Deck 4: Cost-Volume-Profit Analysis: a Managerial Planning Tool

Question 1

To find the number of units to sell to earn a targeted income, it is quicker to simply adjust the break-even point in units equation by adding target income to the variable cost.

Answer 1

False

Question 2

The contribution margin income statement provides a good check to determine if the sale of a certain number of units really results in operating income of the given amount.

Answer 2

True

Question 3

Contribution margin ratio + variable cost ratio = 100%.

Answer 3

True

Question 4

Even when you hold the sales mix constant, it is impossible to calculate the break-even point for individual products in a multiple product firm because many of the fixed costs are common to a number of products.

Question 5

The linear equation for total cost is (unit variable cost × units) + (fixed cost / units).

Question 6

If a multi-product company simply wants to know the overall break-even point and is willing to assume its product mix stays constant, it is easiest to use the break-even point in dollar sales revenue approach.

Question 7

If variable costs per unit increase, the break-even point will increase.

Question 8

If fixed costs increase, the break-even point will decrease.

Question 9

To determine the number of units that must be sold to earn a target operating income, one can use the equation for operating income and replace the operating income term with the target operating income.

Question 10

In the equation to determine the number of units that must be sold to earn a target income, targeted income is added to fixed cost in the denominator.

Question 11

The impact on a firm's income resulting from a change in the number of units sold can be assessed by multiplying the unit contribution margin by the change in units sold assuming that fixed costs remain the same.

Question 12

The break-even point in sales dollars is equal to the break-even point in units multiplied by the variable cost per unit.

Question 13

At the break-even point, revenue is equal to the contribution margin.

Question 14

The profit-volume graph shows the relationship between operating income and the number of units sold.

Question 15

The cost-volume-profit graph depicts the relationships among cost, volume, and profits by plotting the total revenue line and the total cost line on the graph.

Question 16

Variable costs per unit consist of direct materials, direct labour, variable manufacturing overhead and variable selling and administrative costs.

Question 17

The linear equation for revenue is sales price multiplied by fixed cost.

Question 18

Most firms would like to earn operating income exactly equal to the income at the break-even point.

Question 19

The cost-volume-profit graph shows the relationship between cost, volume, and operating income.

Question 20

If variable costs decrease and the sales price increases, the break-even point decreases.

Question 21

Orbee Company sells a product for $24. Variable costs are $14 per unit, and total fixed costs are $6,000. What is the per unit contribution margin?

A) $4
B) $10
C) $14
D) $24

Question 22

Which type of ratio reflects total variable cost divided by sales revenue?

A) sales ratio
B) revenue ratio
C) variable cost ratio
D) contribution rmargin ratio

Question 23

Managers can use cost-volume-profit analysis to help handle risk and uncertainty.

Question 24

What is the purpose of doing a cost-volume-profit (CVP) analysis?

A) CVP analysis is effectively used by single-product firms only.
B) CVP analysis provides managers with information used for control only.
C) CVP analysis shows how revenues, expenses, and profits behave as volume changes.
D) CVP analysis allows managers to do sensitivity analysis by examining the impact of various prices or costs on volume.

Question 25

What is the result when the contribution margin ratio increases?

A) break-even point decreases
B) variable cost ratio increases
C) fixed costs will decrease
D) (variable cost ratio + contribution margin ratio) will be greater than 100%

Question 26

If the break-even point increases, the margin of safety increases.

Question 27

The operating leverage measures the difference between actual sales and break-even point in dollar sales.

Question 28

Which of the following reflects the ratio of fixed costs to the contribution margin ratio?

A) the margin of safety
B) the variable cost ratio
C) the break-even point in sales
D) the break-even point in units

Question 29

Operating leverage is the use of variable cost to extract higher percentage changes in profits as sales activity changes.

Question 30

What is a contribution margin?

A) the difference between sales and variable costs
B) the difference between fixed and variable costs
C) the difference between sales and committed fixed costs
D) the difference between sales and discretionary fixed costs

Question 31

Dollmaker manufactures dolls. The sales price of a doll is $15, and the variable cost is $7 per doll. What is the contribution margin ratio?

A) 37.5%
B) 40.0%
C) 53.3%
D) 60.0%

Question 32

Which statement best describes the break-even point?

A) Profit is greater than zero.
B) Total revenue minus total cost.
C) Total contribution margin equals total fixed cost.
D) Total contribution margin equals total variable cost.

