Deck 22: Cost-Volume-Profit Analysis

Question 1

Cost-volume-profit analysis can be used to predict the effects of reduced selling prices, increased fixed costs, and reduced variable costs on break-even points.

Answer 1

True

Question 2

Curvilinear costs are also known as nonlinear costs.

Answer 2

True

Question 3

The dollar amount of sales needed to achieve a target after-tax income is computed by dividing the sum of fixed costs plus the desired after-tax income plus income taxes by the contribution margin ratio.

Answer 3

True

Question 4

Cost-volume-profit analysis is frequently based on the assumption that the production level is the same as the sales level.

Question 5

Cost-volume-profit analysis provides approximate, but not precise, answers to questions about costs, volumes, and profits.

Question 6

Total variable costs change proportionately with changes in output activity.

Question 7

The contribution margin per unit is equal to the sales price per unit minus the variable costs per unit.

Question 8

The relevant range of operations excludes extremely high and low levels of production that are not likely to occur.

Question 9

As the level of output activity increases, the variable cost per unit remains constant.

Question 10

Variable costs per unit increase proportionately with increases in output activity.

Question 11

The margin of safety can be expressed in units of product, in dollars, or as a percent of sales.

Question 12

The margin of safety is the amount that sales can drop before the company incurs a loss.

Question 13

Contribution margin is the amount of sales that exceeds total variable costs.

Question 14

A step-wise variable cost can be separated into a fixed component and a variable component.

Question 15

As the level of output activity increases, fixed cost per unit remains constant.

Question 16

Dividing a mixed cost into its separate fixed and variable cost components makes it more difficult to perform cost-volume-profit analysis.

Question 17

The extent, or relative size, of fixed costs in the total cost structure is known as operating leverage.

Question 18

The relevant range of operations includes extremely high and low levels of production that are unlikely to occur.

Question 19

The method most likely to produce the most precise line of cost behavior is the scatter diagram.

Question 20

Cost-volume-profit analysis is a precise tool for perfectly predicting the profit consequences of cost changes, price changes, and volume changes.

Question 21

A visual line fit to points in a scatter diagram may be used to identify the approximate relation between past cost and volume.

Question 22

The contribution margin per unit is the price at which a unit must be sold in order for the company to break even.

Question 23

A graphic depiction of the break-even point is known as a cost-volume-profit (CVP) chart.

Question 24

Cost-volume-profit analysis cannot be used when a firm produces and sells more than one product.

Question 25

To calculate the break-even point in units, one must know unit fixed cost, unit variable cost, and sales price.

Question 26

On a typical cost-volume-profit graph, unit sales are shown on the horizontal axis and both dollars of sales and dollars of costs are represented on the vertical axis.

Question 27

To determine the slope of the variable cost from a scatter diagram, divide the change in volume by the change in cost.

Question 28

The high-low method can be used to derive an estimated line of cost behavior.

Question 29

The break-even point is the sales level at which a company neither earns a profit nor incurs a loss.

Question 30

The contribution margin ratio is the percent by which the margin of safety exceeds the break-even point.

Question 31

Least-squares regression is a statistical method for deriving an estimated line of cost behavior.

Question 32

There are only two methods to derive an estimated line of cost behavior; the high-low method and the scatter diagram.

Question 33

The proportion of sales volumes for various products is known as the composite mix.

Question 34

Degree of operating leverage (DOL) is defined as total contribution margin in dollars divided by pretax income.

Question 35

The high-low method of deriving an estimated cost line uses all the data points available.

Question 36

A cost-volume-profit (CVP) chart is a graph that plots volume on the horizontal axis and costs and sales on the vertical axis.

Question 37

Scatter diagrams plot volume on the vertical axis and cost on the horizontal axis.

Question 38

Break-even analysis is a special case of cost-volume-profit analysis.

Question 39

A break-even point can be calculated either in units or in dollars.

Question 40

The high-low method is used to derive an estimated line of cost behavior by graphically connecting the two cost amounts identified with the highest and lowest volume levels.

Question 41

A target income refers to:

A) Income at the break-even point.
B) Income from the most recent period.
C) Income planned for a future period.
D) Income only in a multiproduct environment.
E) Income at the minimum contribution margin.

Question 42

An important tool in predicting the volume of activity, the costs to be incurred, the sales to be earned, and the profit to be received is:

A) Target income analysis.
B) Cost-volume-profit analysis.
C) Least-squares regression of costs.
D) Variance analysis.
E) Process costing.

Question 43

Cost-volume-profit analysis is based on three basic assumptions. Which of the following is not one of these assumptions?

A) Total fixed costs remain constant over changes in volume.
B) Curvilinear costs change proportionately with changes in volume throughout the relevant range.
C) Variable costs per unit of output remain constant as volume changes.
D) Sales price per unit remains constant as volume changes.
E) All of these are basic assumptions.

