Deck 18: Cost Volume Profit Analysis

Question 1

Epex Pty Ltd makes a single product.Annual fixed expenses are $48 000 and the contribution margin ratio is 30 per cent.What volume in sales dollars is necessary for Epex to achieve a target profit of $15 000?

A) $63 000
B) $90 000
C) $160 000
D) $210 000

Answer 1

D

Question 2

If the contribution margin is $10,the selling price per unit is $25 and the fixed costs are $45 000,what is the number of units that must be sold to break even?

A) 4500
B) 4000
C) 3000
D) 1800

Answer 2

A

Question 3

Ribco Company Ltd makes and sells only one product.The unit contribution margin is $6,and the break-even point in unit sales is 24 000.What are the company's fixed expenses?

A) $400 000
B) $14 400
C) $40 000
D) $144 000

Answer 3

D

Question 4

The break-even point in sales dollars can be calculated by dividing:

A) fixed expenses by the unit contribution margin
B) variable expenses by the unit contribution margin
C) fixed expenses by the contribution margin ratio
D) variable expenses by the contribution margin ratio

Question 5

Suppose variable expenses were to decrease by $3.00 per unit.What effect would this have on the cost volume profit analysis?

A) The unit contribution margin would rise by $3.00.
B) The break-even point in units would increase.
C) The break-even point in units would decrease.
D) The unit contribution margin would rise by $3.00 AND the break-even point in units would decrease.

Question 6

The concept of cost volume profit analysis is based on classifying costs as:

A) fixed and variable costs
B) variable product and period costs
C) product controllable and uncontrollable costs
D) fixed and variable costs AND variable product and period costs

Question 7

The firm's fixed costs are $60 000,variable cost per unit is $15 and selling price per unit is $20.The break-even point in sales dollars is:

A) $80 000
B) $120 000
C) $240 000
D) $300 000

Question 8

The break-even point is calculated by:

A) sales volume × unit selling price / sales volume × unit variable cost
B) variable costs / total revenue
C) fixed costs / unit contribution margin
D) variable costs / unit contribution margin

Question 9

Suppose the selling price per unit increased from $5.00 to $6.00 per ticket.What effect would this have on the cost volume profit analysis?

A) The contribution margin would increase.
B) The contribution margin would decrease.
C) The break-even point in units would decrease.
D) The contribution margin would increase AND the break-even point in units would decrease.

Question 10

The contribution margin ratio is (all on a per unit basis):

A) the difference between the selling price and the variable cost
B) variable cost divided by selling price
C) contribution margin divided by selling price
D) contribution margin divided by fixed cost

Question 11

The firm's fixed costs are $60 000,variable cost per unit is $15 and selling price per unit is $20.The break-even point in units is:

A) 1715
B) 3000
C) 4000
D) 12 000

Question 12

Assume that selling price is greater than variable cost.Now suppose the selling price and the variable cost per unit increase by $5.00.What effect would these changes have on the contribution margin in dollars and on the contribution margin ratio?
Dollar contribution margin
Contribution margin ratio

A) Increase
Increase
B) Decrease
Decrease
C) No change
No change
D) No change
Decrease

Question 13

The difference between the budgeted sales revenue and the break-even sales revenue is the:

A) unit contribution margin
B) contribution margin percentage
C) safety margin
D) operating leverage

Question 14

The firm's fixed costs are $60 000,variable cost per unit is $15 and selling price per unit is $20.The contribution margin per unit is:

A) $5
B) $15
C) $20
D) $35

Question 15

The firm's fixed costs are $60 000,variable cost per unit is $15 and selling price per unit is $20.The contribution margin percentage is:

A) 2.5%
B) 25%
C) 33%
D) 400%

Question 16

Which of the following changes will affect the unit contribution margin?

