Deck 6: How Is Cost-Volume-Profit Analysis Used for Decision Making

Question 1

The contribution margin per unit is the amount each unit sold contributes to covering fixed costs and increasing profit.

Answer 1

True

Question 2

The break-even point is the number of units or sales dollars that must be sold to achieve zero profit.

Answer 2

True

Question 3

A decrease in variable costs will reduce the margin of safety.

Answer 3

False

Question 4

Operating leverage refers to the level of fixed costs within an organization.

Question 5

Absorption costing treats fixed manufacturing overhead costs as product costs.

Question 6

Target profit before taxes is calculated as target profit after tax divided by one minus the tax rate.

Question 7

The weighted average contribution margin ratio is calculated by taking total contribution margin divided by total sales.

Question 8

Contribution margin per unit is calculated by subtracting variable costs per unit and fixed costs per unit from the selling price per unit.

Question 9

Sensitivity analysis is also called "what-if analysis."

Question 10

A change in the sales mix will always decrease the break-even point.

Question 11

It is important for all profit and non-profit companies to determine their profit desired after accounting for income taxes.

Question 12

The margin of safety cannot be calculated for multiple product and service organizations.

Question 13

A company makes four products.If it sells everything it produces and is only constrained by finding enough skilled labor,then its goal should be to maximize the contribution margin per labor-hour.

Question 14

Sensitivity analysis can be used to determine how changes in variables will impact target profit.

Question 15

The only difference between absorption costing and variable costing is the treatment of fixed manufacturing overhead costs.

Question 16

The break-even point in sales dollars is the total sales dollars minus the total contribution margin.

Question 17

Firms with high operating leverage tend to make more from increasing sales than similar firms with low operating leverage.

Question 18

Firms with low operating leverage tend to make more from increasing sales than similar firms with high operating leverage.

Question 19

Although absorption costing meets the requirements of generally accepted accounting principles,variable costing is typically more useful for internal decision making purposes.

Question 20

When a company that produces multiple products faces a constraint in areas such as labor hours or machine hours,managers often prefer to maximize the contribution margin per unit of constraint.

Question 21

Absorption costing treats all manufacturing costs as period costs.

Question 22

Exhibit 6-1
Larimer Company has monthly fixed costs totaling $90,000 and variable costs of $5 per unit.Each unit of product is sold for $20.
Refer to Exhibit 6-1.Assume that Larimer Company expects to sell 5,000 units of product this coming month.What is the margin of safety in sales dollars?

A)$1,000
B)$20,000
C)$260,000
D)$15,000
E)None of the answer choices is correct.

Question 23

Exhibit 6-2
Victor Company makes a single product.The company has monthly fixed costs totaling $200,000 and variable costs of $20 per unit.Each unit of product is sold for $35.Brevard expects to sell 25,000 units each month.
Refer to Exhibit 6-2.What would be the operating profit if the unit variable cost decreases 20 percent?

A)$75,000
B)$275,000
C)$100,000
D)$120,000
E)None of the answer choices is correct.

Question 24

Exhibit 6-3
Howard Company sells mountain bikes for $1,400 per unit representing 40 percent of total sales,and cruising bikes for $1,000 per unit representing 60 percent of total sales.Variable cost per unit is $600 for mountain bikes and $500 for cruising bikes.
Refer to Exhibit 6-3.What is the weighted average contribution margin per unit?

A)$620
B)$650
C)$1,160
D)$1,300
E)None of the answer choices is correct.

Question 25

Paco's Bikes sells 120 bicycles each month for $400 per unit.Variable cost per unit is $160 and fixed costs total $4,800 per month.What is the contribution margin per unit?

A)$160
B)$280
C)$200
D)$240
E)None of the answer choices is correct.

Question 26

Exhibit 6-1
Larimer Company has monthly fixed costs totaling $90,000 and variable costs of $5 per unit.Each unit of product is sold for $20.
Refer to Exhibit 6-1.What is the break-even point in units?

