Deck 11: Cost-Volume-Profit Analysis for Decision Making

Question 1

Within the relevant range of activity fixed cost per unit will tend to:

A) vary directly and proportionately with the level of activity.
B) vary inversely with the level of activity.
C) remain constant.
D) exhibit erratic movements.

Answer 1

B

Question 2

A retail organisation pays its employees a commission of three percent on each sale. This is a:

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

Answer 2

C

Question 3

Items such as depreciation, property taxes and insurance can be described as:

A) fixed costs.
B) variable costs.
C) mixed costs.
D) incremental costs.

Answer 3

A

Question 4

In terms of cost behaviour, telephone expense and rent of premises are classified as:

A) fixed and variable, respectively.
B) mixed and fixed, respectively.
C) variable and fixed, respectively.
D) mixed and variable, respectively.

Question 5

On a per unit basis, a variable cost will:

A) decrease.
B) increase.
C) vary from unit to unit.
D) remain constant.

Question 6

Using the high-low method if the highest maintenance cost and machine hours are $50 000 and 10 000 respectively and the lowest maintenance cost and machine hours are $20 000 and 4000 respectively, the variable maintenance costs per machine hour are:

A) $6.
B) $2.50.
C) $5.
D) $4.50.

Question 7

CVP analysis is based on a number of assumptions, which of these is not one of those assumptions?

A) Fixed costs remain constant over the relevant range
B) Variable costs change proportionately with volume
C) Efficiency remains relatively unchanged
D) There are no mixed costs

Question 8

Mailroom clerks at Speedy Mail are paid a salary of $2200 per month. All clerks are full time. A new clerk is hired whenever the volume of mail increases by 40 000 pieces since the last clerk was hired. If volume of mail is the activity base mail-handling costs are:

A) indirect costs.
B) step-variable costs.
C) discretionary fixed costs.
D) committed fixed costs.

Question 9

Which of these is not an example of a mixed cost for an internet service provider?

A) Telephone
B) Insurance of office
C) Water rates
D) Electricity

Question 10

Which of these is an example of a fixed cost?

A) Factory rental
B) Factory bonuses linked to the level of production
C) Packaging costs
D) Raw materials

Question 11

The term 'relevant range', as used in cost accounting, means the range:

A) over which costs may fluctuate.
B) of activity within which an entity expects to operate.
C) over which relevant costs are incurred.
D) over which the firm has a margin of safety.

Question 12

Which of these quantitative methods will separate a semi-variable mixed cost into its fixed and variable components with the highest degree of precision?

A) High-low method
B) Simplex method
C) Linear regression method
D) Visual fit method

Question 13

Which statement relating to the visual fit of a scatter diagram technique is not true?

A) It is applied by drawing a straight line through the relationships of the dependent and the independent variables.
B) The difference between the points and the straight line is minimal compared to other lines that could be drawn.
C) The straight line through the points should have approximately the same number of observations above and below.
D) The approach is usually fairly accurate even though it is a simple method to apply.

Question 14

Mitcham Ltd has observed that at an activity level of 10 000 units the maintenance cost is $13 000, and at 20 000 units the maintenance cost is $18 000. Using the high-low method, the cost formula for maintenance is:

A) $6000 + $.60 x units.
B) $6000 + $.1.54 x units.
C) $5000 + $.60 x units.
D) $1.54/unit.

Question 15

The most serious shortcoming of the high-low method of estimating a mixed cost function is that it:

A) focuses on fixed costs only and ignores variable costs.
B) usually overestimates the total cost.
C) is based on a very small portion of the available data.
D) can only be used if contribution margin income statements are also being used.

Question 16

Which of these costs is a variable manufacturing cost?

A) Depreciation costs computed using the straight-line method
B) Direct labour costs
C) Factory rent
D) General Manager's salary

Question 17

The high-low method is:

A) a quote of the current price of the company's shares.
B) a quantitative technique that can be used to estimate a mixed cost function.
C) a technique for determining the margin of safety.
D) the range of activity when there are changes in productive output.