A) Changes in fixed cost
B) Changes in variable cost per unit
C) Changes in selling price per unit
D) Both changes in variable cost per unit AND changes in selling price per unit

Question 17

The contribution margin per unit is calculated as the difference between:

A) sales revenue per unit and fixed cost per unit
B) sales revenue per unit and variable cost per unit
C) sales revenue per unit and product cost per unit
D) fixed cost per unit and variable cost per unit

Question 18

The break-even point is that level of activity where:

A) total revenue equals total cost
B) total revenue equals fixed cost
C) total revenue equals variable cost
D) total revenue equals product cost

Question 19

If the contribution margin is $10,the selling price per unit is $25 and the fixed costs are $45 000,to earn a targeted net profit of $50 000 the total dollar value of sales must be at least:

A) $10 000
B) $112 500
C) $122 500
D) $237 500

Question 20

Suppose fixed expenses were to increase by 5.9 per cent.How would this affect the break-even point?

A) The break-even point in units would rise 5.9 per cent.
B) The break-even point in dollars would rise 11.8 per cent.
C) The break-even point in dollars would rise by more than 5.9 per cent.
D) The break-even point in dollars would fall by more than 5.9 per cent.

Question 21

If the operating leverage factor is known,which of the following can be determined?

A) Contribution margin ratio
B) Contribution margin in dollars
C) Break-even point in sales dollars
D) Percentage change in profit for a given percentage change in sales

Question 22

Maxie Pty Ltd makes and sells two types of shoes,Plain and Fancy.Product data is as follows:
Sixty per cent of the sales in units are Plain and annual fixed expenses are $45 000.Determine the weighted average unit contribution margin.

A) $17.00
B) $9.25
C) $9.00
D) $4.80

Question 23

Which of the following assumptions is made when doing a cost volume profit analysis based on activity-based costing?

A) Sales volume equals production volume.
B) As production volume changes,the number of set-ups,inspections,material moves etc.does not change.
C) The purchase price of raw materials per unit remains constant.
D) Sales volume equals production volume AND the purchase price of raw materials per unit remains constant.

Question 24

Maxie Pty Ltd makes and sells two types of shoes,Plain and Fancy.Product data is as follows:
Sixty per cent of the sales in units are Plain and annual fixed expenses are $45 000 and the sales mix remains constant.Assume an income tax rate of 20 per cent.The break-even point for this data is 5000 units in total.How will the calculation of the break-even point change (if at all)if the relative percentages of the products in the mix change from 60 per cent Plain shoes to 40 per cent Fancy shoes?

A) The break-even point in total will not change.The only change will be the relative number of each of the units.
B) Neither the break-even point in total nor the relative number of each of the units to produce at break-even will change.
C) The break-even point will change because the calculation above assumes a constant mix,namely 60 per cent to 40 per cent.
D) The break-even point will be higher.

Question 25

Econ Pty Ltd produced and sold 45 000 units of a single product last year.Data concerning the year's profit and loss statement is as follows:
What was Econ's break-even point (rounded)in unit sales?

A) $720 000
B) $762 330
C) $1 080 000
D) $1 134 000

Question 26

Maxie Pty Ltd makes and sells two types of shoes,Plain and Fancy.Product data is as follows:
Sixty per cent of the sales in units are Plain and annual fixed expenses are $45 000 and the sales mix remains constant.How many units of Fancy must Maxie Pty Ltd sell to earn a target profit of $31 500?

A) 3400
B) 2000
C) 7286
D) 8500

Question 27

Econ Pty Ltd produced and sold 45 000 units of a single product last year.Data concerning the year's profit and loss statement is as follows:
What was Econ's break-even point in dollar sales?

A) $36 000
B) $24 000
C) $25 411
D) $26 832

Question 28

Cost volume profit analysis is based on certain general assumptions.Which of the following statements about these assumptions is/are true?

A) The price of the product will remain constant as volume varies within the relevant range.
B) Expenses can be categorised as fixed,variable or semivariable.
C) Total fixed costs remain constant and unit variable cost remains unchanged as activity varies.
D) All of the given answers

Question 29

The extent to which an organisation uses fixed costs in its cost structure is called:

A) financial leverage
B) operating leverage
C) fixed cost leverage
D) operating leverage AND fixed cost leverage

Question 30

Under an activity-based costing system,the break-even point in units is calculated by:

A) total non-volume activity cost / selling price per unit - fixed cost per unit
B) total non-volume activity cost / selling price per unit - unit level cost per unit
C) total non-volume activity cost / contribution margin per unit
D) total fixed costs / contribution margin per unit

Question 31

Econ Pty Ltd produced and sold 45 000 units of a single product last year.Data concerning the year's profit and loss statement are as follows:
What was Econ's total contribution margin for the year?