A)3,600
B)6,000
C)4,500
D)18,000
E)None of the answer choices is correct.

Question 27

Exhibit 6-4
Sanchez Company produces two different remote control products with the following monthly data for the most recent month:

Refer to Exhibit 6-4.Assume the sales mix remains the same at all levels of sales.
What is the weighted average contribution margin per unit?

A)$44
B)$56
C)$100
D)$50
E)None of the answer choices is correct.

Question 28

Exhibit 6-1
Larimer Company has monthly fixed costs totaling $90,000 and variable costs of $5 per unit.Each unit of product is sold for $20.
Refer to Exhibit 6-1.How many units must be sold to earn a monthly profit of $135,000?

A)6,750
B)9,000
C)15,000
D)6,000
E)None of the answer choices is correct.

Question 29

Exhibit 6-2
Victor Company makes a single product.The company has monthly fixed costs totaling $200,000 and variable costs of $20 per unit.Each unit of product is sold for $35.Brevard expects to sell 25,000 units each month.
Refer to Exhibit 6-2.What would be the operating profit if total fixed costs decreases 20 percent?

A)$302,500
B)$135,000
C)$215,000
D)$315,000
E)None of the answer choices is correct.

Question 30

Exhibit 6-3
Howard Company sells mountain bikes for $1,400 per unit representing 40 percent of total sales,and cruising bikes for $1,000 per unit representing 60 percent of total sales.Variable cost per unit is $600 for mountain bikes and $500 for cruising bikes.
Refer to Exhibit 6-3.What is the contribution margin per unit for each product?

A)Mountain bikes: $1,400;Cruising bikes: $1,000
B)Mountain bikes: $560;Cruising bikes: $600
C)Mountain bikes: $800;Cruising bikes: $500
D)Mountain bikes: $600;Cruising bikes: $500
E)None of the answer choices is correct.

Question 31

Exhibit 6-1
Larimer Company has monthly fixed costs totaling $90,000 and variable costs of $5 per unit.Each unit of product is sold for $20.
Refer to Exhibit 6-1.Assume that Larimer Company expects to sell 11,000 units of product this coming month.What is the margin of safety in units?

A)5,000
B)6,500
C)7,400
D)7,000
E)None of the answer choices is correct.

Question 32

Exhibit 6-1
Larimer Company has monthly fixed costs totaling $90,000 and variable costs of $5 per unit.Each unit of product is sold for $20.
Refer to Exhibit 6-1.What is the break-even point in sales dollars?

A)$72,000
B)$90,000
C)$360,000
D)$120,000
E)None of the answer choices is correct.

Question 33

Exhibit 6-2
Victor Company makes a single product.The company has monthly fixed costs totaling $200,000 and variable costs of $20 per unit.Each unit of product is sold for $35.Brevard expects to sell 25,000 units each month.
Refer to Exhibit 6-2.What would be the operating profit if the unit sales price increases 10 percent?

A)$312,500
B)$212,500
C)$362,500
D)$262,500
E)None of the answer choices is correct.

Question 34

Which of the following is the correct profit equation?

A)Total sales - total variable costs
B)Total sales - total fixed costs
C)Total sales - total variable costs - total fixed costs
D)Total sales - total variable costs + total fixed costs
E)None of the answer choices is correct.

Question 35

Exhibit 6-2
Victor Company makes a single product.The company has monthly fixed costs totaling $200,000 and variable costs of $20 per unit.Each unit of product is sold for $35.Brevard expects to sell 25,000 units each month.
Refer to Exhibit 6-2.What is the monthly operating profit?

A)$275,000
B)$375,000
C)$175,000
D)$675,000
E)None of the answer choices is correct.

Question 36

Paco's Bikes sells 120 bicycles each month for $400 per unit.Variable cost per unit is $160 and fixed costs total $4,800 per month.What is the contribution margin ratio?

A)0.40
B)0.60
C)2.50
D)0.70
E)None of the answer choices is correct.

Question 37

Which of the following companies would be most likely to use the break-even point expressed in units?

