Deck 12: Cost-Volume-Profit Analysis

Question 1

The level of sales at which no profits are generated and no losses are incurred is the

A) break-even point.
B) contribution margin.
C) degree of operating leverage.
D) gross margin.
E) margin of safety.

Answer 1

break-even point.

Question 2

Which of the following is not an assumption of break-even analysis?

A) A company is operating within its relevant range of activity.
B) All costs are either variable or fixed.
C) Revenues and variable costs are constant per unit.
D) Contribution margin is the difference between selling price and total cost per unit.
E) Fixed cost per unit decreases as volume increases.

Answer 2

Contribution margin is the difference between selling price and total cost per unit.

Question 3

Managers of businesses are primarily interested in the break-even point because it provides

A) the level of operations that managers would like to achieve over the long run.
B) a reference point which the firm must achieve before profits can be earned.
C) the level of operations beyond which an increase in fixed costs will be expected.
D) the low end of the relevant range of activity.
E) both c and d.

Answer 3

a reference point which the firm must achieve before profits can be earned.

Question 4

In break-even analysis,

A) an increase in contribution margin per unit without an increase total fixed costs will cause an decrease in the break-even point.
B) a decrease in selling price per unit and an increase in variable cost per unit will cause an increase in contribution margin per unit.
C) an increase in selling price per unit while variable cost per unit remains constant will cause a decrease in contribution margin per unit.
D) an increase in total fixed costs and an increase variable cost per unit will cause a decrease in the break-even point.
E) All of the above statements are true.

Question 5

The percentage of revenue that remains after variable costs are covered is the

A) contribution margin ratio.
B) fixed cost ratio.
C) gross profit percentage.
D) contribution margin.
E) variable cost ratio.

Question 6

Contribution margin is

A) revenue remaining after product and period costs are covered.
B) sales less cost of goods sold.
C) revenue remaining after variable costs are covered.
D) also known as gross profit margin.
E) constant even when there is a change in unit selling price.

Question 7

In 2010, Edmonton Corporation sold 10,000 paperweights. Selling price was $60 per unit; variable costs were $20 per unit; and fixed costs for the year were $250,000. Contribution margin per paperweight was

A) $15.
B) $35.
C) none of the above
D) $20.
E) $40.

Question 8

Jackson Co. has the following revenue and cost information:

What is Jackson Co.'s break-even point?

A) 31,111 units
B) 55,557 units
C) 71,250 units
D) 94,445 units
E) 106,250 units

Question 9

At Quebec Corp., selling price is $200 per unit. Fixed costs are $2,000,000 and expected contribution margin is 40%. If the company breaks even at this point, what is the break-even point in units?

A) 6,000
B) 10,000
C) 16,667
D) 25,000
E) 33,333

Question 10

Use the following information to answer questions
At an activity level of 350,000 units, Starkville Corp.'s revenue and cost structure includes the following items.


-What is Starkville's contribution per unit?

A) $1.75
B) $2.50
C) $2.60
D) $3.00
E) $5.00

Question 11

Use the following information to answer questions
At an activity level of 350,000 units, Starkville Corp.'s revenue and cost structure includes the following items.


-During 2010, Starkville produces 400,000 units (which is within its relevant range of activity). What is Starkville's total cost of production?

A) $1,200,000
B) $1,350,000
C) $1,360,000
D) $1,510,000
E) $1,550,000

Question 12

Use the following information to answer questions
At an activity level of 350,000 units, Starkville Corp.'s revenue and cost structure includes the following items.


-If Starkville produced and sold 400,000 units, what was the contribution ratio (rounded to the nearest whole percent)?

A) 29%
B) 42%
C) 50%
D) 55%
E) 83%

Question 13

Use the following information to answer questions
At an activity level of 350,000 units, Starkville Corp.'s revenue and cost structure includes the following items.


-If Starkville produced and sold 400,000 units, what was its break-even point?

