Deck 18: Cost-Volume-Profit Analysis

Question 1

Cost-volume-profit analysis is a precise tool for perfectly predicting the profit consequences of cost changes,price changes,and volume changes.

Answer 1

False

Question 2

As the level of output activity increases,fixed cost per unit remains constant.

Answer 2

False

Question 3

The most complex of the cost estimation methods is the high-low method.

Answer 3

False

Question 4

The dollar amount of sales needed to achieve a targeted after-tax income is computed by dividing the sum of fixed costs plus the desired after-tax income plus income taxes by the contribution margin ratio.

Question 5

The relevant range of operations excludes extremely high and low levels of production that are not likely to occur.

Question 6

The high-low method of deriving an estimated cost line uses all the data points available.

Question 7

The margin of safety can be expressed in units of product,in dollars,or as a percentage of sales.

Question 8

Total variable costs change proportionately with changes in output activity.

Question 9

Curvilinear costs are also known as nonlinear costs.

Question 10

As the level of output activity increases,the variable cost per unit remains constant.

Question 11

Cost-volume-profit analysis is frequently based on the assumption that the production level is the same as the sales level.

Question 12

A step-wise variable cost can be separated into a fixed component and a variable component.

Question 13

The margin of safety is the amount that sales can drop before the company incurs a loss.

Question 14

Variable costs per unit increase proportionately with increases in output activity.

Question 15

Least-squares regression is a statistical method for deriving an estimated line of cost behavior.

Question 16

Cost-volume-profit analysis provides approximate,but not precise,answers to questions about the relations among costs,volume,and profits.

Question 17

Dividing a mixed cost into its separate fixed and variable cost components makes it more difficult to do cost-volume-profit analysis.

Question 18

The relevant range of operations includes extremely high and low levels of production that are unlikely to occur.

Question 19

Unit contribution margin is the amount a product's unit selling price exceeds its total variable cost.

Question 20

Cost-volume-profit analysis can be used to predict the effects of reduced selling prices,increased fixed costs,and reduced variable costs on break-even points.

Question 21

The extent,or relative size,of fixed costs in the total cost structure is known as operating leverage.

Question 22

The contribution margin per unit is the price at which a unit must be sold in order for the company to break even.

Question 23

Unit contribution ratio is calculated by dividing sales price per unit by the unit contribution margin.

Question 24

A visual inspection of a scatter diagram may be used to identify the approximate relation between past cost and volume.

Question 25

A break-even point can be calculated either in units or in dollars.

Question 26

A cost-volume-profit (CVP)chart is a graph that plots volume on the horizontal axis and costs and sales on the vertical axis.

Question 27

Unit contribution margin is the amount each unit contributes to both fixed costs and net income.

Question 28

On a typical cost-volume-profit graph,unit sales are shown on the horizontal axis and both dollars of sales and dollars of costs are represented on the vertical axis.

Question 29

A graphic depiction of the break-even point is known as a cost-volume-profit (CVP)chart.

Question 30

The high-low method is used to derive an estimated line of cost behavior by graphically connecting the two cost amounts identified with the highest and lowest volume levels.

Question 31

Degree of operating leverage (DOL)is defined as total contribution margin in dollars divided by pretax income.

Question 32

To calculate the break-even point in units,one must know unit fixed cost,unit variable cost,and unit sales price.

Question 33

The break-even point is the sales level at which a company neither earns a profit nor incurs a loss.

Question 34

To determine the slope of the variable cost from a scatter diagram,divide the change in volume by the change in cost.

Question 35

The contribution margin per unit is equal to the sales price per unit minus the variable costs per unit.

Question 36

Scatter diagrams plot volume on the vertical axis and cost on the horizontal axis.

Question 37

There are only two methods to derive an estimated line of cost behavior: the high-low method and the scatter diagram.

Question 38

The high-low method can be used to derive an estimated line of cost behavior.

Question 39

Break-even analysis is a special case of cost-volume-profit analysis.

Question 40

The contribution margin ratio is the percentage by which the margin of safety exceeds the break-even point.

