Deck 4: Cost-Volume-Profit Relationships

Question 1

A company with a degree of operating leverage of 4 would expect net operating income to increase by 200% if sales increased from $100,000 to $150,000.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

If fixed expenses increase by $10,000 per year,then the level of sales needed to break even will also increase by $10,000.

Answer 3

False

Question 4

If two companies have the same total sales and total expenses and make the same product,the volatility of net operating income with changes in sales will tend to be greater in the company with a higher proportion of fixed expenses in its cost structure.

Question 5

At the break-even point: Sales - Variable expenses = Fixed expenses.

Question 6

Mark Company currently sells a video recorder with a selling price of $300 per unit.The variable expense per unit is $175 and fixed expenses are $100,000.If the company reduces variable expenses by $20 per unit and increases the fixed expenses by $10,000,the break-even point will increase.

Question 7

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

Question 8

To facilitate decision-making,fixed expenses should be expressed on a per-unit basis.

Question 9

The variable expense per unit is $12 and the selling price per unit is $40.Then the contribution margin ratio is 70%.

Question 10

The difference between total sales in dollars and total variable expenses is called:

A)net operating income.
B)net profit.
C)the gross margin.
D)the contribution margin.

Question 11

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

Question 12

Reynold Enterprises sells a single product for $25.The variable expense per unit is $15 and the fixed expense per unit is $5 at the current level of sales.The company's net operating income will increase by $5 if one more unit is sold.

Question 13

If two companies produce the same product and have the same total sales and same total expenses,operating leverage will be lower in the company with a higher proportion of fixed expenses in its cost structure.

Question 14

Incremental analysis is an analytical approach that focuses only on those revenues and costs that will change as a result of a decision.

Question 15

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

Question 16

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

Question 17

If the fixed expenses increase in a company,and all other factors remain unchanged,then one would expect the margin of safety to decrease.

Question 18

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

Question 19

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

Question 20

The impact on net operating income of a given dollar change in sales can be computed by applying the contribution margin ratio to the dollar change in sales.

Question 21

Sensabaugh Inc. ,a company that produces and sells a single product,has provided its contribution format income statement for January. If the company sells 1,600 units,its total contribution margin should be closest to:

A)$22,200
B)$28,800
C)$4,800
D)$32,400

Question 22

The following information relates to Clyde Corporation which produced and sold 50,000 units last month. There were no beginning or ending inventories.Production and sales next month are expected to be 40,000 units.The company's unit contribution margin next month should be:

A)$16.63
B)$3.10
C)$7.98
D)$13.30

Question 23

Brasher Company manufactures and sells a single product that has a positive contribution margin.If the selling price and variable expenses both decrease by 5% and fixed expenses do not change,then what would be the effect on the contribution margin per unit and the contribution margin ratio?

A)Option A
B)Option B
C)Option C
D)Option D

Question 24

The break-even point in unit sales increases when variable expenses:

A)increase and the selling price remains unchanged.
B)decrease and the selling price remains unchanged.
C)decrease and the selling price increases.
D)remain unchanged and the selling price increases.

Question 25

If Q equals the level of output,P is the selling price per unit,V is the variable expense per unit,and F is the fixed expense,then the break-even point in units is:

A)Q $\div$ (P-V).
B)F $\div$ (P-V).
C)V $\div$ (P-V).
D)F $\div$ [Q(P-V)].

Question 26

Butteco Corporation has provided the following cost data for last year when 100,000 units were produced and sold: All costs are variable except for $100,000 of manufacturing overhead and $100,000 of selling and administrative expense.There are no beginning or ending inventories.If the selling price is $10 per unit,the net operating income from producing and selling 110,000 units would be:

A)$450,000
B)$385,000
C)$405,000
D)$560,000

Question 27

The degree of operating leverage can be calculated as:

A)contribution margin divided by sales.
B)gross margin divided by net operating income.
C)net operating income divided by sales.
D)contribution margin divided by net operating income.

Question 28

James Company has a margin of safety percentage of 20% based on its actual sales.The break-even point is $200,000 and the variable expenses are 45% of sales.Given this information,the actual profit is:

A)$27,500
B)$18,000
C)$22,500
D)$22,000

Question 29

The break-even point in unit sales is found by dividing total fixed expenses by:

A)the contribution margin ratio.
B)the variable expenses per unit.
C)the sales price per unit.
D)the contribution margin per unit.

Question 30

Which of the following formulas is used to calculate the contribution margin ratio?

