Deck 9: Break-Even Point and Cost-Volume-Profit Analysis

Question 1

When using CVP analysis to determine sales level for a desired amount of profit,the profit is treated as an additional cost to be covered.

Answer 1

True

Question 2

Total variable costs vary directly with levels of production.

Answer 2

True

Question 3

Total fixed costs vary inversely with levels of production.

Answer 3

False

Question 4

On a CVP graph,the total variable cost line intersects the y-axis at zero.

Question 5

After the break-even point is reached,each dollar of contribution margin is a dollar of before-tax profit.

Question 6

Dividing total fixed costs by the contribution margin ratio yields break-even point in sales dollars.

Question 7

On a CVP graph,the total cost line intersects the y-axis at zero.

Question 8

When computing profit on an after-tax basis,it is necessary to divide the pretax profit by the effective tax rate.

Question 9

Variable costs per unit remain unchanged with levels of production.

Question 10

Dividing total fixed costs by the contribution margin ratio yields break-even point in units.

Question 11

Absorption costing is more useful than variable costing in determining a company's break-even point.

Question 12

Fixed costs per unit remain constant with levels of production.

Question 13

Variable costing is more useful than absorption costing in determining a company's break-even point.

Question 14

Total fixed costs remain unchanged with levels of production.

Question 15

Variable costs per unit vary directly with levels of production.

Question 16

Fixed costs per unit vary inversely with levels of production.

Question 17

When computing profit on an after-tax basis,it is necessary to divide the pretax profit by (1 - effective tax rate).

Question 18

A company's break-even point is the level where total revenues equal total costs.

Question 19

Break-even point may be expressed in terms of units or dollars.

Question 20

After the break-even point is reached,each dollar of contribution margin is a dollar of after-tax profit.

Question 21

The relationship between a company's variable costs and fixed costs is referred to as its ______________________________.

Question 22

The margin of safety is an effective measure of risk for a company.

Question 23

CVP analysis is based on concepts from

A)standard costing.
B)variable costing.
C)job order costing.
D)process costing.

Question 24

The level of activity where a company's total revenues equal total costs is referred to as the ______________________________.

Question 25

A process that focuses only on factors that change from one course of action to another is referred to as ___________________________________.

Question 26

On a CVP graph,the total fixed cost line parallels the x-axis.

Question 27

With respect to fixed costs,CVP analysis assumes total fixed costs

A)per unit remain constant as volume changes.
B)remain constant from one period to the next.
C)vary directly with volume.
D)remain constant across changes in volume.

Question 28

In a multi-product environment,CVP analysis makes the assumption that a company's sales mix is constant.

Question 29

CVP analysis requires costs to be categorized as

A)either fixed or variable.
B)direct or indirect.
C)product or period.
D)standard or actual.

Question 30

The __________________________________________________ is computed by dividing the contribution margin by profit before tax.

Question 31

There is an inverse relationship between degree of operating leverage and the margin of safety.

Question 32

Cost-volume-profit analysis is a technique available to management to understand better the interrelationships of several factors that affect a firm's profit.As with many such techniques,the accountant oversimplifies the real world by making assumptions.Which of the following is not a major assumption underlying CVP analysis?

A)All costs incurred by a firm can be separated into their fixed and variable components.
B)The product selling price per unit is constant at all volume levels.
C)Operating efficiency and employee productivity are constant at all volume levels.
D)For multi-product situations,the sales mix can vary at all volume levels.

Question 33

On a CVP graph,the total revenue line intersects the y-axis at zero.

Question 34

Contribution margin divided by revenue is referred to as the ________________________________________.

Question 35

The excess of budgeted or actual sales over sales at break-even point is referred to as ______________________________.

Question 36

Incremental analysis focuses on factors that change from one decision to another.

Question 37

In CVP analysis,linear functions are assumed for

A)contribution margin per unit.
B)fixed cost per unit.
C)total costs per unit.
D)all of the above.

Question 38

CVP analysis relies on the assumptions that costs are either strictly fixed or strictly variable.Consistent with these assumptions,as volume decreases total

A)fixed costs decrease.
B)variable costs remain constant.
C)costs decrease.
D)costs remain constant.

Question 39

The margin of safety is computed by dividing 1 by the degree of operating leverage.

Question 40

In CVP analysis,sales and production are assumed to be equal.

Question 41

The contribution margin ratio always increases when the

A)variable costs as a percentage of net sales increase.
B)variable costs as a percentage of net sales decrease.
C)break-even point increases.
D)break-even point decreases.

