Deck 10: Costvolumeprofit Analysis

Question 1

Which of the following statements is correct? If the activity level goes outside the relevant range:

A) fixed costs can no longer be assumed to be fixed.
B) fixed costs will remain constant.
C) fixed costs will always increase.
D) fixed costs will always decrease.

Answer 1

A

Question 2

Using the information below,calculate the weighted average contribution margin.
$\begin{array}{|l|r|r|}\hline & \text{ Product A} & \text{ Product B } \\\hline \text{ Contribution margin }&\$ 60.00 &\$ 20.00 \\\hline \text{ Sales Mix }& 40 \% & 60 \% \\\hline \text{ Fixed costs \$ 30000} & & \\\hline\end{array}$

A) $36
B) $42
C) $32
D) $48

Answer 2

$36

Question 3

Which of the following is normally a mixed cost?

A) Motor vehicle running costs.
B) Electricity costs.
C) Telephone costs.
D) All of the above options are examples of mixed costs.

Answer 3

D

Question 4

The margin of safety:

A) indicates the amount of revenue in excess of the break-even point.
B) indicates the number of sales units that can be lost before the break-even units are reached.
C) if small, may require managers to focus on reducing costs to avoid potential loss.
D) all of the above options are correct.

Question 5

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 6

Which of the following cannot be used to determine a break-even point?

A) graphical representation of CVP analysis.
B) regression analysis.
C) contribution margin calculation.
D) mathematical equation.

Question 7

In a cost-volume-profit graph,the break-even point is where the total revenue line:

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

Question 8

If production increases by 20%,total variable cost will:

A) decrease by 20%.
B) increase by 20%.
C) increase by more than 20%.
D) remain the same.

Question 9

If fixed costs are $200 000 and variable costs are 60% of the selling price,the break-even point in sales dollars is:

A) $800 000
B) $333 333
C) $200 000
D) $500 000

Question 10

If an entity increases its level of activity:

A) some costs will vary, others will remain the same.
B) all costs will vary.
C) all costs will remain the same.
D) most costs will rise.

Question 11

The break-even point would not be affected by changes to:

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

Question 12

A cost that changes with the level of activity is a:

A) variable cost.
B) fixed cost.
C) total cost.
D) mixed cost.

Question 13

A fixed cost is a cost that:

A) changes with changes in the level of activity.
B) stays the same per unit as the number of units changes.
C) stays the same irrespective of changes in the level of activity.
D) is a fixed proportion of profit.

Question 14

Contribution margin equals revenue less:

A) cost of sales.
B) fixed costs.
C) mixed costs.
D) variable costs.

Question 15

Besser Ltd's contribution margin per unit is $2 and the break-even number of units is 2000.If Besser Ltd sell 5000 units their profit will be:

A) $2000
B) $6000
C) $10 000
D) $4 000

Question 16

If selling price is $25 per unit and variable costs are $16 per unit,the contribution margin per unit is:

A) $11.00
B) $41.00
C) $9.00
D) $1.56

Question 17

Which of these is not a fixed cost?

A) Depreciation on motor vehicles.
B) Direct labour.
B) Management salaries.
D) Lease payments.

Question 18

From the information below,calculate the break-even number of units for each product.
$\begin{array}{|l|r|r|r|}\hline & \text{ Product X } & \text{ Product \( Y \)} & \text{ Product Z } \\\hline\text{ Contribution margin} &\$ 10.00 & \$ 20.00 &\$ 40.00 \\\hline\text{ Sales Mix }& 50 \% &25 \%& 25 \% \\\hline\text{ Fixed costs\$ 15000} & & & \\\hline\end{array}$

A) X: 7500; Y: 3750; Z: 3750.
B) X: 1875; Y: 1875; Z: 3750.
C) X: 3750; Y: 1875; Z: 1875.
D) X: 3750; Y: 3750; Z: 7500.

Question 19

If Jewel Ltd's selling price is $8 per unit,variable costs are $3 per unit and fixed costs are $300 000,the break-even number of sales units is:

A) 60 000 units.
B) 37 500 units.
C) 25 000 units.
D) 100 000 units.

Question 20

The break-even number of units equals fixed costs divided by:

A) selling price per unit.
B) contribution margin per unit.
C) total contribution margin.
D) variable cost per unit.

