Deck 22: Cost-Volume-Profit Analysis for Decision Making

Question 1

Davis Ltd has observed that at an activity level of 10 000 units the maintenance cost is $22 000, and at 20 000 units the maintenance cost is $28 000. Using the high-low method, the cost formula for maintenance is:

A) $16 000 + $.60 x units.
B) $16 000 + $.1.54 x units.
C) $6 000 + $.60 x units.
D) $1.40/unit.

Answer 1

A

Question 2

Using the high-low method, if the highest maintenance cost and machine hours are $40 000 and 12 000 hours respectively and the lowest maintenance cost and machine hours are $20 000 and 8 000 hours respectively, the variable maintenance costs per machine hour are:

A) $3.33
B) $5.00
C) $2.50
D) $3.00

Answer 2

B

Question 3

Which statement relating to the visual fit of a scatter diagram technique is not true?

A) It is applied by drawing a straight line through the relationships of the dependent and the independent variables.
B) The difference between the points and the straight line is minimal compared to other lines that could be drawn.
C) The approach is usually fairly accurate even though it is a simple method to apply.
D) The straight line through the points should have approximately the same number of observations above and below.

Answer 3

C

Question 4

CVP analysis is based on a number of assumptions. Which of the following is not one of those assumptions?

A) Fixed costs remain constant over the relevant range
B) There are no mixed costs
C) Variable costs change proportionately with volume
D) Efficiency remains relatively unchanged

Question 5

The high-low method is:

A) a technique for determining the margin of safety.
B) a quote of the current price of the company's shares.
C) a quantitative technique that can be used to estimate a mixed cost function.
D) the range of activity when there are changes in productive output.

Question 6

Costs which, in total, vary directly or nearly directly with the volume of production are known as:

A) direct costs.
B) indirect costs.
C) variable costs.
D) fixed costs.

Question 7

The most serious shortcoming of the high-low method of estimating a mixed cost function is that it:

A) usually overestimates the total cost.
B) is based on a very small portion of the available data.
C) focuses on fixed costs only and ignores variable costs.
D) can only be used if contribution margin income statements are also being used.

Question 8

As production increases what would you expect to happen to total fixed costs?

A) Decrease
B) Increase
C) Remain the same
D) Either increase or decrease, depending on the variable cost

Question 9

On a per unit basis, a variable cost will:

A) vary from unit to unit.
B) remain constant.
C) decrease.
D) increase.

Question 10

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

A) Factory rental
B) Raw materials
C) Packaging costs
D) Factory bonuses linked to the level of production

Question 11

In terms of cost behaviour, telephone expense and rent of premises are classified as:

A) variable and fixed, respectively.
B) mixed and variable, respectively.
C) fixed and variable, respectively.
D) mixed and fixed, respectively.

Question 12

Items such as depreciation, property taxes and insurance can be described as:

A) variable costs.
B) fixed costs.
C) mixed costs.
D) incremental costs.

Question 13

The term 'relevant range', as used in cost accounting, means the range:

A) over which costs may fluctuate.
B) over which relevant costs are incurred.
C) over which the firm has a margin of safety.
D) of activity within which an entity expects to operate.

Question 14

Which of the following most accurately explains the behaviour of costs?

A) The majority of costs are fixed per unit of production.
B) The majority of costs are variable per unit of production.
C) Costs can be fixed or variable but not a combination of both.
D) There is no norm; costs can be fixed, variable or a combination of both.

Question 15

Mailroom clerks at Snail Mail are paid a salary of $3200 per month. All clerks are full time. A new clerk is hired whenever the volume of mail increases by 30 000 pieces since the last clerk was hired. If volume of mail is the activity base, mail-handling costs are:

A) committed fixed costs.
B) indirect costs.
C) step-variable costs.
D) discretionary fixed costs.

Question 16

A retail organisation pays its sales staff a commission of four percent on each sale. This is a:

A) fixed cost.
B) constant cost.
C) variable cost.
D) mixed cost.

Question 17

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

A) there are no mixed costs.
B) efficiency remains unchanged.
C) variable costs change proportionately with volume.
D) fixed costs remain constant over the relevant range.

Question 18

Which of the following costs is a variable manufacturing cost?

A) Depreciation costs computed using the straight-line method
B) General Manager's salary
C) Factory rent
D) Direct labour costs

Question 19

Within the relevant range of activity fixed cost per unit will tend to:

A) vary directly and proportionately with the level of activity.
B) vary inversely with the level of activity.
C) exhibit erratic movements.
D) remain constant.

Question 20

Which of the following is not an example of a mixed cost for an internet service provider?

A) Office insurance
B) Telephone
C) Water rates
D) Electricity

Question 21

The formula for break-even point sales in dollars is:

A) FC = VC.
B) Sales = VC.
C) FC = Sales.
D) (FC + Profit) / CM%.

Question 22

A small publishing house sold 25 000 copies of 'All about Greyhounds' in paperback at $3 per book. Fixed costs were $18 000 and variable costs were $45 000. What is the break-even point in units?