A) 50,000 units
B) 57,692 units
C) 60,000 units
D) 350,000 units
E) 400,000 units

Question 14

Candy Corp. manufactures peppermints. The selling price and variable cost per pound of peppermints is $2.00 and $1.20 per pound, respectively. For 2010, Candy's fixed costs are $0.05 per unit. What is Candy's variable cost ratio?

A) 37.5%
B) 40.0%
C) 50.0%
D) 60.0%
E) 70.0%

Question 15

Chesser Industries manufactures telescopes that sell for $200 each. Variable costs are $140 per unit and fixed costs are $360,000. What is Chesser's break-even point in sales dollars?

A) $ 1,800
B) $ 6,000
C) $120,000
D) $360,000
E) $514,286

Question 16

Anthony Industries manufactures lawnmowers. The selling price of a lawnmower is $300 and variable costs are $180 per unit. Fixed costs are $1,200,000 per period. What is Anthony's break-even point in units?

A) 4,000
B) 6,667
C) 10,000
D) 1,200,000
E) none of the above

Question 17

Atlantic Corporation manufactures lobster traps. Variable production costs per unit are $8 per unit and variable selling costs are $2 per unit. Fixed costs are $300,000. Atlantic's break-even point is 50,000 units. Ignoring taxes, what is the selling price of an Atlantic lobster trap?

A) $ 8
B) $10
C) $12
D) $14
E) $16

Question 18

K Inc. sells a single product that has the following production per unit costs: direct material, $15; direct labor, $4; variable overhead, $6; and fixed overhead, $2. The fixed overhead cost was calculated using 100,000 units of annual sales and production. Selling costs are $1 per unit and $179,200 of fixed costs. K's product sells for $50 per unit. If K Inc. wants to earn a pre-tax profit of $62,544, how many units must be sold?

A) 14,858
B) 17,664
C) 18,406
D) 20,073
E) 21,670

Question 19

Use the following information to answer questions
Reliable Furniture manufactures recliners selling for $500 each. Variable costs per unit are $175 for direct material, $125 for direct labor, $35 for variable production overhead, and $15 for variable selling and administrative costs. Annual fixed costs are $200,000 for production overhead and $100,000 for selling and administrative costs. The company applies fixed production overhead to recliners based on a capacity of 20,000 units per year.

-Reliable Furniture's contribution margin ratio is

A) 28%.
B) 30%.
C) 33%.
D) 40%.
E) 53%.

Question 20

Use the following information to answer questions
Reliable Furniture manufactures recliners selling for $500 each. Variable costs per unit are $175 for direct material, $125 for direct labor, $35 for variable production overhead, and $15 for variable selling and administrative costs. Annual fixed costs are $200,000 for production overhead and $100,000 for selling and administrative costs. The company applies fixed production overhead to recliners based on a capacity of 20,000 units per year.

-Reliable Furniture's break-even point is

A) 2,000 units.
B) 2,581 units.
C) 600 units.
D) 1,819 units.
E) none of the above.

Question 21

Use the following information to answer questions
Reliable Furniture manufactures recliners selling for $500 each. Variable costs per unit are $175 for direct material, $125 for direct labor, $35 for variable production overhead, and $15 for variable selling and administrative costs. Annual fixed costs are $200,000 for production overhead and $100,000 for selling and administrative costs. The company applies fixed production overhead to recliners based on a capacity of 20,000 units per year.

-If the company wants to earn a before-tax profit of $600,000, how many recliners must be sold?

A) 1,200 units
B) 1,800 units
C) 4,000 units
D) 4,500 units
E) 6,000 units

Question 22

Use the following information to answer questions
Reliable Furniture manufactures recliners selling for $500 each. Variable costs per unit are $175 for direct material, $125 for direct labor, $35 for variable production overhead, and $15 for variable selling and administrative costs. Annual fixed costs are $200,000 for production overhead and $100,000 for selling and administrative costs. The company applies fixed production overhead to recliners based on a capacity of 20,000 units per year.

-The company wants to earn an after-tax profit of $315,000. Reliable's tax rate is 40%. How many recliners must be sold to accomplish management's objective?