A)(Sales - Fixed expenses) $\div$ Sales
B)(Sales - Cost of goods sold) $\div$ Sales
C)(Sales - Variable expenses) $\div$ Sales
D)(Sales - Total expenses) $\div$ Sales

Question 31

Menlove Company had the following income statement for the most recent year: Given this data,the unit contribution margin was:

A)$2 per unit
B)$15 per unit
C)$6 per unit
D)$4 per unit

Question 32

A company has provided the following data: If the sales volume decreases by 25%,the variable cost per unit increases by 15%,and all other factors remain the same,net operating income will:

A)decrease by $31,875.
B)decrease by $15,000.
C)increase by $20,625.
D)decrease by $3,125.

Question 33

The margin of safety percentage is computed as:

A)Break-even sales $\div$ Total sales.
B)Total sales - Break-even sales.
C)(Total sales - Break-even sales) $\div$ Break-even sales.
D)(Total sales - Break-even sales) $\div$ Total sales.

Question 34

All other things the same,which of the following would be true of the contribution margin and variable expenses of a company with high fixed costs and low variable costs as compared to a company with low fixed costs and high variable costs?

A)Option A
B)Option B
C)Option C
D)Option D

Question 35

The amount by which a company's sales can decline before losses are incurred is called the:

A)contribution margin.
B)degree of operating leverage.
C)margin of safety.
D)contribution margin ratio.

Question 36

With regard to the CVP graph,which of the following statements is not correct?

A)The CVP graph assumes that volume is the only factor affecting total cost.
B)The CVP graph assumes that selling prices do not change.
C)The CVP graph assumes that variable costs go down as volume goes up.
D)The CVP graph assumes that fixed expenses are constant in total within the relevant range.

Question 37

East Company manufactures and sells a single product with a positive contribution margin.If the selling price and the variable expense per unit both increase 5% and fixed expenses do not change,what is the effect on the contribution margin per unit and the contribution margin ratio?

A)Option A
B)Option B
C)Option C
D)Option D

Question 38

Mancuso Corporation has provided its contribution format income statement for January.The company produces and sells a single product. If the company sells 3,100 units,its total contribution margin should be closest to:

A)$27,045
B)$181,000
C)$162,400
D)$173,600

Question 39

Dimitrov Corporation,a company that produces and sells a single product,has provided its contribution format income statement for July. If the company sells 6,900 units,its net operating income should be closest to:

A)$35,979
B)$34,500
C)$36,500
D)$32,000

Question 40

Break-even analysis assumes that:

A)total costs are constant.
B)the average fixed expense per unit is constant.
C)the average variable expense per unit is constant.
D)variable expenses are nonlinear.

Question 41

South Company sells a single product for $20 per unit.If variable expenses are 60% of sales and fixed expenses total $9,600,the break-even point will be:

A)$24,000
B)$14,400
C)$9,600
D)$16,000

Question 42

Pool Company's variable expenses are 36% of sales.Pool is contemplating an advertising campaign that will cost $20,000.If sales increase by $80,000,the company's net operating income should increase by:

A)$28,800
B)$64,000
C)$8,800
D)$31,200

Question 43

The Herald Company manufactures and sells a single product which sells for $50 per unit and has a contribution margin ratio of 30%.The company's monthly fixed expenses are $25,000.If Herald desires a monthly target net operating income equal to 20% of sales dollars,sales in units will have to be (rounded):

A)2,500 units
B)5,000 units
C)1,666 units
D)1,000 units

Question 44

Danneman Corporation's fixed monthly expenses are $13,000 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 $41,000?

A)$9,960
B)$5,040
C)$22,960
D)$28,000

Question 45

Darth Company sells three products.Sales and contribution margin ratios for the three products follow: Given these data,the contribution margin ratio for the company as a whole would be:

A)25%
B)75%
C)33.3%
D)it is impossible to determine from the data given.

Question 46

The contribution margin ratio is 25% for Grain Company and the break-even point in sales is $200,000.To obtain a target net operating income of $60,000,sales would have to be:

A)$260,000
B)$440,000
C)$280,000
D)$240,000

Question 47

Gaudy Inc.produces and sells a single product.The company has provided its contribution format income statement for May. If the company sells 4,300 units,its net operating income should be closest to:

A)$7,700
B)$25,513
C)$26,700
D)$19,500

Question 48

Patterson Company's variable expenses are 55% of sales.At a $400,000 sales level,the degree of operating leverage is 5.If sales increase by $30,000,the new degree of operating leverage will be (rounded):

A)5.00
B)3.18
C)2.91
D)3.91

Question 49

Street Company's fixed expenses total $150,000,its variable expense ratio is 60% and its variable expenses are $4.50 per unit.Based on this information,the break-even point in units is:

A)50,000 units
B)37,500 units
C)33,333 units
D)100,000 units

Question 50

Cindy,Inc.sells a product for $10 per unit.The variable expenses are $6 per unit,and the fixed expenses total $35,000 per period.By how much will net operating income change if sales are expected to increase by $40,000?