Question 21

When considering whether or not to make or buy a product,an entity should identify which of the following:

A) incremental income and incremental costs.
B) opportunity costs.
C) all of these options should be identified in the decision-making process.
D) additional costs from making the product.

Question 22

If Vincent Pty Ltd sells 4000 chairs and 1000 tables,the sales mix is:

A) 0.2 chairs, 0.8 tables.
B) 0.8 chairs, 0.2 tables.
C) 0.4 chairs, 0.1 tables.
D) none of the options are correct.

Question 23

Nail Pro Pty Ltd desires an after-tax profit of $15 000.If the tax rate is 30%,what is the before-tax profit that must be earned by Nail Pro Pty Ltd?

A) $4 500
B) $50 000
C) $21 429
D) $10 500

Question 24

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 the impact of increasing advertising costs to generate more sales.
B) Consider changing the sales mix.
C) Consider reducing prices.
D) Confirm that the cost forecasts used are reliable.

Question 25

Which of the following statements is correct when assessing profitability with resource limitations?

A) Most businesses are not limited by market demand.
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 only relate to labour hours.

Question 26

The break-even point is where:

A) total sales = fixed costs plus profit.
B) total sales = total variable costs.
C) total sales = total variable costs plus profit.
D) total sales = total costs.

Question 27

Break-even data can assist with various decisions such as:

A) how many bikes need to be sold to achieve a before-tax profit of $12 000 for the year?
B) which resources do we need to focus on to increase our profit?
C) what is the impact on profit if there is an increase in fixed costs ?
D) all of the above.

Question 28

From the information below,determine the contribution margin per unit of limiting factor (labour hours).
$\begin{array}{|l|r|}\hline \text {Selling price per unit} & \$ 150 \\\hline \text {Variable costs per unit }& \$ 120 \\\hline\text { Labour hours per unit }&\text { 3 hours} \\\hline\end{array}$

A) $3
B) $40
C) $10
D) $30

Question 29

Which of the following statements is not an important assumption regarding CVP analysis?

A) The sales mix for multiple products remains constant.
B) Cost behaviour is linear.
C) Unit price and cost data vary over the time period.
D) Fixed costs remain fixed.

Question 30

Which of the following statements regarding the margin of safety is not true?

A) The margin of safety is the mix between fixed and variable costs.
B) The margin of safety indicates how much revenue can decrease before reaching the break-even point.
C) A small margin of safety should motivate managers to reduce costs and increase sales to avoid potential losses.
D) The margin of safety in units is equal to the actual or estimated units of activity minus units at break-even point.

Question 31

Windmill Pty Ltd makes miniature windmills for gardens.If the selling price per windmill is $100,the contribution margin ratio is 40%,and total fixed costs are $25 000,how many windmills must they sell to achieve a desired profit of $20 000?

A) 1125
B) 200
C) 625
D) 500

Question 32

The contribution margin ratio is:

A) the contribution margin shown as a percentage of revenue.
B) determines the sales dollars required to achieve a desired profit.
C) total contribution margin divided by total sales and then multiplied by 100.
D) all of the above.

Question 33

Calculate the break-even point in dollars from the following information.Selling price per unit is $50,variable costs per unit are $30 and fixed costs for the year are $25 000.

A) $62 500
B) $1 250
C) $83 333
D) $41 667

Question 34

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

A) Market demand.
B) Equipment.
C) Space.
D) Labour.

Question 35

An entity with a higher proportion of fixed costs to variable costs compared to an entity with a lower proportion of fixed to variable costs is regarded as:

A) having a lower operating leverage.
B) equal in risk.
C) more risky.
D) less risky.

Question 36

The following formula can be used to determine the contribution margin ratio:

A) after-tax profit divided by (1 - tax rate).
B) contribution margin per unit divided by selling price per unit.
C) selling price per unit less variable costs per unit.
D) fixed costs ($) divided by contribution margin per unit ($).

Question 37

Which of the following statements about opportunity costs is true?

A) Opportunity costs are avoidable costs.
B) Opportunity costs are not relevant in decision making.
C) Opportunity costs are the costs of forgoing benefits that would be available if the resources had been used in the next best alternative.
D) All of the statements are true.