Question 41

A cost that can be separated into fixed and variable components is called a:

A) Mixed cost
B) Step-variable cost
C) Composite cost
D) Curvilinear cost
E) Differential cost

Question 42

Curvilinear costs always increase:

A) With decreases in volume.
B) In constant proportion to changes in production levels.
C) When management performs break-even analysis.
D) When volume increases but not at a constant rate.
E) On a per unit basis when volume of activity goes down.

Question 43

A cost that remains constant over a limited range of volume but increases by a lump sum when volume increases beyond a maximum amount is a(n):

A) Step-wise cost
B) Fixed cost
C) Curvilinear cost
D) Incremental cost
E) Opportunity cost

Question 44

Which one of the following statements is not true?

A) Total fixed costs remain the same regardless of volume.
B) Total variable costs change with volume.
C) Total variable costs decrease as the volume increases.
D) Fixed costs per unit increase as the volume decreases.
E) Variable costs per unit remain the same regardless of the volume.

Question 45

A cost that changes in total proportionately to changes in volume of activity is a(n):

A) Differential cost
B) Fixed cost
C) Incremental cost
D) Variable cost
E) Product cost

Question 46

If a firm's forecasted sales are $250,000 and its break-even sales are $190,000,the margin of safety (in dollars)is:

A) $60,000
B) $250,000
C) $190,000
D) $440,000
E) $24,000

Question 47

A cost that changes with volume,but not at a constant rate,is called a:

A) Variable cost
B) Curvilinear cost
C) Step-wise variable cost
D) Fixed cost
E) Differential cost

Question 48

Cost-volume-profit analysis cannot be used when a firm produces and sells more than one product.

Question 49

Cost-volume-profit analysis is based on three basic assumptions.Which of the following is not one of these assumptions?

A) Total fixed costs remain constant over changes in volume.
B) Curvilinear costs change proportionately with changes in volume throughout the relevant range.
C) Variable costs per unit of output remain constant as volume changes.
D) Sales price per unit remains constant as volume changes.
E) The relationship between volume, costs, and profits do not necessarily hold outside the relevant range.

Question 50

An important tool in predicting the volume of activity,the costs to be incurred,the sales to be earned,and the profit to be received is:

A) Target income analysis.
B) Cost-volume-profit analysis.
C) Least-squares regression of costs.
D) Variance analysis.
E) Process costing.

Question 51

Break-even analysis cannot be applied in a multiproduct situation.

Question 52

A cost that remains the same in total even when volume of activity varies is a:

A) Fixed cost
B) Curvilinear cost
C) Variable cost
D) Step-wise variable cost
E) Standard cost

Question 53

A firm expects to sell 25,000 units of its product at $11 per unit.Pretax income is predicted to be $60,000.If the variable costs per unit are $6,total fixed costs must be:

A) $65,000
B) $90,000
C) $125,000
D) $215,000
E) $275,000

Question 54

A company's normal operating range,which excludes extremely high and low volumes that are not likely to occur,is called the:

A) Margin of safety.
B) Contribution range.
C) Break-even point.
D) Relevant range.
E) High-low point.

Question 55

An important assumption in the analysis of a multiproduct situation is that the sales mix is known and remains constant.

Question 56

The excess of expected sales over the sales level at the break-even point is known as the:

A) Sales turnover.
B) Profit margin.
C) Contribution margin.
D) Relevant range.
E) Margin of safety.

Question 57

A term describing a firm's normal range of operating activities is:

A) Relevant range of operations.
B) Break-even level of operations.
C) Margin of safety of operations.
D) Relevant operating analysis.
E) High-low level of operations.

Question 58

A target income refers to:

A) Income at the break-even point.
B) Income from the most recent period.
C) Income planned for a future period.
D) Income only in a multiproduct environment.
E) Income at the minimum contribution margin.

