase.

Question 11

Incremental analysis is an analytical approach that focuses only on those revenues and costs that will not change as a result of a decision.

Question 12

A decrease in the number of units sold will decrease the break-even point.

Question 13

When expressed on a per unit basis, fixed costs can mislead decision makers into thinking of them as variable costs.

Question 14

On a CVP graph for a profitable company, the total expense line will be steeper than the total revenue line.

Question 15

In a CVP graph (sometimes called a break-even chart), unit volume is represented on the horizontal (X)axis and dollars on the vertical (Y)axis.

Question 16

The break-even point can be determined by simply adding together all of the expenses from the income statement.

Question 17

The smaller the contribution margin ratio, the smaller the amount of sales required to cover a given amount of fixed expenses.

Question 18

An increase in the number of units sold will decrease a company's break-even point.

Question 19

Two companies with the same margin of safety in dollars will also have the same total contribution margin.

Question 20

For a capital intensive, automated company the break-even point will tend to be higher and the margin of safety will be lower than for a less capital intensive company with the same sales.

Question 21

Which of the following would not affect the break-even point?

A)number of units sold
B)variable expense per unit
C)total fixed expense
D)selling price per unit

Question 22

If sales volume increases and all other factors remain constant, then the:

A)contribution margin ratio will increase.
B)break-even point will decrease.
C)margin of safety will increase.
D)net operating income will decrease.

Question 23

A company with high operating leverage will experience a larger reduction in net operating income in a period of declining sales than a company with low operating leverage.

Question 24

Which of the following is true regarding the contribution margin ratio of a company that produces only a single product?

A)As fixed expenses decrease, the contribution margin ratio increases.
B)The contribution margin ratio multiplied by the selling price per unit equals the contribution margin per unit.
C)The contribution margin ratio will decline as unit sales decline.
D)The contribution margin ratio equals the selling price per unit less the variable expense ratio.

Question 25

Break-even analysis assumes that:

A)Total revenue is constant.
B)Unit variable expense is constant.
C)Unit fixed expense is constant.
D)Selling prices must fall in order to generate more revenue.

Question 26

A shift in the sales mix from products with high contribution margin ratios toward products with low contribution margin ratios will raise the break-even point for the company as a whole.

Question 27

If the degree of operating leverage is 4, then a one percent change in quantity sold should result in a four percent change in:

A)unit contribution margin.
B)revenue.
C)variable expense.
D)net operating income.

Question 28

To obtain the dollar sales volume necessary to attain a given target profit, which of the following formulas should be used?

A)(Fixed expenses + Target net profit)/Total contribution margin
B)(Fixed expenses + Target net profit)/Contribution margin ratio
C)Fixed expenses/Contribution margin per unit
D)Target net profit/Contribution margin ratio

Question 29

The degree of operating leverage is computed by dividing sales by the contribution margin.

Question 30

The margin of safety percentage is equal to the margin of safety in dollars divided by total contribution margin.

Question 31

Which of the following is correct? The break-even point occurs on the CVP graph where:

A)total profit equals total expenses.
B)total profit equals total fixed expenses.
C)total contribution margin equals total fixed expenses.
D)total variable expenses equal total contribution margin.

Question 32

The degree of operating leverage in a company is smallest at the break-even point and increases as sales rise.

Question 33

If the contribution margin is not sufficient to cover fixed expenses:

A)total profit equals total expenses.
B)contribution margin is negative.
C)a loss occurs.
D)variable expenses equal contribution margin.

Question 34

Fawn Company's margin of safety is $90,000.If the company's sales drop by $80,000, it will still have positive net operating income.

Question 35

Mossfeet Shoe Corporation is a single product firm.The company is predicting that a price increase next year will not cause unit sales to decrease.What effect would this price increase have on the following items for next year?

Question 36

A $2.00 increase in a product's variable expense per unit accompanied by a $2.00 increase in its selling price per unit will:

A)decrease the degree of operating leverage.
B)decrease the contribution margin.
C)have no effect on the break-even volume.
D)have no effect on the contribution margin ratio.

