Deck 20: Cost-Volume-Profit Analysis

Question 1

Contribution margin ratio is equal to contribution margin per unit divided by unit sales price.

Answer 1

True

Question 2

With variable costs,the cost per unit varies with changes in volume.

Answer 2

False

Question 3

Any business which operates at less than capacity will have smaller fixed costs than variable costs.

Answer 3

False

Question 4

When cost-volume-profit analysis is used,the need for a cost accounting system is eliminated.

Question 5

The break-even point is the level of activity at which operating income is equal to cost of goods sold.

Question 6

One characteristic common to all types of costs is the tendency to rise and fall in direct proportion to changes in the volume of business output.

Question 7

Economies of scale can be achieved by using facilities more intensively.

Question 8

As volume increases,per unit fixed costs stay the same.

Question 9

Contribution margin is total revenue less variable costs.

Question 10

The volume of output which causes fixed costs to be equal in amount to total revenue is called the break-even point.

Question 11

The range over which output may be expected to vary is called the relevant range.

Question 12

With fixed costs,the cost per unit varies with changes in volume.

Question 13

The margin of safety sales volume times the contribution margin ratio equals operating income.

Question 14

The higher the unit contribution margin,the higher the volume of unit sales required to cover a given amount of fixed costs.

Question 15

Executive salaries are typically considered variable costs.

Question 16

The contribution margin is the difference between total revenue and fixed costs.

Question 17

As volume increases,per unit variable costs will decrease on a per-unit basis and stay the same in total.

Question 18

The contribution margin is the amount by which revenue exceeds variable costs.

Question 19

As volume increases,total fixed costs remain the same.

Question 20

Costs which increase in total amount in direct proportion to an increase in output are called variable costs.

Question 21

In cost-volume-profit analysis,the number of units sold is assumed to be equal to the number of units produced.

Question 22

The high-low method is the only method to be used when determining semivariable costs.

Question 23

Management expects total sales of $40 million,a margin of safety of $10 million,and a contribution margin ratio of 45%.Which of the following estimated amounts is not consistent with this information?

A)Variable costs,$22 million.
B)Fixed costs,$13.5 million.
C)Operating income,$6 million.
D)Break-even sales volume,$30 million.

Question 24

In cost-volume-profit analysis,income tax expense:

A)Is included among the monthly operating expenses as a variable cost.
B)Is considered a fixed cost of doing business.
C)Is treated as a semi-variable cost that is partially dependent upon sales volume.
D)Is generally ignored.

Question 25

A fixed cost may include all of the following except:

A)Rent for the warehouse.
B)Annual salary of the CEO.
C)Depreciation.
D)Sales commission expense.

Question 26

A 45% contribution margin ratio means that:

A)The company should contribute 45% of its operating income to qualified charities for maximum tax benefits.
B)55% of the company's revenue is consumed by fixed and variable costs.
C)The company's revenue has increased by 45% during the current accounting period.
D)45% of the company's revenue is available to cover fixed costs and to contribute toward operating income.

Question 27

A company's relevant range of production is:

A)The production range from zero to 100% of plant capacity.
B)The production range over which CVP assumptions are valid.
C)The production range beyond the break-even point.
D)The production range that covers fixed but not variable costs.

Question 28

Within the relevant range,fixed costs:

A)Fall as sales volume falls.
B)Rise as sales volume rises.
C)Rise as sales volume falls.
D)Remain steady when sales volume changes.

Question 29

A company with monthly revenue of $120,000,variable costs of $50,000,and fixed costs of $40,000 has a contribution margin of:

A)$90,000.
B)$80,000.
C)$70,000.
D)$30,000.

Question 30

When volume increases,fixed cost per unit:

A)Increases.
B)Decreases.
C)Stays the same.
D)Increases or decreases,depending upon the situation.

Question 31

The contribution margin ratio is expressed as:

A)A percentage of revenue.
B)A total dollar amount for the period.
C)A contribution margin per unit.
D)Total contribution margin amount.

Question 32

Margin of safety is the dollar amount by which actual sales volume exceeds the break-even sales volume.

Question 33

Which of the following is an example of a fixed cost for an airline?

A)Depreciation on the corporate headquarters.
B)Fuel costs.
C)Income taxes expense.
D)Passengers' meals.

Question 34

The break-even point in a cost-volume-profit graph is always found:

A)At 50% of full capacity.
B)At the sales volume resulting in the lowest average unit cost.
C)At the volume at which total revenue equals total variable costs.
D)At the volume at which total revenue equals total fixed costs plus total variable costs.