Question 42

A firm's break-even point in dollars can be found in one calculation using which of the following formulas?

A)FC/CM per unit
B)VC/CM
C)FC/CM ratio
D)VC/CM ratio

Question 43

If a firm's net income does not change as its volume changes,the firm('s)

A)must be in the service industry.
B)must have no fixed costs.
C)sales price must equal $0.
D)sales price must equal its variable costs.

Question 44

Which of the following will decrease the break-even point? $\begin{array}{lll}Decrease ~ in&Increase~ in ~direct&Increase~ in\\\underline{Fixed~ cast}&\underline{labor~ cost}&\underline{selling ~price}\end{array}$

A)yes yes yes
B)yes no yes
C)yes no no
D)no yes no

Question 45

In a CVP graph,the slope of the total revenue line indicates the

A)rate at which profit changes as volume changes.
B)rate at which the contribution margin changes as volume changes.
C)ratio of increase of total fixed costs.
D)total costs per unit.

Question 46

Consider the equation X = Sales - [(CM/Sales)´ (Sales)].What is X?

A)net income
B)fixed costs
C)contribution margin
D)variable costs

Question 47

If a company's fixed costs were to increase,the effect on a profit-volume graph would be that the

A)contribution margin line would shift upward parallel to the present line.
B)contribution margin line would shift downward parallel to the present line.
C)slope of the contribution margin line would be more pronounced (steeper).
D)slope of the contribution margin line would be less pronounced (flatter).

Question 48

In a multiple-product firm,the product that has the highest contribution margin per unit will

A)generate more profit for each $1 of sales than the other products.
B)have the highest contribution margin ratio.
C)generate the most profit for each unit sold.
D)have the lowest variable costs per unit.

Question 49

At the break-even point,fixed costs are always

A)less than the contribution margin.
B)equal to the contribution margin.
C)more than the contribution margin.
D)more than the variable cost.

Question 50

Cost-volume-profit relationships that are curvilinear may be analyzed linearly by considering only

A)fixed and mixed costs.
B)relevant fixed costs.
C)relevant variable costs.
D)a relevant range of volume.

Question 51

On a break-even chart,the break-even point is located at the point where the total

A)revenue line crosses the total fixed cost line.
B)revenue line crosses the total contribution margin line.
C)fixed cost line intersects the total variable cost line.
D)revenue line crosses the total cost line.

Question 52

Given the following notation,what is the break-even sales level in units? SP = selling price per unit,FC = total fixed cost,VC = variable cost per unit

A)SP/(FC/VC)
B)FC/(VC/SP)
C)VC/(SP - FC)
D)FC/(SP - VC)

Question 53

____ focuses only on factors that change from one course of action to another.

A)Incremental analysis
B)Margin of safety
C)Operating leverage
D)A break-even chart

Question 54

In a CVP graph,the area between the total cost line and the total revenue line represents total

A)contribution margin.
B)variable costs.
C)fixed costs.
D)profit.

Question 55

In a CVP graph,the area between the total cost line and the total fixed cost line yields the

A)fixed costs per unit.
B)total variable costs.
C)profit.
D)contribution margin.

Question 56

Which of the following factors is involved in studying cost-volume-profit relationships?

A)product mix
B)variable costs
C)fixed costs
D)all of the above

Question 57

After the level of volume exceeds the break-even point

A)the contribution margin ratio increases.
B)the total contribution margin exceeds the total fixed costs.
C)total fixed costs per unit will remain constant.
D)the total contribution margin will turn from negative to positive.

Question 58

Break-even analysis assumes over the relevant range that

A)total variable costs are linear.
B)fixed costs per unit are constant.
C)total variable costs are nonlinear.
D)total revenue is nonlinear.

Question 59

To compute the break-even point in units,which of the following formulas is used?

A)FC/CM per unit
B)FC/CM ratio
C)CM/CM ratio
D)(FC+VC)/CM ratio

Question 60

The method of cost accounting that lends itself to break-even analysis is

A)variable.
B)standard.
C)absolute.
D)absorption.

Question 61

The most useful information derived from a cost-volume-profit chart is the

A)amount of sales revenue needed to cover enterprise variable costs.
B)amount of sales revenue needed to cover enterprise fixed costs.
C)relationship among revenues,variable costs,and fixed costs at various levels of activity.
D)volume or output level at which the enterprise breaks even.