A) 2,100 units
B) 4,100 units
C) 5,323 units
D) 5,500 units
E) 7,250 units

Question 23

Calgary Corp. desires a pre-tax income of $700,000. Anticipated sales are 5,000 units; variable costs per unit are $25; and fixed costs are $600,000. How much should the selling price per unit be to achieve the desired income?

A) $104
B) $165
C) $260
D) $285
E) Cannot be determined from the information given

Question 24

Chelsea Co. projects the following cost information for the upcoming year:

Chelsea Co.'s tax rate is 35%. If Chelsea Co. wants to earn $260,000 in after-tax profits and each product unit sells for $75, how many units of product must be sold?

A) 22.620
B) 25,000
C) 27.000
D) 28,410
E) 36,202

Question 25

A company could determine the effect that a 10% variable cost increase would have on total production costs by using

A) flexible budget analysis.
B) after-tax analysis.
C) incremental analysis.
D) linear programming analysis.
E) marginal profit analysis.

Question 26

Andersen Electronics manufactures a product that sells for $100 per unit. Variable cost per unit is $60 and fixed costs per period are $120,000. If Andersen decreases variable costs by 5%, the company's break-even point in units would

A) increase by 333 units.
B) decrease by 333 units.
C) decrease by 429 units.
D) increase by 209 units.
E) decrease by 209 units.

Question 27

The selling price of one unit of a product made by Ellis Corp. is $4.50. Variable cost per unit is $1.50. Fixed costs per period are $150,000. Ellis' variable costs increase by 20% and fixed costs decrease by 5%. These changes will cause the company BEP to

A) increase by 5,000 units.
B) decrease by 5,000 units.
C) increase by 2,778 units .
D) decrease by 2,778 units.
E) increase by 5,555 units.

Question 28

Pete Co. is currently experiencing a $45,000 loss from the sale of its product. The company has received a special order for 1,800 units of its product. Costs incurred by Pete Co. are as follows:

If Pete Co. wants to earn $9,000 in pre-tax profit from the sale all its products, each unit of product in the special order should be sold at what price?

A) $ 46
B) $ 51
C) $ 65
D) $111
E) Cannot be determined because the units currently being sold are not known.

Question 29

To compute break-even for a company selling multiple products, which of the following is needed?

Question 30

Use the following information to answer questions
Orange Confectioners makes two products: chocolate almond bark and hand-dipped strawberries. The contribution margins of the almond bark and strawberries are $2.00 and $2.50 per pound, respectively. Fixed costs are $375,000.

-The almond bark and strawberries are sold in a 5:2 ratio. How many pounds of almond bark must be sold to break-even?

A) 25,000
B) 50,000
C) 83,555
D) 119,048
E) 125,000

Question 31

Use the following information to answer questions
Orange Confectioners makes two products: chocolate almond bark and hand-dipped strawberries. The contribution margins of the almond bark and strawberries are $2.00 and $2.50 per pound, respectively. Fixed costs are $375,000.

-Orange sells almond bark and strawberries in a 5:2 ratio. How many pounds of strawberries must be sold to break-even?

A) 25,000
B) 50,000
C) 83,555
D) 119,048
E) 125,000

Question 32

Use the following information to answer questions 32 - 34:
In 2010, Printext estimates that for every two printers sold, the company will sell six ink cartridges. The products have a 2:6 ratio. Fixed production costs are $150,000 and fixed selling costs are $50,000. Printext's selling prices and variable expenses information are as follows:


-How many printers must be sold to break even?

A) 1,250
B) 1,875
C) 2,500
D) 6,452
E) None of the above

Question 33

Use the following information to answer questions 32 - 34:
In 2010, Printext estimates that for every two printers sold, the company will sell six ink cartridges. The products have a 2:6 ratio. Fixed production costs are $150,000 and fixed selling costs are $50,000. Printext's selling prices and variable expenses information are as follows:


-How many ink cartridges must be sold to break even?

