Deck 16: Cost-Volume-Profit Analysis

Question 1

Able Company sells a product for $50 per unit, its variable costs are $35 per unit and its total fixed costs are $45 000. What is Able's break-even point?

A) 900 units
B) 1286 units
C) 3000 units
D) 6000 units

Answer 1

C

Question 2

Heath Ltd owns and operates a textile manufacturing plant. Garments are sold for $40 each. The fixed plant and equipment costs are $51 600 per annum. Producing each garment incurs $15 of labour costs and $7.80 of material costs. To make a profit of $4000, Heath Ltd must produce (to the nearest integer):

A) 1390 garments.
B) 1727 garments.
C) 2224 garments.
D) 3233 garments.

Answer 2

D

Question 3

Under the assumptions used in cost-volume-profit analysis, as volume increases:

A) fixed costs increase in proportion to the increase in volume.
B) variable costs per unit remain the same.
C) fixed costs per unit remain the same.
D) variable costs per unit increase in proportion to the increase in volume.

Answer 3

B

Question 4

To calculate the break-even point, that is, where neither a profit nor a loss is made, the formula
Sx = VCx + FC + P can be used, but only if P is equal to zero.

Question 5

All of the following are assumptions made in cost-volume-profit analysis except:

A) the cost of materials can change at different levels of volume.
B) fixed costs are constant over the volume of production being considered.
C) mixed costs can be separated into their variable and fixed components.
D) the various components of unit variable cost remain constant during the period of analysis.

Question 6

A company has net profit of $10 000, sales price per unit of $25 and fixed costs of $40 000. The company would like to increase profits by 50%. What percentage increase in sales volume would be needed to achieve this goal?

A) 20%
B) 10%
C) 12.5%
D) Answer cannot be determined from the information given

Question 7

The break-even point is the point at which the total contribution margin is equal to total:

A) sales.
B) variable costs.
C) fixed costs.
D) fixed and variable costs.

Question 8

Sweet Things, Inc. had the following results for the year ended 31 December. Volume was 60 000 units this year. If volume increased to 70 000 units, what should Sweet Things, Inc. have expected net profit to be next year?

A) $35 000
B) $45 000
C) $46 000
D) $50 000

Question 9

Jany Ltd produces 20 000 golf balls. Each golf ball sells for $4, and it costs $50 000 to produce the golf balls. The cost of the fixed plant and equipment needed to produce the golf balls is $15 000 per period. The break-even point for Jany Ltd is (to the nearest integer):

A) 10 000 golf balls.
B) 15 000 golf balls.
C) 20 000 golf balls.
D) 26 000 golf balls.

Question 10

The contribution margin ratio is equal to the contribution margin divided by sales, and shows the proportion of each sales dollar available to cover fixed costs and contribute to profit.

Question 11

If the break-even point is 300 units and the contribution margin is $30 per unit, then every unit sold above 300 will contribute $30 to profit.

Question 12

Heath Ltd owns and operates a textile manufacturing plant. Garments are sold for $40 each. The fixed plant and equipment costs are $51 600 per annum. Producing each garment incurs $15 of labour costs and $7.80 of material costs. If Heath Ltd's cost of plant and equipment increases, which of the following is true?

A) The contribution margin increases
B) Variable costs increases
C) The break-even point increases
D) No change occurs

Question 13

The contribution margin is equal to sales revenue less fixed costs.

Question 14

Heath Ltd owns and operates a textile manufacturing plant. Garments are sold for $40 each. The fixed plant and equipment costs are $51 600 per annum. Producing each garment incurs $15 of labour costs and $7.80 of material costs. What is the break-even point for Heath Ltd?

A) 1290 garments
B) 1602 garments
C) 2064 garments
D) 3000 garments

Question 15

Cost-volume-profit (CVP) analysis is a technique that examines the interrelationship between cost, volume and profit at constant activity levels.

Question 16

Heath Ltd owns and operates a textile manufacturing plant. Garments are sold for $40 each. The fixed plant and equipment costs are $51 600 per annum. Producing each garment incurs $15 of labour costs and $7.80 of material costs. Heath Ltd's contribution margin per garment is:

A) $40.
B) $32.20.
C) $25.
D) $17.20.

Question 17

A firm sells a product for $250. Variable costs are $100 per unit and total fixed costs are $120 000. The break-even point will be 800 units.

Question 18

The contribution margin of every unit of goods or services sold after the break-even point has been reached will contribute to profit.

Question 19

Heath Ltd owns and operates a textile manufacturing plant. Garments are sold for $40 each. The fixed plant and equipment costs are $51 600 per annum. Producing each garment incurs $15 of labour costs and $7.80 of material costs. If Heath Ltd is considering advertising costs of $4300, how many garments must be sold to break even?

A) 1397 garments
B) 1736 garments
C) 2236 garments
D) 3250 garments

Question 20

A break-even point occurs when:

A) variable costs equal fixed costs.
B) sales revenue equals the total of variable and fixed costs of production.
C) assets equal liabilities.
D) contribution margin equals all variable costs.

Question 21

Jany Ltd produces 20 000 golf balls. Each golf ball sells for $4, and it costs $50 000 to produce the golf balls. However, Jany Ltd is considering switching to golf clubs, which have a contribution margin of $10. The cost of the fixed plant and equipment needed to produce the golf balls is $15 000. Jany Ltd expects to sell 1000 golf clubs per period at $100 each. Which of the following is true?