Question 35

How will a company's contribution margin be affected by an investment in equipment that increases fixed costs in order to achieve a reduction in direct labor cost?

A)Contribution margin will increase.
B)Contribution margin will fall.
C)Contribution margin will either increase or decrease depending on the relative magnitudes of the changes in fixed and variable costs.
D)Contribution margin will remain the same.

Question 36

Sales of products with high contribution margins often are described as quantity sales.

Question 37

A company with monthly fixed costs of $170,000 expects to earn monthly operating income of $25,000 by selling 6,500 units per month.What is the company's expected unit contribution margin?

A)$30 per unit.
B)$26 per unit.
C)$22 per unit.
D)The information given is insufficient to determine unit contribution margin.

Question 38

Variable costs would include:

A)Insurance expense.
B)Amortization expense.
C)Sales commission expense.
D)Executive salaries expense.

Question 39

Cost-volume-profit analysis is often complex when applied to a company with different products.

Question 40

A semi-variable cost:

A)Increases and decreases directly and proportionately with changes in volume.
B)Changes in response to a change in volume,but not proportionately.
C)Increases if volume increases,but remains constant if volume decreases.
D)Changes inversely in response to a change in volume.

Question 41

The following information is available: What is the operating income?

A)$40,000.
B)$50,000.
C)$8,000.
D)$10,400.

Question 42

If a product sells for $8,variable costs are $6 and fixed costs are $150,000,what would total sales have to be in order to break-even?

A)$390,000.
B)$399,999.
C)$600,000.
D)$699,999.

Question 43

Product X sells for $35 per unit and has related variable costs of $25 per unit.The fixed costs of producing product X are $65,000 per month.How many units of product X must be sold each month to earn a monthly operating income of $85,000?

A)2,833 units.
B)6,000 units.
C)15,000 units.
D)10,000 units.

Question 44

In comparison to selling a product with a low contribution margin ratio,selling a product with a high contribution margin ratio always:

A)Requires less dollar sales volume to cover a given level of fixed costs.
B)Results in a greater margin of safety.
C)Results in higher operating income.
D)Results in a higher contribution margin per unit sold.

Question 45

If the unit sales price is $12,variable costs are $6 per unit and fixed costs are $36,000 what are the sales in dollars necessary to break-even?

A)$90,000.
B)$72,000.
C)$70,000.
D)$60,000.

Question 46

If unit sales prices are $7 and variable costs are $5 per unit,how many units would have to be sold to break-even if fixed costs equal $8,000?

A)2,000 units.
B)3,000 units.
C)4,000 units.
D)3,800 units.

Question 47

If monthly fixed costs are $21,000 and the contribution margin ratio is 42%,the monthly sales volume required to break even is:

A)$8,820.
B)$50,000.
C)$78,000.
D)$39,207.

Question 48

A company with an operating income of $72,000 and a contribution margin ratio of 56% has a margin of safety of: (rounded)

A)$40,320.
B)$128,571.
C)$163,636.
D)It is not possible to determine the margin of safety from the information provideD.$72,000/.56 = $128,571

Question 49

If the unit sales price is $7 and variable costs are $3,how many units have to be sold to earn a profit of $3,600 if fixed costs equal $5,000?

A)900 units.
B)1,250 units.
C)1,500 units.
D)2,150 units.

Question 50

In order to calculate break-even sales units,fixed costs are divided by the:

A)Contribution margin per unit.
B)Contribution margin percentage.
C)Target operating income.
D)Sales volume.

Question 51

The dollar amount by which sales can decline before an operating loss is incurred is called the:

A)Contribution margin.
B)Contribution margin ratio.
C)Margin of safety.
D)Relevant range.

Question 52

If the unit sales price is $12,variable costs are $6 per unit and fixed costs are $26,000 what is the contribution margin ratio per unit?

A)40%.
B)50%.
C)60%.
D)70%.

Question 53

If the unit sales price is $14,variable costs are $7 per unit and fixed costs are $42,000,how many units must be sold to earn an income of $250,000? (Round your final answer to the next whole number.)

A)52,142 units.
B)41,715 units.
C)34,762 units.
D)29,796 units.

Question 54

A company's most profitable products are often those which:

A)Have the highest contribution margin ratios and the highest sales volumes.
B)Have the highest contribution margin ratios and the lowest sales volumes.
C)Have the lowest contribution margin ratios and the highest sales volumes.
D)Have the lowest contribution margin ratios and the lowest sales volumes.