A) 1,250
B) 5,625
C) 14,516
D) 19,356
E) None of the above

Question 34

Use the following information to answer questions 32 - 34:
In 2010, Printext estimates that for every two printers sold, the company will sell six ink cartridges. The products have a 2:6 ratio. Fixed production costs are $150,000 and fixed selling costs are $50,000. Printext's selling prices and variable expenses information are as follows:


-If the sales mix changed to 3:5 and Printext sold 2.700 printers, the company will incur a

A) $ 16,400 loss.
B) $ 27,200 loss.
C) $ 64,600 profit.
D) $232,000 profit.
E) $350,800 profit.

Question 35

Use the following information to answer questions
Boca Inc.'s current product selling price is $70, variable cost per unit is $35, total fixed costs are $1,430,000, and sales volume is 150,000 units.

-The company estimates that a $10 reduction in selling price and an $80,000 increase in advertising will cause sales volume to increase by 20,000 units. What is the incremental profit or loss?

A) $1,080,000 profit
B) $1,080,000 loss
C) $2,740,000 loss
D) $2,740,000 profit
E) None of the above

Question 36

Use the following information to answer questions
Boca Inc.'s current product selling price is $70, variable cost per unit is $35, total fixed costs are $1,430,000, and sales volume is 150,000 units.

-The company is considering accepting an order to sell an additional 5,000 units for $40 per unit. Variable selling expenses will rise by $1 per unit because of an additional sales commission that would have to be paid and an additional $17,000 would need to be spent for fixed costs related to the order. By how much would profits increase or decrease if Boca accepts this special order?

A) $ 22,000 decrease
B) $172,000 decrease
C) $ 3,000 increase
D) $178,000 increase
E) $183,000 increase

Question 37

Which of the following statements about break-even graphs is false?

A) The x-axis represents volume in units and the y-axis represents dollars earned or spent by the company.
B) At each volume level, the distance between the fixed cost and the total cost lines represents total variable cost.
C) Total revenue is plotted from zero, using a slope that represents the selling price per unit.
D) The break-even point is at the intersection of the revenue and fixed cost lines.
E) Beyond the BEP, profit is represented as the distance between the total revenue and total cost lines for any number of units.

Question 38

The break-even point is shown on a BEP graph as the point at which the

A) total fixed cost equals total variable cost.
B) fixed cost line intersects the total revenue line.
C) fixed cost line intersects the total costs line.
D) variable cost line intersects the total revenue line.
E) total costs line intersects the total revenues line.

Question 39

A graph that shows profit and loss amounts at specific volume levels is a

A) break-even graph.
B) profit-volume graph.
C) contribution margin graph.
D) degree of operating leverage graph.
E) gross margin graph.

Question 40

A profit-volume graph specifically plots which of the following items?

Question 41

Use the following information to answer questions
Wild Bear Corp. sells tents for $250. The company produced and sold 5,000 tents in 2010 and incurred the following costs:
Variable production cost per tent $125
Fixed production cost $195,000
Variable selling expense per tent $25
Fixed selling and administrative cost $135,000
The company had expected to sell 3,900 units in 2010. Wild Boar's tax rate is 30%.

-What was Wild Bear's margin of safety in units for 2010?

A) 1,100 units
B) 1,700 units
C) 3,640 units
D) 3,023 units
E) 3,050 units

Question 42

Use the following information to answer questions
Wild Bear Corp. sells tents for $250. The company produced and sold 5,000 tents in 2010 and incurred the following costs:
Variable production cost per tent $125
Fixed production cost $195,000
Variable selling expense per tent $25
Fixed selling and administrative cost $135,000
The company had expected to sell 3,900 units in 2010. Wild Boar's tax rate is 30%.

-What was Wild Bear's margin of safety in dollars for 2010?

A) $ 90,000
B) $165,000
C) $275,000
D) $425,000
E) There was no margin of safety because Wild Bear sold fewer units than its BEP.

