Deck 6: Cost-Volume-Profit Relationships

Question 1

Fixed costs are those which do not respond to changes in volume.

Answer 1

True

Question 2

On a cost-volume graph, costs are represented on the x-axis, and volume is represented on the y-axis.

Answer 2

False

Question 3

Variable costs are theoretically equal to $0 when volume is 0.

Answer 3

True

Question 4

The total costs for a company are composed of both fixed and variable costs.

Question 5

A manager should focus his or her attention on what will happen to costs at all points of production, even if those points are unrealistic or not currently relevant.

Question 6

A manager can only assume linear behavior of costs within the "relevant range".

Question 7

While fixed costs remain constant over the relevant range, most fixed costs can change in the long run, and are often best described by a step cost pattern, given a sufficiently long horizon.

Question 8

Fixed per-unit costs decrease proportionately within the relevant range.

Question 9

In order to make better decisions, costs should be broken into fixed and variable components.

Question 10

The high-low method uses the highest and lowest cost points to approximate a linear relationship between activities and costs.

Question 11

The analytical data provided by approximating a least-squares regression line generally is sufficient information to make informed business decisions.

Question 12

The least-squares regression method generally is considered the most accurate method for approximating a linear cost relationship.

Question 13

The formula for break-even analysis assumes that all cost behave consistently over the relevant range.

Question 14

Contribution margin is the amount left over after all fixed costs have been covered.

Question 15

Contribution margin is the amount left over after all variable costs have been covered.

Question 16

Contribution margin ratio = Sales Price per unit / Contribution Margin per unit

Question 17

A company's "margin of safety"
is the overall level of sales needed to maintain profitability.

Question 18

Desired Net Income = Desired Sales - Total Variable Costs - Total Fixed Costs

Question 19

Operating leverage is a measure of how much a company relies on borrowing to fund its operations.

Question 20

Which of following costs would be considered variable?

A) Heating Bill
B) Employee Salaries
C) Rent expense
D) Materials Purchases
E) All of the above

Question 21

Total costs for a company are usually composed of which of the following?

A) Fixed and Mixed Costs
B) Fixed and Variable Costs
C) Mixed and Variable Costs
D) None of the above

Question 22

Which of the following is an example of a fixed cost?

A) Utility expense for electricity usage
B) Hourly Wages
C) Depreciation of manufacturing equipment
D) Indirect Supplies purchases
E) None of the above

Question 23

When choosing an activity basis to measure in conducting cost behavior analysis, which of the following statements is not true?

A) There should be a logical causal relationship between the cost and the driver.
B) The quantities of the driver and the costs should be highly correlated.
C) The cost of measuring the driver should not outweigh the benefit it provides.
D) A cost-volume graph may be useful in identifying an activity base.
E) All of the above are true.

Question 24

Max Machining incurs the following utilities costs at different levels of production:
How would utility costs be properly classified?

A) Stepped
B) Curvilinear
C) Fixed
D) Variable
E) Mixed

Question 25

Milkon Manufacturing produces sensors used in microchip manufacturing processes. Milton has a regular supplier, who provides a key component of the sensors to meet Milton's regular manufacturing demands. However, when Milton has special orders come in that necessitate production beyond a normal range of activity, the supplier does not have the capacity to meet Milton's extra demand for components. In that case, Milton will purchase the components from other suppliers. However, because the preferred supplier gives Milton a volume discount, the per-unit cost of the extra components is greater than the usual price Milton pays for the components.
How would the overall materials cost of the components be properly classified?

A) Fixed
B) Variable
C) Mixed
D) Stepped
E) Curvilinear

Question 26

Caleb Construction (CC) incurs supervisor salaries expense in the construction of homes. If CC manufactures 100 homes in a year, fixed supervisor salaries will be $400,000. With the current construction supervisors, CC's productive capacity is 150 homes in a year. However, if CC is contracts to build more than 150 homes per year, it will need to hire additional supervisors, which are hired as full-time rather than temporary employees. CC's productive capacity would then become 200 homes per year, and salaries expense would increase to $470,000.
How would CC's salaries expense be properly classified?

