Deck 10: Cost-Volume-Profit Analysis

Question 1

If the level of production falls:

A)fixed costs will decrease proportionately
B)total costs will decrease proportionately
C)revenue per unit of production will increase proportionately
D)variable costs will not decrease

Answer 1

B

Question 2

If production is increased by 10%,total variable cost will

A)increase by 10%.
B)decrease by 10%.
C)increase by more than 10%.
D)not change

Answer 2

A

Question 3

The break-even point is calculated by dividing fixed costs by the

A)selling price per unit.
B)total contribution margin.
C)contribution margin per unit.
D)sales mix.

Answer 3

C

Question 4

The relevant range describes the

A)level of activity where cost behaviour is assumed to be valid.
B)level of activity where an entity will operate.
C)level of activity where all costs can be predicted accurately.
D)physical area where an entity plans to conduct its business.

Question 5

Contribution margin equals

A)selling price less cost of sales.
B)selling price less variable costs.
C)selling price less fixed costs.
D)selling price less gross profit.

Question 6

Assuming the unit contribution margin is $1 and the break-even point is 4000 units sold,if there are 5000 units sold then profit will be:

A)$1000
B)$4000
C)$5000
D)none of the options is correct

Question 7

If fixed costs are $500 000 and variable costs are 75% of the selling price,the break-even point in sales dollars is:

A)$6 666 667
B)$1 750 000
C)$2 000 000
D)$2 500 000

Question 8

If an entity increases its level of activity

A)no costs will remain the same.
B)some costs will vary,others will not.
C)most costs will rise.
D)costs should remain the same.

Question 9

An increase in the level of production,within the relevant range,has what effect on fixed costs per unit?

A)they rise
B)they fall
C)they usually rise
D)they usually fall

Question 10

A fixed cost is a cost that

A)remains constant as the level of activity changes.
B)varies inversely with changes in the level of activity.
C)remains constant per unit as the level of activity changes.
D)is a fixed proportion of profit.

Question 11

In a cost-volume-profit graph,the break-even point is where the

A)total revenue line crosses the fixed cost line.
B)total revenue line is above the total cost line.
C)total revenue line crosses the variable cost line.
D)total revenue line crosses the total cost line.

Question 12

A break-even point can be determined in all the following ways,except:

A)deriving it from a CVP graph
B)using regression analysis
C)calculating it using the contribution margin
D)calculating it using a mathematical equation

Question 13

If selling price is $18 per unit and variable costs are $13 per unit,contribution margin is:

A)$31 per unit
B)$5 per unit
C)$6 per unit
D)$1.38 per unit

Question 14

Which of these is not a fixed cost?

A)depreciation on buildings
B)supervisory salaries
C)direct labour
D)local government rates

Question 15

If the contribution margin is $24 for product T and $8 for product Z,fixed costs are $30 000 and the sales mix is 25% product T and 75% product Z,the weighted average contribution margin is:

A)$32
B)$16
C)$20
D)$12

Question 16

A variable cost is a cost that

A)may or may not be incurred depending on management's discretion.
B)occurs at various times of the year.
C)varies with changes in activity.
D)all of the options are correct

Question 17

A product has $3 variable costs,$20 000 fixed costs and a profit target of $20 000.If 10 000 units are to be sold,the price they should be sold for is:

A)$4 per unit
B)$6 per unit
C)$8 per unit
D)none of the options is correct

Question 18

A change in which item would not affect the break-even point?

A)total fixed costs
B)the number of units sold
C)the sales price per unit
D)variable cost per unit

Question 19

If the weighted average contribution margin is $20,fixed costs are $30 000 and the sales mix is 25% product F and 75% product H,the units of each product to be produced to break even are:

A)1500 F: 1500 H
B)375 F: 1125 H
C)750 F: 750 H
D)500 F: 1000 H

Question 20

If a company's selling price is $5,variable cost is $3 and fixed costs are $100 000,the break-even sales point is

A)20 000 units
B)$50 000
C)50 000 units
D)$100 000

Question 21

If selling price is $24 per unit,variable costs are $12 per unit and fixed costs are $40 000 per annum,the break-even point in dollars is:

A)$80 000
B)$3333
C)$75 000
D)$81 250

Question 22

CVP analysis will answer all of these questions except:

A)Why does actual overhead exceed applied overhead?
B)What is the most profitable sales mix?
C)How many more sales are required to offset an increase in variable costs?
D)If labour is replaced with machinery what will happen to profit?

Question 23

Which of the following is not a production or operational limitation for a manufacturing business?