Question 33

In a multi-product firm, if the sales mix changes, the break-even points for each product will change.

Question 34

Which of the following best describes the break-even point?

A) the point at which total sales equal total cost
B) the point at which fixed costs equal variable costs
C) the point at which total sales are less than total cost
D) the point at which total sales are greater than total cost

Question 35

Which formulat calculates the contribution margin?

A) contribution margin = fixed costs
B) contribution margin ratio = 100% - variable cost ratio
C) contribution margin = sales revenue × variable cost ratio
D) contribution margin ratio = contribution margin/variable costs

Question 36

Direct fixed expenses are the fixed costs that are traceable to the segments and would remain even if one of the segments was eliminated.

Question 37

What formula is used to calculate contribution margin ratio?

A) 100% + variable cost ratio
B) unit contribution margin/total revenues
C) contribution margin per unit/sales price per unit
D) contribution margin per unit/variable costs per unit

Question 38

Which type of ratio reflects total contribution margin divided by sales revenue?

A) the sales ratio
B) the fixed cost ratio
C) the variable cost ratio
D) the contribution margin ratio

Question 39

The income statement for Thompson Manufacturing Company is as follows: $\begin{array}{lr}\text { Sales }(10,000 \text { units) } & \$ 150,000 \\\text { Variable costs } & 102,000 \\\text { Contribution margin } & \$ 48,000 \\\text { Fixed costs } & 36,000\\\text { Operating income }&\$12,000\end{array}$ What is the contribution margin per unit?

A) $1.20
B) $4.80
C) $7.20
D) $120,000.00

Question 40

Common fixed expenses are the fixed costs that are traceable to the segments and would remain even if one of the segments was eliminated.

Question 41

Which formula calculates operating income?

A) (sales price × units sold) - (unit variable cost × units sold) - fixed cost
B) (sales price × units sold) + (unit variable cost × units sold) + fixed cost
C) (sales price + units sold) - (unit variable cost + units sold) - fixed cost
D) (sales price - units sold) + (unit variable cost - units sold) + fixed cost

Question 42

What relationship is visually portrayed by a profit-volume graph?

A) profits and units sold
B) total sales and total cost
C) total sales and units sold
D) fixed costs and variable costs

Question 43

TriTech Company sells a product for $12. Variable costs are $6 per unit, and total fixed costs are $6,000. How many units must Melody sell to earn an operating profit of $240?

A) 62
B) 1,040
C) 1,260
D) 1,480

Question 44

What formula calculates the sales dollars needed to earn a desired profit?

A) (fixed costs + contribution margin)/(1 - variable cost ratio)
B) (fixed costs + desired profit)/(1 - variable cost ratio)
C) (fixed costs + variable costs)/(1 - variable cost ratio)
D) (fixed costs + desired profit)/(1 - sales ratio)

Question 45

Suppose variable costs per unit decrease. What will be the effect on sales volume at the break-even point?

A) Sales volume will increase.
B) Sales volume will decrease.
C) Sales volume will remain the same.
D) Sales volume will remain the same; however, contribution margin per unit will decrease.

Question 46

Suppose the sales price per unit increases. What will be the effect on the break-even point in units?

A) The units will increase.
B) The units will decrease.
C) The units will remain the same.
D) The units will remain the same; however, contribution per unit will decrease.

Question 47

Wendall Company sells only one product at a regular sales price of $7.50 per unit. At that sales price, variable costs are 60% of sales, and fixed costs are $30,000. Management has decided to decrease the sales price to $6 in hopes of increasing its volume of sales. What is the contribution margin ratio when the sales price is reduced to $6 per unit?

A) 25%
B) 40%
C) 60%
D) 75%

Question 48

Bonda, Inc. sells its product for $90. It has a variable cost ratio of 50% and total fixed costs of $14,000. What is the break-even point in sales dollars?

A) $3,600
B) $7,000
C) $14,000
D) $28,000

Question 49

Go For It Company sells go-carts at $1,000 each, incurs a variable cost per unit of $600, and has a total fixed cost of $75,000. How many units must be sold to achieve a target operating income of $55,000?

A) 215
B) 250
C) 325
D) 600

Question 50

Assume the following information: Variable cost ratio 80%
Total fixed costs $60,000
What volume of sales dollars is needed to break even?