Question 18

As production increases what would you expect to happen to total fixed costs?

A) Remain the same
B) Decrease
C) Increase
D) Either increase or decrease, depending on the variable cost

Question 19

Which of these most accurately explains the behaviour of costs?

A) The majority of costs are variable per unit of production.
B) There is no norm; costs can be fixed, variable or a combination of both.
C) Costs can be fixed or variable but not a combination of both.
D) The majority of costs are fixed per unit of production.

Question 20

It is not an assumption of cost-volume-profit analysis that:

A) there are no mixed costs.
B) variable costs change proportionately with volume.
C) fixed costs remain constant over the relevant range.
D) efficiency remains unchanged.

Question 21

Break-even analysis adjusted for a profit factor:

A) is often adapted for different sales levels to aid in determining the possible levels of potential profit.
B) is a poor basis for evaluating the profitability of a venture.
C) will not necessarily increase the number of required units.
D) calculates breakeven profit.

Question 22

Product ABC sells for $50 per unit. The contribution margin per unit for ABC is $14. Total monthly fixed costs are estimated to be $91 000. The monthly break-even units for this product will be:

A) 16 500.
B) 3000.
C) 6500.
D) 22 000.

Question 23

Yamhill Marketing purchases novelty gift items from a wholesaler at a cost of $2 each and sells them at retail for $5 each. Yamhill's monthly expenses are as follows.
Rent $375
Sales wages/commissions $1000 month + 10% of sales
Utilities $115 per month
Depreciation on equipment $200 per month
If 1000 units are sold during January what is Yamhill's total contribution margin for the month?

A) $-810
B) $1310
C) $2500
D) $3000

Question 24

Product A sells for $20 per unit and has a contribution margin rate of 40%. Fixed expenses total $120 000 annually. How many units of Product A must be sold to yield a profit of $30 000?

A) 12 500
B) 18 750
C) 75 000
D) 50 000

Question 25

Variable expenses of Charlie Limited constitute 40% of sales value and its fixed expenses are $90 000. What is the break-even point in terms of sales dollars?

A) $150 000
B) $100 000
C) $110 000
D) $130 000

Question 26

Contribution margin can be calculated as:

A) profit + total variable costs.
B) fixed costs - variable costs.
C) total revenue - total fixed costs.
D) total revenue - total variable costs.

Question 27

Which of these will not result in a change to the contribution margin?

A) Variation of selling price per unit sold
B) Variation in the number of units sold
C) An increase in purchase price per unit
D) An increase in packaging costs

Question 28

If the targeted sales are 12 000 units. The sales price per unit is $70, fixed costs are $130 000 and variable costs are $40 per unit, then planned profit must be:

A) $4333.
B) $303 333.
C) $710 000.
D) $230 000.

Question 29

The break-even point is the level of activity :

A) where fixed costs are zero.
B) where fixed costs equal variable costs.
C) where total income equals total costs.
D) where fixed and variable costs reach the upper level of the relevant range.

Question 30

Contribution margin is:

A) sales less cost of sales.
B) equivalent to gross profit.
C) sales less fixed costs.
D) sales less variable costs.

Question 31

The term a in the cost equation y = a + bx represents:

A) total costs.
B) fixed costs.
C) variable costs.
D) total output.

Question 32

Contribution margin is:

A) sales less cost of sales.
B) sales less fixed costs.
C) sales per unit less (variable costs per unit plus fixed costs per unit).
D) sales less variable costs.

Question 33

Which of these is not an assumption of cost-volume-profit analysis?

A) The behaviour of income and expenses is regarded as linear over the relevant range.
B) Costs can be classified into variable and fixed categories.
C) The time value of money is incorporated into the analysis.
D) The sales mix will remain constant.