A) Golf balls are more profitable per unit than golf clubs.
B) The contribution margin per golf ball is $8.50 larger than that for each golf club.
C) Total revenue from golf clubs will be higher than that from golf balls.
D) Every golf club sold contributes $8.50 more to the company's profit than each golf ball.

Question 22

Breakeven point analysis is one of the most common uses of cost-volume-profit analysis. What is the breakeven point and why is it useful for managers to know what it is for their company?

Question 23

Explain how the cost-volume-profit (CVP) assumptions about fixed costs may be violated. Give two examples of situations that may cause these assumptions to be violated.

Question 24

The sales price is $60 per unit, variable costs are $25 per unit, and fixed costs are $175 000. What level of sales, in units, would achieve a target profit of $350 000?

A) 10 000 units
B) 14 000 units
C) 15 000 units
D) 21 000 units

Question 25

Extra Extra Newspaper Company had the following results this year. What is Extra Extra's contribution margin per unit?

A) 3.50 cents
B) 7 cents
C) 70 cents
D) $1.30

Question 26

A company's current sales are $400 000 at a volume of 10 000 units. Fixed costs are $120 000 and variable costs are $30 per unit. What is the company's break-even sales volume in units?

A) 3000
B) 4000
C) 10 000
D) 12 000

Question 27

On a break-even graph, the break-even point is the point on the graph where the:

A) revenue line crosses the fixed-cost line.
B) revenue line crosses the line that represents fixed costs plus variable costs.
C) revenue line crosses the contribution margin line.
D) total cost line crosses the contribution margin line.

Question 28

If a company is currently operating at its break-even point, which of the following statements is true? (Income tax considerations are ignored.)

A) If fixed costs increase, net profit will decrease by the contribution margin ratio times the amount of the increase in fixed costs.
B) If sales increase by 20%, net profit will also increase by 20%, assuming that fixed costs are not equal to zero.
C) If variable costs double, net profit will decrease by 50%.
D) Net profit will increase by the increase in number of units sold times the contribution margin per unit.

Question 29

List and explain two assumptions about costs and activities that are made in cost-volume-profit analysis.

Question 30

The point where profit equals the total of fixed and variable costs is called the:

A) break-even point.
B) target net income.
C) margin of safety.
D) contribution margin.

Question 31

Sweet Things, Inc. had the following results for the year ended 31 December. Volume was 60 000 units this year. What is Sweet Things, Inc.'s break-even sales volume in dollars?

A) $80 000
B) $90 000
C) $100 000
D) $120 000

Question 32

If fixed costs for a company are $65 000 and variable costs are 20% of sales, what do total sales need to be to achieve a target net profit of $35 000?

A) $80 000
B) $100 000
C) $125 000
D) $500 000

Question 33

Which of the following situations would be most likely to violate cost-volume-profit assumptions about variable costs?

A) As volume doubles, direct labour costs also double.
B) As volume decreases, per-unit material costs remain constant.
C) The company's raw material supplier typically allows volume discounts when larger amounts of the raw material are purchased.
D) Fixed costs per unit decrease as volume increases.

Question 34

Extra Extra Newspaper Company had the following results this year. What is Extra Extra's contribution margin ratio?

A) 10.5%
B) 35%
C) 65%
D) $35 000

Question 35

Extra Extra Newspaper Company had the following results in this year. What is Extra Extra's breakeven sales in units?

A) 15 000 units
B) 16 150 units
C) 20 000 units
D) 30 000 units

Question 36

The dollar value that is available to be contributed to fixed costs after deducting variable expenses from sales is called the:

A) profit-volume ratio.
B) break-even point.
C) contribution margin ratio.
D) contribution margin.

Question 37

If a company's sales price for its product is $40, its variable cost percentage is 30%, its sales are $200 000, and its fixed costs are $100 000, what will be its contribution margin per unit?

A) $10
B) $12
C) $28
D) $30

Question 38

Which of the following situations would be most likely to violate cost-volume-profit assumptions about fixed costs?

A) When production volume increases beyond the capacity of the plant, a second shift will be added instead of building a new plant.
B) As volume decreases, per-unit fixed manufacturing overhead remains constant.
C) The company's raw material supplier typically allows volume discounts when larger amounts of the raw material are purchased.
D) Fixed costs per unit decrease as volume increases.

Question 39

Extra Extra Newspaper Company had the following results this year. How many additional units does Extra Extra have to sell to double current profit?

A) 20 000 units
B) 30 000 units
C) 40 000 units
D) 50 000 units

Question 40

Winter Sales, Inc. sells many kinds of winter sports equipment, primarily through telemarketing. Its sales staff are paid 15% of all sales dollars generated. In order to decrease the uncertainty of this arrangement for its staff and increase loyalty, the company is considering a change in the method of payment. The company would like to pay its 100 employees $1000 per month plus 10% of sales. Using cost-volume-profit analysis, what volume of sales dollars does the company need to exceed per month to make this new method more profitable for the company than the old method?

A) $100 000
B) $1 000 000
C) $2 000 000
D) Answer cannot be determined from the information given.

Question 41

Discuss the concept of the 'relevant range' as it applies to cost-volume-profit analysis.

Question 42

Projected Profit
A company can determine its projected profit by using the following equation:
profit = total income - (total fixed costs + total variable costs)
Based on market research, CSO Corporation feels its product will sell for $200 / unit. At that price, CSO can sell 150 units per month. Currently, CSO incurs the following costs on a per unit basis: direct material, $10; direct labour, $60; variable overhead, $20. Its total fixed costs per month are $3 300.

Question 43

A company had the following results for this year:
Answer the following questions independently.