A)equipment
B)materials
C)labour
D)market demand

Question 24

Entities with a higher proportion of fixed costs to variable costs,within their cost structures,compared to entities with a lower proportion of fixed to variable costs,are regarded as:

A)more risky
B)less risky
C)having a lower operating leverage
D)not different in risk

Question 25

If 20 000 units of product C and 30 000 units of product D are sold the sales mix is:

A)2/5 C to 5/5 D
B)2/3 C to 3/3 D
C)3/5 C to 2/5 D
D)none of the options is correct

Question 26

A product sells for $12.50,has $5 variable costs,$34 000 fixed costs and an after tax profit target of $60 000.If the tax rate is 30% calculate the unit sales necessary to achieve the desired profit.

A)12 533 units
B)119 714 units
C)17 143 units
D)15 962 units

Question 27

Unit contribution margin is:

A)the amount that each unit sold contributes to profit and to the recovery of variable costs
B)revenue per unit plus the variable costs per unit
C)the amount that each unit sold contributes to profit with any excess contributing to the recovery of fixed costs
D)the amount that each unit sold contributes to fixed costs with any excess contributing to profit

Question 28

The contribution margin ratio can be calculated as:

A)total contribution margin divided by selling price per unit
B)selling price per unit divided by contribution margin per unit.
C)contribution margin per unit divided by total sales
D)contribution margin per unit divided by the selling price per unit

Question 29

All of these are an assumption of CVP analysis,except:

A)fixed costs remain constant over the relevant range.
B)variable costs per unit remain constant over the relevant range.
C)the sales mix for a multi-product producer is constant.
D)as sales increase,the selling price must decrease.

Question 30

With all else constant a 10% increase in both the selling price and variable costs will

A)lower the break-even point.
B)raise the break-even point.
C)have no effect on the break-even point.
D)none of the options is correct

Question 31

If the tax rate is 30% and after tax profit is $80 000,before tax profit is:

A)$56 000
B)$114 286
C)$84 000
D)$120 741

Question 32

A product has a selling price of $20,a contribution margin ratio of 40% and fixed costs of $120 000.To make a profit of $30 000 the number of units that must be sold is:

A)375 000
B)180 750
C)18 750
D)37 500

Question 33

Which of the following statements regarding break-even analysis is true?

A)Break even analysis is conducted on pre-tax profit.
B)Break even analysis can only be conducted with after-tax profit.
C)Pre-tax profit can be determined by multiplying after-tax profit by (1- tax rate)
D)None of the options is true.

Question 34

If calculations show that the break-even point is too high for the period which of these is not a possible course of action?

A)consider reducing prices
B)consider changing the cost mix between fixed and variable costs
C)consider changing the sales mix
D)recheck the assumptions on which the analysis is based

Question 35

The break-even point is where:

A)total sales equals fixed costs plus profit
B)total sales equals total variable costs
C)total sales equals total costs
D)total sales equals total variable costs minus profit

Question 36

Which of the following statements regarding CVP analysis is not true?

A)cost behaviour can be classified as fixed or variable
B)only fixed costs are assumed to behave in a linear manner across the relevant range
C)unit price and cost data remain constant over the time period and the relevant range
D)cost behaviour is linear

Question 37

The break-even point decreases with:

A)an increase in the contribution margin ratio.
B)an increase in fixed costs
C)an increase in variable costs
D)none of the options is correct

Question 38

If resources are limited the greatest profit can be earned by:

A)maximising production of the product with the highest contribution margin per unit of the limiting factor.
B)minimising production of the product with the highest contribution margin per unit of the limiting factor.
C)maximising production of the product with the lowest contribution margin per unit of the limiting factor.
D)none of the options is true

Question 39

If the tax rate is 30% and the after tax profit is $40 000,the before tax profit is:

A)$28 000
B)$133 333
C)$85 714
D)$57 143

Question 40

Selling price per unit is $30,variable costs per unit are $18,labour time per unit is 2 hours and labour hours are the limiting factor in production.Contribution margin per unit of limiting factor is:

A)12
B)$6
C)$24
D)$3

Question 41

An increase in total fixed costs would cause the break-even point to (increase/decrease)___________________.

Question 42

The amount of revenue per unit remaining after deducting unit variable costs is known as the _____________ _____________.

Question 43

The horizontal axis of a CVP graph represents ____________________.

Question 44

Costs that differ among alternative courses of action are known as:

A)opportunity costs
B)relevant costs
C)unavoidable costs
D)none of the above

Question 45

Costs which possess fixed and variable characteristics are known as ________ costs.