A) Fixed
B) Variable
C) Mixed
D) Stepped
E) Curvilinear

Question 27

Which of the following statements best explains the concept of "relevant range"?

A) All costs behave in the same manner, regardless of the level of production.
B) Over a large enough range of production, all costs are generally considered fixed.
C) Management focuses mainly on how costs behave within the levels of production that are reasonably likely to occur.
D) Over a small enough range of production, all costs are generally considered variable.
E) All of the above

Question 28

If all possible levels of production are considered, which of the following statements is/are true?

A) All costs are essentially Fixed.
B) All costs are essentially Mixed.
C) Not all costs are relevant.
D) All costs can change.
E) All of the above

Question 29

If only a single level of production (or a very small range) is considered, which of the following statements is/are true?

A) All costs are essentially Mixed.
B) All costs are essentially Variable.
C) All costs are essentially Fixed
D) Not all costs are considered relevant.
E) None of the above

Question 30

Which of the following best explains "step costs"?

A) Costs that are fixed overall, but variable within a relevant range
B) Costs that change proportionally with changes in production
C) Costs that increase disproportionately at higher levels of demand
D) Costs that are fixed within a relevant range but change at certain thresholds
E) None of the above

Question 31

Which method of cost data analysis employs a plot of data points, drawing a line to find an approximate "best visual fit"?

A) High-low method
B) Scattergraph method
C) Least-squares regression method
D) All of the above
E) None of the above

Question 32

Which method of cost data analysis involves approximating a linear cost relationship based on the extremes of production volume?

A) High-low method
B) Scattergraph method
C) Least-squares regression method
D) All of the above
E) None of the above

Question 33

Which method of cost data analysis employs statistical mathematical models to approximate the average linear relationship?

A) High-low method
B) Scattergraph method
C) Least-squares method
D) All of the above
E) None of the above

Question 34

Which method of cost data analysis is generally considered the most accurate?

A) High-low method
B) Scattergraph method
C) Least-squares regression method
D) All of the above
E) None of the above

Question 35

Which of the following is/are assumptions of CVP analysis?

A) Costs behave differently given different levels of production.
B) The sales mix ratio (for multiple products) can change.
C) Sales price will remain the same regardless of the level of sales.
D) All costs are variable in the relevant range.
E) All of the above

Question 36

Which of the following is not an assumption of CVP analysis?

A) The sales mix ratio (for multiple products) remains constant.
B) Total fixed cost and total variable cost per unit are constant over the entire range of analysis.
C) Sales price will remain constant on a per-unit basis regardless of the level of sales.
D) All costs are variable in the relevant range.
E) All of the above

Question 37

What is the general break-even formula?

A) Total Sales = Variable Costs + Fixed Costs
B) Fixed Costs = Variable Sales - Total Sales
C) Fixed Costs = Variable Costs + Total Costs
D) Total Sales = Variable Costs - Fixed Costs
E) None of the above

Question 38

Which of the following pieces of information is Not needed to calculate the break-even point in units?

A) Sales price per unit
B) Variable cost per unit
C) Total Fixed costs
D) Number of units sold
E) All of the above are needed.

Question 39

Which of the following correctly illustrates how to calculate contribution margin?

A) Sales - Variable Costs - Operating Costs
B) Sales - Fixed Costs - Variable Costs
C) Sales - Variable Costs
D) Variable Costs / Sales
E) None of the above

Question 40

Which of the following equations describes the contribution margin ratio?

A) (Variable Costs - Fixed Costs) / Sales
B) (Sales - Variable Costs) / Sales
C) (Variable Costs - Sales) / Sales
D) (Sales - Fixed Costs) / Sales
E) None of the above

Question 41

Which of the following equations describes the contribution margin ratio?

A) 1 - (Variable Costs / Sales)
B) (Variable Costs - 1 / Sales
C) (Sales - 1) / Variable Costs
D) Sales × (1 - Variable Costs) / Variable Costs
E) None of the above

Question 42

Which of the following equations is used in break-even analysis?

