Deck 3: Cost-Volume-Profit Analysis

Question 1

An assumption needed for CVP analysis in multiple-product companies is that the sales mix remains constant.

Answer 1

True

Question 2

The contribution margin per unit is calculated as Selling Price per unit minus Variable Cost per unit.

Answer 2

True

Question 3

When an organization produces and sells a number of different products or services, the weighted average contribution margin per unit is used to determine the breakeven point or target profit in units.

Answer 3

True

Question 4

Assumptions and limitations are irrelevant when using CVP analysis.

Question 5

CVP calculations can only be used in companies that sell a single product.

Question 6

The margin of safety is the excess of a firm's profits above the breakeven point.

Question 7

The breakeven point is often expressed as a cost per unit.

Question 8

CVP analysis can be used in companies that sell multiple products.

Question 9

Accountants develop CVP analysis to help managers decide which products or services to emphasize.

Question 10

Because managers cannot usually be certain about their cost function, they also cannot be certain about the level of sales needed to earn a target profit.

Question 11

A CVP analysis indicates that the breakeven point for Rebo Company is 2,000 units. If the company sells 2,350 units, then it will be guaranteed to earn a profit.

Question 12

CVP analysis can assist in budgeting for discretionary expenditures, such as fixed costs for advertising.

Question 13

In CVP analysis, costs are assumed to be linear; that is, they can be expressed as "TC = F + VxQ" format, where F represents total fixed costs.

Question 14

A linear revenue function is one of the assumptions involved in CVP analysis.

Question 15

On a cost-volume-profit graph, the breakeven point is located where the fixed cost line intersects the x-axis.

Question 16

If a company can produce and sell 400 units at $10 each and its variable costs are $6 per unit, expected profit using the profit equation will be $1,600.

Question 17

Accountants typically do not perform CVP analysis; instead, they delegate that responsibility to production managers.

Question 18

The breakeven point can be expressed as a number of units or as total amount of revenue.

Question 19

Managers implicitly assume that operations will be within the relevant range when using CVP analysis.

Question 20

For companies with multiple products, the sales mix should be stated as a proportion of units when performing CVP computations in units.

Question 21

Managers can use cost-volume-profit analysis to:
I) Plan operating activity levels
II) Achieve targeted profits
III) Monitor organizational performance

A) I only
B) II and III only
C) I and III only
D) I, II, and III

Question 22

Gross margin and contribution margin mean the same thing; they are just different ways of describing the result of sales less COGS (either variable or fixed).

Question 23

Alpha Corporation's fixed costs total $10,000, while Beta Corporation's fixed costs total $12,000 for the same period of time. Therefore, Beta has a higher margin of safety than Alpha.

Question 24

Which of the following is an uncertainty faced by managers in CVP analysis?
I) Unexpected changes in costs
II) How quickly demand for new products will change
III) The amount of budgeted advertising costs

A) III only
B) I and II only
C) I and III only
D) I, II, and III

Question 25

CVP analysis can be used in the following type(s) of organization:
I) Manufacturing
II) Service
III) Not-for-profit

A) I and III only
B) II and III only
C) I and II only
D) I, II, and III

Question 26

The Puppet Co. has the following unit and mix data: $\begin{array}{lll}&\text { Do }&\text { Dah }&\text { Total }\\\text { Unit sales price } & \$ 5.00 & \$ 4.00 \\\text { Unit contribution margin } & 0.75 & 0.6 \\\text { Sales mix }(\$) & 80 \% & 20 \%\\\text { Fixed costs }&&&\$99,000\\\text { Target profit }&&&24,750\end{array}$ How many units in total must be sold to earn the target profit?

A) 687,500
B) 165,000
C) 112,500
D) 171,875

Question 27

The Puppet Co. has the following unit and mix data: $\begin{array}{lll}&\text { Do }&\text { Dah }&\text { Total }\\\text { Unit sales price } & \$ 5.00 & \$ 4.00 \\\text { Unit contribution margin } & 0.75 & 0.6 \\\text { Sales mix }(\$) & 80 \% & 20 \%\\\text { Fixed costs }&&&\$99,000\\\text { Target profit }&&&24,750\end{array}$ How many units of Dah must be sold at the breakeven point?

A) 75,000
B) 27,500
C) 37,500
D) 55,000

Question 28

A larger margin of safety gives managers greater confidence in making plans such as incurring additional fixed costs.