A) $495 000
B) $540 000
C) $724 500
D) $810 000

Question 32

The total contribution margin is calculated as the difference between:

A) sales price and variable cost per unit
B) sales price and fixed cost per unit
C) total revenue and total variable cost
D) total revenue and total cost

Question 33

Maxie Pty Ltd makes and sells two types of shoes,Plain and Fancy.Product data is as follows:
Sixty per cent of the sales in units are Plain and annual fixed expenses are $45 000 and the sales mix remains constant.Determine the number of units of Plain and Fancy respectively that Maxie Pty Ltd must sell to break even.

A) 2000;3000
B) 0;5000
C) 5000;0
D) 3000;2000

Question 34

Alclear Pool & Spa presently provides a weekly maintenance service to 150 homes.Fixed costs are approximately $13 000 per quarter (13 weeks).Customers pay $270 per quarter for the weekly service.All contracts are written for one quarter (13 weeks).Now assume the contracts with customers are restructured such that the price per quarter is $300 and the contribution margin percentage is 57 per cent.Assume the tax rate is 25 per cent.Determine the sales dollars (to the nearest $100)necessary to obtain an after-tax profit of $9600 per quarter.

A) $39 600
B) $45 300
C) $52 900
D) $90 200

Question 35

Maxie Pty Ltd makes and sells two types of shoes,Plain and Fancy.Product data is as follows:
Sixty per cent of the sales in units are Plain and annual fixed expenses are $45 000 and the sales mix remains constant.Assume an income tax rate of 20 per cent.The break-even point for this data is 5000 units in total.How will the calculation of the break-even point change (if at all)if the relative percentages of the products in the mix change from 60 per cent Plain shoes to 40 per cent Fancy shoes?

A) The break-even point in total will not change.The only change will be the relative number of each of the units.
B) Neither the break-even point in total nor the relative number of each of the units to produce at break-even will change.
C) The break-even point will change because the calculation above assumes a constant mix,namely 60 per cent to 40 per cent.
D) The break-even point will be higher.

Question 36

Which of the following are advantages of an activity-based costing approach to cost volume profit (CVP)analysis as compared to a CVP analysis based on traditional product costing?

A) Unit variable costs are recognised more clearly.
B) Fixed costs are viewed as fixed only with respect to changes in sales and production volume,but not as fixed with respect to changes in other cost drivers such as number of set-ups and number of material moves.
C) The assumption in traditional CVP analysis that sales and production volumes are equal can be relaxed.
D) Unit variable costs are recognised more clearly AND fixed costs are viewed as fixed only with respect to changes in sales and production volume,but not with respect to changes in other cost drivers such as number of set-ups and number of material moves.

Question 37

If total costs remain the same,the smaller the proportion of fixed costs in a firm's cost structure:

A) the greater the impact on profit from a percentage change in sales volume
B) the smaller the impact a percentage change in sales volume will have on profit
C) the lower the contribution margin
D) the smaller the impact a percentage change in sales volume will have on profit AND the lower the contribution margin

Question 38

Maxie Pty Ltd makes and sells two types of shoes,Plain and Fancy.Product data is as follows:
Sixty per cent of the sales in units are Plain and annual fixed expenses are $45 000.Determine the weighted average unit contribution margin.

A) $17.00
B) $9.25
C) $9.00
D) $4.80

Question 39

Maxie Pty Ltd makes and sells two types of shoes,Plain and Fancy.Product data is as follows:
Sixty per cent of the sales in units are Plain and annual fixed expenses are $45 000 and the sales mix remains constant.Assume an income tax rate of 20 per cent.How many units of Plain must Maxie Pty Ltd sell to earn an after tax profit of $18 000?

A) 4500
B) 7875
C) 3960
D) 8437

Question 40

Alclear Pool & Spa presently provides a weekly maintenance service to 150 homes.Variable costs amount to approximately $12 per week for labour,mileage,chemicals and other supplies.Fixed costs are approximately $13 000 per quarter (13 weeks).Customers pay $270 per quarter for the weekly service.All contracts are written for one quarter (13 weeks).Determine the number of customers (rounded)to break even.