Question 34

When fixed costs are $24 000 and the contribution margin is $8, the break-even point is:

A) 3000 units.
B) 16 000 units.
C) 24 000 units.
D) 192 000 units.

Question 35

Which question can cost-volume-profit analysis not assist in answering?

A) What additional sales volume is required to offset an increase in purchase costs?
B) What is the most profitable sales mix?
C) Will the firm have sufficient funds to meet its commitments to creditors?
D) If variable costs, such as labour, are replaced with fixed costs, such as machinery, what will be the impact on profits?

Question 36

The formula for break-even point sales in dollars is:

A) FC = VC.
B) FC = Sales.
C) (FC + Profit) /CM%.
D) Sales = VC.

Question 37

In a cost-volume-profit graph the break-even point will be found:

A) where the predetermined overhead rate equals the contribution margin rate.
B) at the point where total income equals total fixed costs.
C) at the point where total income equals total fixed plus total variable costs.
D) where the total income line crosses the fixed costs line.

Question 38

The vertical axis of the cost-volume-profit chart represents:

A) margin of safety.
B) direct costs.
C) volume of units.
D) committed fixed costs.

Question 39

Costs which, in total, vary directly or nearly directly with the volume of production are known as:

A) indirect costs.
B) direct costs.
C) variable costs.
D) fixed costs.

Question 40

A small publishing house sold 50 000 copies of 'How to Control Dogs' in paperback at $3 per book. Fixed costs were $36 000 and variable costs were $90 000. What is the break-even point in units?

A) 6000
B) 20 000
C) 10 000
D) 30 000

Question 41

Elements Utensils has the following cost estimates: variable cost per unit is $9, total fixed costs are $58 000 and the projected sales price is $13 each. The new accountant suggests that fixed costs can be reduced by $8000. If so, how many units must be sold to produce a profit of $130 000?

A) 13 846
B) 32 000
C) 45 000
D) 47 000

Question 42

Suppose the break-even point for revenue for Knitwear Inc. is $1 000 000. Fixed costs are $400 000. Compute the contribution margin percentage.

A) 0.25
B) 0.40
C) 0.60
D) 0.65

Question 43

A change in which of these items would not affect the break-even point?

A) Number of units sold
B) Variable cost per unit
C) Total fixed costs
D) Sales price per unit

Question 44

Product X sells for $20 per unit and has a contribution margin rate of 40 percent. Fixed expenses total $120 000 annually. How many units of Product X must be sold to yield a profit of $30 000?

A) 12 500
B) 18 750
C) 75 000
D) 250 000

Question 45

Energetic Ltd, a sporting goods manufacturer, has recently created a new department to produce racquetball equipment. In the next period the department will manufacture a single product, an aluminium racquetball racquet, which has a unit selling price of $15. The variable costs per unit are $5 and the fixed costs per month are $10 000. The department has the capacity to produce 5000 units per month. Management would like to use the production facilities at full capacity and also yield a monthly profit of $30 000. Assuming demand can be increased by reducing the selling price, calculate the minimum unit price at which both these objectives can be achieved.

A) $13
B) $14
C) $12
D) $15

Question 46

If for an accounting period break-even sales are $250 000, actual sales are $480 000 and budgeted sales were $500 000, the margin of safety is:

A) $250 000.
B) $230 000.
C) $20 000.
D) cannot be calculated.

Question 47

Super Saver light globes can sell 10 000 units of a product for which the variable expenses are $4 per unit. Fixed expenses are $20 000 and the business wishes to earn a profit of $20 000. What price must Super Saver charge?

A) $5 per unit
B) $6 per unit
C) $7 per unit
D) $8 per unit

Question 48

The contribution margin for Brand X is $20 and for Brand Y $40 and the product mix is 5 Brand X models for each Brand Y model. The weighted average contribution margin per unit is $23.33.

A) $110 000
B) $100 000
C) $120 000
D) $105 000

Question 49

What will be the effect on the breakeven point if advertising is increased?