A)$16,000 increase
B)$5,000 increase
C)$24,000 increase
D)$11,000 decrease

Question 51

Data concerning Lancaster Corporation's single product appear below: Fixed expenses are $105,000 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 $44.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)Decrease of $38,400
B)Decrease of $5,600
C)Increase of $5,600
D)Increase of $38,400

Question 52

Knoke Corporation's contribution margin ratio is 29% and its fixed monthly expenses are $17,000.If the company's sales for a month are $98,000,what is the best estimate of the company's net operating income? Assume that the fixed monthly expenses do not change.

A)$81,000
B)$11,420
C)$52,580
D)$28,420

Question 53

Rothe Company manufactures and sells a single product that it sells for $90 per unit and has a contribution margin ratio of 35%.The company's fixed expenses are $46,800.If Rothe desires a monthly target net operating income equal to 15% of sales,the amount of sales in units will have to be (rounded):

A)1,486 units
B)3,467 units
C)1,040 units
D)2,600 units

Question 54

Balonek Inc.'s contribution margin ratio is 57% and its fixed monthly expenses are $41,000.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 $112,000?

A)$63,840
B)$7,160
C)$71,000
D)$22,840

Question 55

Sinclair Company's single product has a selling price of $25 per unit.Last year the company reported a profit of $20,000 and variable expenses totaling $180,000.The product has a 40% contribution margin ratio.Because of competition,Sinclair Company will be forced in the current year to reduce its selling price by $2 per unit.How many units must be sold in the current year to earn the same profit as was earned last year?

A)15,000 units
B)12,000 units
C)16,500 units
D)12,960 units

Question 56

Weinreich Corporation produces and sells a single product.Data concerning that product appear below: The company is currently selling 2,000 units per month.Fixed expenses are $131,000 per month.The marketing manager believes that an $18,000 increase in the monthly advertising budget would result in a 170 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 $2,700
B)Increase of $15,300
C)Decrease of $18,000
D)Decrease of $2,700

Question 57

Data concerning Runnells Corporation's single product appear below: The company is currently selling 6,000 units per month.Fixed expenses are $424,000 per month.The marketing manager believes that a $7,000 increase in the monthly advertising budget would result in a 100 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 $8,000
B)Increase of $1,000
C)Decrease of $7,000
D)Decrease of $1,000

Question 58

Turner Company's contribution margin ratio is 15%.If the degree of operating leverage is 12 at the $150,000 sales level,net operating income at the $150,000 sales level must equal:

A)$1,500
B)$2,700
C)$2,160
D)$1,875

Question 59

Loren Company's single product has a selling price of $15 per unit.Last year the company reported total variable expenses of $180,000,fixed expenses of $90,000,and a net operating income of $30,000.A study by the sales manager discloses that a 15% increase in the selling price would reduce unit sales by 10%.If her proposal is adopted,net operating income would:

A)increase by $45,000
B)increase by $37,500
C)increase by $7,500
D)increase by $28,500

Question 60

The contribution margin ratio is 30% for the Honeyville Company and the break-even point in sales is $150,000.If the company's target net operating income is $60,000,sales would have to be:

A)$200,000
B)$350,000
C)$250,000
D)$210,000

Question 61

Last year,Farrer Corporation had sales of $1,500,000,variable expenses of $900,000,and fixed expenses of $400,000.What would be the dollar sales at the break-even point?

A)$1,300,000
B)$1,000,000
C)$1,380,000
D)$1,200,000

Question 62

Data concerning Moscowitz Corporation's single product appear below: Fixed expenses are $375,000 per month.The company is currently selling 8,000 units per month.The marketing manager would like to cut the selling price by $15 and increase the advertising budget by $23,000 per month.The marketing manager predicts that these two changes would increase monthly sales by 3,100 units.What should be the overall effect on the company's monthly net operating income of this change?

A)Decrease of $128,900
B)Increase of $426,500
C)Increase of $8,900
D)Increase of $128,900

Question 63

Montgomery Corporation produces and sells a single product.Data concerning that product appear below: Fixed expenses are $239,000 per month.The company is currently selling 3,000 units per month.The marketing manager would like to cut the selling price by $12 and increase the advertising budget by $12,000 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)Increase of $102,000
B)Decrease of $30,000
C)Decrease of $6,000
D)Increase of $30,000

Question 64

Data concerning Hewell Enterprises Corporation's single product appear below: The unit sales to attain the company's monthly target profit of $14,000 is closest to:

A)4,408 units
B)8,186 units
C)5,153 units
D)2,865 units

Question 65

Ribb Corporation produces and sells a single product.Data concerning that product appear below: Fixed expenses are $913,000 per month.The company is currently selling 9,000 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 400 units.What should be the overall effect on the company's monthly net operating income of this change?

