Deck 8: Cost-Volume-Profit Analysis

Question 1

Which of the following items would NOT be considered in cost-volume-profit analysis?

A)units of production
B)fixed costs
C)product mix
D)gross profit margin

Answer 1

D

Question 2

Figure 8-3
Sarah Smith, a sole proprietor, has the following projected figures for next year: $\begin{array}{lr}\text { Selling price per unit } & £ 150.00 \\\text { Contributi on margin per unit } & £ 45.00 \\\text { Total fixed costs } & £ 630,000\end{array}$

-Refer to Figure 8-3. How many units must be sold to obtain a target before-tax profit of £270,000?

A)6,000 units
B)20,000 units
C)8,572 units
D)14,000 units

Answer 2

20,000 units

Question 3

Figure 8-2
Lewis Production Company had the following projected information for 2011: $\begin{array}{lr}\text { Selling price per unit } & £ 150 \\\text { Variable cost per unit } & £ 90 \\\text { Total fixed costs } & £ 300,000\end{array}$

-Refer to Figure 8-2. What is the contribution margin ratio?

A)0.400
B)1.667
C)2.500
D)0.600

Answer 3

0.400

Question 4

Total contribution margin is calculated by subtracting

A)cost of goods sold from total revenues.
B)fixed costs from total revenues.
C)total manufacturing costs from total revenues.
D)total variable costs from total revenues.

Question 5

The following data pertain to the three products produced by Alberts Ltd.: $\begin{array}{llrr}&A&B&C\\\text { Selling price per unit } & £ 5.00 & £ 7.00 & £ 6.00 \\\text { Variable costs per unit } &{4.00} &{5.00} &{3.00} \\\text { Contrihution margin ner unit } &{£ .100} & {£ 200}&£ 300 \\\end{array}$ Fixed costs are £90,000 per month. Sixty per cent of all units sold are Product A, 30 per cent are Product B, and 10 per cent are Product C.
What is the monthly break-even point for total units?

A)45,000 units
B)36,000 units
C)60,000 units
D)180,000 units

Question 6

Figure 8-4
Dirth Company sells only one product at a regular price of £7.50 per unit. Variable expenses are 60 per cent of sales and fixed expenses are £30,000. Management has decided to decrease the selling price to £6.00 in hopes of increasing its volume of sales.
Refer to Figure 8-4. What sales pound level is needed to obtain a before-tax profit of £60,000 when the selling price is £6.00 per unit?

A)£360,000
B)£120,000
C)£72,000
D)£90,000

Question 7

Figure 8-2
Lewis Production Company had the following projected information for 2011: $\begin{array}{lr}\text { Selling price per unit } & £ 150 \\\text { Variable cost per unit } & £ 90 \\\text { Total fixed costs } & £ 300,000\end{array}$

-Refer to Figure 8-2. What is the break-even point in units?

A)2,000 units
B)5,000 units
C)3,333 units
D)60,000 units

Question 8

Figure 8-4
Dirth Company sells only one product at a regular price of £7.50 per unit. Variable expenses are 60 per cent of sales and fixed expenses are £30,000. Management has decided to decrease the selling price to £6.00 in hopes of increasing its volume of sales.
Refer to Figure 8-4. What is the new break-even point in units for Dirth Company when the selling price is £6.00?

A)10,000 units
B)6,667 units
C)4,000 units
D)20,000 units

Question 9

The break-even point is

A)the volume of activity where all fixed costs are recovered.
B)where fixed costs equal total variable costs.
C)where total revenues equal total costs.
D)where total costs equal total contribution margin.

Question 10

Figure 8-4
Dirth Company sells only one product at a regular price of £7.50 per unit. Variable expenses are 60 per cent of sales and fixed expenses are £30,000. Management has decided to decrease the selling price to £6.00 in hopes of increasing its volume of sales.
Refer to Figure 8-4. What is the monetary sales level required to break even at the old price of £7.50?