A) $12,000
B) $48,000
C) $75,000
D) $300,000

Question 51

Suppose the contribution margin ratio increases. What will be the effect on the break-even point in sales dollars?

A) The dollar value will double.
B) The dollar value will increase.
C) The dollar value will decrease.
D) The dollar value will remain the same.

Question 52

Diamonds in the Ruff sells only one product at a regular sales price of $7.50 per unit. Variable costs are 60% of sales, and fixed costs are $30,000. What is the break-even point in sales dollars?

A) $12,000
B) $18,000
C) $50,000
D) $75,000

Question 53

Suppose fixed costs increase. What will be the effect on the break-even point in units?

A) The break-even point will increase.
B) The break-even point will decrease.
C) The break-even point will remain the same.
D) The break-even point will remain the same; however, contribution per unit will decrease.

Question 54

How can a profit-volume graph be distinguished from a cost-volume-profits graph?

A) Revenues are expected at targeted sales levels.
B) Costs are graphed on the y-axis against sales volume.
C) Operating income is graphed on the y-axis against sales volume.
D) Revenues and costs are graphed on the y-axis against sales volume.

Question 55

East Side Company produces two products, X and Y, which account for 60% and 40%, respectively, of total sales dollars. Contribution margin ratios are 50% for X and 25% for Y. Total fixed costs are $120,000. What is the break-even point in sales dollars?

A) $300,000
B) $328,767
C) $342,856
D) $375,000

Question 56

What formula calculates the number of units needed to earn a desired profit?

A) (fixed costs + variable costs)/sales
B) (fixed costs + desired profit)/sales
C) (fixed costs + desired profit)/contribution margin per unit
D) (fixed costs + variable costs)/contribution margin per unit

Question 57

Assume the following information: $$\begin{array} { l r } \text { Sales price per unit } & \$ 100 \\\text { Contribution margin ratio } & 50 \% \\\text { Total fixed costs } & \$ 250,000\end{array}$$ How many units must be sold to generate a before-tax profit of $45,000?

A) 2,500 units
B) 3,000 units
C) 3,750 units
D) 5,900 units

Question 58

Roundstreet Company sells a product for $14. Variable costs are $7 per unit, and total fixed costs are $7,000. What is the break-even point in units?

A) 210
B) 504
C) 1,000
D) 7,000

Question 59

Suppose the contribution margin per unit decreases. What will be the effect on the break-even point in units?

A) The units will increase.
B) The units will decrease.
C) The units will remain the same.
D) The units cannot be determined from the information given.

Question 60

Which statement best describes a profit-volume graph?

A) It is difficult to interpret.
B) It can be plotted only if fixed costs are known.
C) It can be plotted only if the break-even point is known.
D) It fails to reveal how costs change as sales volume changes.

Question 61

Firm X and Firm Y compete within the same industry and have the same sales volumes and costs other than the following items: Firm X manufactures its product using large amounts of direct labour. Firm Y has replaced direct labour with investment in machinery. Projected sales for both firms are 15% less than in the previous year. What will be the projected profits for Firm X compared to Firm Y?

A) Firm X will lose more profit than Firm Y.
B) Firm Y will lose more profit than Firm X.
C) Neither Firm X nor Firm Y will lose profit.
D) Firm X and Firm Y will lose the same amount of profit.

Question 62

What "what-if" technique examines the impact on an answer as a result of changes in underlying assumptions?

A) sensitivity training
B) sensitivity analysis
C) degree of sensitivity
D) degree of operating leverage

Question 63

What should be used to compute the sales mix so that the break-even computation is meaningful to management?

A) the expected mix
B) the traditional mix
C) the least desirable mix
D) the most desirable mix

Question 64

Where is the break-even point on a cost-volume-profit graph?

A) at the intersection of the revenue line and the profit line
B) at the intersection of the revenue line and the total cost line
C) at the intersection of the fixed cost line and the variable cost line
D) at the intersection of the contribution margin line and the fixed cost line

Question 65

Which statement describes a characteristic of the cost-volume-profit graph?

A) It is difficult to interpret.
B) It plots three separate lines.
C) It plots the total revenue line and the total cost line.
D) The vertical axis is measured in units sold, and the horizontal axis is measured in dollars.

Question 66

What items is the sales mix the relative combination of?

A) products sold by a firm
B) outputs produced by a firm
C) distribution channels used by a firm
D) inputs required to produce a product

Question 67

Which term refers to the units sold or expected to be sold, or the sales revenue earned or expected to be earned, above the break-even volume?