A) Total Fixed Costs / Unit Contribution Margin
B) Total Fixed Costs / Contribution Margin Ratio
C) Variable Cost per unit / Fixed Cost per unit
D) Sales price per unit / Variable Cost per unit
E) Both A and B

Question 43

Which equation properly represents the Margin of Safety ratio?

A) Break-even Sales / Actual Sales
B) (1 - Actual Sales) / Break-even Sales
C) (1 - Break-even Sales) / Break-even Sales
D) (Actual Sales - Break-even Sales) / Actual Sales
E) None of the above

Question 44

When a company has high operating leverage:

A) It has low fixed costs.
B) It borrows to cover most costs.
C) It has high fixed costs relative to variable costs.
D) It has high variable costs relative to fixed costs.
E) None of the above

Question 45

A low level of operating leverage signifies:

A) Lower risk
B) Higher risk
C) Higher overall costs
D) Lower overall costs
E) None of the above

Question 46

Which of the following statements is true regarding CVP analysis?

A) CVP is only useful in a manufacturing context
B) CVP cannot be used in service industries
C) CVP can be used with multiple products only if the product ratio is fixed and based on a weighted average unit contribution margin
D) CVP is useful in all types of business and with any number of products and product mixes
E) None of the above

Question 47

Using the following data, apply the high-low method of cost analysis to the three cost data groups:
What cost behavior patterns are apparent for Alpha?

A) Fixed
B) Variable
C) Mixed
D) Semi-fixed
E) None of the above

Question 48

Using the following data, apply the high-low method of cost analysis to the three cost data groups:
What cost behavior patterns are apparent for Beta?

A) Fixed
B) Variable
C) Mixed
D) Semi-fixed
E) None of the above

Question 49

Using the following data, apply the high-low method of cost analysis to the three cost data groups:
What cost behavior patterns are apparent for Gamma?

A) Fixed
B) Variable
C) Mixed
D) Semi-fixed
E) None of the above

Question 50

Using the following data, apply the high-low method of cost analysis to the three cost data groups:
What cost behavior patterns are apparent for each group?

A) Alpha = Variable, Beta = Mixed, Gamma = Fixed
B) Alpha = Mixed, Beta = Fixed, Gamma = Variable
C) Alpha = Variable, Beta = Fixed, Gamma = Mixed
D) Alpha = Fixed, Beta = Variable, Gamma = Mixed
E) Alpha = Mixed, Beta = Variable, Gamma = Fixed

Question 51

Using the following data, apply the high-low method of cost analysis to the three cost data groups:
What is the apparent total fixed cost for Alpha?

A) $0
B) $1,000
C) $5,000
D) $6,600
E) $9,480

Question 52

Using the following data, apply the high-low method of cost analysis to the three cost data groups:
What cost behavior patterns are apparent for Hedwig?

A) Fixed
B) Variable
C) Mixed
D) Semi-fixed
E) None of the above

Question 53

Using the following data, apply the high-low method of cost analysis to the three cost data groups:
What cost behavior patterns are apparent for Scabbers?

A) Fixed
B) Variable
C) Mixed
D) Semi-fixed
E) None of the above

Question 54

Using the following data, apply the high-low method of cost analysis to the three cost data groups:
What cost behavior patterns are apparent for Crookshanks?

A) Fixed
B) Variable
C) Mixed
D) Semi-fixed
E) None of the above

Question 55

Using the following data, apply the high-low method of cost analysis to the three cost data groups:
What cost behavior patterns are apparent for each group?

A) Hedwig = Variable, Scabbers = Mixed, Crookshanks = Fixed
B) Hedwig = Mixed, Scabbers = Variable, Crookshanks = Fixed
C) Hedwig = Mixed, Scabbers = Fixed, Crookshanks = Variable
D) Hedwig = Variable, Scabbers = Fixed, Crookshanks = Mixed
E) Hedwig = Fixed, Scabbers = Variable, Crookshanks = Mixed

Question 56

Using the following data, apply the high-low method of cost analysis to the three cost data groups:
What is the apparent total fixed cost for Hedwig?

