Deck 6: Cost-Volume-Profit Relationship

Question 1

The degree of operating leverage is greatest at sales levels near the break-even point and decreases as sales rise.

Answer 1

True

Question 2

The contribution margin ratio measures the effect on the total contribution margin of a given change in total sales.

Answer 2

True

Question 3

Which of the following is an assumption that is NOT made in most cost-volume-profit calculations?

A) Selling price, variable expense per unit, and fixed expense per unit do not change throughout the relevant range.
B) There is no change in inventory levels.
C) In a multiproduct company, the sales mix does not change.
D) The selling price is constant.

Answer 3

A

Question 4

As total sales increase beyond the break-even point, the degree of operating leverage will also increase.

Question 5

If a company increases advertising by $500,000, this will cause net operating income to increase if the resulting increase in sales dollars is greater than:

A) $500,000.
B) $500,000 divided by the percentage increase in advertising.
C) $500,000 divided by the degree of operating leverage.
D) $500,000 divided by the contribution margin ratio.

Question 6

Assuming that the unit sales are unchanged, the total contribution margin will decrease if:

A) fixed expenses increase.
B) fixed expenses decrease.
C) variable expense per unit increases.
D) variable expense per unit decreases.

Question 7

A company with sales of $100,000, variable expenses of $70,000, and fixed expenses of $50,000 will reach its break-even point if sales are increased by $20,000.

Question 8

All other things the same, in periods of increasing sales, net operating income will tend to increase more rapidly in a company with high variable costs and low fixed costs than in a company with high fixed costs and low variable costs.

Question 9

Once the break-even point is reached:

A) the total contribution margin changes from negative to positive.
B) net operating income will increase by the unit contribution margin for each additional item sold.
C) variable expenses will remain constant in total.
D) the contribution margin ratio begins to decrease.

Question 10

If the sales mix changes, the average contribution margin ratio is likely to change as well.

Question 11

At the break-even point, variable expenses and fixed expenses are equal.

Question 12

On a cost-volume-profit graph, the revenue line will be shown above the total expense line for any activity level above the break-even point.

Question 13

The profit in cost-volume-profit equations is the same as the net operating income on a contribution income statement.

Question 14

A contribution approach income statement can usually be easily prepared from the information contained in a corporation's published income statement.

Question 15

On a CVP graph for a profitable company, the line representing total expenses is steeper than the line representing total revenue.

Question 16

All other things equal, the margin of safety in a company with high fixed costs and low variable costs will tend to be higher than the margin of safety in a similar company that has low fixed costs and high variable costs.

Question 17

Which of the following is true regarding the contribution margin ratio of a single product company?

A) As fixed expenses decrease, the contribution margin ratio increases.
B) The contribution margin ratio multiplied by the variable expense per unit equals the contribution margin per unit.
C) If sales increase, the dollar increase in net operating income can be computed by multiplying the contribution margin ratio by the dollar increase in sales.
D) The contribution margin ratio increases as the number of units sold increases.

Question 18

All other things the same, a decrease in variable expense per unit will reduce the break-even point.

Question 19

On a cost-volume-profit graph, the break-even point is located:

A) at the origin.
B) where the total revenue line intersects the volume axis.
C) where the total expenses line intersects the dollars axis.
D) where the total revenue line intersects the total expenses line.

Question 20

An increase in the number of units sold will decrease the break-even point.

Question 21

To obtain the break-even point in terms of dollar sales, total fixed expenses are divided by which of the following?

A) Variable expense per unit.
B) Variable expense per unit/Selling price per unit.
C) Fixed expense per unit.
D) (Selling price per unit - Variable expense per unit)/Selling price per unit.

Question 22

A company has provided the following data:
If the dollar contribution margin per unit is increased by 10%, total fixed cost is decreased by 20%, and all other factors remain the same, net operating income will:

A) increase by $61,000.
B) increase by $20,000.
C) increase by $3,500.
D) increase by $11,000.