Question 55

In the area of cost-volume-profit analysis,the contribution margin ratio shows how much each dollar of sales contributes to:

A)Cover the fixed costs of the business and providing operating income.
B)Fixed expenses and variable expenses.
C)Variable expenses and interest charges.
D)Variable expenses when production is at normal capacity.

Question 56

The contribution margin ratio is computed as:

A)Sales minus variable costs,divided by sales.
B)Fixed costs plus variable costs,divided by sales.
C)Sales minus fixed costs,divided by sales.
D)Sales divided by variable costs.

Question 57

If the monthly sales volume required to break even is $190,000 and monthly fixed costs are $55,900,the contribution margin ratio is closest to:

A)29%.
B)71%.
C)23%.
D)340%.

Question 58

The margin of safety is calculated by:

A)Dividing fixed costs plus target income by the contribution margin.
B)Subtracting break-even income from current income.
C)Subtracting break-even sales from current sales.
D)Subtracting fixed costs from current contribution margin.

Question 59

All other things held constant,how will an increase in selling price affect the break-even point measured in units?

A)The break-even point will decrease.
B)The break-even point will increase.
C)The break-even point will remain constant.
D)The effect on the break-even point can't be predicted with certainty.

Question 60

Millar Company produces a single product which it sells for $89 a unit.If the fixed costs of manufacturing and selling the product are $68,400 a month and the variable costs are $57 a unit,which of the below is correct?

A)The fixed costs amount to $32 per unit at any level of output within a relevant volume range.
B)The company will break even with a sales volume of $68,400 a month.
C)An increase in sales volume above $68,400 a month will cause an increase in fixed costs.
D)The contribution margin per unit of product is $32.

Question 61

The Parry Company's breakeven point in units is 20,000.Assuming that variable costs are 30% and fixed costs are $100,000,what is the company's projected operating income if sales are $750,000?

A)$425,000.
B)$125,000.
C)$250,000.
D)$400,000.

Question 62

Nanu Corporation manufactures two products; data are shown below: If Nanu's monthly fixed costs average $425,000,what is its break-even point expressed in sales dollars?

A)$1,320,000.
B)$1,250,000.
C)$1,400,000.
D)$990,000.

Question 63

Relevant range
What is meant by the phrase relevant range of activity?

Question 64

Cost-volume-profit graph
Describe the important relationships shown on a cost-volume-profit graph.

Question 65

Accounting terminology
Listed below are nine technical accounting terms introduced or emphasized in this chapter: Each of the following statements may (or may not)describe one of these technical terms.In the space provided beside each statement,indicate the accounting term described,or answer "None" if the statement does not correctly describe any of the terms.
____ (a)The amount by which sales revenue exceeds total variable cost expressed as a percentage of sales.
____ (b)The amount by which sales volume exceeds the break-even point.
____ (c)The study of financial statements by a potential investor or creditor as a means of evaluating the profitability and solvency of a business.
____ (d)A type of activity that has a causal effect in the occurrence of a particular cost.
____ (e)The level of sales at which revenue equals operating expenses.
____ (f)A cost that responds to changes in sales volume by less than a proportionate amount.
____ (g)A mathematical technique used to determine the fixed and variable elements of a mixed or semi-variable cost.

Question 66

The Davidson Company's breakeven point in units is 40,000.Assuming that variable costs are 60% and fixed costs are $300,000,what is the company's projected operating income if sales are $1,000,000?

A)$750,000.
B)$100,000.
C)$250,000.
D)$400,000.

Question 67

Using cost-volume-profit formulas
Gary Corporation manufactures a single product.The selling price is $104 per unit,and variable costs amount to $78 per unit.The fixed costs are $36,000 per month (round any units to the next highest full unit).
(a)What is the contribution margin per unit? $_______________ per unit
(b)What is the contribution margin ratio? _______________%
(c)What is the monthly sales volume (in dollars)at the break-even point? $________________
(d)How many units must be sold each month to earn a monthly operating income of $32,000? _______________ units
(e)What is the monthly margin of safety (in dollars)if 3,000 units are sold each month? $_______________
(f)What will be the monthly operating income if 3,000 units are sold each month? $_______________

Question 68

Cost-volume-profit analysis and strategy
A manufacturing company experiencing severe financial difficulties has applied for a large government guaranteed loan.As a condition for obtaining the guarantee,the government mandates that the company significantly reduce its annual break-even point.What steps might the company take to achieve the required reduction in its break-even point?