Question 37

Which of the following statements is correct with regard to a CVP graph?

A)A CVP graph shows the maximum possible profit.
B)A CVP graph shows the break-even point as the intersection of the total sales revenue line and the total expense line.
C)A CVP graph assumes that total expense varies in direct proportion to unit sales.
D)A CVP graph shows the operating leverage as the gap between total sales revenue and total expense at the actual level of sales.

Question 38

The margin of safety is the amount by which sales can decrease before losses are incurred by the company.

Question 39

Which of the following is an assumption underlying standard CVP analysis?

A)In multiproduct companies, the sales mix is constant.
B)In manufacturing companies, inventories always change.
C)The price of a product or service is expected to change as volume changes.
D)Fixed expenses will change as volume increases.

Question 40

If a company increases its selling price by $2 per unit due to an increase in its variable labor cost of $2 per unit, the break-even point in units will:

A)decrease.
B)increase.
C)not change.
D)change but direction cannot be determined.

Question 41

Ploeger Corporation has provided the following contribution format income statement.All questions concern situations that are within the relevant range. The break-even point in dollar sales is closest to:

A)$234,000
B)$237,900
C)$156,000
D)$0

Question 42

Mishoe Corporation has provided the following contribution format income statement.All questions concern situations that are within the relevant range. The break-even point in unit sales is closest to:

A)0 units
B)895 units
C)700 units
D)650 units

Question 43

Coultrap Corporation has provided the following contribution format income statement.All questions concern situations that are within the relevant range. The contribution margin per unit is closest to:

A)$21.00
B)$60.00
C)$39.00
D)$4.90

Question 44

Stauffer Corporation has provided the following contribution format income statement.All questions concern situations that are within the relevant range. The variable expense ratio is closest to:

A)60%
B)40%
C)67%
D)33%

Question 45

Duve Corporation has provided the following contribution format income statement.All questions concern situations that are within the relevant range. If the selling price increases by $4 per unit and the sales volume decreases by 200 units, the net operating income would be closest to:

A)$7,200
B)$12,800
C)$10,400
D)$11,520

Question 46

Thomason Corporation has provided the following contribution format income statement.All questions concern situations that are within the relevant range. If the variable cost per unit increases by $1, spending on advertising increases by $2,000, and unit sales increase by 50 units, the net operating income would be closest to:

A)$450
B)$1,000
C)$2,150
D)$9,450

Question 47

Escareno Corporation has provided its contribution format income statement for June.The company produces and sells a single product. If the company sells 8,200 units, its total contribution margin should be closest to:

A)$301,000
B)$311,600
C)$319,200
D)$66,674

Question 48

Rovinsky Corporation, a company that produces and sells a single product, has provided its contribution format income statement for November. If the company sells 5,300 units, its net operating income should be closest to:

A)$24,600
B)$2,200
C)$22,874
D)$15,400

Question 49

Sorin Inc., a company that produces and sells a single product, has provided its contribution format income statement for January. If the company sells 4,600 units, its total contribution margin should be closest to:

A)$54,600
B)$59,800
C)$69,400
D)$13,362

Question 50

Carver Corporation produces a product which sells for $40.Variable manufacturing costs are $18 per unit.Fixed manufacturing costs are $5 per unit based on the current level of activity, and fixed selling and administrative costs are $4 per unit.A selling commission of 15% of the selling price is paid on each unit sold.The contribution margin per unit is:

A)$7
B)$17
C)$22
D)$16

Question 51

Nocum Corporation has provided the following contribution format income statement.All questions concern situations that are within the relevant range. If sales decline to 2,900 units, the net operating income would be closest to:

A)$29,000
B)$1,000
C)$8,700
D)$8,000

Question 52

Warrix Corporation has provided the following contribution format income statement.All questions concern situations that are within the relevant range. If sales increase to 3,020 units, the increase in net operating income would be closest to:

A)$800.00
B)$20.00
C)$600.00
D)$200.00

Question 53

The following information pertains to Nova Co.'s cost-volume-profit relationships: How much will be contributed to net operating income by the 1,001st unit sold?