A) $0
B) $2,000
C) $5,500
D) $8,500
E) $13,375

Question 57

Minerva Company has analyzed its overhead costs and derived a general formula for their behavior: $50,000 + $18 per direct labor hour employed. The company expects to use 40,000 direct labor hours during the next accounting period.
What overhead rate per direct labor hour should be applied to jobs worked during the period?

A) $1.25 per direct labor hour
B) $18.00 per direct labor hour
C) $19.25 per direct labor hour
D) $770,000 per direct labor hour
E) None of the above

Question 58

Sirius Company has analyzed its overhead costs and derived a general formula for their behavior: $75,000 + $20 per direct labor hour employed. The company expects to use 25,000 direct labor hours during the next accounting period.
What overhead rate per Direct Labor hour should be applied to jobs worked during the period?

A) $23 per direct labor hour
B) $20 per direct labor hour
C) $3 per direct labor hour
D) $575,000 per direct labor hour
E) None of the above

Question 59

Trelawney Company has analyzed its overhead costs and derived a general formula for their behavior: $30,000 + $15 per direct labor hour employed. The company expects to use 60,000 direct labor hours during the next accounting period.
What overhead rate per Direct Labor hour should be applied to jobs worked during the period?

A) $0.50 per direct labor hour
B) $15.00 per direct labor hour
C) $15.50 per direct labor hour
D) $930,000 per direct labor hour
E) None of the above

Question 60

Neville's Pillow Store sells pillows with a sales price of $25 each. Each pillow costs the company $15 to produce, and the store incurs a total of $100,000 in fixed costs each year.
What is the yearly breakeven point in units?

A) 4,000 pillows
B) 6,667 pillows
C) 15,000 pillows
D) 10,000 pillows
E) None of the above

Question 61

Umbridge Purses Unlimited sells purses with a sales price of $35 each. Each purse costs the company $20 to produce, and the store incurs a total of $300,000 in fixed costs each year.
What is the yearly breakeven point in units?

A) 8,572 purses
B) 10,000 purses
C) 15,000 purses
D) 20,000 purses
E) None of the above

Question 62

Ginny W. Company sells custom door mats with a sales price of $20 each. Each door mat costs the company $15 to produce, and the company incurs a total of $150,000 in fixed costs each year.
What is the yearly breakeven point in units?

A) 7,500 door mats
B) 30,000 door mats
C) 15,000 door mats
D) 10,000 door mats
E) None of the above

Question 63

Lupin's Burgers sells gourmet hamburgers. These burgers are so good, it is the only item on the menu. In recent years, Lupin's breakeven point has been 25,000 burgers. Annual fixed cost are $250,000 and the burgers have a sales price of $15.
What is the variable cost per unit of each burger?

A) $5
B) $10
C) $15
D) $25
E) None of the above

Question 64

Lupin's Burgers sells gourmet hamburgers. These burgers are so good, it is the only item on the menu. In recent years, Lupin's breakeven point has been 25,000 burgers. Annual fixed cost are $250,000 and the burgers have a sales price of $15.
What is the contribution margin per unit of each burger?

A) $5
B) $10
C) $15
D) $25
E) None of the above

Question 65

Pavarti's Sandwiches sells its signature 2-foot long sub sandwiches. These sandwiches are so good, it is the only item on the menu. In recent years, Pavarti's breakeven point has been 30,000 sandwiches. Annual fixed cost are $600,000 and the sandwiches have a sales price of $27.
What is the variable cost per unit of each sandwich?

A) $7
B) $15
C) $20
D) $27
E) None of the above

Question 66

Pavarti's Sandwiches sells its signature 2-foot long sub sandwiches. These sandwiches are so good, it is the only item on the menu. In recent years, Pavarti's breakeven point has been 30,000 sandwiches. Annual fixed cost are $600,000 and the sandwiches have a sales price of $27.
What is the contribution margin per unit of each sandwich?

A) $7
B) $15
C) $20
D) $27
E) None of the above

Question 67

Cornelius' Cheeseburgers sells gourmet cheeseburgers. These cheeseburgers are so good, it is the only item on the menu. In recent years, Cornelius' breakeven point has been 40,000 cheeseburgers. Annual fixed cost are $200,000 and the cheeseburgers have a sales price of $15.
What is the variable cost per unit of each cheeseburger?