A)£75,000
B)£12,000
C)£18,000
D)£50,000

Question 11

Figure 8-3
Sarah Smith, a sole proprietor, has the following projected figures for next year: $\begin{array}{lr}\text { Selling price per unit } & £ 150.00 \\\text { Contributi on margin per unit } & £ 45.00 \\\text { Total fixed costs } & £ 630,000\end{array}$

-Refer to Figure 8-3. What is the break-even point in monetary terms?

A)£426,000
B)£2,100,000
C)£189,000
D)£900,000

Question 12

On a profit-volume graph, the profit line intersects the horizontal axis at

A)the origin.
B)the break-even point.
C)a volume of 1,000 units.
D)a point where profit is greater than zero.

Question 13

Figure 8-3
Sarah Smith, a sole proprietor, has the following projected figures for next year: $\begin{array}{lr}\text { Selling price per unit } & £ 150.00 \\\text { Contributi on margin per unit } & £ 45.00 \\\text { Total fixed costs } & £ 630,000\end{array}$

-Refer to Figure 8-3. What selling price per unit is needed to obtain a before-tax profit of £270,000 at a volume of 4,000 units?

A)£150.00
B)£330.00
C)£225.00
D)£105.00

Question 14

Which of the following is a TRUE statement about sales mix?

A)Profits may decline with an increase in total monetary sales if the sales mix shifts to sell more of the high contribution margin product.
B)Profits may decline with an increase in total monetary sales if the sales mix shifts to sell more of the lower contribution margin product.
C)Profits will remain constant with an increase in total monetary sales if the total sales in units remains constant.
D)Profits will remain constant with a decrease in total monetary sales if the sales mix also remains constant.

Question 15

Figure 8-5
Information about the Harmon Company's two products includes: $\begin{array}{lrr}&\text { Product X} & \text { Product Y} \\\text { Unit selling price}&£9.00&£9.00\\\text { Unit variable costs:}\\\text { Manufacturing } & £ 5.25 & £ 6.75 \\\text { Selling } & .75&.75 \\\text { Total } &£6.00&£7.50\\\\\text { Monthly fixed costs are as follows: }\\\text { Manufacturing } & £ 82,500 \\\text { Selling and administrative } & \underline{45,000} \\\text { Total } & £ 127,500\end{array}$

-Refer to Figure 8-5. What is the total monthly sales volume in units required to break even when the sales mix in units is 70 per cent Product X and 30 per cent Product Y?

A)8,333 units
B)50,000 units
C)16,667 units
D)56,667 units

Question 16

Figure 8-5
Information about the Harmon Company's two products includes: $\begin{array}{lrr}&\text { Product X} & \text { Product Y} \\\text { Unit selling price}&£9.00&£9.00\\\text { Unit variable costs:}\\\text { Manufacturing } & £ 5.25 & £ 6.75 \\\text { Selling } & .75&.75 \\\text { Total } &£6.00&£7.50\\\\\text { Monthly fixed costs are as follows: }\\\text { Manufacturing } & £ 82,500 \\\text { Selling and administrative } & \underline{45,000} \\\text { Total } & £ 127,500\end{array}$

-Refer to Figure 8-5. If the sales mix in units is 50 per cent Product X and 50 per cent Product Y, the monthly break-even total monetary sales is

A)£150,000.
B)£450,000.
C)£510,000.
D)£630,000.

Question 17

The contribution margin at the break-even point

A)equals total fixed costs.
B)is zero.
C)plus total fixed costs equals total revenues.
D)is greater than variable costs.

Question 18

Product 1 has a contribution margin of £6.00 per unit, and Product 2 has a contribution margin of £7.50 per unit. Total fixed costs are £300,000. Sales mix and total volume varies from one period to another. Which of the following is TRUE?

A)At a sales volume in excess of 25,000 units of 1 and 25,000 units of 2, operations will be profitable.
B)The ratio of net profit to total sales for 2 will be larger than the ratio of net profit to total sales for 1.
C)The contribution margin per unit of direct materials is lower for 1 than for 2.
D)The ratio of contribution to total sales always will be larger for 1 than for 2.

Question 19

Figure 8-2
Lewis Production Company had the following projected information for 2011: $\begin{array}{lr}\text { Selling price per unit } & £ 150 \\\text { Variable cost per unit } & £ 90 \\\text { Total fixed costs } & £ 300,000\end{array}$

-Refer to Figure 8-2. What is the profit when one unit more than the break-even point is sold?