Question 23

Last year, Twins Company reported $750,000 in sales (25,000 units) and a net operating income of $25,000. At the break-even point, the company's total contribution margin equals $500,000. Based on this information, the company's:

A) contribution margin ratio is 40%.
B) break-even point is 24,000 units.
C) variable expense per unit is $9.
D) variable expenses are 60% of sales.

Question 24

The break-even point in dollar sales for Rice Company is $360,000 and the company's contribution margin ratio is 30%. If Rice Company desires a profit of $84,000, sales would have to total

A) $280,000
B) $640,000
C) $480,000
D) $560,000

Question 25

Fenestre Corporation's contribution margin ratio is 25%. The company's break-even is 80,000 units and the selling price of its only product is $4.00 a unit. What are the company's fixed expenses?

A) $80,000
B) $320,000
C) $20,000
D) $120,000

Question 26

Witczak Company has a single product and currently has a degree of operating leverage of 5. Which of the following will increase Witczak's degree of operating leverage?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 27

Which of the following would a manufacturing company expect to experience as it automates and shifts from variable expenses to fixed expenses?

A) A lower margin of safety percentage.
B) A higher contribution margin ratio.
C) A steeper total expenses line on its cost-volume-profit graph.
D) Both A and B above.

Question 28

Filson Inc., a company that produces and sells a single product, has provided its contribution format income statement for February.
If the company sells 9,700 units, its total contribution margin should be closest to:

A) $252,200
B) $74,026
C) $247,000
D) $263,200

Question 29

Marston Enterprises sells three chemicals: petrol, septine, and tridol. Petrol's unit contribution margin is higher than septine's which is higher than tridol's. Which one of the following events is most likely to decrease the company's overall break-even point?

A) The installation of new computer-controlled equipment that reduces variable costs and increases fixed costs.
B) A decrease in tridol's selling price.
C) An increase in the overall market demand for septine.
D) A change in the relative market demand for the products, with the increase favoring petrol relative to septine and tridol.

Question 30

The ratio of fixed expenses to the unit contribution margin is the:

A) break-even point in unit sales.
B) profit margin.
C) contribution margin ratio.
D) margin of safety.

Question 31

At a break-even point of 400 units sold, variable expenses were $4,000 and fixed expenses were $2,000. What will the 401st unit sold contribute to profit?

A) $0
B) $5
C) $10
D) $15

Question 32

Litke Corporation, a company that produces and sells a single product, has provided its contribution format income statement for February.
If the company sells 5,100 units, its net operating income should be closest to:

A) $15,600
B) $11,700
C) $8,400
D) $14,733

Question 33

Carver Company produces a product which sells for $30. Variable manufacturing costs are $15 per unit. Fixed manufacturing costs are $5 per unit based on the current level of activity, and fixed selling and administrative costs are $4 per unit. A selling commission of 10% of the selling price is paid on each unit sold. The contribution margin per unit is:

A) $3
B) $15
C) $8
D) $12

Question 34

A company increased the selling price for its product from $5 to $6 per unit when total fixed expenses increased from $100,000 to $200,000 and variable expense per unit remained unchanged. How would these changes affect the break-even point?

A) The break-even point in units would increase.
B) The break-even point in units would decrease.
C) The break-even point in units would remain unchanged.
D) The effect cannot be determined from the information given.

Question 35

North Company sells a single product. The product has a selling price of $30 per unit and variable expenses of 70% of sales. If the company's fixed expenses total $60,000 per year, then it will have a break-even of:

A) $60,000
B) $85,714
C) $42,000
D) $200,000

Question 36

Pilkinton Corporation has provided its contribution format income statement for July. The company produces and sells a single product.
If the company sells 10,300 units, its total contribution margin should be closest to:

A) $49,211
B) $391,400
C) $407,400
D) $376,200

Question 37

Finnefrock Inc. produces and sells a single product. The company has provided its contribution format income statement for December.
If the company sells 9,200 units, its net operating income should be closest to:

A) $115,800
B) $95,800
C) $110,975
D) $78,600

Question 38

The margin of safety is equal to:

A) Sales - Net operating income.
B) Sales - (Variable expenses/Contribution margin).
C) Sales - (Fixed expenses/Contribution margin ratio).
D) Sales - (Variable expenses + Fixed expenses).