A)An accounting firm
B)A law firm
C)An electrician
D)An automobile dealer
E)None of the answer choices is correct.

Question 38

All of the following are assumptions required to perform break-even and target profit calculations except:

A)Costs can be separated into fixed and variable components.
B)Contribution margin ratio remains constant for each product,segment,or department.
C)Break-even points can only be calculated for single product companies.
D)Sales mix remains constant with changes in sales volume.
E)None of the answer choices is correct.

Question 39

Using the information below,identify the mathematical equation used to find total profit.
S= Selling price per unit;
V= Variable cost per unit;
F= Total fixed costs;and
Q= Quantity of units produced and sold

A)(S/Q)- (V/Q) - F
B)(S * Q) - (V * Q) - F
C)[(S + V) * Q] - F
D)S - (V * Q) - (F * Q)
E)None of the answer choices is correct.

Question 40

An advantage of using absorption costing is that it prevents managers from increasing production solely for the purpose of inflating profit.

Question 41

Exhibit 6-5
Estrada Incorporated produces two different products with the following monthly data.

Refer to Exhibit 6-5.What would be the operating profit if total fixed costs increase 10 percent?

A)$72,000
B)$99,000
C)$108,000
D)$81,000
E)None of the answer choices is correct.

Question 42

Exhibit 6-5
Estrada Incorporated produces two different products with the following monthly data.

Refer to Exhibit 6-5.Management believes that pushing sales of the Gas Barbecues product would maximize company profits because of the high contribution margin per unit.However,only 20,000 labor hours are available each year and the Gas Barbecue requires 5 labor hours per unit while the Charcoal Barbecue model requires 2 labor hours per unit.
If the company sells everything it produces,what is the contribution margin per unit of the constrained resource for the Charcoal Barbecue?

A)$98
B)$120
C)$48
D)$45
E)None of the answer choices is correct.

Question 43

Exhibit 6-4
Sanchez Company produces two different remote control products with the following monthly data for the most recent month:

Refer to Exhibit 6-4.Assume the sales mix remains the same at all levels of sales.
How many units in total must be sold to break even?

A)25,000
B)28,000
C)14,000
D)70,000
E)None of the answer choices is correct.

Question 44

Exhibit 6-6
Sauer Company sells folding chairs for $40.00 per unit.Variable cost is $15.00 per unit.Each chair requires 4 direct labor hours and 2 machine hours to produce.
Refer to Exhibit 6-6.Which of the following is the correct contribution margin per machine hour?

A)$12.50
B)$6.25
C)$0.08
D)$0.10
E)None of the answer choices is correct.

Question 45

Exhibit 6-4
Sanchez Company produces two different remote control products with the following monthly data for the most recent month:

Refer to Exhibit 6-4.Assume the sales mix remains the same at all levels of sales.
How many units in total must be sold to earn a monthly profit of $504,000?

A)43,273
B)19,040
C)38,080
D)34,000
E)None of the answer choices is correct.

Question 46

Which of the following statements is true regarding operating leverage?

A)Companies with high operating leverage will earn lower profits than companies with low operating leverage.
B)Companies with high operating leverage will earn higher profits than companies with low operating leverage.
C)Companies with high operating leverage generally experience fewer profit fluctuations as sales fluctuate than do companies with low operating leverage.
D)Companies with high operating leverage generally experience larger operating profit fluctuations as sales fluctuate than do companies with low operating leverage
E)None of the answer choices is correct.

Question 47

Exhibit 6-5
Estrada Incorporated produces two different products with the following monthly data.

Refer to Exhibit 6-5.What would be the operating profit if the Charcoal Barbecue sales price decreases 20 percent?

A)$132,000
B)$50,400
C)$18,000
D)$48,000
E)None of the answer choices is correct.

Question 48

Exhibit 6-5
Estrada Incorporated produces two different products with the following monthly data.

Refer to Exhibit 6-5.What would be the operating profit if the Charcoal Barbecue sales volume increases 100 units with a corresponding decrease of 100 units in Gas Barbecue sales?