A)Decrease of $3,200
B)Increase of $50,800
C)Decrease of $50,800
D)Increase of $3,200

Question 66

Data concerning Knipp Corporation's single product appear below: Fixed expenses are $587,000 per month.The company is currently selling 4,000 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 $16 per unit.In exchange,the sales staff would accept a decrease in their salaries of $57,000 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 100 units.What should be the overall effect on the company's monthly net operating income of this change?

A)Increase of $55,400
B)Increase of $745,800
C)Increase of $9,800
D)Increase of $104,200

Question 67

Last year,Flynn Company reported a profit of $70,000 when sales totaled $520,000 and the contribution margin ratio was 40%.If fixed expenses increase by $10,000 next year,what amount of sales will be necessary in order for the company to earn a profit of $80,000?

A)$600,000
B)$570,000
C)$562,500
D)$625,000

Question 68

The following monthly data are available for the Eager Company and its only product: The margin of safety for the company for March was:

A)$315,000
B)$225,000
C)$135,000
D)$495,000

Question 69

The contribution margin ratio of Lime Corporation's only product is 75%.The company's monthly fixed expense is $688,500 and the company's monthly target profit is $20,000.The dollar sales to attain that target profit is closest to:

A)$531,375
B)$944,667
C)$918,000
D)$516,375

Question 70

Lone International Corporation's only product sells for $230.00 per unit and its variable expense is $80.50.The company's monthly fixed expense is $822,250 per month.The unit sales to attain the company's monthly target profit of $33,000 is closest to:

A)3,718 units
B)6,688 units
C)10,624 units
D)5,721units

Question 71

Rider Company sells a single product.The product has a selling price of $40 per unit and variable expenses of $15 per unit.The company's fixed expenses total $30,000 per year.The company's break-even point in terms of total dollar sales is:

A)$100,000
B)$80,000
C)$60,000
D)$48,000

Question 72

The following data pertain to last month's operations: The break-even point in dollars is:

A)$300,000
B)$240,000
C)$200,000
D)$160,000

Question 73

Perona Corporation produces and sells a single product.Data concerning that product appear below: The unit sales to attain the company's monthly target profit of $9,000 is closest to:

A)5,601 units
B)4,400 units
C)2,464 units
D)4,155 units

Question 74

Smith Company sells a single product at a selling price of $30 per unit.Variable expenses are $12 per unit and fixed expenses are $41,400.Smith's break-even point is:

A)1,380 units
B)2,300 units
C)3,450 units
D)6,900 units

Question 75

Hirt Corporation sells its product for $12 per unit.Next year,fixed expenses are expected to be $400,000 and variable expenses are expected to be $8 per unit.How many units must the company sell to generate net operating income of $80,000?

A)50,000 units
B)120,000 units
C)60,000 units
D)100,000 units

Question 76

Hassick Corporation produces and sells a single product whose contribution margin ratio is 63%.The company's monthly fixed expense is $460,530 and the company's monthly target profit is $19,000.The dollar sales to attain that target profit is closest to:

A)$290,134
B)$302,104
C)$761,159
D)$731,000

Question 77

The following is last month's contribution format income statement: What is the company's margin of safety percentage to the nearest whole percent?

A)42%
B)40%
C)17%
D)20%

Question 78

Mowrer Corporation produces and sells a single product.Data concerning that product appear below: Fixed expenses are $567,000 per month.The company is currently selling 9,000 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 $11 per unit.In exchange,the sales staff would accept a decrease in their salaries of $84,000 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 600 units.What should be the overall effect on the company's monthly net operating income of this change?

A)Increase of $77,400
B)Increase of $21,600
C)Increase of $669,600
D)Decrease of $146,400

Question 79

A total of 30,000 units were sold last year.The contribution margin per unit was $2,and fixed expenses totaled $20,000 for the year.This year fixed expenses are expected to increase to $26,000,but the contribution margin per unit will remain unchanged at $2.How many units must be sold this year to earn the same profit as was earned last year?

A)23,000 units
B)43,000 units
C)30,000 units
D)13,000 units

Question 80

A product sells for $20 per unit and has a contribution margin ratio of 40 percent.Fixed expenses total $240,000 annually.How many units of the product must be sold to yield a profit of $60,000?

A)37,500 units
B)40,000 units
C)65,000 units
D)30,000 units