A)£150
B)£60
C)£1,500,150
D)£600,060

Question 20

Figure 8-1
The Kringel Company provides the following information: $$\begin{array} { l r } \text { Sales (200,000 units) } & £ 500,000 \\\text { Manufacturing costs: } & \\\text { Variable } &170,000 \\\text { Fixed } & 30,000 \\\text { Selling and administrative costs: } & \\\text { Variable } & 80,000 \\\text { Fixed } & 20,000\end{array}$$

-Refer to Figure 8-1. What is the break-even point in units for Kringel?

A)33,334 units
B)100,000 units
C)40,000 units
D)200,000 units

Question 21

On a profit-volume graph, the intersection of the profit line with the vertical axis provides a

A)profit of £1,000.
B)profit equal to zero.
C)profit equal to fixed costs.
D)loss equal to fixed costs.

Question 22

Which of the following assumptions does NOT pertain to cost-profit-volume analysis?

A)Sales price per unit remains constant.
B)The sales mix is constant.
C)Inventories in a manufacturing entity may go up or down.
D)Fixed expenses are constant at all volumes of activities within the relevant range.

Question 23

In a cost-volume-profit graph, the slope of the total cost line represents

A)the selling price per unit.
B)the contribution margin per unit.
C)the variable cost per unit.
D)total contribution margin.

Question 24

Assuming all other things are equal, fixed costs must have ____ if there was a decrease in the break-even point.

A)remained the same
B)increased first, then decreased
C)increased
D)decreased

Question 25

Using cost-volume-profit analysis, we can conclude that a 20 per cent reduction in variable costs will

A)reduce the break-even sales volume by 20 per cent.
B)reduce total costs by 20 per cent.
C)reduce the slope of the total cost line by 20 per cent.
D)not affect the break-even sales volume if there is an offsetting 20 per cent increase in fixed costs.

Question 26

Cost-volume-profit models assume that

A)the sales mix may vary among multiple products.
B)unit selling prices are constant.
C)inventories are dynamic and subject to change.
D)the total cost function is quadratic.

Question 27

In a cost-volume-profit graph, the slope of the total revenue line represents

A)the selling price per unit.
B)the contribution margin per unit.
C)the variable cost per unit.
D)total contribution margin.

Question 28

Which of the following assumptions does NOT pertain to cost-volume-profit analysis?

A)The units produced will equal the units sold.
B)Inventories are constant.
C)All costs are classified as fixed or variable.
D)Sales mix may vary during the related period.

Question 29

Figure 8-6
The following diagram is a cost-volume-profit graph for a manufacturing company:
Refer to Figure 8-6. The difference between line AB and line AC (area BAC) is the

A)contribution ratio.
B)total variable cost.
C)contribution margin per unit.
D)total fixed cost.

Question 30

When a company sells more units than the break-even point,

A)it moves above the relevant range.
B)profits are positive.
C)there are no new variable costs incurred.
D)profits are negative.

Question 31

Figure 8-7
The income statement for Thomas Manufacturing Company for 2011 is as follows: $\begin{array}{lr}\text { Sales }(10,000 \text { units) } & £ 120,000 \\\text { Variable expenses } & 72,000 \\\text { Contribution margin } & £ 48,000 \\\text { Fixed expenses } &{36,000}\\\text { Operating income } & £ 12,000\end{array}$

-Refer to Figure 8-7. What is the contribution margin per unit?

A)£7.20
B)£1.20
C)£4.80
D)£120,000

Question 32

Figure 8-7
The income statement for Thomas Manufacturing Company for 2011 is as follows: $\begin{array}{lr}\text { Sales }(10,000 \text { units) } & £ 120,000 \\\text { Variable expenses } & 72,000 \\\text { Contribution margin } & £ 48,000 \\\text { Fixed expenses } &{36,000}\\\text { Operating income } & £ 12,000\end{array}$

-Refer to Figure 8-7. If sales increase by £60,000, what will happen to profit?