Question 46

A local clothing manufacturer,Polo Pty Ltd,has been approached by Wally to supply a special order for 20 000 polo shirts at a price of $6 per polo shirt.The cost of producing a shirt is made up of direct costs of $4 per shirt plus an allocation of fixed costs of $7.00 per shirt.Polo Pty Ltd has no spare capacity to manufacture the order without affecting its normal production.If the sale price for each polo shirt currently produced is $12.00 should Polo Pty Ltd accept the order?

A)there is not enough information to decide whether Polo Pty Ltd should accept the order or not
B)no
B
C)yes,as long as there are no adverse long-term effects that outweigh the short-term benefits
D)yes

Question 47

Which of the following statements about opportunity costs is true?

A)Opportunity costs are the costs of forgoing benefits that would be available if the resources had been used in the next best alternative.
B)Calculating opportunity costs is not an important part of tactical decision making.
C)Opportunity costs are avoidable costs
D)all of the statements are true

Question 48

A local clothing manufacturer,Polo Pty Ltd,has been approached to supply a special order for 20 000 polo shirts at a price of $6 per polo shirt.The current cost of producing a shirt is made up of direct costs of $4 per shirt plus an allocation of fixed costs of $7.00 per shirt.Polo Pty Ltd has sufficient spare capacity to manufacture the order without affecting its normal production.Should Polo Pty Ltd accept the order?

A)no,as the price being offered of $6 per shirt not sufficiently above the full cost of production of $5.50 per shirt
B)yes,as long as there are no adverse long-term effects of accepting the order that outweigh the short-term benefit of a contribution of $40 000 towards overhead costs
C)there is insufficient information to tell whether Polo Pty Ltd should accept the order or not
D)yes,as profits will be increased by the excess of the order price above the variable costs of production ($6 - $4 = $2 x 20 000 shirts = $40 000)

Question 49

If the contribution margin ratio is 25%,fixed costs are $50 000,and sales revenue is $240 000 then profit is ____________________.

Question 50

The _______________ margin ratio can be used to perform CVP analysis in circumstances where the there is insufficient data to calculate the number of units of a product required to read the break-even point.

Question 51

If variable costs are 60% of sales and fixed costs are $100 000,the break-even sales revenue is ____________________.

Question 52

In deciding whether to undertake a special order at a reduced price:

A)the effect on existing customers should be considered.
B)whether the order will make a contribution to fixed costs should be considered
C)the opportunity cost of forgone regular sales should be considered
D)all the options should be considered

Question 53

The ___________________ point occurs when total sales revenue equals total costs.

Question 54

If an entity has sufficient spare capacity it is more likely to accept a special order because:

A)under these circumstances any order will be profitable.
B)management will not want to have employees idle.
C)there is no opportunity cost to accepting the order.
D)customers will always be willing to pay more for special orders.

Question 55

When assessing profitability when there are resource limitations which statement is not correct?

A)For some businesses sales are not limited by market demand but by production limitations
B)The most profitable result will be to maximise production of the product with the highest contribution margin per unit of the limiting factor
C)The most profitable result will be to minimise production of the product with the highest overall contribution margin
D)Limiting factors could relate to labour,space,materials or equipment

Question 56

As production increases,unit fixed costs (increase/decrease)_________________.

Question 57

An important assumption in CVP analysis is that all cost functions are assumed to be _______________.

Question 58

When making decisions about special orders:

A)if there is idle capacity,opportunity costs need to be considered.
B)if there is no idle capacity,opportunity costs need to be considered.
C)Increasing overall profit is the only consideration
D)none of the options is true

Question 59

The range over which an entity expects to operate in known as the ______________ range.

Question 60

A local manufacturer has been approached to supply a special order for 20 000 mobile phones at a price of $20 per phone.The current cost of producing the phones is made up of direct materials of $8 per phone,direct labour costs of $6 per phone,direct overhead costs of $7 per phone plus fixed overhead costs of $5 each.The company has sufficient spare capacity to manufacture the order without affecting its normal production.Should they accept the order?

A)yes
B)no
C)yes,as long as there are no adverse long-term effects of accepting the order that outweigh the short-term benefits
D)yes as long as the customer pays for the order in cash

Question 61

__________________ leverage is the mix between fixed and variable costs in the cost structure of an entity.

Question 62

Buying in a product or service instead of producing it known as ________________.

Question 63

When production needs to be limited due to limited resources,the contribution margin per ________________ factor should be calculated,to determine which product or service in a business's product mix will provide the most profitable use of the limiting factor.

Question 64

In make or outsource decisions (avoidable/unavoidable)__________________ costs are irrelevant to the decision.