A)$24,000
B)$75,000
C)$9,000
D)$105,000
E)None of the answer choices is correct.

Question 49

Exhibit 6-4
Sanchez Company produces two different remote control products with the following monthly data for the most recent month:

Refer to Exhibit 6-4.Assume the sales mix remains the same at all levels of sales.
What is the weighted average contribution margin ratio (rounded)?

A)25.0%
B)21.5%
C)30.0%
D)24.0%
E)None of the answer choices is correct.

Question 50

Which of the following companies would most likely have a high operating leverage?

A)A landscaping company.
B)An accounting company.
C)A plumbing company.
D)A company manufacturing microprocessors.
E)None of these have high operating leverage.

Question 51

Exhibit 6-5
Estrada Incorporated produces two different products with the following monthly data.

Refer to Exhibit 6-5.What would be the operating profit if the Charcoal Barbecue sales price increases 20 percent?

A)$185,600
B)$144,000
C)$132,000
D)$42,000
E)None of the answer choices is correct.

Question 52

Exhibit 6-4
Sanchez Company produces two different remote control products with the following monthly data for the most recent month:

Refer to Exhibit 6-4.Assume the sales mix remains the same at all levels of sales.
How many units of each product must be sold to earn a monthly profit of $504,000?

A)Plane 34,618 units;Boat 8,655 units
B)Plane 15,232 units;Boat 3,808 units
C)Plane 30,464 units;Boat 7,616 units
D)Plane 27,200 units;Boat 6,800 units
E)None of the answer choices is correct.

Question 53

Exhibit 6-4
Sanchez Company produces two different remote control products with the following monthly data for the most recent month:

Refer to Exhibit 6-4.If the sales mix shifts to 50 percent planes and 50 percent boats,what happens to the break-even point in units?

A)It increases.
B)It decreases.
C)It is not affected.
D)There is not enough information to answer this question.

Question 54

Exhibit 6-4
Sanchez Company produces two different remote control products with the following monthly data for the most recent month:

Refer to Exhibit 6-4.Assume the sales mix remains the same at all levels of sales.
How many units of each product must be sold to break even?

A)Plane 22,400 units;Boat 5,600 units
B)Plane 11,200 units;Boat 2,800 units
C)Plane 20,000 units;Boat 5,000 units
D)Plane 56,000 units;Boat 14,000 units
E)None of the answer choices is correct.

Question 55

Exhibit 6-4
Sanchez Company produces two different remote control products with the following monthly data for the most recent month:

Refer to Exhibit 6-4.If the sales mix shifts to 50 percent planes and 50 percent boats,what happens to the weighted average contribution margin per unit?

A)It decreases.
B)It increases.
C)It is not affected.
D)There is not enough information to answer this question.

Question 56

Exhibit 6-6
Sauer Company sells folding chairs for $40.00 per unit.Variable cost is $15.00 per unit.Each chair requires 4 direct labor hours and 2 machine hours to produce.
Refer to Exhibit 6-6.Which of the following is the correct contribution margin per unit?

A)$15.00
B)$5.00
C)$40.00
D)$25.00
E)None of the answer choices is correct.

Question 57

Which of the following companies would most likely have a high operating leverage?

A)A landscaping company.
B)An accounting company.
C)A plumbing company.
D)A company manufacturing microprocessors.
E)None of these have high operating leverage.

Question 58

Exhibit 6-5
Estrada Incorporated produces two different products with the following monthly data.

Refer to Exhibit 6-5.What is the operating profit?

A)$90,000
B)$570,000
C)$270,000
D)$255,000
E)None of the answer choices is correct.

Question 59

High operating leverage means:

A)the company has relatively high variable costs.
B)the company has relatively low fixed costs.
C)the company has relatively high fixed costs.
D)the company has a relatively low amount of debt.
E)None of the answer choices is correct.

Question 60

Exhibit 6-5
Estrada Incorporated produces two different products with the following monthly data.