Question 43

Use the following information to answer questions
Wild Bear Corp. sells tents for $250. The company produced and sold 5,000 tents in 2010 and incurred the following costs:
Variable production cost per tent $125
Fixed production cost $195,000
Variable selling expense per tent $25
Fixed selling and administrative cost $135,000
The company had expected to sell 3,900 units in 2010. Wild Boar's tax rate is 30%.

-Wild Boar's degree of operating leverage for 2010 was

A) 0.24.
B) 0.34.
C) 2.50.
D) 2.94.
E) 4.20.

Question 44

The measure that reflects an organization's variable and fixed cost relationship and indicates how a percentage change in sale from the current level will impact impact profits is called the

A) break-even point.
B) contribution margin.
C) degree of operating leverage.
D) gross margin.
E) margin of safety.

Question 45

In 2010, Brown Dog sold 20,000 units of its product at $50 per unit. The following information is also available:

What was Brown Dog's degree of operating leverage in 2010?

A) 1.44
B) 1.56
C) 1.64
D) 2.56
E) Cannot calculate from the information given

Question 46

In 2010, Hernandez Co. had sales of $3,000,000, profits of $420,000, and a degree of operating leverage of 8. The company expects a 15% increase in sales for 2011. As such profits should increase by

A) $ 63,000.
B) $450,000.
C) $470,400.
D) $504,000.
E) $924,000.

Question 47

Use the following information to answer question
Newfoundland Inc. budgeted the sale of 4,000 cabinets for 2010, but only sold 3,500 in that year. Selling price per unit is $245, variable production cost is $125 per unit, variable selling expense is $15 per unit, and fixed costs are $336,000 for the year. The company's tax rate is 35%.

-The margin of safety in units for 2010 is

A) 300.
B) 700.
C) 800.
D) 1,200.
E) 3,200.

Question 48

Use the following information to answer question
Newfoundland Inc. budgeted the sale of 4,000 cabinets for 2010, but only sold 3,500 in that year. Selling price per unit is $245, variable production cost is $125 per unit, variable selling expense is $15 per unit, and fixed costs are $336,000 for the year. The company's tax rate is 35%.

-The margin of safety in dollars for 2010 is

A) $ 24,375.
B) $ 58,500.
C) $ 73,500.
D) $117,600.
E) $196,000.

Question 49

Use the following information to answer question
Newfoundland Inc. budgeted the sale of 4,000 cabinets for 2010, but only sold 3,500 in that year. Selling price per unit is $245, variable production cost is $125 per unit, variable selling expense is $15 per unit, and fixed costs are $336,000 for the year. The company's tax rate is 35%.

-What is Newfoundland's degree of operating leverage for 2010?

A) 4.7
B) 5.3
C) 7.2
D) 9.8
E) 15.1

Question 50

Managers want to know the break-even point is so that it can be set as a desired sales goal.

Question 51

The break-even model cannot be expanded to integrate desired profitability.

Question 52

The effectiveness of the break-even model is limited because most of its underlying assumptions will not hold true in the long-term.

Question 53

Cost-volume-profit analysis relies on an assumption that selling price per unit varies directly with the level of activity.

Question 54

Cost-volume-profit analysis relies on an assumption that a company operates within relevant range.

Question 55

Cost-volume-profit analysis relies on an assumption that contribution margin varies directly with the level of activity.

Question 56

Cost-volume-profit analysis relies on an assumption that costs are fixed, variable, or mixed.

Question 57

Break-even point and cost-volume-profit analysis are both based on the income statement formula.

Question 58

The contribution margin ratio is equal to (selling price - variable costs) divided by selling price.

Question 59

The contribution margin ratio is always computed on a per-unit basis.

Question 60

The variable cost ratio is equal to (selling price - variable costs) divided by variable cost per unit.

Question 61

Variable production costs and variable selling costs are incurred for each unit produced.

Question 62

After-tax profits are computed as pre-tax profits multiplied by (1 - tax rate).

Question 63

CVP analysis can be used to determine the allowable variable cost per unit rather than a periodic profit amount.