Question 39

Last year, Black Company reported sales of $640,000, a contribution margin of $160,000, and a net loss of $40,000. Based on this information, the break-even point was:

A) $640,000
B) $480,000
C) $800,000
D) $960,000

Question 40

If company A has a higher degree of operating leverage than company B, then:

A) company A has higher variable expenses.
B) company A's profits are more sensitive to percentage changes in sales.
C) company A is more profitable.
D) company A is less risky.

Question 41

Ringstaff Corporation produces and sells a single product. Data concerning that product appear below:
The company is currently selling 7,000 units per month. Fixed expenses are $615,000 per month. The marketing manager believes that a $21,000 increase in the monthly advertising budget would result in a 180 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 $600
B) decrease of $600
C) decrease of $21,000
D) increase of $21,600

Question 42

Scobie Corporation's fixed monthly expenses are $16,000 and its contribution margin ratio is 57%. 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 $69,000?

A) $39,330
B) $23,330
C) $13,670
D) $53,000

Question 43

Last year, variable expenses were 60% of total sales and fixed expenses were 10% of total sales. If the company increases its selling prices by 10%, but if fixed expenses, variable costs per unit, and unit sales remain unchanged, the effect of the increase in selling price on the company's total contribution margin would be:

A) a decrease of 2%.
B) an increase of 5%.
C) an increase of 10%.
D) an increase of 25%.

Question 44

Seyal Inc.'s contribution margin ratio is 55% and its fixed monthly expenses are $34,000. 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 $94,000?

A) $17,700
B) $60,000
C) $8,300
D) $51,700

Question 45

Mardist Corporation has sales of $100,000, variable expenses of $75,000, fixed expenses of $30,000, and a net loss of $5,000. How much would Mardist have to sell to achieve a profit of 10% of sales?

A) $187,500
B) $200,000
C) $225,500
D) $180,000

Question 46

Forest Corporation has prepared the following budgeted data based on a sales forecast of $3,000,000:
What would be the amount of dollar sales at the break-even point?

A) $1,125,000
B) $2,000,000
C) $2,650,000
D) $1,750,000

Question 47

Similien Corporation produces and sells a single product. Data concerning that product appear below:
Fixed expenses are $300,000 per month. The company is currently selling 5,000 units per month. The marketing manager would like to cut the selling price by $14 and increase the advertising budget by $17,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 1,400 units. What should be the overall effect on the company's monthly net operating income of this change?

A) increase of $64,200
B) increase of $215,400
C) decrease of $64,200
D) decrease of $5,800

Question 48

Data concerning Sa Corporation's single product appear below:
Fixed expenses are $445,000 per month. The company is currently selling 6,000 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 $9 per unit. In exchange, the sales staff would accept a decrease in their salaries of $43,000 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) decrease of $88,900
B) decrease of $2,900
C) increase of $42,100
D) increase of $537,100

Question 49

Data concerning Grodi Corporation's single product appear below:
Fixed expenses are $324,000 per month. The company is currently selling 5,000 units per month. Management is considering using a new component that would increase the unit variable cost by $9. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 500 units. What should be the overall effect on the company's monthly net operating income of this change?