A)increase by £60,000
B)increase by £24,000
C)increase by £6,000
D)increase by £36,000

Question 33

Assuming all other things are the same, selling price per unit must have ____ if there was a decrease in the break-even point.

A)remained the same
B)increased first, then decreased
C)increased
D)decreased

Question 34

In a profit-volume graph, the slope of the profit line represents

A)the selling price per unit.
B)the contribution margin per unit.
C)the variable cost per unit.
D)total contribution margin.

Question 35

Figure 8-6
The following diagram is a cost-volume-profit graph for a manufacturing company:
Refer to Figure 8-6. Select the answer that best describes the labeled item on the diagram.

A)Area CDE represents the area of net loss.
B)Line AC graphs total fixed costs.
C)Point D represents the point at which the contribution margin per unit increases.
D)Line AC graphs total costs.

Question 36

A profit-volume graph

A)measures profit or loss on the horizontal axis.
B)illustrates total revenues, total cost, and profits at various sales volumes.
C)is not subject to the same limiting assumptions as cost-volume-profit graphs.
D)illustrates the relationship between volume and profits.

Question 37

Which of the following statements is TRUE?

A)The slope of the total cost line is dependent on the variable cost per unit.
B)The total cost line normally begins at zero.
C)The total revenue line typically begins above zero.
D)The slope of the total revenue line is the contribution margin per unit.

Question 38

Assuming all other things are the same, contribution margin per unit must have ____ if there was an increase in the break-even point.

A)remained the same
B)increased first, then decreased
C)increased
D)decreased

Question 39

Which of the following assumptions is NOT necessary for cost-volume-profit analysis?

A)Total variable costs are linear.
B)Total revenues increase when total costs increase.
C)Inventories are constant.
D)The product sales mix is constant.

Question 40

Assuming all other things are the same, variable cost per unit must have ____ if there was an increase in the break-even point.

A)remained the same
B)increased first, then decreased
C)increased
D)depends on the circumstances

Question 41

The Millennium Company produces two types of products: Quality and Superior. The company expects to sell 1,200 units of Quality and 800 units of Superior.
A projected income statement for the firm as a whole follows: $\begin{array}{lr}\text { Sales } & £ 400,000 \\\text { Less: Variable costs } & 100,000 \\\text { Contribution margin } & £ 300,000 \\\text { Less: Fixed costs } & \overline{£ 25,000} \\\text { Operating income } & £ 25,000\end{array}$

a.Determine the break-even point in terms of sales revenue.
b.Determine the sales revenue necessary to generate a before-tax profit of £300,000.
c.Determine the sales revenue necessary to generate an after-tax profit of £270,000 if the tax rate is 40 per cent.

Question 42

For each of the following situations, draw a graph that best describes the cost behaviour pattern. The vertical axis represents costs, and the horizontal axis represents volume.
a.Direct materials per unit
b.Depreciation expense on a building per unit
c.An employee paid £50 per hour with a guaranteed salary of £1,000 per week
d.A consultant paid £100 per hour with a maximum fee of £2,000
e.Salaries of teachers where each teacher can handle a maximum of 15 students

Question 43

Which of the following statements is true concerning the use of linear analysis at high activity levels (above the range for which the company's facility was designed)?

A)Linear analysis is well suited for estimating total costs at high activity levels.
B)Linear analysis likely understates total costs at high activity levels.
C)Linear analysis likely overstates total costs at high activity levels.
D)Linear analysis of high activity levels fails to capture the fact that total fixed costs decrease as more units are produced.