A) $5
B) $13
C) $18
D) $40
E) None of the above

Question 68

Cornelius' Cheeseburgers sells gourmet cheeseburgers. These cheeseburgers are so good, it is the only item on the menu. In recent years, Cornelius' breakeven point has been 40,000 cheeseburgers. Annual fixed cost are $200,000 and the cheeseburgers have a sales price of $15.
What is the contribution margin per unit of each cheeseburger?

A) $5
B) $13
C) $18
D) $40
E) None of the above

Question 69

Fennier Company sells a single product for $12 per unit. Variable costs are $7 per unit and fixed costs are $65,000.
What is Fennier Company's break-even point in units?

A) 5,417
B) 9,286
C) 6,500
D) 13,000
E) None of the above

Question 70

Fennier Company sells a single product for $12 per unit. Variable costs are $7 per unit and fixed costs are $65,000.
How many units must Fennier sell to earn $15,000 before income tax?

A) 6,667
B) 11,429
C) 13,000
D) 16,000
E) None of the above

Question 71

Fennier Company sells a single product for $12 per unit. Variable costs are $7 per unit and fixed costs are $65,000.
How many units must Fennier sell to earn $14,000 after income tax, assuming a 20% tax rate?

A) 12,143
B) 16,500
C) 15,800
D) 17,000
E) None of the above

Question 72

Remus Company sells a single product for $15 per unit. Variable costs are $5 per unit and fixed costs are $75,000.
What is Remus Company's break-even point in units?

A) 5,000
B) 7,500
C) 10,000
D) 15,000
E) None of the above

Question 73

Remus Company sells a single product for $15 per unit. Variable costs are $5 per unit and fixed costs are $75,000.
How many units must Remus sell to earn $25,000 before income tax?

A) 6,667
B) 7,500
C) 10,000
D) 20,000
E) None of the above

Question 74

Remus Company sells a single product for $15 per unit. Variable costs are $5 per unit and fixed costs are $75,000.
How many units must Remus sell to earn $21,000 after income tax, assuming a 20% tax rate?

A) 7,000
B) 10,125
C) 10,500
D) 21,000
E) None of the above

Question 75

Lumos Company sells a single product for $8 per unit. Variable costs are $5 per unit and fixed costs are $36,000.
What is Lumos Company's break-even point in units?

A) 4,500
B) 6,000
C) 7,200
D) 12,000
E) None of the above

Question 76

Lumos Company sells a single product for $8 per unit. Variable costs are $5 per unit and fixed costs are $36,000.
How many units must Lumos sell to earn $18,000 before income tax?

A) 6,750
B) 12,000
C) 10,800
D) 18,000
E) None of the above

Question 77

Lumos Company sells a single product for $8 per unit. Variable costs are $5 per unit and fixed costs are $36,000.
How many units must Lumos sell to earn $31,500 after income tax, assuming a 25% tax rate?

A) 10,125
B) 27,000
C) 26,000
D) 12,000
E) None of the above

Question 78

Pigwidgeon Company charges a selling price of $30 per unit for its single product, incurs variable costs of $14 per unit, and total fixed costs of $280,000.
What unit sales volume is necessary to earn a net income before tax of $40,000?

A) 17,500
B) 19,469
C) 20,000
D) 21,000
E) None of the above

Question 79

Pigwidgeon Company charges a selling price of $30 per unit for its single product, incurs variable costs of $14 per unit, and total fixed costs of $280,000.
What sales volume is necessary to earn a net income after tax of $42,000, assuming a tax rate of 25%?

A) 17,500
B) 19,469
C) 20,000
D) 21,000
E) None of the above

Question 80

Draco Company charges a selling price of $25 per unit for its single product, incurs variable costs of $17 per unit, and total fixed costs of $140,000.
What unit sales volume is necessary to earn a net income before tax of $32,000?

A) 17,500
B) 21,500
C) 23,500
D) 32,000
E) None of the above