A)$650
B)$500
C)$150
D)$0

Question 54

Goodman Corporation has sales of 3,000 units at $80 per unit.Variable costs are 35% of the sales price.If total fixed costs are $66,000, the degree of operating leverage is:

A)0.79
B)0.93
C)2.67
D)1.73

Question 55

Stockmaster Corporation has provided the following contribution format income statement.All questions concern situations that are within the relevant range. The margin of safety in dollars is closest to:

A)$6,400
B)$16,000
C)$121,600
D)$128,000

Question 56

Hedman Corporation has provided the following contribution format income statement.All questions concern situations that are within the relevant range. The margin of safety percentage is closest to:

A)75%
B)1%
C)6%
D)24%

Question 57

Cassius Corporation has provided the following contribution format income statement.All questions concern situations that are within the relevant range. The number of units that must be sold to achieve a target profit of $31,500 is closest to:

A)42,000 units
B)16,400 units
C)35,000 units
D)9,400 units

Question 58

Kelchner Corporation has provided the following contribution format income statement.All questions concern situations that are within the relevant range. The contribution margin ratio is closest to:

A)67%
B)40%
C)33%
D)60%

Question 59

Schister Systems uses the following data in its Cost-Volume-Profit analyses: What is total contribution margin if sales volume increases by 20%?

A)$80,000
B)$158,400
C)$200,000
D)$144,000

Question 60

Decaprio Inc.produces and sells a single product.The company has provided its contribution format income statement for June. If the company sells 9,200 units, its net operating income should be closest to:

A)$27,077
B)$49,900
C)$36,700
D)$25,900

Question 61

Variable expenses for Alpha Corporation are 40% of sales.What are sales at the break-even point, assuming that fixed expenses total $150,000 per year:

A)$250,000
B)$375,000
C)$600,000
D)$150,000

Question 62

Last year Easton Corporation reported sales of $480,000, a contribution margin ratio of 25% and a net loss of $16,000.Based on this information, the break-even point was:

A)$435,000
B)$544,000
C)$506,000
D)$600,000

Question 63

Moyas Corporation sells a single product for $20 per unit.Last year, the company's sales revenue was $300,000 and its net operating income was $24,000.If fixed expenses totaled $96,000 for the year, the break-even point in unit sales was:

A)12,000 units
B)9,900 units
C)15,000 units
D)14,100 units

Question 64

Tropp Corporation sells a product for $10 per unit.The fixed expenses are $420,000 per month and the unit variable expenses are 60% of the selling price.What sales would be necessary in order for Tropp to realize a profit of 10% of sales?

A)$1,050,000
B)$945,000
C)$1,400,000
D)$840,000

Question 65

Creswell Corporation's fixed monthly expenses are $29,000 and its contribution margin ratio is 56%.Assuming that the fixed monthly expenses do not change, what is the best estimate of the company's net operating income in a month when sales are $95,000?

A)$12,800
B)$24,200
C)$53,200
D)$66,000

Question 66

Warbler Gift's reported the following information for the sales of their single product: Warbler's salesmen have proposed to decrease the selling price by 50 cents per unit.How many units will need to be sold for Warbler to earn at least the same net operating income?

A)5,715 units
B)36,000 units
C)34,286 units
D)28,572 units

Question 67

Data concerning Pellegren Corporation's single product appear below: Fixed expenses are $531,000 per month.The company is currently selling 4,000 units per month.The marketing manager would like to cut the selling price by $14 and increase the advertising budget by $35,000 per month.The marketing manager predicts that these two changes would increase monthly sales by 500 units.What should be the overall effect on the company's monthly net operating income of this change?