Question 62

Palmer Company Below is an income statement for Palmer Company:
$\begin{array}{ll}\text { Sales } & \$ 400,000 \\\text { Variable costs } & \underline{(125,000)} \\\text { Contribution margin } & \$ 275,000 \\\text { Fixed costs } & \underline{(200,000)} \\\text { Profit before taxes } & \underline{\$ 75,000}\end{array}$ Refer to Palmer Company.Based on the cost and revenue structure on the income statement,what was Palmer's break-even point in dollars?

A)$200,000
B)$325,000
C)$300,000
D)$290,909

Question 63

As projected net income increases the

A)degree of operating leverage declines.
B)margin of safety stays constant.
C)break-even point goes down.
D)contribution margin ratio goes up.

Question 64

A managerial preference for a very low degree of operating leverage might indicate that

A)an increase in sales volume is expected.
B)a decrease in sales volume is expected.
C)the firm is very unprofitable.
D)the firm has very high fixed costs.

Question 65

Palmer Company Below is an income statement for Palmer Company:
$\begin{array}{ll}\text { Sales } & \$ 400,000 \\\text { Variable costs } & \underline{(125,000)} \\\text { Contribution margin } & \$ 275,000 \\\text { Fixed costs } & \underline{(200,000)} \\\text { Profit before taxes } & \underline{\$ 75,000}\end{array}$ Refer to Palmer Company.Assuming that the fixed costs are expected to remain at $200,000 for the coming year and the sales price per unit and variable costs per unit are also expected to remain constant,how much profit before taxes will be produced if the company anticipates sales for the coming year rising to 130 percent of the current year's level?

A)$97,500
B)$195,000
C)$157,500
D)A prediction cannot be made from the information given.

Question 66

Ideal Company Ideal Company produces and sells a single product.Information on its costs follow:
$\begin{array}{ll}\text{Variable costs:}\\~~\text { SG\&A } & \$ 2 \text { per unit } \\~~\text { Production } & \$ 4 \text { per unit } \\\text { Fixed costs: } & \\~~\text { SG\&A } & \$ 12,000 \text { per year }\\~~\text { Production } & \$ 15,000 \text { per year } \end{array}$ Refer to Ideal Company.Assume Ideal Company produced and sold 5,000 units.At this level of activity,it produced a profit of $18,000.What was Ideal Company's sales price per unit?

A)$15.00
B)$11.40
C)$9.60
D)$10.00

Question 67

Shelton Company Below is an income statement for Shelton Company:
$\begin{array}{ll}\text { Sales } & \$ 600,000 \\\text { Variable costs } & \underline{(150,000)} \\\text { Contribution margin } & \$ 450,000 \\\text { Fixed costs } & \underline{(300,000)} \\\text { Profit before taxes } & \underline{\$ 150,000}\end{array}$ Refer to Shelton Company.Based on the cost and revenue structure on the income statement,what was Shelton's break-even point in dollars?

A)$300,000
B)$400,000
C)$425,000
D)$450,000

Question 68

Management is considering replacing an existing sales commission compensation plan with a fixed salary plan.If the change is adopted,the company's

A)break-even point must increase.
B)margin of safety must decrease.
C)operating leverage must increase.
D)profit must increase.

Question 69

Palmer Company Below is an income statement for Palmer Company:
$\begin{array}{ll}\text { Sales } & \$ 400,000 \\\text { Variable costs } & \underline{(125,000)} \\\text { Contribution margin } & \$ 275,000 \\\text { Fixed costs } & \underline{(200,000)} \\\text { Profit before taxes } & \underline{\$ 75,000}\end{array}$ Refer to Palmer Company.What is Palmer's degree of operating leverage?

A)3.67
B)5.33
C)1.45
D)2.67

Question 70

The margin of safety is a key concept of CVP analysis.The margin of safety is the

A)contribution margin rate.
B)difference between budgeted contribution margin and actual contribution margin.
C)difference between budgeted contribution margin and break-even contribution margin.
D)difference between budgeted sales and break-even sales.

Question 71

Campbell Manufacturing incurs annual fixed costs of $250,000 in producing and selling a single product.Estimated unit sales are 125,000.An after-tax income of $75,000 is desired by management.The company projects its income tax rate at 40 percent.What is the maximum amount that Campbell can expend for variable costs per unit and still meet its profit objective if the sales price per unit is estimated at $6?

A)$3.37
B)$3.59
C)$3.00
D)$3.70

Question 72

Teal Company The following information relates to financial projections of Teal Company:
$\begin{array}{ll}\text { Projected sales } & 60,000 \text { units } \\\text { Projected variable costs } & \$ 2.00 \text { per unit } \\\text { Projected fixed costs } & \$ 50,000 \text { per year } \\\text { Projected unit salesprice } & \$ 7.00\end{array}$ Refer to Teal Company.If Teal Company achieves its projections,what will be its degree of operating leverage?