Question 38

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

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

Question 39

From the information in the table below,calculate the unit sales necessary to achieve the desired profit.
$\begin{array}{|l|r|}\hline \text { Selling price per unit} & \$ 20.00 \\\hline \text { Variable cost per unit }& \$ 12.00 \\\hline \text { Fixed costs }&\$ 50000 \\\hline \text { After-tax desired profit }& \$ 70000 \\\hline \text { Tax rate} & 30 \% \\\hline\end{array}$

A) 15 000 units.
B) 8 750 units.
C) 12 500 units.
D) 18 750 units.

Question 40

Which of the following statements is correct with regards to the underlying assumptions of CVP analysis?

A) A step up to the next relevant range of activity may incur an increase in fixed costs.
B) All costs can be classified as either fixed or variable.
C) The sales mix between multiple products is always the same.
D) All the above statements are correct.

Question 41

An outsourcing decision means:

A) choosing to buy all products to be sold.
B) making all products to be sold.
C) asking another entity to supply services.
D) deciding on whether to buy or make the products or services.

Question 42

A local manufacturer has been approached to supply a special order for 500 ceramic vases at a price of $20 per vase.The current cost of producing the vases is made up of direct materials of $10 per vase,direct labour costs of $8 per vase,direct overhead costs of $5 per vase 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 43

The range of activity over which costs are assumed to be valid is the _____________ range.

Question 44

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

Question 45

Opportunity costs need to be considered when making decisions about special orders:

A) if fixed costs remain constant.
B) if irrelevant costs exist.
C) if there is idle capacity.
D) if there is no idle capacity.

Question 46

Mixed costs possess both ________ and ________ characteristics.

Question 47

A manufacturer of children's clothing,Kids Wear Pty Ltd,has been approached to supply a special order for 10 000 designer shirts at a price of $12 per shirt.The variable costs of producing a shirt are $8 per shirt.Kids Wear Pty Ltd has sufficient spare capacity to manufacture the order without affecting its normal production and the order is within the relevant range so there will be no impact on fixed costs.Should Kids Wear Pty Ltd accept the order?

A) No, as the price being offered of $12 per shirt is not sufficiently above the full cost of production of $8 per shirt.
B) Yes, as fixed costs will not change.
C) There is insufficient information to tell whether Kids Wear Pty Ltd should accept the order or not.
D) Yes, as profits will be increased by $40 000.

Question 48

The mix between fixed and variable costs in the cost structure of an entity is known as operating _______________.

Question 49

When production is affected by limited resources,the contribution margin per ________________ factor should be calculated to determine the most profitable mix of products/services.

Question 50

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

A) there is no opportunity cost to accepting the order.
B) any order that uses up spare capacity will be profitable.
C) management will not want to have their machinery and employees idle.
D) the entity can demand a higher selling price for the special order.

Question 51

The horizontal axis of a CVP graph represents the ____________________ level.

Question 52

Accepting a special order will require consideration of such factors as:

A) whether there is available capacity.
B) if there is a possibility of developing a long-term relationship with the customer.
C) reactions of existing customers who are paying a higher price for the product.
D) all of the above options should be considered.

Question 53

The break-even point will (increase/decrease)___________________ if there is a decrease in total fixed costs.

Question 54

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

Question 55

The point where total sales revenue equals total costs is known as the _____________ point.

Question 56

Baseball Mitts Pty Ltd has been asked to fulfil a special order for 2000 mitts at a 20% discount on the current selling price.Baseball Mitts Pty Ltd are already at full production capacity and would have to forgo regular sales worth $50 000 if they accept this special order.If the net benefits of the special order total $20 000 should they accept the order?

A) Yes, the profits will increase by $20 000.
B) No, a loss of $30 000 will be generated from the special order.
C) Yes, as long as there are no adverse long-term effects that outweigh the short-term benefits.
D) No. Baseball Mitts Pty Ltd do not have the capacity to accept this special order.

Question 57

If variable costs are 75% of sales and fixed costs are $500 000,the break-even sales revenue will be ____________________.

Question 58

The contribution margin ratio can be used to perform CVP analysis in circumstances where there is insufficient data to calculate the number of units of a product required to reach the _______________point.

Question 59

As production increases,fixed costs per unit will (increase/decrease)_____________.

Question 60

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 of the options should be considered.

Question 61

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

Question 62

The amount of capacity an entity has available to increase its output is known as either ______________ or _____________ capacity.