Refer to Exhibit 6-5.Management believes that pushing sales of the Gas Barbecue would maximize company profits because of the high contribution margin per unit.However,only 20,000 labor hours are available each year and the Gas Barbecue requires 5 labor hours per unit while the Charcoal Barbecue requires 2 labor hours per unit.
If the company sells everything it produces,what is the contribution margin per unit of the constrained resource for the Gas Barbecue?

A)$98
B)$120
C)$48
D)$45
E)None of the answer choices is correct.

Question 61

Exhibit 6-6
Sauer Company sells folding chairs for $40.00 per unit.Variable cost is $15.00 per unit.Each chair requires 4 direct labor hours and 2 machine hours to produce.
Refer to Exhibit 6-6.Which of the following is the correct contribution margin per direct labor hour?

A)$12.50
B)$6.25
C)$0.08
D)$0.10
E)None of the answer choices is correct.

Question 62

The local nonprofit youth symphony is planning a concert fundraiser.The organization estimates that 550 tickets can be sold for $16 per person.The fixed costs are $720.The local chamber of commerce office will process ticket orders for a fee of $4 per ticket,to relieve the youth symphony of this responsibility.
(1)How many tickets does your organization have to sell to break even?
(2)How many tickets does your organization have to sell to earn a profit of $4,320?
(3)How much must your organization have in sales dollars to break even (rounded to the nearest cent)?
(4)How much must your organization have in sales dollars to earn a profit of $4,320 (rounded to the nearest cent)?
(5)What is the organization's margin of safety in units and in sales dollars?

Question 63

If the number of units produced is more than the number of units sold,which of the following statements is true when comparing operating profit under absorption versus variable costing?

A)Variable costing will produce a higher operating profit.
B)Absorption costing will produce a higher operating profit.
C)Operating profit is the same under both methods.
D)Sales revenue will be less when absorption costing is used.
E)None of the answer choices is correct.

Question 64

Management of Raley Company would like to achieve a target profit after taxes of $80,000.The company's income tax rate is 20 percent.What target profit before taxes is required to earn $80,000 in after tax profit?

A)$100,000
B)$64,000
C)$160,000
D)$400,000
E)None of the answer choices is correct.

Question 65

If the number of units produced is more than the number of units sold,which of the following statements is true when comparing overhead costs under absorption versus variable costing?

A)Variable costing will produce higher fixed overhead costs on the income statement.
B)Absorption costing will produce higher fixed overhead costs on the income statement.
C)Overhead costs on the income statement are the same under both methods.
D)Absorption costing will have higher variable overhead costs on the income statement.
E)None of the answer choices is correct.

Question 66

Exhibit 6-7
Bodega Chocolate,Inc.is a new company that produces a single product.The company has no beginning inventory.During the year the company produced 10,000 units out of which 9,000 were sold.Below are Bodega's costs:

Refer to Exhibit 6-7.What is the unit product cost using variable costing?

A)$4.00
B)$6.07
C)$8.57
D)$6.50
E)None of the answer choices is correct.

Question 67

Capri Incorporated has annual fixed costs totaling $3,000,000 and variable costs of $450 per unit.Each unit of product is sold for $850.Assume a tax rate of 30 percent.How many sales dollars are required to earn an annual profit of $210,000 after taxes?

A)$3,898,100
B)$7,012,500
C)$7,862,500
D)$6,821,250
E)None of the answer choices is correct.

Question 68

Paddleboard Incorporated builds three products: River,Lake,and Ocean.Information for these three products is shown below:

Total annual fixed costs are $765,000.Assume the sales mix remains the same at all levels of sales.
Assume each scenario below is independent of the other.Unless stated otherwise,assume the variables are the same as in the base case.
(1)Prepare a contribution margin income statement for the base case.
(2)How will total profit change if the Lake sales price increases by 15 percent? (Compare your result with requirement 1 above. )
(3)Go back to the base case.How will total profit change if the River sales volume decreases by 2,000 units and the sales volume of other products remains the same? (Compare your result with requirement 1 above. )
(4)Go back to the base case.How will total profit change if fixed costs decrease by 10 percent? (Compare your result with requirement 1 above. )