Question 44

Information about two products is as follows: $\begin{array}{lcc}&\text { Froduct C } & \text { Product D }\\\text { Selling price per unit } & £ 20 & £ 25 \\\text { Variable costs per unit } & \underline{11} & \underline{18} \\\text { Contribution margin per unit } & \underline{\underline{£ 9}} & \underline{\underline{ } 7}\end{array}$
The firm expects 60 per cent of its sales (in units) to be Product C (a sales mix of 6:4). Fixed costs are expected to be £82,000. Break-even in units would be $\begin{array}{lr}\text { Product C }&\text { Product D }\end{array}$

A) $\begin{array}{lr}1,200 \text { units } & 800 \text { units } \\\end{array}$
B) $\begin{array}{lr}2,460 \text { units } & 1,312 \text { units } \\\end{array}$
C) $\begin{array}{lr}18,000 \text { units } & 14,000 \text { units } \\\end{array}$
D) $\begin{array}{lr}6,000 \text { units } & 4,000 \text { units }\end{array}$

Question 45

Supply the missing data in each independent case. $\begin{array}{|l|c|c|c|c|c}\hline& \text {Case 1}&\text {Case 2}&\text {Case 3}&\text {Case 4}&\text {Case 5}\\\hline \text { Unit sales } & 700 & 300 & ? & ? & ? \\\hline \text { Sales revenue } & £ 42,000 & ? & ? & £ 58,000 & £ 40,000 \\\hline \text { Variable cost per unit } & £ 45 & £1 & £15 & ? & ? \\\hline \text { Contribution Margin } & ? & £ 1,200 & ? & ? & £ 10,000 \\\hline \text { Fixed costs } & £ 7,500 & ? & £ 60,000 & ? & ? \\\hline \text { Operating income } & ? & £ 100 & ? & ? & ? \\\hline \text { Unit contribution margin } & ? & ? & ? & £1 & £2 \\\hline \text { Break-even point (units) } & ? & ? & 5,000 & 30,000 & ? \\\hline \text { Margin of Safety } & ? & ? & 1,000 & -1,000 & 600 \\\hline\end{array}$

Question 46

The following information is provided: $\begin{array}{lr}\text { Sales price per unit } & £ 70 \\\text { Variable cost per unit } & £ 45 \\\text { Fixed costs } & £ 50,000 \\\text { Expected sales } & 5,000 \text { units }\end{array}$
The margin of safety is

A)2,000 units.
B)3,000 units.
C)5,000 units.
D)7,000 units.

Question 47

The Barnes Company manufactures two products. Information about the two product lines is as follows:
$\begin{array}{lcc}&\text { Product K } & \text { Product Y } \\\text { Selling price per unit } & £ 80 & £ 30 \\\text { Variable costs per unit } & \underline{45} & \underline{15} \\\text { Contribution margin per unit } & \underline{£ 35} & \underline{£ 15}\end{array}$ The company expects fixed costs to be £189,000. The firm expects 60 per cent of its sales (in units) to be Product K (a sales mix of 3:2).

Required:
a.Calculate the contribution margin per package.
b.Determine the break-even point in units for Product K and Product Y.
c.Determine the level of sales (in pounds) necessary to generate a before-tax profit of £135,000.

Question 48

Refer to Figure 8-8. Suppose Urban could reduce setup costs by £300 per setup and could reduce the number of engineering hours needed to 1,400 hours. How many units must be sold to break even in this case?

A)10,670 units
B)21,340 units
C)6,350 units
D)7,500 units

Question 49

Management is interested in utilizing the full capacity of production facilities because it

A)spreads variable costs over a greater number of units, thereby reducing the variable cost per unit.
B)spreads fixed costs over a greater number of units, thereby reducing the fixed cost per unit.
C)reduces total variable costs.
D)reduces total fixed costs.

Question 50

The Valdez Mug Company manufactures plastic mugs that sell to wholesalers for £4.00 each. Variable and fixed costs are as follows: Valdez Mug produced and sold 10,000 cups during April 2011. There were no beginning or ending inventories.

Required:
a.Determine Valdez Mug's monthly break-even point in units.
b.If monthly sales increase by 500 cups, what will be the change in monthly profits?
c.If Valdez Mug is now subject to an income tax of 40 per cent, what pound sales volume is required to earn a monthly after-tax net income of £12,000?

Question 51

At a price of £32, the estimated monthly sales of a product are 12,000 units. Variable costs include manufacturing costs of £18 and distribution costs of £6. Fixed costs are £40,000 per month.