A) decrease of $4,500
B) decrease of $40,500
C) increase of $40,500
D) increase of $4,500

Question 50

Vaccaro Corporation produces and sells a single product. Data concerning that product appear below:
Fixed expenses are $293,000 per month. The company is currently selling 3,000 units per month. Management is considering using a new component that would increase the unit variable cost by $13. 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) increase of $600
B) increase of $39,600
C) decrease of $600
D) decrease of $39,600

Question 51

Data concerning Amburn Corporation's single product appear below:
Fixed expenses are $179,000 per month. The company is currently selling 3,000 units per month. The marketing manager would like to cut the selling price by $9 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) decrease of $7,500
B) increase of $19,500
C) decrease of $19,500
D) increase of $43,500

Question 52

Green Company's variable expenses are 75% of sales. At a sales level of $400,000, the company's degree of operating leverage is 8. At this sales level, fixed expenses are:

A) $87,500
B) $100,000
C) $50,000
D) $75,000

Question 53

Jatry Corporation's budgeted sales are $300,000, its budgeted variable expenses are $210,000, and its budgeted fixed expenses are $60,000. The company's break-even in dollar sales is:

A) $200,000
B) $330,000
C) $210,000
D) $270,000

Question 54

Scott Company's variable expenses are 72% of sales. The company's break-even point in dollar sales is $2,450,000. If sales are $60,000 below the break-even point, the company would report a:

A) $43,200 loss
B) $60,000 loss
C) $16,800 loss
D) cannot be determined from the data given.

Question 55

Bear Publishing sells a nature guide. The following information was reported for a typical month (sales volume is constant each month):
Bear is expecting a 20 cent increase in variable expenses. No other changes are expected or planned. How much contribution margin should Bear expect after the increase?

A) $7,700
B) $4,100
C) $9,900
D) Cannot be determineD.Number of units = $17,600

Question 56

Riven Corporation has a single product whose selling price is $10. At an expected sales level of $1,000,000, the company's variable expenses are $600,000 and its fixed expenses are $300,000. The marketing manager has recommended that the selling price be increased by 20%, with an expected decrease of only 10% in unit sales. What would be the company's net operating income if the marketing manager's recommendation is adopted?

A) $132,000
B) $290,000
C) $180,000
D) $240,000

Question 57

Mitch Corporation's contribution margin ratio is 14% and its fixed monthly expenses are $87,000. If the company's sales for a month are $678,000, what is the best estimate of the company's net operating income? Assume that the fixed monthly expenses do not change.

A) $591,000
B) $496,080
C) $94,920
D) $7,920

Question 58

Slosh Cleaning Corporation services both residential and commercial customers. Slosh expects the following operating results next year for each type of customer:
Slosh expects to have $18,000 in fixed expenses next year. What would Slosh's total dollar sales have to be next year in order to generate a profit of $90,000?

A) $216,000
B) $250,000
C) $270,000
D) $300,000

Question 59

Moloney Corporation produces and sells a single product. Data concerning that product appear below:
Fixed expenses are $898,000 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 $16 per unit. In exchange, the sales staff would accept a decrease in their salaries of $117,000 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 $115,400
B) decrease of $16,600
C) decrease of $250,600
D) increase of $1,063,400

Question 60

Data concerning Damberger Corporation's single product appear below:
The company is currently selling 5,000 units per month. Fixed expenses are $243,000 per month. The marketing manager believes that an $11,000 increase in the monthly advertising budget would result in a 180 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 $200
B) decrease of $200
C) increase of $10,800
D) decrease of $11,000

Question 61

Data concerning Vogelgesang Corporation's single product appear below:
The break-even in monthly dollar sales is closest to:

A) $850,000
B) $527,000
C) $921,281
D) $1,386,842

Question 62

Steckelberg Inc. produces and sells a single product. The selling price of the product is $150.00 per unit and its variable cost is $54.00 per unit. The fixed expense is $154,560 per month. The break-even in monthly unit sales is closest to:

A) 1,610
B) 1,030
C) 1,834
D) 2,862

Question 63

Austin Manufacturing had the following operating data for the year just ended.
Management plans to improve the quality of its only product by: (1) replacing a component that costs $3.50 with a higher-grade component that costs $5.50; and (2) renting a packing machine for $18,000 a year. If the desired target profit is $288,000, the company must sell:

A) 19,300 units
B) 21,316 units
C) 22,500 units
D) 20,842 units

Question 64

Aybar International Corporation's only product sells for $210.00 per unit and its variable expense is $75.60. The company's monthly fixed expense is $766,080 per month. The unit sales to attain the company's monthly target profit of $28,000 is closest to:

A) 5,908
B) 6,731
C) 10,504
D) 3,781

Question 65

Lineman Corporation sells a product for $230 per unit. The product's current sales are 23,400 units and its break-even sales are 20,124 units.
What is the margin of safety in dollars?