Question 64

If a company's contribution margin increases and its fixed costs remain constant, break-even point will decrease.

Question 65

If a company's contribution margin remains constant and its fixed costs decrease, then break-even point will increase.

Question 66

Decisions about pricing a special order at less than "normal" selling price per unit should be made solely on the basis of the net profit or loss that might be generated from the special order.

Question 67

The constant mix assumption states that a company will sell all of its products in a defined ratio relationship.

Question 68

If a company uses a constant mix assumption and the mix shifts from the product selling in a lesser number to the product selling in a higher number, profits will increase.

Question 69

A break-even graph provides the same accuracy of information about break-even point as does an algebraic solution.

Question 70

On a break-even graph, total fixed cost is plotted as a line horizontal to the x-axis.

Question 71

On a profit-volume graph, the break-even point is shown at the point at which the total cost line crosses the total revenue line.

Question 72

If a company's sales revenue is $500,000 and its break-even sales are $300,000, then its margin of safety is 1.67.

Question 73

The degree of operating leverage ratio measures an organization's sensitivity to changes in fixed costs from the current level.

Question 74

Mandeville Corporation manufactures stuffed animals and has the following revenue and cost structure. The company's tax rate is 40%.

Required:
a. What is Mandeville's contribution margin and contribution margin ratio?
b. Calculate Mandeville's pre-tax break-even point in units and in dollars.
c. If Mandeville wants to earn $206,500 in pre-tax profits, how many units will the company need to sell?
d. If Mandeville wants to earn $150,000 in after-tax profits, how many units will the company need to sell?

Question 75

Brouillette Corporation publishes inspirational books. The company prepared the following revenue and cost estimates for 2011.

a. Calculate Brouillette's break-even point for 2011.
b. Assume that Brouillette is currently selling 25,000 copies of the book. A special order is received for 1,500 copies. Selling cost per book will only be $1.50 per unit, but production cost per unit will increase by $0.75. At what selling price per unit should Brouillette quote the book if the company desires to have a total after-tax profit of $21,000. The company's tax rate is 30%. (Round upwards to the nearest cent.)
c. Brouillette estimates that 4,000 additional copies of the book can be sold if a leather
cover is added to those copies. The cover will increase variable product costs by 20% and fixed product cost will increase by 30%. The new book will be sold for $25 per unit. Should Brouillette publish the book with the leather cover? Provide supporting computations for your answer.
d. Brouillette is considering accepting an offer from a foreign company to publish 5,000 copies of a book. Brouillette would sell the book to the foreign company for $20 per unit. Relative to this publication, variable production costs will increase by 35% and variable selling costs will increase by 10%. The publication will not cause any impact on fixed costs, but it is estimated that this publication will cause a reduction of 1,000 units of current sales. Should Brouillette take the foreign company's business? Provide supporting computations for your answer.

Question 76

Thibodeaux Corporation produces hand-dipped strawberries and frozen bananas. Fixed product costs total $230,000 and fixed selling costs total $268,200. Product sales and cost information follow:
Thibodeaux sells six strawberries for every banana. The company's tax rate is 30%.
Required:
a. How many units of each product must Thibodeaux sell to break-even?
b. How many units of each product must Thibodeaux sell to earn $148,400 on a pre-tax basis?
c. How many units of each product must Thibodeaux sell to earn $207,760 on an after-tax basis?

Question 77

Mulvey Corporation manufactures hand painted vases. The company currently sells 50,000 units per year. The company's revenues and costs follow:

Required:
a. Calculate Mulvey's before-tax break-even point in units and sales dollars.
b. Calculate Mulvey's contribution margin ratio.
c. Calculate Mulvey's variable cost ratio.
d. Calculate Mulvey's margin of safety in units and sales dollars.
e. Calculate Mulvey's degree of operating leverage.
f. Using your answer from (e), determine what impact a 30% increase in sales volume would have on pretax profits. Use an income statement to prove your answer by calculating the pretax profits at the new sales volume level.