Required:

Determine each of the following values:
a.Unit contribution margin
b.Monthly break-even unit sales volume
c.Before-tax monthly profit
d.Monthly margin of safety in units

Question 52

The range of operations within which a linear cost function is valid is called:

A)the linear average.
B)the relevant range.
C)the marginal range.
D)the functional range.

Question 53

Anthony Industries developed the following income statement using a contribution margin approach: $\begin{array}{c} \text {ANTHONY INDUSTRIES }\\ \text {PROJECTED INCOME STATEMENT}\\ \text { FOR THE CURRENT YEAR ENDING DECEMBER 31}\\\begin{array}{lll} \text {Sales}&&£750,000\\\\ \text {Less variable costs:}\\ \text {Variable manufacturing costs }&£280,000 \\ \text {Variable selling costs} & \_ 120,000 \\ \text {Total variable costs}&&\underline{400,000}\\ \text {Contribution margin}&&£ 350,000\\\\ \text {Less fixed costs:}\\ \text {Fixed manufacturing costs}&£ 130,000\\ \text {Fixed selling and administrative costs}&\underline{80,000}\\ \text {Total fixed costs}&&\_210,000\\ \text {Operating income}&&£140,000\end{array}\end{array}$
The projected income statement was based on sales of 100,000 units. Anthony has the capacity to produce 120,000 units during the year.
a.Determine the break-even point in units.
b.The sales manager believes the company could increase sales by 8,000 units if advertising expenditures were increased by £22,000. Determine the effect on income if the company increases advertising expenditures.
c.What is the maximum amount the company could pay for advertising if the advertising would increase sales by 8,000 units?

Question 54

Zachary Plumbing Company has the following information for 20011:
a.Profit line
b.Intersection of profit line and vertical axis
c.Break-even point
d.Profit area
e.Loss area

Question 55

Camp Gordon has annual fixed operating costs of £150,000 and variable cost of £550 per camper. Total fees charged to campers amount to £500 each. The camp expects 350 campers next summer. Projected government grants are £95,000. How much must Camp Gordon raise from other sources to break even?

A)£45,000
B)£37,500
C)£97,500
D)£72,500

Question 56

What is the first step in classifying costs according to behaviour?

A)identify the resources needed and the output of the activity
B)measure the outputs and inputs
C)determine the time horizon
D)determine the impact of output changes on the activity cost

Question 57

Which of the following statements is TRUE about relevant range?

A)When costs reach a level above the relevant range, they are considered appropriate for analysis.
B)Linear estimates of an economist's curvilinear cost function is only valid within the relevant range.
C)When costs reach a level below the relevant range, they are considered appropriate for analysis.
D)The nonlinear relevant range is ignored, and only those costs outside of this range may be considered.

Question 58

Chopra Company developed the following income statement using a contribution margin approach: $\begin{array}{c} \text {CHOPRA COMPANY }\\ \text {PROJECTED INCOME STATEMENT}\\ \text { FOR THE CURRENT YEAR ENDING DECEMBER 31}\\\begin{array}{lll} \text {Sales}&&£240,000\\\\ \text {Less variable costs:}\\ \text {Variable manufacturing costs }&£ 60,000 \\ \text {Variable selling costs} & \_ 36,000 \\ \text {Total variable costs}&&\underline{96,000}\\ \text {Contribution margin}&&£ 144,000\\\\ \text {Less fixed costs:}\\ \text {Fixed manufacturing costs}&£ 85,000\\ \text {Fixed selling and administrative costs}&\underline{35,000}\\ \text {Total fixed costs}&&\_120,000\\ \text {Operating income}&&£24,000\end{array}\end{array}$
The projected income statement was based on sales of 12,000 units. Chopra has the capacity to produce 15,000 units during the year.
a.Determine the break-even point in units.
b.The sales manager believes the company could increase sales by 1,000 units if advertising expenditures were increased by £15,000. Determine the effect on income if the company increases advertising expenditures.
c.What is the maximum amount the company could pay for advertising if the advertising would increase sales by 1,000 units?

Question 59

A decrease in the sales price in the basic cost-volume-profit model would

A)require a recomputation of the gross profit per unit.
B)be offset by an increase in unit costs.
C)decrease the break-even volume.
D)increase the break-even volume.