Question 44

If a firm's forecasted sales are $250,000 and its break-even sales are $190,000, the margin of safety in dollars is:

A) $60,000.
B) $250,000.
C) $190,000.
D) $440,000.
E) $24,000.

Question 45

The excess of expected sales over the sales level at the break-even point is known as the:

A) Sales turnover.
B) Profit margin.
C) Contribution margin.
D) Relevant range.
E) Margin of safety.

Question 46

A company's normal operating range, which excludes extremely high and low volumes that are not likely to occur, is called the:

A) Margin of safety.
B) Contribution range.
C) Break-even point.
D) Relevant range.
E) High-low point.

Question 47

A cost that changes with volume, but not at a constant rate, is called a:

A) Variable cost.
B) Curvilinear cost.
C) Step-wise variable cost.
D) Fixed cost.
E) Differential cost.

Question 48

A cost that remains the same in total even when volume of activity varies is a:

A) Fixed cost.
B) Curvilinear cost.
C) Variable cost.
D) Step-wise variable cost.
E) Standard cost.

Question 49

A cost that changes in proportion to changes in volume of activity is a(n):

A) Differential cost.
B) Fixed cost.
C) Incremental cost.
D) Variable cost.
E) Product cost.

Question 50

Curvilinear costs always increase:

A) With decreases in volume.
B) In constant proportion to changes in production levels.
C) When management performs break-even analysis.
D) When volume increases, but not at a constant rate.
E) On a per unit basis when volume of activity goes down.

Question 51

The margin of safety is the excess of:

A) Break-even sales over expected sales.
B) Expected sales over variable costs.
C) Expected sales over fixed costs.
D) Fixed costs over expected sales.
E) Expected sales over break-even sales.

Question 52

A cost that can be separated into fixed and variable components is called a:

A) Mixed cost.
B) Step-variable cost.
C) Composite cost.
D) Curvilinear cost.
E) Differential cost.

Question 53

During its most recent fiscal year, Simon Enterprises sold 200,000 electric screwdrivers at a price of $15 each. Fixed costs amounted to $400,000 and pretax income was $600,000. What amount should have been reported as variable costs in the company's contribution margin income statement for the year in question?

A) $2,400,000.
B) $1,600,000.
C) $3,000,000.
D) $2,000,000.
E) $1,000,000.

Question 54

A term describing a firm's normal range of operating activities is:

A) Relevant range of operations.
B) Break-even level of operations.
C) Margin of safety of operations.
D) Relevant operating analysis.
E) High-low level of operations.

Question 55

Which one of the following statements is not true?

A) Total fixed costs remain the same regardless of volume within the relevant range.
B) Total variable costs change with volume.
C) Total variable costs decrease as the volume increases.
D) Fixed costs per unit increase as the volume decreases.
E) Variable costs per unit remain the same regardless of the volume.

Question 56

A cost that remains constant over a limited range of volume, but increases by a lump sum when volume increases beyond a maximum amount, is a(n):

A) Step-wise cost.
B) Fixed cost.
C) Curvilinear cost.
D) Incremental cost.
E) Opportunity cost.

Question 57

An important assumption in multiproduct analysis is that the sales mix is known and remains constant.

Question 58

Hartman Co. has fixed costs of $36,000 and a contribution margin ratio of 24%. If expected sales are $200,000, what is the margin of safety as a percent of sales?

A) 6%.
B) 25%.
C) 33%.
D) 50%.
E) 75%.

Question 59

Select cost information for Winfrey Enterprises is as follows: Based on this information:

A) Both direct materials and rent expense are variable costs.
B) Utilities expense is a mixed cost and rent expense is a variable cost.
C) Utilities expense is a mixed cost and rent expense is a fixed cost.
D) Direct materials is a fixed cost and utilities expense is a mixed cost.
E) Both direct materials and utilities expense are mixed costs.

Question 60

A firm expects to sell 25,000 units of its product at $11 per unit. Pretax income is predicted to be $60,000. If the variable costs per unit are $5, total fixed costs must be:

A) $65,000.
B) $90,000.
C) $125,000.
D) $215,000.
E) $275,000.

Question 61

The budgeted income statement presented below is for Griffith Corporation for the coming fiscal year. If Griffith Corporation is able to achieve the budgeted level of sales, its margin of safety in dollars would be:

A) $172,420.
B) $150,000.
C) $262,500.
D) $275,862.
E) $310,115.

Question 62

A statistical method for deriving an estimated line of cost behavior is the:

A) Scatter diagram method.
B) High-low method.
C) Composite method.
D) CVP charting method.
E) Least-squares regression method.

Question 63

Conan Company has total fixed costs of $112,000. Its product sells for $35 per unit and variable costs amount to $25 per unit. Next year Conan Company wishes to earn a pretax income that equals 10% of fixed costs. How many units must be sold to achieve this target income level?