A) 95
B) 103
C) 114
D) 197

Question 41

Econ Pty Ltd produced and sold 45 000 units of a single product last year.Data concerning the year's profit and loss statement is as follows:
What was Econ's operating leverage?

A) 4
B) 5
C) 6
D) 7

Question 42

Which of the following statements applies to cost volume profit and sensitivity analysis?
I)Only one variable is changed
Ii)All variables are changed.
Iii)One or more variables are changed.iv.Only one set of variables need be assessed.

A) i
B) ii
C) iii
D) iv

Question 43

Which of the following are assumptions of cost volume profit analysis?
I)Sales mix is constant
Ii)External factors do not change.
Iii)Fixed costs change with sales volume.iv.Variable costs are constant per unit of sales.

A) i,ii and iii
B) ii,iii and iv
C) i,ii and iv
D) All of the given answers

Question 44

Nesto sells two products: X and Y.The contribution margin ratio for X is 40 per cent and for Y is 50 per cent.If the proportion of sales of X decreases,what will happen to the weighted average contribution margin?

A) Increase
B) Decrease
C) Remain the same
D) Changes in sales volume do not affect weighted average contribution margin

Question 45

Econ Pty Ltd produced and sold 45 000 units of a single product last year.Data concerning the year's profit and loss statement is as follows:
Assuming all cost relationships will remain constant for the coming year,how many units must be sold for the company to earn an after-tax profit of $180 000 if the income tax rate is 40 per cent?

A) 45 000
B) 47 500
C) 61 000
D) 70 000

Question 46

Which of the following will increase a company's break-even point?

A) Increasing the contribution margin per unit
B) Increasing the variable cost per unit
C) Reducing the company's total fixed costs
D) Increasing the selling price per unit

Question 47

The firm uses activity-based costing and has the following cost structure: selling price $50,batch cost $20 000,unit level costs $30 per unit,facility costs $120 000 and product costs $60 000.What is the break-even point in units?

A) 6000
B) 7000
C) 9000
D) 10 000

Question 48

Under activity-based costing systems,break-even point in units treats which costs as included in the numerator?
I)Batch costs
Ii)Product costs
Iii)Faculty level costs

A) i and ii
B) i and iii
C) ii and iii
D) All of the given answers

Question 49

Cost volume profit analysis,including customer-related costs,must incorporate which of the following costs:
I)market level costs
Ii)customer level costs
Iii)order level costs
Iv)batch level costs

A) i and ii
B) ii and iii
C) i,ii and iii
D) All of the given answers

Question 50

If break-even sales volume is $40 000 and contribution margin $7500,what is the net profit?

A) $7500
B) $32 500
C) $0
D) Insufficient information to determine

Question 51

Would you expect the following to be high or low in a labour-intensive firm: (1)operating leverage, (2)safety margin and (3)profit potential?

A) low,high,low
B) low,low,high
C) high,low,high
D) high,low,low

Question 52

Your local pizza parlour has annual fixed costs of $20 000,the pizza price is $8 and the unit variable cost $4.What is the contribution margin ratio?

A) 40%
B) 45%
C) 50%
D) 60%

Question 53

For a firm that would break even at $200 000 sales and earn a profit of $30 000 at sales of $250 000,which of the following statements is always true?

A) Fixed costs are $80 000.
B) The selling price is $2 per unit.
C) Profit at sales of $300 000 would be $80 000.
D) The contribution margin is 60 per cent of sales.

Question 54

Econ Pty Ltd produced and sold 45 000 units of a single product last year.Data concerning the year's profit and loss statement is as follows:
Assuming sales revenue increases by 15 per cent,what will be the percentage increase in profit before income tax?

A) 15%
B) 45%
C) 60%
D) 75%

Question 55

Would you expect the following to be high or low in an automated firm: (1)safety margin, (2)operating leverage and (3)profit potential?

A) low,high,high
B) high,high,low
C) low,high,low
D) high,low,low

Question 56

Would you expect the following to be high or low in an automated firm: (1)level of fixed costs, (2)level of risk and (3)break-even point?