Question 69

Unique Corporation manufactures two products; data are shown below: If Unique's monthly fixed costs average $400,000,what is its break-even point expressed in sales dollars? (Rounded)

A)$1,320,462.
B)$1,250,000.
C)$1,400,000.
D)$1,052,632.

Question 70

Cost-volume-profit relationships
Spotless,Inc.,sells only one product.The sales price per unit is $50,with variable cost per unit of $40.Fixed costs are $60,000 per month.Maximum capacity is 34,000 units per month.Answer the following questions:
(a)To break-even,how many units must Spotless,sell per month? _______________ units
(b)If Spotless,Inc.,sold 25,000 units,what would be its operating income for the month? $________________
(c)At present capacity,what is the maximum operating income Spotless,can expect to earn per month? $________________
(d)Assuming that direct labor cost can be reduced by $2 per unit,what would the maximum operating income be per month? $_______________

Question 71

Montclair Company earns an average contribution margin ratio of 40% on its sales.The local store manager estimates that he can increase monthly sales volume by $45,000 by spending an additional $7,000 per month for direct mail advertising.Compute the monthly increase in operating income if the manager's estimate about the increased sales volume is accurate.

A)$11,000.
B)$23,000.
C)$16,000.
D)$18,000.

Question 72

Operating income can be calculated by:

A)Dividing fixed costs by the contribution margin ratio.
B)Multiplying fixed costs by the contribution margin ratio.
C)Multiplying the margin of safety by the contribution margin ratio.
D)Dividing the margin of safety by the contribution margin ratio.

Question 73

Cost-volume relationships
(a)What is the effect of an increase or decrease in activity upon variable costs per unit of activity?
(b)What is the effect of an increase or decrease in activity upon total fixed costs?

Question 74

Raymond & Sons generates an average contribution margin ratio of 45% on its sales.Management estimates that by spending $3,500 more per month to rent additional facilities,the business will be able to increase operating income by $10,000 per month.Management must feel that the additional facilities will increase monthly sales volume (in dollars)by:

A)$4,725.
B)$8,775.
C)$13,500.
D)$30,000.

Question 75

Using cost-volume-profit formulas
Fantasy Corporation manufactures a single product.The selling price is $125 per unit,and variable costs amount to $81 per unit.The fixed costs are $28,500 per month (round any units to the next highest full unit).
(a)What is the contribution margin per unit? $_______________ per unit
(b)What is the contribution margin ratio? _______________% (Rounded to 1 decimal place)
(c)What is the monthly sales volume (in dollars)at the break-even point? $________________
(d)How many units must be sold each month to earn a monthly operating income of $50,000? _______________ units
(e)What is the monthly margin of safety (in dollars)if 1,500 units are sold each month? $_______________
(f)What will be the monthly operating income if 1,500 units are sold each month? $_______________

Question 76

Cost-volume-profit relationships
The following data are available for a product manufactured and sold by Logan Company: Compute the following:
(a)Contribution margin per unit: $_______________
(b)Number of units that must be sold to break-even: _______________ units
(c)Dollar sales volume to produce income of $864,000 before taxes (round units to the next highest full unit): $_______________

Question 77

The Gillett Company's breakeven point in units is 25,000.Assuming that variable costs are 50% and fixed costs are $500,000,what is the company's projected operating income if sales are $1,250,000?

A)$750,000.
B)$100,000.
C)$125,000.
D)$400,000.

Question 78

A product sells for $125,variable costs are $80,and fixed costs are $45,000.If the selling price can be increased by 20% with a similar increase in variable costs,how many fewer units would have to be sold to earn $300,000? (Rounded)

A)5,595 units.
B)7,667 units.
C)1,278 units.
D)6,389 units.

Question 79

Stupper Corporation manufactures two products; data are shown below: If Stupper's monthly fixed costs average $200,000,what is its break-even point expressed in sales dollars (rounded)?

A)$320,000.
B)$250,000.
C)$370,370.
D)$152,632.

Question 80

Estimating costs and profit
International,Inc.expects total sales of $55 million,a margin of safety of $25 million,and a contribution margin ratio of 25%.Compute the following:
(a)Variable costs: $_________________
(b)Break-even sales volume (in dollars): $_________________
(c)Fixed costs: $_________________
(d)Operating income: $_________________