A) The break-even point will be lower.
B) The break-even point will be higher.
C) The break-even point will not change.
D) It is not possible to calculate the effect without having more information.

Question 50

Hall & Associates' data are:
Selling price per unit $12
Variable cost per unit $5
Fixed cost of operations per year $24 500
What is the break-even point in units?

A) 2042
B) 3500
C) 1140
D) 171 500

Question 51

A change in which of these would not affect the break-even point?

A) Number of units sold
B) Variable cost per unit
C) Total fixed costs
D) Sales price per unit

Question 52

Tilba Auto Parts has reported sales of $440 000, a contribution margin of $6 per unit, fixed costs of $90 000 and a profit of $42 000. How many units did they sell?

A) 22 000
B) 15 000
C) 73 333
D) 10 476

Question 53

Which statement relating to margin of safety is true?

A) It is the difference between fixed and variable costs at a given level of production.
B) It is the excess of actual sales over expected sales.
C) It indicates the amount of goods or services which can be safely produced by the business.
D) It is the amount by which sales can decrease before a loss occurs.

Question 54

Unit sales price $40
Variable production costs 15
Fixed production costs $8000
Selling and Administrative costs $4000 + 10% of sales
Given the above information the break-even point in sales dollars is:

A) $22 857
B) $19 200
C) $15 238
D) $12 811

Question 55

The income statement for Darwin Co is:
Sales $150 000
Variable Expense 90 000
Contribution Margin $ 60 000
Fixed Expenses 40 000
Profit $20 000
What is the break-even point in sales dollars?

A) $33 333
B) $50 000
C) $66 667
D) $100 000

Question 56

Gail Co sells a single product for $40 per unit. Fixed costs are $195 000 and variable costs equal 75% of sales. If fixed costs increase by $15 000, Gail will have to increase sales by how much just to earn profits equal to those earned before costs increased?

A) $20 000
B) $15 000
C) $80 000
D) $60 000

Question 57

If all other factors remain the same a 20% increase in both the selling price and variable costs of a product will:

A) lower the company's break-even point in units.
B) raise the company's break-even point in units.
C) have no effect on the company's break-even point in units.
D) cannot be determined without more information.

Question 58

Margin of safety is:

A) the excess of actual or expected sales over break-even sales.
B) the amount by which sales revenue exceeds variable costs.
C) equal to the contribution margin.
D) the amount by which actual sales exceed expected sales.

Question 59

Which of these would cause the break-even point to change?

A) An increase in sales
B) An increase in fixed costs due to an addition to the physical plant
C) An increase in the amount of inventory held
D) A decrease in total production

Question 60

A) 750
B) 2250
C) 3750
D) 4500

Question 61

How many hoes will be sold at breakeven point?

A) 1257 hoes
B) 2514 hoes
C) 2200 hoes
D) 1100 hoes

Question 62

The contribution margin for Brand X is $20 and for Brand Y $40 and the product mix is 5 Brand X models for each Brand Y model. The weighted average contribution margin is:

A) $21.22.
B) $30.
C) $60.
D) $23.33.

Question 63

The Glitter Company has three products - A, B and C - having contribution margins of $3, $2 and $1 respectively. The Sales Manager is planning to sell 200 000 units in the next period, consisting of A (20 000), B (80 000) and C (100 000). The company's fixed costs for the period were $255 000. What is the total break-even point for the company, assuming that the given sales mix is maintained?

A) 160 199
B) 159 375
C) 268 000
D) 320 000

Question 64

The following information is available for Eve Ltd

The variable expense variance is:

A) $22 000 U
B) $33 500 U
C) $16 000 U
D) $22 500 F

Question 65

The budgeted sales price multiplied by the difference between the actual and budgeted number of units sold is which variance?

A) Sales volume variance
B) Variable cost variance
C) Sales price variance
D) Margin of safety variance