A) high,high,high
B) low,high low
C) high,high,low
D) low,low,high

Question 57

Which of the following do limitations of cost volume profit include?
I)Not all costs can be classified as fixed or variable
Ii)Revenue changes may not be linear.
Iii)Sales volume is the only cost driver.iv.Inventory levels do not change.

A) i and ii
B) i and iii
C) i,ii and ii
D) All of the given answers

Question 58

'Goal seek' analysis provides for which of the following?
I)An output for a given set of inputs
Ii)Required inputs for a given output
Iii)A range of outputs for a range of inputs

A) i
B) ii
C) iii
D) None of the given answers

Question 59

The contribution margin ratio is calculated as follows:

A) total contribution margin / total sales revenue
B) total profit / sales revenue
C) contribution margin per unit / selling price per unit
D) total contribution margin / total sales revenue AND contribution margin per unit / selling price per unit

Question 60

Would you expect the following to be high or low in a labour-intensive industry: (1)operating leverage, (2)break-even point and (3)safety margin?

A) high,high,low
B) low,low,high
C) low,low,low
D) high,high,high

Question 61

Cost volume profit analysis is a popular tool in practice.Why is it so popular?

A) It is a simple tool that can be used for long-run decision making.
B) It is a simple tool to apply and is suitable for short-run decision making.
C) It can be employed in all types of firms.
D) It is a simple tool to apply and is suitable for short-run decision making AND it can be employed in all types of firms.

Question 62

Cost volume profit analysis is based on the separation of fixed and variable costs.The analysis can be stated as an equation as follows: P = a(b - c)- d.In this statement of the equation,P is the profit,and:

A) b is the price per unit;c is the variable cost per unit;a is the number of units produced;d is the fixed cost.
B) b is the number of units produced;c is the fixed cost;a is the price per unit;d is the variable cost per unit.
C) b is the fixed cost;c is the number of units produced;a is the variable cost per unit;d is the price per unit.
D) All of the given answers are incorrect because they all refer to the number of units produced.In fact,profit is determined according to the number of units sold.

Question 63

A firm makes and sells three standard products in a specific product mix.All three products are made using the same production facilities.The following budgeted data for the coming year is available.Total annual fixed costs $348 000
Tax rate 40%
Calculate the margin of safety for the firm.

A) $1 776 000
B) $1 664 000
C) $1 332 000
D) None of the given answers

Question 64

Which of the following statements about the cost-volume-profit graph is false?

A) It can be used to identify both profit areas and loss areas.
B) It shows the relevant range of total revenue.
C) It cannot be used to make managerial decisions involving step-wise costs.
D) It can be used to identify break-even points.

Question 65

A firm is reorganising and reclassifying its cost structure.The firm previously classified the item 'glue and nails' as indirect material.The firm is considering now tracing this cost directly to products and treating 'glue and nails' as direct material.What is the effect on the break-even point (if any)of that change,provided all other items remain unchanged?

A) The break-even point will not change.
B) The break-even point will increase.
C) The break-even point will decrease.
D) The break-even point will change but without actual figures,it is impossible to say in what direction the change will be.

Question 66

A firm has an operating leverage factor of 4.This means that:

A) if sales revenue increased by 2 per cent,profit would increase by 4 per cent.
B) if sales revenue increased by 2 per cent,profit would increase by 8 per cent.
C) if sales revenue increased by 2 per cent,profit would increase by 2 per cent.
D) profit would increase by 4 times the dollar increase in sales revenue.

Question 67

A firm is reorganising and reclassifying its cost structure.What is the effect on the break-even point (if any)if direct labour costs are reduced and fixed indirect labour costs are increased,provided all other items remain unchanged?

A) The break-even point will increase.
B) The break-even point will decrease.
C) The break-even point will change but without actual figures,it is impossible to say in what direction the change will be.
D) It is not possible to determine whether the break-even point will change or will remain the same.

Question 68

The margin of safety is the difference between:

A) contribution margin and net profit before tax
B) budgeted contribution margin and actual contribution margin
C) budgeted sales revenue and actual sales revenue
D) budgeted sales revenue and break-even sales revenue

Question 69

Which of the following statements is most correct with respect to the assumptions of the cost volume profit model?