Question 69

Assume that Snowmobile Company produces two products: Racer and Cruiser.Below are the data for each:

In the past,Snowmobiles had difficulty finding skilled workers.However,the company recently hired additional labor,thereby eliminating this resource constraint.The company now is faced with limited available machine-hours.It has a total of 4,000 machine-hours available each month.The Racer requires 50 machine-hours per unit and the Cruiser requires 15 machine-hours per unit.
(1)What is the contribution margin provided by each product?
(2)Calculate the contribution margin per unit of constrained resource for each model.
(3)Which model would the company prefer to sell to maximize overall company profit?

Question 70

Paddleboard Incorporated builds three products: River,Lake,and Ocean.Information for these three products is shown below:

Total annual fixed costs are $765,000.Assume the sales mix remains the same at all levels of sales.
(1)
a.How many products in total must be sold to break even?
a.How many products in total must be sold to earn an annual profit of $1,275,000?
b.How many units of each product must be sold to break even?
(2)
b.How many units of each product must be sold to earn an annual profit of $1,275,000?

Question 71

All of the following are steps used to find the target profit for companies that incur income taxes except:

A)convert the desired target profit after taxes to target profit before taxes.
B)determine the desired target profit after taxes.
C)convert the desired target profit before taxes to target profit after taxes.
D)use the target profit before taxes to calculate target profit in units or in sales dollars.
E)None of the answer choices is correct.

Question 72

Which of the following is not found on an income statement prepared using absorption costing?

A)Operating profit.
B)Sales.
C)Contribution margin.
D)Cost of goods sold.
E)None of the answer choices is correct.

Question 73

Exhibit 6-8
Perry,Inc.produced 15,000 units during the year.Of these,12,000 were sold for $50 each.Other Perry,Inc.data are as follows:

Refer to Exhibit 6-8.Calculate Perry's operating profit assuming the company uses absorption costing.

A)$271,000
B)$286,000
C)$396,000
D)$370,000
E)None of the answer choices is correct.

Question 74

Designer Jackets,Inc.produces blazers and has the following data available on these products.

(1)How many units must be sold to earn a monthly profit of $180,000 after taxes?
(2)How many sales dollars are required to earn a monthly profit of $180,000 after taxes?

Question 75

Exhibit 6-7
Bodega Chocolate,Inc.is a new company that produces a single product.The company has no beginning inventory.During the year the company produced 10,000 units out of which 9,000 were sold.Below are Bodega's costs:

Refer to Exhibit 6-7.What is the unit product cost using absorption costing?

A)$4.00
B)$6.07
C)$8.57
D)$9.42
E)None of the answer choices is correct.

Question 76

Smart Products Inc.produces smart phones.The company has no finished goods inventory at the beginning of year 1.The following information pertains to Smart Products Inc.

Question 77

Huston Company has annual fixed costs totaling $3,000,000 and variable costs of $450 per unit.Each unit of product is sold for $850.Assume a tax rate of 30 percent.How many units must be sold to earn an annual profit of $210,000 after taxes?

A)8,250
B)4,586
C)9,250
D)8,025
E)None of the answer choices is correct.

Question 78

If the number of units produced is less than the number of units sold,which of the following statements is true when comparing operating profit under absorption versus variable costing?

A)Sales revenue will be less when absorption costing is used.
B)Absorption costing will produce a higher operating profit.
C)Operating profit is the same under both methods.
D)Variable costing will produce a higher operating profit.
E)None of the answer choices is correct.

Question 79

Exhibit 6-8
Perry,Inc.produced 15,000 units during the year.Of these,12,000 were sold for $50 each.Other Perry,Inc.data are as follows:

Refer to Exhibit 6-8.Calculate Perry's operating profit assuming the company uses variable costing.

A)$271,000
B)$286,000
C)$396,000
D)$370,000
E)None of the answer choices is correct.