A) margin of safety
B) break-even point
C) operating leverage
D) contribution margin

Question 68

What is the result when actual sales equal break-even point in dollar sales?

A) the margin of safety is positive
B) the margin of safety is negative
C) the margin of safety equals zero
D) the margin of safety is negative or positive

Question 69

The following data pertain to the three products produced by Rona Corporation: $\begin{array}{lrrr}&\underline{A} & \underline{B} &\underline{C}\\\text { Sales price per unit } & \$ 5.00 & \$ 7.00 & \$ 6.00 \\\text { Variable costs per unit } & \underline{4.00} & \underline{5.00} & \underline{3.00} \\\text { Contribution margin per unit } & \underline{\$ 1.00} & \underline{\underline{\$ 2.00}} & \underline{\underline{\$ 3.00}}\end{array}$
Fixed costs are $90,000 per month. Of all units sold, 60% are Product A, 30% are Product B, and 10% are Product C.
What is the monthly break-even point for total units?

A) 36,000 units
B) 45,000 units
C) 60,000 units
D) 180,000 units

Question 70

Which statement is NOT an assumption used to prepare a cost-volume-profit graph?

A) The sales mix is constant.
B) The constant cost fluctuates.
C) Units produced equals units sold.
D) Linear costs are within the relevant range.

Question 71

Which graph depicts the relationships among total variable costs, total fixed costs, number of units, and operating income?

A) cost graph
B) volume graph
C) break-even graph
D) cost-volume-profit graph

Question 72

Which statement is an assumption of a cost-volume-profit analysis?

A) Revenue and costs behave in a linear manner.
B) More inventory is produced than is sold in the period.
C) Sales price and costs vary within the relevant range.
D) Sales price and costs cannot be accurately identified.

Question 73

Information about the K-9 Salon's two products is as follows: $\begin{array}{lc}&\underline{\text {Dog Brush}}&\underline{\text { Cat Toy}}\\\text { Unit sales price }&\$9.00&\$9.00 \\\text { Unit variable costs: }\\ \text { Manufacturing } & \$ 5.25&\$6.75 \\\text { Selling } & \underline{.75} & \underline{.75} \\\text { Total }&\$6.00&\$7.50\\\\\text { Monthly fixed costs are as follows: }\\\text { Manufacturing } & \$ 82,500 \\\text { Selling and administrative } & \$ 45,000 \\\text { Total } & \$ 127,500\end{array}$
Suppose the sales mix in units is 70% Product X and 30% Product Y. What total monthly sales volume in units is required to break even?

A) 8,333 units
B) 16,667 units
C) 50,000 units
D) 56,667 units

Question 74

By what amount can sales decline before losses are incurred?

A) by the fixed costs
B) by the margin of safety
C) by the contribution margin
D) by the degree of operating leverage

Question 75

What formula calculates the margin of safety in dollars?

A) expected sales - expected profit
B) expected sales - sales at break-even
C) expected costs - costs at break-even
D) costs at break-even - expected profit

Question 76

Acme Company sells two products. Product X has a contribution margin of $6.00 per unit, and Product Y has a contribution margin of $7.50 per unit. Total fixed costs are $400,000. Sales mix and total volume varies from one period to another. Which statement best describes this situation?

A) Selling less than 25,000 units of each product will result in a loss.
B) Variable costs are $1.50 higher for Product X than for Product Y.
C) The ratio of contribution to total sales always will be larger for Product X than for Product Y.
D) The ratio of net profit to total sales for Product Y will be larger than the ratio of net profit to total sales for Product X.

Question 77

Which term best describes fixed costs that can be directly traced to individual segments?

A) contribution margin
B) direct fixed expenses
C) overall fixed expenses
D) common fixed expenses

Question 78

Which statement describes a characteristic of the cost-volume-profit graph?

A) It is hard to interpret.
B) It cannot be plotted if the break-even point is known.
C) It shows the relationship among cost, volume, and profits.
D) It reveals how costs change as sales volume remains the same.

Question 79

Which of the following can be considered a measure of risk in cost-volume-profit analysis?

A) fixed cost
B) margin of safety
C) contribution margin
D) contribution margin ratio

Question 80

How is the sales mix expressed?

A) in terms of units but not revenues
B) in terms of revenues but not units
C) in terms of either revenues or units
D) in terms of neither units nor revenue