A) 3 000
B) 5 000
C) 10 000
D) 15 000

Question 23

Which of the following is not an assumption of cost-volume-profit analysis?

A) Costs can be classified into variable and fixed categories.
B) The time value of money is incorporated into the analysis.
C) The sales mix will remain constant.
D) The behaviour of income and expenses is regarded as linear over the relevant range.

Question 24

Contribution margin can be calculated as:

A) profit + total variable costs.
B) fixed costs - variable costs.
C) total revenue - total fixed costs.
D) total revenue - total variable costs.

Question 25

The break-even point is the level of activity where:

A) fixed costs equal variable costs.
B) total income equals total costs.
C) fixed costs are zero.
D) fixed and variable costs reach the upper level of the relevant range.

Question 26

When fixed costs are $140 000 and the contribution margin is $20, the break-even point is:

A) 7 000 units.
B) 14 000 units.
C) 17 500 units.
D) 70 000 units.

Question 27

Which of the following questions cannot be answered by cost-volume-profit analysis?

A) What is the most profitable sales mix?
B) Will the firm have sufficient funds to meet its commitments to creditors?
C) What additional sales volume is required to offset an increase in purchase costs?
D) If variable costs, such as labour, are replaced with fixed costs, such as machinery, what will be the impact on profits?

Question 28

Contribution margin is:

A) sales less fixed costs.
B) sales less cost of sales.
C) sales less variable costs.
D) sales per unit less (variable costs per unit plus fixed costs per unit).

Question 29

Product A sells for $100 per unit and has a contribution margin rate of 25%. Fixed expenses total $80 000 annually. How many units of Product A must be sold to yield a profit of $40 000?

A) 1 600
B) 4 800
C) 10 000
D) 25 000

Question 30

Contribution margin is:

A) sales less cost of sales.
B) sales less variable costs.
C) equivalent to gross profit.
D) sales less fixed costs.

Question 31

The term 'a' in the cost equation, y = a + bx, represents:

A) total costs.
B) total output.
C) fixed costs.
D) variable costs.

Question 32

Break-even analysis adjusted for a profit factor:

A) calculates breakeven profit.
B) is a poor basis for evaluating the profitability of a venture.
C) will not necessarily increase the number of required units.
D) is often adapted for different sales levels to aid in determining the possible levels of potential profit.

Question 33

Jackman Ltd sells its product for $50 per unit. The contribution margin per unit for Jackman Ltd is $20. Total monthly fixed costs are estimated to be $60 000. The monthly break-even units for this product will be:

A) 3 000
B) 6 500
C) 12 000
D) 18 000

Question 34

Hanson Company's data are:
Selling price per unit $120
Variable cost per unit $50
Fixed cost of operations per year $210 000
What is the break-even point in units?

A) 1 750
B) 3 000
C) 1 235
D) 4 200

Question 35

Variable expenses of Snoopy Limited constitute 60% of sales value and its fixed expenses are $75 000. What is the break-even point in terms of sales dollars?

A) $187 500
B) $125 000
C) $45 000
D) $30 000

Question 36

The vertical axis of the cost-volume-profit chart represents:

A) direct costs.
B) margin of safety.
C) volume of units.
D) committed fixed costs.

Question 37

Which of the following will not result in a change to the contribution margin?

A) Variation in the number of units sold
B) An increase in packaging costs
C) An increase in purchase price per unit
D) Variation of selling price per unit sold

Question 38

Which of the following quantitative methods will separate a semi-variable mixed cost into its fixed and variable components with the highest degree of precision?

A) Linear regression method
B) Visual fit method
C) High-low method
D) Simplex method

Question 39

In a cost-volume-profit graph the break-even point will be found:

A) where the total income line crosses the fixed costs line.
B) at the point where total income equals total fixed costs.
C) at the point where total income equals total fixed plus total variable costs.
D) where the predetermined overhead rate equals the contribution margin rate.

Question 40

If the targeted sales are 18 000 units, the sales price per unit is $50, fixed costs are $120 000 and variable costs are $40 per unit, then planned profit must be:

A) $90 000.
B) $120 000.
C) $180 000.
D) $60 000.

Question 41

The budgeted sales price multiplied by the difference between the actual and budgeted number of units sold is the:

A) variable cost variance
B) sales price variance
C) sales volume variance
D) margin of safety variance

Question 42

Downs Co sells a single product for $20 per unit. Fixed costs are $85 000 and variable costs equal 60% of sales. If fixed costs increase by $20 000, Downs Co will have to increase sales by how much just to earn profits equal to those earned before costs increased?

A) $12 000
B) $20 000
C) $42 000
D) $50 000

Question 43

The Glitter Company has three products - X, Y and Z - having contribution margins of $6, $4 and $2 respectively. The Sales Manager is planning to sell 200 000 units in the next period, consisting of X (40 000), Y (60 000) and Z (100 000). The company's fixed costs for the period were $204 000. What is the total break-even point for the company, assuming that the given sales mix is maintained?