A)6.00
B)1.20
C)1.68
D)2.40

Question 73

If a company's variable costs per unit were to increase but its unit selling price stays constant,the effect on a profit-volume graph would be that the

A)contribution margin line would shift upward parallel to the present line.
B)contribution margin line would shift downward parallel to the present line.
C)slope of the contribution margin line would be pronounced (steeper).
D)slope of the contribution margin line would be less pronounced (flatter).

Question 74

Shelton Company Below is an income statement for Shelton Company:
$\begin{array}{ll}\text { Sales } & \$ 600,000 \\\text { Variable costs } & \underline{(150,000)} \\\text { Contribution margin } & \$ 450,000 \\\text { Fixed costs } & \underline{(300,000)} \\\text { Profit before taxes } & \underline{\$ 150,000}\end{array}$ Refer to Shelton Company.What is Shelton's degree of operating leverage?

A)1.33
B)2.00
C)3.00
D)4.00

Question 75

Shelton Company Below is an income statement for Shelton Company:
$\begin{array}{ll}\text { Sales } & \$ 600,000 \\\text { Variable costs } & \underline{(150,000)} \\\text { Contribution margin } & \$ 450,000 \\\text { Fixed costs } & \underline{(300,000)} \\\text { Profit before taxes } & \underline{\$ 150,000}\end{array}$ Refer to Shelton Company.What was Shelton's margin of safety?

A)$150,000
B)$175,000
C)$200,000
D)$300,000

Question 76

Palmer Company Below is an income statement for Palmer Company:
$\begin{array}{ll}\text { Sales } & \$ 400,000 \\\text { Variable costs } & \underline{(125,000)} \\\text { Contribution margin } & \$ 275,000 \\\text { Fixed costs } & \underline{(200,000)} \\\text { Profit before taxes } & \underline{\$ 75,000}\end{array}$ Refer to Palmer Company.What was Palmer's margin of safety?

A)$200,000
B)$75,000
C)$100,000
D)$109,091

Question 77

Teal Company The following information relates to financial projections of Teal Company:
$\begin{array}{ll}\text { Projected sales } & 60,000 \text { units } \\\text { Projected variable costs } & \$ 2.00 \text { per unit } \\\text { Projected fixed costs } & \$ 50,000 \text { per year } \\\text { Projected unit salesprice } & \$ 7.00\end{array}$ Refer to Teal Company.How many units would Teal Company need to sell to earn a profit before taxes of $10,000?

A)25,714
B)10,000
C)8,571
D)12,000

Question 78

Ideal Company Ideal Company produces and sells a single product.Information on its costs follow:
$\begin{array}{ll}\text{Variable costs:}\\~~\text { SG\&A } & \$ 2 \text { per unit } \\~~\text { Production } & \$ 4 \text { per unit } \\\text { Fixed costs: } & \\~~\text { SG\&A } & \$ 12,000 \text { per year }\\~~\text { Production } & \$ 15,000 \text { per year } \end{array}$ Refer to Ideal Company.In the upcoming year,Ideal Company estimates that it will produce and sell 4,000 units.The variable costs per unit and the total fixed costs are expected to be the same as in the current year.However,it anticipates a sales price of $16 per unit.What is Ideal Company's projected margin of safety for the coming year?

A)$7,000
B)$20,800
C)$18,400
D)$13,000

Question 79

Shelton Company Below is an income statement for Shelton Company:
$\begin{array}{ll}\text { Sales } & \$ 600,000 \\\text { Variable costs } & \underline{(150,000)} \\\text { Contribution margin } & \$ 450,000 \\\text { Fixed costs } & \underline{(300,000)} \\\text { Profit before taxes } & \underline{\$ 150,000}\end{array}$ Refer to Shelton Company.Assuming that the fixed costs are expected to remain at $300,000 for the coming year and the sales price per unit and variable costs per unit are also expected to remain constant,how much profit before taxes will be produced if the company anticipates sales for the coming year rising to 125 percent of the current year's level?

A)$112,500
B)$187,500
C)$262,500
D)$300,000

Question 80

The margin of safety would be negative if a company('s)

A)was presently operating at a volume that is below the break-even point.
B)present fixed costs were less than its contribution margin.
C)variable costs exceeded its fixed costs.
D)degree of operating leverage is greater than 100.