A) $3,588,000
B) $5,382,000
C) $753,480
D) $4,628,520

Question 66

Knell Corporation sells a product for $230 per unit. The product's current sales are 33,000 units and its break-even sales are 26,400 units. The margin of safety as a percentage of sales is closest to:

A) 25%
B) 75%
C) 20%
D) 80%

Question 67

Data concerning Enslow Corporation's single product appear below:
The break-even in monthly unit sales is closest to:

A) 6,711
B) 4,390
C) 12,495
D) 3,249

Question 68

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

A) $18,000
B) $6,000
C) $11,250
D) $7,500

Question 69

Harist Corporation sold 5,000 units in May. Sales were $400,000, variable expenses were $240,000, and fixed expenses were $120,000. If the company increases its selling price by 10%, how many units would have to be sold in June to generate a profit of $40,000?

A) 4,200
B) 4,500
C) 4,000
D) 5,000

Question 70

The following is last month's contribution format income statement:
What is the company's margin of safety in dollars?

A) $100,000
B) $600,000
C) $1,500,000
D) $250,000

Question 71

A product sells for $20 per unit, and has a contribution margin ratio of 40%. Fixed expenses are $120,000. How many units must be sold to yield a profit of $30,000?

A) 18,750
B) 20,000
C) 25,000
D) 12,500

Question 72

Monsky Corporation produces and sells a single product whose contribution margin ratio is 60%. The company's monthly fixed expense is $420,000 and the company's monthly target profit is $13,000. The dollar sales to attain that target profit is closest to:

A) $252,000
B) $259,800
C) $721,667
D) $700,000

Question 73

Terres Corporation produces and sells a single product. Data concerning that product appear below:
The break-even in monthly dollar sales is closest to:

A) $889,273
B) $438,000
C) $293,460
D) $540,244

Question 74

Lempka 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 $17,000 is closest to:

A) 4,172
B) 4,520
C) 2,169
D) 3,620

Question 75

The contribution margin ratio of Scoggins Corporation's only product is 69%. The company's monthly fixed expense is $364,320 and the company's monthly target profit is $14,000. The dollar sales to attain that target profit is closest to:

A) $261,041
B) $251,381
C) $548,290
D) $528,000

Question 76

Witting Corporation produces and sells a single product. Data concerning that product appear below:
The break-even in monthly unit sales is closest to:

A) 2,523
B) 1,502
C) 3,337
D) 2,730

Question 77

Last year, Perry Company reported profits of $4,200. Its variable expenses totaled $66,000 or $6 per unit. The unit contribution margin was $3.00. The break-even point in unit sales for Perry Company is:

A) 11,000
B) 9,600
C) 22,000
D) 12,400

Question 78

Zents Inc. produces and sells a single product. The selling price of the product is $240.00 per unit and its variable cost is $108.00 per unit. The fixed expense is $407,880 per month.
The break-even in monthly dollar sales is closest to:

A) $685,293
B) $741,600
C) $906,400
D) $407,880

Question 79

The following is last month's contribution format income statement:
What is the company's break-even in unit sales?

A) 0 units
B) 12,000 units
C) 6,000 units
D) 8,000 units

Question 80

Data concerning Shanor Enterprises Corporation's single product appear below:
The unit sales to attain the company's monthly target profit of $13,000 is closest to:

A) 2,245
B) 3,805
C) 5,475
D) 3,842