Question 59

A product sells for $30 per unit and has variable costs of $18 per unit.The fixed costs are $720,000.If the variable costs per unit were to decrease to $15 per unit and fixed costs increase to $900,000,and the selling price does not change,break-even point in units would:

A) Increase by 20,000
B) Equal 6,000
C) Increase by 6,000
D) Decrease by 20,000
E) Not change

Question 60

The margin of safety is the excess of:

A) Break-even sales over expected sales.
B) Expected sales over variable costs.
C) Expected sales over fixed costs.
D) Fixed costs over expected sales.
E) Expected sales over break-even sales.

Question 61

Use the following information to determine the margin of safety in dollars:
$\begin{array}{ll}\text { Unit sales }&50,000 \text { unit }\\ \text { Dollar sales } & \$ 500,000 \\\text { Fixed costs } & \$ 204,000 \\\text { Variable costs } & \$ 187,500\end{array}$

A) $88,500
B) $108,500
C) $173,600
D) $326,400
E) $500,000

Question 62

Schmidt Inc,manufactures inexpensive cameras that sell for $50.Fixed costs are $720,000 and variable costs are $30.00 per unit.Schmidt can buy a newer production machine that will increase fixed costs by $14,400 per year but will increase variable costs by 10% per unit.What are the original and the new break-even points in this situation?

A) Original $43,200; New $36,720.
B) Original $36,000; New $36,720.
C) Original $36,000; New $42,353.
D) Original $36,000; New $43,200.
E) Original $24,000; New $41,506.

Question 63

A method that estimates cost behavior by connecting the costs linked to the highest and lowest volume levels on a scatter diagram with a straight line is called the:

A) Scatter method.
B) High-low method.
C) Least-squares method.
D) Break-even method.
E) Step-wise method.

Question 64

The least-squares regression method is:

A) A graphical method to identify cost behavior.
B) An algebraic method to identify cost behavior.
C) A statistical method to identify cost behavior.
D) The only identify cost estimation method allowed by GAAP.
E) A cost estimation method that only uses the two extreme values.

Question 65

Management of a company is evaluating two potential orders.Due to limited capacity only one of these orders can be accepted.Incremental fixed costs are the same for either option.Based on the information in the table below,which of the following statements is true?
$$\begin{array} { | l | l | l | } \hline & \text { Option A } & \text { Option B } \\\hline \text { Number of units } & 30 & 40 \\\hline \text { Contribution margin ratio } & 35 \% & 45 \% \\\hline \text { Selling price per unit } & \$ 400 & \$ 300 \\\hline\end{array}$$

A) Option B has the highest contribution margin per unit.
B) Option A has the highest total contribution margin.
C) Option B has the lowest contribution margin ratio.
D) Option B has the highest total contribution margin.
E) Option A has the highest amount per dollar of sales to contribute to contribution margin and profit.

Question 66

Conan Company has total fixed costs of $112,000.Its product sells for $35 per unit and variable costs amount to $25 per unit.Next year Conan Company wishes to earn a pretax income that equals 10% of fixed costs.How many units must be sold to achieve this target income level?

A) 1,120
B) 8,214
C) 11,200
D) 12,320
E) 14,080

Question 67

A company wishes to earn a pretax income equal to 35% of total fixed costs.Its product sells for $50.75 per unit.Total fixed costs equal $156,800 and variable costs per unit are $32.50.How many units must this company sell to meet its goal? (Round answer to complete units.)

A) 11,599
B) 8,592
C) 4,171
D) 6,513
E) 11,047

Question 68

Hartman Co.has fixed costs of $36,000 and a contribution margin ratio of 24%.If expected sales are $200,000,what is the margin of safety as a percentage of sales?

A) 6%
B) 25%
C) 33%
D) 50%
E) 75%

Question 69

A graph used to analyze past cost behaviors by displaying costs and volume levels for each period as points on the diagram is called a:

A) Least-squares diagram.
B) Step-wise diagram.
C) Scatter diagram.
D) Break-even diagram.
E) Composite diagram.