Question 29

PhotoMix Corporation produces three products. Cost, price, and volume data is shown below: $\begin{array}{lr}\text { Total Fixed costs } & \$ 2,400 \\\text { Tax rate } & 40 \%\end{array}$

$\begin{array}{lrrr}&\text { Picture } & \text { Candle } & \text { CD } \\&\text { Holders } & \text { Holders } & \text { Holders } \\\hline\text { Normal volume } & 300 & 150 & 200 \\\text { Price per unit } & \$ 5 & \$ 7 & \$ 10 \\\text { Variable cost per unit } & 2 & 3 & 4\end{array}$ PhotoMix's pre-tax profit next period is expected to be:

A) $240
B) $300
C) More than $300
D) Cannot be determined

Question 30

CVP analysis can be used to make decisions about discretionary expenditures, such as:

A) Advertising
B) Taxes
C) Direct materials purchases
D) City license fees

Question 31

PhotoMix Corporation produces three products. Cost, price, and volume data is shown below: $\begin{array}{lr}\text { Total Fixed costs } & \$ 2,400 \\\text { Tax rate } & 40 \%\end{array}$

$\begin{array}{lrrr}&\text { Picture } & \text { Candle } & \text { CD } \\&\text { Holders } & \text { Holders } & \text { Holders } \\\hline\text { Normal volume } & 300 & 150 & 200 \\\text { Price per unit } & \$ 5 & \$ 7 & \$ 10 \\\text { Variable cost per unit } & 2 & 3 & 4\end{array}$ When using units as the measure, what proportion of the sales mix do picture holders represent? Round to the nearest whole percent.

A) 33%
B) 46%
C) Some other percentage
D) Cannot be determined

Question 32

CVP analysis is most likely to be used for which of the following decisions?

A) The amount of discretionary expenditures for the next period
B) The organizational vision
C) The exact level of operations at which the organization will operate
D) Whether to buy a business segment operating in Germany

Question 33

PhotoMix Corporation produces three products. Cost, price, and volume data is shown below: $\begin{array}{lr}\text { Total Fixed costs } & \$ 2,400 \\\text { Tax rate } & 40 \%\end{array}$

$\begin{array}{lrrr}&\text { Picture } & \text { Candle } & \text { CD } \\&\text { Holders } & \text { Holders } & \text { Holders } \\\hline\text { Normal volume } & 300 & 150 & 200 \\\text { Price per unit } & \$ 5 & \$ 7 & \$ 10 \\\text { Variable cost per unit } & 2 & 3 & 4\end{array}$ The weighted average contribution margin per unit, rounded to the nearest cent, is:

A) $3.00
B) $4.00
C) $4.15
D) $6.00

Question 34

A firm with fixed costs of $61,500 per month sells three products with the following characteristics: $\begin{array}{lll}& \text { Sales Mix } & \text { Contribution } \\\text { Product } & \text { Percentage } & \text { Margin }\\\mathrm{P} & 25 \% & \$ 48 \\\mathrm{Q} & 50 \% & 50 \\\mathrm{R} & 25 \% & 52\end{array}$ How many total units must be sold to break even?

A) 1,230
B) 1,500
C) 1,533
D) 1,600

Question 35

If sales are $80,000, variable costs are $50,000, and fixed costs are $20,000, the contribution margin ratio is:

A) 37.5%
B) 12.5%
C) 62.5%
D) 25.0%

Question 36

PhotoMix Corporation produces three products. Cost, price, and volume data is shown below: $\begin{array}{lr}\text { Total Fixed costs } & \$ 2,400 \\\text { Tax rate } & 40 \%\end{array}$

$\begin{array}{lrrr}&\text { Picture } & \text { Candle } & \text { CD } \\&\text { Holders } & \text { Holders } & \text { Holders } \\\hline\text { Normal volume } & 300 & 150 & 200 \\\text { Price per unit } & \$ 5 & \$ 7 & \$ 10 \\\text { Variable cost per unit } & 2 & 3 & 4\end{array}$ The weighted average contribution margin ratio, rounded to the nearest whole percent, is:

A) 57%
B) 59%
C) 60%
D) Some other number

Question 37

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

Question 38

PhotoMix Corporation produces three products. Cost, price, and volume data is shown below: $\begin{array}{lr}\text { Total Fixed costs } & \$ 2,400 \\\text { Tax rate } & 40 \%\end{array}$

$\begin{array}{lrrr}&\text { Picture } & \text { Candle } & \text { CD } \\&\text { Holders } & \text { Holders } & \text { Holders } \\\hline\text { Normal volume } & 300 & 150 & 200 \\\text { Price per unit } & \$ 5 & \$ 7 & \$ 10 \\\text { Variable cost per unit } & 2 & 3 & 4\end{array}$ When using revenues as the measure, what proportion of the sales mix do CD holders represent? Round to the nearest whole percent.