A) 1,120.
B) 8,214.
C) 11,200.
D) 12,320.
E) 14,080.

Question 64

The least-squares regression method is:

A) A graphical method to identify cost behavior.
B) An algebraic method to identify cost behavior.
C) A statistical method to identify cost behavior.
D) The only identify cost estimation method allowed by GAAP.
E) A cost estimation method that only uses the two extreme values.

Question 65

A graph used to analyze past cost behaviors by displaying costs and volume levels for each period as points on the diagram is called a:

A) Least-squares diagram.
B) Step-wise diagram.
C) Scatter diagram.
D) Break-even diagram.
E) Composite diagram.

Question 66

A company's product sells at $12 per unit and has a $5 per unit variable cost. The company's total fixed costs are $98,000.The contribution margin per unit is:

A) $5.00.
B) $7.00.
C) $8.17.
D) $12.00.
E) $17.00.

Question 67

A product sells for $200 per unit, and its variable costs per unit are $130. The fixed costs are $420,000. If the firm wants to earn $35,000 pretax income, how many units must be sold?

A) 6,500.
B) 6,000.
C) 500.
D) 5,000.
E) 5,500.

Question 68

Total contribution margin in dollars divided by pretax income is the:

A) Degree of operating leverage.
B) Contribution margin ratio.
C) Margin of safety.
D) Sales mix.
E) Break-even point in units.

Question 69

Brown Company's contribution margin ratio is 24%. Total fixed costs are $84,000. What is Brown's break-even point in sales dollars?

A) $20,160.
B) $110,526.
C) $350,000.
D) $240,000.
E) $84,000.

Question 70

In cost-volume-profit analysis, the unit contribution margin is:

A) Sales price per unit less cost of goods sold per unit.
B) Sales price per unit less unit fixed cost per unit.
C) Sales price per unit less total variable cost per unit.
D) Sales price per unit less unit total cost per unit.
E) The same as the contribution margin ratio.

Question 71

A method that estimates cost behavior by connecting the costs linked to the highest and lowest volume is called the:

A) Scatter method.
B) High-low method.
C) Least-squares method.
D) Break-even method.
E) Step-wise method.

Question 72

Management anticipates fixed costs of $72,500 and variable costs equal to 40% of sales. What will pretax income equal if sales are $325,000?

A) $57,500.
B) $122,500.
C) $130,000.
D) $181,250.
E) $252,500.

Question 73

Which of the following is the correct interpretation of a degree of operating leverage of 5?

A) Operating leverage of 5 means that sales can decrease by 5% before the firm's current level of sales will hit the break-even point.
B) Operating leverage of 5 means that if sales increase by 5% the firm will hit its break-even point.
C) Operating leverage of 5 means that if sales increase by 5%, there will be a 25% increase in the firm's pretax profit.
D) Operating leverage of 5 measures the degree of debt employed by the firm's debt structure.
E) Operating leverage of 5 means that the company would need to increase sales by 5 times in order to hit its break-even point.

Question 74

A line on a scatter diagram that is intended to reflect the past relation between cost and volume is the:

A) Margin of safety line.
B) Break-even line.
C) Contribution margin line.
D) Estimated line of cost behavior.
E) Standard cost line.

Question 75

Use the following information to determine the margin of safety in dollars:

A) $88,500.
B) $108,500.
C) $173,600.
D) $326,400.
E) $500,000.

Question 76

The contribution margin ratio:

A) Is the percent of each sales dollar that remains after deducting total unit variable cost.
B) Is the percent of each sales dollar that remains after deducting total unit fixed cost.
C) Is the percent of each sales dollar that remains to cover fixed costs and contribute to the managers' incomes.
D) Cannot be used in conjunction with other analytical tools.
E) Is the same as the unit contribution margin.

Question 77

The sales level at which a company neither earns a profit nor incurs a loss is the:

A) Relevant range.
B) Margin of safety.
C) Step-wise variable level.
D) Break-even point.
E) Contribution margin.

Question 78

Ivan Company has a goal of earning $70,000 after-tax income. Ivan would need to pay $20,000 of income taxes at the target level of income. The contribution margin ratio is 30%. What amount of dollar sales must be achieved to reach the goal if fixed costs are $36,000?

A) $23,333.
B) $36,000.
C) $300,000.
D) $353,333.
E) $420,000.

Question 79

The budgeted income statement presented below is for Griffith Corporation for the coming fiscal year. If Griffith Corporation's income tax rate is 40%, compute the number of units that must be sold in order to achieve a target pretax income of $130,000.

A) 53,165.
B) 81,250.
C) 36,207.
D) 50,000.
E) 58,621.

Question 80

A company's product sells at $12 per unit and has a $5 per unit variable cost. The company's total fixed costs are $98,000. The break-even point in units is:

A) 5,158.
B) 7,000.
C) 8,167.
D) 14,000.
E) 19,600.