A) 17 000
B) 60 000
C) 10 200
D) 51 000

Question 44

A change in which of the following would not affect the break-even point?

A) Total fixed costs
B) Number of units sold
C) Variable cost per unit
D) Sales price per unit

Question 45

Suppose the break-even point for revenue for Woolly Jumpers Inc. is $500 000. Fixed costs are $300 000. The contribution margin percentage is:

A) 0.25
B) 0.40
C) 0.60
D) 0.75

Question 46

Soft Lighting can sell 15 000 lamp shades during the year. The variable expenses are $5 per lamp shade. Fixed expenses are $40 000 and the business wishes to earn a profit of $50 000. What price must Soft Lighting charge per lamp shade?

A) $5
B) $6
C) $10
D) $11

Question 47

Sports Equipment Ltd, a sporting goods manufacturer, has recently created a new department to produce badminton equipment. In the next period the department will manufacture a single product, an aluminium badminton racquet, which has a unit selling price of $18. The variable costs per unit are $6 and the fixed costs per month are $8 000. The department has the capacity to produce 5 000 units per month. Management would like to use the production facilities at full capacity and also yield a monthly profit of $20 000. Assuming demand can be increased by reducing the selling price, calculate the minimum unit price at which both these objectives can be achieved.

A) $10.00
B) $11.60
C) $12.00
D) $18.00

Question 48

The income statement for Brisbane Co is:
$$\begin{array} { l r } \text { Sales } & \$ 300000 \\\text { Variable Expense } & 200000 \\\text { Contribution Margin } & \$ 100000 \\\text { Fixed Expenses } & 60000 \\\text { Profit } & \$ 40000\end{array}$$ What is the break-even point in sales dollars?

A) $20 000
B) $60 000
C) $90 000
D) $180 000

Question 49

Product G sells for $25 per unit and has a contribution margin rate of 20 percent. Fixed expenses total $120 000 annually. How many units of Product G must be sold to yield a profit of $60 000?

A) 24 000
B) 36 000
C) 12 000
D) 9 000

Question 50

Which of the following statements relating to margin of safety is correct?

A) It is the amount by which sales can decrease before incurring a loss.
B) It is the excess of actual sales over expected sales.
C) It is the difference between fixed and variable costs at a given level of production.
D) It indicates the amount of goods or services which can be safely produced by the business.

Question 51

Which of the following would cause the break-even point to change?

A) An increase in fixed costs due to an addition to equipment
B) An increase in the amount of inventory held
C) A decrease in total production
D) An increase in sales

Question 52

Watson Limited has the following cost estimates: variable cost per unit is $22, total fixed costs are $64 000 and the projected sales price is $30 each. The new accountant suggests that fixed costs can be reduced by $6 000. If so, how many units must be sold to produce a profit of $80 000?

A) 18 000
B) 18 750
C) 17 250
D) 10 000

Question 53

What will be the effect on the breakeven point if advertising costs increase?

A) The break-even point will be higher.
B) The break-even point will be lower.
C) The break-even point will not change.
D) It is not possible to calculate the effect without having more information.

Question 54

A change in which of the following items would not affect the break-even point?

A) Number of units sold
B) Total fixed costs
C) Sales price per unit
D) Contribution margin per unit

Question 55

Given the following information, the break-even point in sales dollars is:
Unit sales price $100
Variable production costs per unit $65
Fixed production costs $18 000
Selling and Administrative costs $3 000 + 5% of sales

A) $25 714
B) $21 000
C) $51 429
D) $60 000

Question 56

Genuine Auto Parts has reported sales of $500 000, a contribution margin of $8 per unit, fixed costs of $75 000 and a profit of $45 000. How many units did they sell?

A) 9 375
B) 15 000
C) 62 500
D) 47 500

Question 57

If all other factors remain the same, a 20% increase in both the selling price and variable costs of a product will:

A) raise the company's break-even point in units.
B) lower the company's break-even point in units.
C) cannot be determined without more information.
D) have no effect on the company's break-even point in units.

Question 58

The contribution margin for Brand A is $10 and for Brand B is $40 and the product mix is 10 Brand A models for every two Brand B model. The weighted average contribution margin is:

A) $10
B) $20
C) $25
D) $15

Question 59

The contribution margin for Product X is $80 and for Product Y $120 and the product mix is 3 Product X models for each Product Y model. The weighted average contribution margin per unit is:

A) $90
B) $72
C) $120
D) $100

Question 60

Margin of safety is:

A) the amount by which sales revenue exceeds variable costs.
B) the excess of actual or expected sales over break-even sales.
C) the amount by which actual sales exceed expected sales.
D) equal to the contribution margin.

Question 61

The following information is available for Alfred Ltd

The variable expense variance is:

A) $30 000 F
B) $30 000 U
C) $21 000 U
D) $21 000 F