A) 44%
B) 38%
C) 31%
D) Cannot be determined

Question 39

Hangers Co. manufactures and sells a single product. This product has the following operational data: Unit sales price $\quad$$\$ 30$
Variable manufacturing cost per unit $\quad$ 17
Fixed manufacturing costs $\quad$ 72,000
Variable selling cost per unit $\quad$ 1
Fixed selling costs $\quad$ 27,000
Marginal tax rate $\quad 40 \%$ What amount of total revenue would be needed to meet an after-tax profit target of $48,000?

A) $365,000
B) $547,500
C) $630,000
D) $447,500

Question 40

Which of the following techniques examine changes in profits in response to changes in volume, costs, and prices?

A) Activity-based costing
B) Financial statement analysis
C) Cost-volume-profit analysis
D) Balanced scorecard

Question 41

At the breakeven point:

A) Sales will be equal to variable costs plus target profit
B) Sales will be equal to variable costs plus fixed costs
C) Sales will be equal to fixed costs plus target profit
D) Fixed costs will be equal to variable costs

Question 42

How is the relevant range of activity related to CVP analysis?

A) Managers are normally uncertain about the relevant range
B) In CVP analysis, operations are assumed to be within the relevant range
C) The relevant range is irrelevant to CVP analysis
D) The relevant range affects costs but not revenues

Question 43

Which of the following business conditions may violate an assumption of CVP analysis?
I) Supplier volume discounts
II) Learning curves
III) Customer discounts

A) I and II only
B) II and III only
C) I, II, and III
D) I and III only

Question 44

Which of the following is the amount by which sales could drop before profits reach the breakeven point?

A) Operating leverage
B) Total contribution margin
C) Margin of safety
D) Incremental sales

Question 45

The margin of safety is:

A) The difference between estimated sales and breakeven sales.
B) Not a useful measure for management in understanding the risk associated with a product line.
C) The amount sales can drop before the target profit is met.
D) How far sales must increase to earn a profit.

Question 46

Which of the following is not an assumption in CVP analysis?

A) Actual costs will be exactly the amount that we predict in the analysis
B) Operations are within the relevant range
C) The revenue function is linear
D) The cost function is linear

Question 47

The breakeven point can be defined as:

A) The point at which sales equal variable costs
B) The point at which the total contribution margin equals the total fixed costs
C) The level of operations at which the firm earns a profit
D) The level of operations that equals budgeted sales

Question 48

MacLean Company produces a single product. Following is cost information: $\begin{array}{lll}&&\text { Variable Cost }\\&\text { Fixed Cost }&\text { Per Unit }\\\text { Manufacturing costs } & \$ 35,000 & \$ 15 \\\text { Non-manufacturing costs } & 60,000 & 10\end{array}$ If the product sells for $60, how many units must be sold to break even?

A) 1,000
B) 2,375
C) 2,714
D) 3,800

Question 49

The cost function for Ciao Company is: TC = $800 + 0.375 × Revenue. If Ciao expects after-tax income of $600, and the tax rate is 40%, what is the firm's margin of safety?

A) $3,680
B) $2,400
C) $2,880
D) $1,600

Question 50

What is the relationship between the margin of safety percentage and the degree of operating leverage?

A) They are unrelated
B) They are always the same
C) They are reciprocals
D) They are both subject to management bias

Question 51

Ciao Company manufactures a single product. The product sells for $10. The variable manufacturing cost per unit is $2 and the variable selling cost is $2 per unit. Ciao incurs monthly fixed costs of $100,000 for manufacturing and $140,000 for administration and selling.
Ciao Company is considering changes to its production and distribution procedures. If the changes are made, total variable costs (manufacturing and selling) will be $3 and total fixed costs (manufacturing, administration, and selling) will be $350,000 per month. The selling price will remain at $10. If the changes are made, the number of units required to break even will be:

A) Greater than before
B) The same as before
C) Less than before
D) Cannot be determined

Question 52

FCS Corporation sells its single product for $14 per unit, and its variable cost per unit is $4. Total fixed costs are $800. Its CVP graph is as follows:

Area C is best described as:

A) Fixed cost
B) Margin of safety
C) Estimated profit at actual volume
D) Breakeven point

Question 53

FCS Corporation sells its single product for $14 per unit, and its variable cost per unit is $4. Total fixed costs are $800. Its CVP graph is as follows:

Point A is best described as:

A) Fixed cost
B) Margin of safety
C) Estimated profit at actual volume
D) Breakeven point

Question 54

When the assumption of linearity is applied to revenue in CVP analysis:

A) Fixed cost per unit increases as revenue decreases
B) Variable cost per unit is linear with respect to total revenue
C) The sales mix and all of the prices remain constant
D) The sales mix remains constant, but prices decrease as volumes increase

Question 55

The assumption of cost function linearity means:
I) Fixed costs remain fixed.
II) Sales mix remains constant.
III) The average cost per unit remains constant.

A) I only
B) I and II only
C) I, II, and III
D) III only

Question 56

Terry's Donut Shop had the following activity for December: $$\begin{array} { l l } \text { Total donuts sold } & 17,000 \\\text { Total revenues } & \$ 595,000 \\\text { Total fixed costs } & 99,000 \\\text { Total variable costs } & 357,000\end{array}$$ What was Terry's margin of safety, in dollars?

A) $430,000
B) $247,500
C) $347,500
D) $357,000

Question 57

The ratio of contribution margin / profit is used to compute a company's:

A) Expected fixed costs
B) Degree of operating leverage
C) Margin of safety
D) Margin of safety percentage

Question 58

Managers should consider which of the following in CVP analysis?
I) Assumptions
II) Uncertainties
III) Biases

A) II and III only
B) I and III only
C) I and II only
D) I, II, and III

Question 59

FCS Corporation sells its single product for $14 per unit, and its variable cost per unit is $4. Total fixed costs are $800. Its CVP graph is as follows:

Point B is best described as:

A) Fixed cost
B) Margin of safety
C) Estimated profit at actual volume
D) Breakeven point

Question 60

In CVP analysis, managers usually assume that the cost function is linear. Which of the following equations best represents a linear function for total cost if the cost is a mixed cost?

A) y = $200 + $60x
B) y = $60x2
C) y = $60x
D) y = $200

Question 61

Stain Manufacturer's contribution margin is $200, after-tax income is $96, and the tax rate is 40%. What are the fixed costs?

A) $60
B) $50
C) $40
D) $33

Question 62

FCS Corporation sells its single product for $14 per unit, and its variable cost per unit is $4. Total fixed costs are $800. Its CVP graph is as follows:

Area D is best described as:

A) Fixed cost
B) Margin of safety
C) Estimated profit at actual volume
D) Breakeven point

Question 63

Data extracted from the accounting information system of Turner Corporation produced the following graph. The equation of the dashed line is y = $25x; the equation of the solid line is y = $200 + $5x. The point where the dashed line intersects the solid line is the:

A) Variable cost per unit
B) Breakeven point
C) Unit contribution margin
D) None of the above

Question 64

Data extracted from the accounting information system of Turner Corporation produced the following graph. The equation of the dashed line is y = $25x; the equation of the solid line is y = $200 + $5x. The solid line represents:

A) Total variable costs
B) Total fixed costs
C) Total costs
D) Total revenues

Question 65

Chisholm Co. has a contribution margin ratio of 40% and a breakeven point of $200,000 in sales. If the firm reports net income of $50,000 after taxes of 50%, what were total sales for the year?

A) $450,000
B) $466,667
C) $500,000
D) $700,000

Question 66

Ruben, Inc. is a management consulting firm specializing in pension plans. Its billing rate to clients is $120 per hour, and variable costs average $80 per hour. Fixed costs are $24,000 per month. The income tax rate is 20%.
If variable costs increase by 10% and management increases its billing rate by 10%, what is the effect on the breakeven point, in billable hours?

A) It increases the breakeven point
B) The breakeven point will not change
C) It decreases the breakeven point
D) Cannot be determined

Question 67

Data extracted from the accounting information system of Turner Corporation produced the following graph. The equation of the dashed line is y = $25x; the equation of the solid line is y = $200 + $5x. The area to the left of the point where the two lines intersect, where the dashed line is below the solid line, shows where Turner:

A) Operates at a loss
B) Operates at a profit
C) Breaks even if product mix remains constant
D) Cannot be determined

Question 68

Data extracted from the accounting information system of Turner Corporation produced the following graph. The equation of the dashed line is y = $25x; the equation of the solid line is y = $200 + $5x. Which of the following terms best describes the graph?