Question 70

During the past year a company had total fixed costs of $70,000.Its product sold for $9 per unit.Variable costs during this time equaled $5 per unit.Next year the company is anticipating a 4% increase in total fixed costs and a $1 per unit decrease in variable costs but would like to maintain its current selling price per unit.How many units must the company sell next year to earn $1 million? (Round answer to complete units.)

A) 119,200
B) 200,000
C) 214,560
D) 268,200
E) 18,200

Question 71

A line on a scatter diagram that is intended to reflect the past relation between cost and volume is the:

A) Margin of safety line.
B) Break-even line.
C) Contribution margin line.
D) Estimated line of cost behavior.
E) Standard cost line.

Question 72

Reference: 18_01
Willco Inc. manufactures electronic parts. They are analyzing their monthly maintenance costs to determine the best way to budget these costs in the future. They have collected the following data for the last six months:
$$\begin{array} { | l | c | c | } \hline { \text { Month } } & \text { Machine Hours } & \text { Maintenance Costs } \\\hline \text { January } & 30,000 & \$ 62,000 \\\hline \text { February } & 40,000 & \$ 74,500 \\\hline \text { March } & 37,500 & \$ 65,900 \\\hline \text { April } & 39,000 & \$ 68,750 \\\hline \text { May } & 42,300 & \$ 74,000 \\\hline \text { June } & 35,000 & \$ 64,500 \\\hline\end{array}$$

-Using the high-low method and the Willco data,calculate the variable maintenance cost per machine hour (round to three decimal places).

A) $1.016/hr.
B) $0.976/hr.
C) $1.863/hr.
D) $1.250/hr.
E) $0.907/hr.

Question 73

A product sells for $210 per unit,and its variable costs per unit are $130.The fixed costs are $420,000.If the firm wants to earn $35,000 after tax income (assume a 30% tax rate),how many units must be sold?

A) 6,500
B) 6,275
C) 500
D) 5,875
E) 5,500

Question 74

A statistical method for deriving an estimated line of cost behavior is the:

A) Scatter diagram method.
B) High-low method.
C) Composite method.
D) CVP charting method.
E) Least-squares regression method.

Question 75

A product sells for $200 per unit,and its variable costs per unit are $130.The fixed costs are $420,000.If the firm wants to earn $35,000 pretax income,how many units must be sold?

A) 6,500
B) 6,000
C) 500
D) 5,000
E) 5,500

Question 76

During the past year a company had total fixed costs of $700,000.Its product sold for $93 per unit.Variable costs during this time equaled $45 per unit.Next year the company is anticipating a 10% increase in total fixed costs and a $3 per unit decrease in variable costs but would like to maintain its current selling price per unit.How many units must the company sell next year to earn $1 million? (Round answer to complete units.)

A) 19,608
B) 34,706
C) 36,875
D) 20,833
E) 19,033

Question 77

Ivan Company has a goal of earning $70,000 after-tax income.Ivan would need to pay $20,000 of income taxes at the target level of income.The contribution margin ratio is 30%.What amount of dollar sales must be achieved to reach the goal if fixed costs are $36,000?

A) $23,333
B) $36,000
C) $300,000
D) $353,333
E) $420,000

Question 78

Mueller Corp.manufactures compact discs that sell for $5.Fixed costs are $28,000 and variable costs are $3.60 per unit.Mueller can buy a newer production machine that will increase fixed costs by $8,000 per year but will decrease variable costs by $0.40 per unit.What effect would the purchase of the new machine have on Mueller's break-even point in units?

A) 4,444 unit increase.
B) 9,850 unit decrease.
C) 5,714 unit increase.
D) 4,444 unit decrease.
E) No effect on the break-even point in units.

Question 79

Total contribution margin in dollars divided by pretax income is the:

A) Degree of operating leverage.
B) Contribution margin ratio.
C) Margin of safety.
D) Sales mix.
E) Break-even point in units.

Question 80

Management anticipates fixed costs of $72,500 and variable costs equal to 40% of sales.What will pretax income equal if sales are $325,000?

A) $57,500
B) $122,500
C) $130,000
D) $181,250
E) $252,500