A)decrease of $18,000
B)increase of $38,000
C)decrease of $38,000
D)increase of $58,000

Question 68

Iverson Corporation's variable expenses are 60% of sales.At a $400,000 sales level, the degree of operating leverage is 5.If sales increase by $40,000, the new degree of operating leverage will be (rounded):

A)3.67
B)2.86
C)5.25
D)5.00

Question 69

How much will a company's net operating income change if it undertakes an advertising campaign given the following data:

A)$200 increase
B)$25,200 increase
C)$15,000 increase
D)$9,800 increase

Question 70

Jilk Inc.'s contribution margin ratio is 58% and its fixed monthly expenses are $36,000.Assuming that the fixed monthly expenses do not change, what is the best estimate of the company's net operating income in a month when sales are $103,000?

A)$23,740
B)$59,740
C)$67,000
D)$7,260

Question 71

Black Corporation's sales are $600,000, its fixed expenses are $150,000, and its variable expenses are 60% of sales.The margin of safety is:

A)$90,000
B)$190,000
C)$225,000
D)$240,000

Question 72

Gayne Corporation's contribution margin ratio is 12% and its fixed monthly expenses are $84,000.If the company's sales for a month are $738,000, what is the best estimate of the company's net operating income? Assume that the fixed monthly expenses do not change.

A)$565,440
B)$654,000
C)$88,560
D)$4,560

Question 73

Kuzio Corporation produces and sells a single product.Data concerning that product appear below: The company is currently selling 6,000 units per month.Fixed expenses are $263,000 per month.The marketing manager believes that a $5,000 increase in the monthly advertising budget would result in a 140 unit increase in monthly sales.What should be the overall effect on the company's monthly net operating income of this change?

A)increase of $2,280
B)increase of $7,280
C)decrease of $5,000
D)decrease of $2,280

Question 74

Data concerning Bazin Corporation's single product appear below: Fixed expenses are $384,000 per month.The company is currently selling 6,000 units per month.The marketing manager would like to introduce sales commissions as an incentive for the sales staff.The marketing manager has proposed a commission of $9 per unit.In exchange, the sales staff would accept a decrease in their salaries of $46,000 per month.(This is the company's savings for the entire sales staff.)The marketing manager predicts that introducing this sales incentive would increase monthly sales by 500 units.What should be the overall effect on the company's monthly net operating income of this change?

A)increase of $27,500
B)decrease of $64,500
C)increase of $41,500
D)increase of $507,500

Question 75

Sabv Corporation's break-even-point in sales is $675,000, and its variable expenses are 75% of sales.If the company lost $24,000 last year, sales must have amounted to:

A)$651,000
B)$579,000
C)$603,000
D)$471,000

Question 76

Hopi Corporation expects the following operating results for next year: What is Hopi expecting total fixed expenses to be next year?

A)$75,000
B)$100,000
C)$200,000
D)$225,000

Question 77

Chovanec Corporation produces and sells a single product.Data concerning that product appear below: Fixed expenses are $521,000 per month.The company is currently selling 7,000 units per month.Management is considering using a new component that would increase the unit variable cost by $6.Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 500 units.What should be the overall effect on the company's monthly net operating income of this change?

A)decrease of $48,000
B)decrease of $6,000
C)increase of $48,000
D)increase of $6,000

Question 78

Northern Pacific Fixtures Corporation sells a single product for $28 per unit.If variable expenses are 65% of sales and fixed expenses total $9,800, the break-even point is:

A)$15,077
B)$18,200
C)$9,800
D)$28,000

Question 79

Awtis Corporation has a margin of safety percentage of 20% based on its actual sales.The break-even point is $500,000 and the variable expenses are 60% of sales.Given this information, the actual profit is:

A)$65,000
B)$55,000
C)$50,000
D)$41,500

Question 80

Data concerning Dorazio Corporation's single product appear below: Fixed expenses are $87,000 per month.The company is currently selling 1,000 units per month.Management is considering using a new component that would increase the unit variable cost by $28.Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 400 units.What should be the overall effect on the company's monthly net operating income of this change?

A)increase of $5,600
B)increase of $33,600
C)decrease of $5,600
D)decrease of $33,600