A) Learning curve graph
B) Operating leverage graph
C) Margin of safety graph
D) Cost-volume-profit graph

Question 69

When sales are $1,000, the contribution margin is $600 and a pre-tax loss of $60 occurs. What is the breakeven point in dollars?

A) $833
B) $1,100
C) $1,167
D) $1,750

Question 70

The Laser Co. produces a single product. Its cost structure is: $\begin{array}{lll}&&\text { Variable Cost }\\&\text { Fixed Cost }&\text { Per Unit }\\\text { Manufacturing costs } & \$ 35,000 & \$ 15 \\\text { Non-manufacturing costs } & 60,000 & 10\end{array}$ If the firm sells 5,000 units per period, what price should be charged to earn $35,000?

A) $44
B) $45
C) $50
D) $51

Question 71

(B002) Data extracted from the accounting information system of Turner Corporation produced the following graph. The equation of the dashed line is y = $25x; the equation of the solid line is y = $200 + $5x. The solid line intersects the y-axis at the:

A) Fixed cost per unit
B) Variable cost per unit
C) Total fixed cost
D) Total variable cost

Question 72

If the total contribution margin decreases and fixed costs do not change, pre-tax income

A) Decreases by an equal amount
B) Increases by an equal amount
C) Does not change
D) Increases by some other amount

Question 73

Data extracted from the accounting information system of Turner Corporation produced the following graph. The equation of the dashed line is y = $25x; the equation of the solid line is y = $200 + $5x. The dashed line represents:

A) Total variable costs
B) Total fixed costs
C) Total costs
D) Total revenues

Question 74

Grady, Inc. produces a single product and projects the following costs for a normal month in which 100 units are produced and sold: $\begin{array}{lrr}&\text { Manufacturing }&\text { Non-manufacturing }\\\text { Fixed costs } & \$ 8,000 & \$ 5,000 \\\text { Total variable costs } & 7,700 & 6,050\end{array}$ The selling price per unit is $300. What volume, in units, must Grady sell to break even?

A) 36
B) 58
C) 80
D) 90

Question 75

A firm selling three products has the following data: $\begin{array}{llll}\text { Unit}&\text { Unit Variable }\\\text { Product }&\text {Sales Mix }&\text {Price }&\text {cost }\\P & 60,000 \text { units } & \$ 40 & \$ 20 \\Q & 40,000 \text { units } & 60 & 30 \\R & 20,000 \text { units } & 30 & 15\end{array}$ If the firm can change the sales mix from 60,000 P, 40,000 Q, and 20,000 R to 60,000 P, 20,000 Q, and 40,000 R, pre-tax income will be:

A) Lower
B) Higher
C) Unchanged
D) Cannot be determined

Question 76

Data extracted from the accounting information system of Turner Corporation produced the following graph. The equation of the dashed line is y = $25x; the equation of the solid line is y = $200 + $5x. The horizontal ("x") axis shows:

A) Fixed costs
B) Revenues
C) Units
D) Variable costs

Question 77

Ruben, Inc. is a management consulting firm specializing in pension plans. Its billing rate to clients is $120 per hour, and variable costs average $80 per hour. Fixed costs are $24,000 per month. The income tax rate is 20%.
If variable costs increase by 10% and management increases its billing rate by 8%, what is the effect on the breakeven point, in billable hours?

A) It increases the breakeven point
B) The breakeven point will not change
C) It decreases the breakeven point
D) Cannot be determined

Question 78

Data extracted from the accounting information system of Turner Corporation produced the following graph. The equation of the dashed line is y = $25x; the equation of the solid line is y = $200 + $5x. The area to the right of the point where the two lines intersect, where the dashed line is above the solid line, shows where TXC:

A) Operates at a loss
B) Operates at a profit
C) Breaks even if product mix remains constant
D) Cannot be determined

Question 79

At a breakeven point of 300 units, the variable costs were $600 and the fixed costs were $300. What will the next (i.e., 401st) unit sold contribute to profit before income taxes?

A) $0
B) $2
C) $1
D) Cannot be determined

Question 80

Data extracted from the accounting information system of Turner Corporation produced the following graph. The equation of the dashed line is y = $25x; the equation of the solid line is y = $200 + $5x. The vertical ("y") axis shows:

A) Dollars
B) Units
C) Contribution margin
D) Total profit