A) The assumptions of the model are realistic.
B) The assumptions of the model are unrealistic,and therefore the model has little usefulness.
C) It is not possible to state whether the assumptions of the model are realistic or unrealistic.
D) The assumptions of the model are unrealistic,but the model has great usefulness in certain circumstances,as evidenced by its use in practice.

Question 70

A firm makes and sells three standard products in a specific product mix.All three products are made using the same production facilities.The following budgeted data for the coming year is available.Total annual fixed costs $348 000
Tax rate 40%
What sales revenue would be required for each of the three products to earn a profit of $139 200 after tax?

A) $400 000;$600 000;$480 000
B) $296 000;$740 000;$444 000
C) $200 000;$300 000;$240 000
D) $800 000;$1 200 000;$960 000

Question 71

Cost volume profit (CVP)analysis is based on a number of limiting assumptions.Which of the following is not one of the assumptions of the CVP model?

A) Production units equal sales units over the period.
B) If the firm has a product mix,the mix remains constant.
C) Cost behaviour is linear over the relevant range.
D) CVP analysis only applies to a single-product firm.

Question 72

The operating leverage factor is calculated as follows:

A) total profit / sales revenue
B) contribution margin per unit / selling price per unit
C) contribution margin / net profit
D) contribution margin / total fixed costs

Question 73

Chelonia Ltd manufactures small robot toys.It plans to introduce a new product,Speedie the robot tortoise.The following activity cost information is available:
It is expected that each unit of Speedie will sell for $23.The direct material cost for unit is $10.What is the break-even point in units? (For simplicity,assume that you can have partial moves and partial batches - that is,no need to round up the number of batches and the number of moves)

A) 518 units
B) 1000 units
C) 1250 units
D) 2850 units

Question 74

Chelonia Ltd manufactures small robot toys.It plans to introduce a new product,Speedie the robot tortoise.The following activity cost information is available:
It is expected that each unit of Speedie will sell for $23.The direct material cost for unit is $10.What is the contribution margin per units? (For simplicity,assume that you can have partial moves and partial batches - that is,no need to round up the number of batches and the number of moves)

A) $21
B) $13
C) $11
D) $4

Question 75

Cost volume profit applied to the service industry
A nursing home has the following annual budget:
Which of the following statements is correct if fixed administration costs were increased by $50 000 and all other matters remained the same?

A) The break-even point in inpatient days would increase.
B) The contribution would decrease.
C) The net profit would increase.
D) There would be no change in break-even point.

Question 76

A firm makes and sells three standard products in a specific product mix.All three products are made using the same production facilities.The following budgeted data for the coming year is available.Total annual fixed costs $348 000
Tax rate 40%
The break-even sales units for products 1,2 and 3 are:

A) 1200;3000;1800
B) 3600;9000;5400
C) 2400;6000;3600
D) Can only determine the total break-even point,not the units of each product

Question 77

Cost volume profit applied to the service industry
A nursing home has the following annual budget:
Calculate the budgeted contribution margin ratio.

A) 3%
B) 22%
C) 25%
D) 33.33%

Question 78

Cost volume profit applied to the service industry
A nursing home has the following annual budget:
Calculate the budgeted break-even point in inpatient days.

A) 7333 days
B) 22 000 days
C) 25 000 days
D) None of the given answers

Question 79

Cost volume profit applied to the service industry
A hotel has 10 000 room nights available per annum,charges $50 per room per night,pays fixed costs of $150 000 per annum and variable costs of $16 for each night a room is occupied.If the price per room per night is increased by 5 per cent,the break-even occupancy rate as a percentage (rounded)is:

A) 38%
B) 41%
C) 44%
D) 50%

Question 80

Which of the following is the most precise definition of the operating leverage factor? The operating leverage factor measures:

A) the proportion of fixed costs in a firm's cost structure
B) the proportion of variable costs in a firm's cost structure
C) the effect that an increase (decrease)in sales volume will have on profit
D) the proportion of fixed costs in a firm's cost structure AND the proportion of variable costs in a firm's cost structure