Deck 3: Costvolumeprofit Analysis and Pricing Decisions

Question 1

At the breakeven point, the total contribution margin equals total fixed expenses.

Answer 1

True

Question 2

To adhere to the sales mix ratio, a company should split fixed costs between the multiple products and come up with individual product breakeven points or target income points.

Answer 2

False - Do not split fixed costs between the multiple products and try to come up with individual product breakeven points or target income points.This will result in selling units of product in a ratio that differs from the sales mix ratio,

Question 3

The breakeven graph illustrates the relationship between product and period costs, allowing managers to view a range of results at a single glance.

Answer 3

False
The breakeven graph illustrates the relationship between sales and costs, allowing managers to view a range of results at a single glance,

Question 4

Net income divided by (1 - tax rate) = Operating income

Question 5

On the breakeven graph, any level of sales to the left of the breakeven point represents a profit.

Question 6

On the breakeven graph, the point at which the total sales revenue line and the total cost line intersect is the breakeven point.

Question 7

When a company sells more than one product, its sales mix is the sales of each product relative to operating income.

Question 8

One assumption made when using CVP as a decision tool is that all costs can be easily and accurately separated into fixed and variable categories.

Question 9

Knowing the breakeven point helps managers evaluate the profitability, but not the desirability of various business opportunities.

Question 10

A company with high operating leverage will experience a large percentage change in operating income as a result of a small percentage change in sales.

Question 11

The degree of operating leverage is calculated as the contribution margin divided by the sales revenue.

Question 12

One of the activities managers like to engage in is called "what-if" analysis, or sensitivity analysis.

Question 13

Companies that carry a high level of fixed costs relative to variable costs are considered to have greater risk than companies with a high level of variable costs relative to fixed costs.

Question 14

At the breakeven point, sales revenue is exactly equal to total costs, and there is no profit or loss.

Question 15

A company's margin of safety is the difference between current sales and breakeven sales.

Question 16

Operating leverage is the change in total variable costs relative to sales revenue.

Question 17

Changing a company's cost structure affects its operating leverage and may have behavioral implications for the employees.

Question 18

If the sales mix changes, the breakeven point and target units will change as well.

Question 19

Firms can manage their degree of operating leverage by converting variable costs into fixed costs, or vice versa.

Question 20

Cost-volume-profit analysis, or CVP, helps managers assess the impact of various business decisions on company profits.

Question 21

At the breakeven point,

A)sales revenue equals zero.
B)sales revenue equals total costs.
C)operating income equals total sales.
D)operating income equals total costs.

Question 22

Assume a sales price per unit of $25, variable cost per unit $15, and total fixed costs of $18,000.What is the breakeven point in dollars?

A)$30,000
B)$45,000
C)$26,999
D)$37,500

Question 23

Which of the following formulas is used to calculate the breakeven point in units?

A)Total fixed costs divided by contribution margin per unit.
B)Total fixed costs divided by total contribution margin.
C)Total fixed costs divided by contribution margin ratio.
D)None of these formulas calculates the breakeven point in units.

Question 24

Which of the following formulas is used to calculate the breakeven point in sales dollars?

A)Total fixed costs divided by contribution margin per unit.
B)Total fixed costs divided by total contribution margin.
C)Total fixed costs divided by contribution margin ratio.
D)None of these formulas calculates the breakeven point in sales dollars.

Question 25

A drawback of cost-plus pricing is that it is a relatively difficult approach to pricing.

Question 26

Whereas cost-plus pricing starts with the cost, target costing starts with the price customers are willing to pay.

Question 27

At the breakeven point, which of the following is not true?

A)Sales revenue is equal to total costs.
B)Contribution margin is equal to total variable costs.
C)Contribution margin is equal to total fixed costs.
D)Operating income equals zero.

Question 28

Companies must engage in target costing after introducing a new product.

Question 29

Assume a sales price per unit of $25, variable cost per unit $15, and total fixed costs of $18,000.What is the breakeven point in units?

A)720 units
B)1,200 units
C)1,800 units
D)None of these answer choices is correct.

Question 30

Knowing the breakeven point helps managers evaluate

A)the profitability of various business opportunities.
B)the desirability of various business opportunities.
C)the cost behavior various business opportunities.
D)the operating leverage of various business opportunities.

Question 31

At the breakeven point,

A)sales revenue equals zero.
B)contribution margin equals total variable costs.
C)sales revenue equals total costs.
D)operating income equals total costs.

Question 32

If a company sells a single product and the selling price per unit and the variable cost per unit both increase by 5% while fixed costs remain the same, then contribution margin

A)per unit increases and breakeven in units increases.
B)per unit increases and breakeven in units decreases.
C)remains the same and breakeven in units increases.
D)decreases and breakeven in units decreases.

Question 33

Cost-plus pricing adds an amount to the cost of the product or service to cover the company's operating costs and contribute to its profit.

Question 34

Which of the following is not a step in calculating the breakeven point?

A)Put everything into "constant" form - sales price per unit, variable cost per unit, total fixed cost.
B)Subtract fixed cost from sales revenue.
C)Calculate the contribution margin per unit.
D)Solve by dividing total fixed cost by contribution margin per unit.

Question 35

Assume a sales price per unit of $20, variable cost per unit $16, and total fixed costs of $168,000.What is the breakeven point in units?

A)42,000 units
B)10,500 units
C)8,400 units
D)4,666 units

Question 36

A breakeven graph illustrates the relationship between

A)volume and sales price.
B)volume and total costs.
C)breakeven and operating income.
D)sales and costs.

Question 37

Assume a sales price per unit of $20, variable cost per unit $16, and total fixed costs of $168,000.What is the breakeven point in dollars?

A)$210,000
B)$420,000
C)$672,000
D)$840,000

Question 38

Cost-plus pricing implies that the cost of the seller's operational inefficiencies should be borne by the customer.

Question 39

Which of the following formulas is not used to calculate the breakeven point?

A)Total fixed costs divided by contribution margin per unit.
B)Total fixed costs divided by (sales price per unit less variable cost per unit).
C)Total fixed costs divided by contribution margin ratio.
D)Total fixed cost divided by total contribution margin.

Question 40

If a product's variable cost per unit increases while the selling price and fixed costs remain constant, what will happen to the breakeven point?

A)It will increase.
B)It will decrease.
C)It will remain the same.
D)It may increase or decrease, depending on how much the variable cost per unit changes.

Question 41

On the breakeven graph, any level of sales to the right of the breakeven point represents

A)a fixed cost. b a variable cost.
C)operating income.
D)an operating loss.

Question 42

Benny Books sells first edition books.Benny purchases the books from his supplier for $100 a book and sells them through his website for $225 a book.Benny's fixed costs are $87,000.What is Benny's breakeven point in books?

A)268
B)387
C)696
D)870

Question 43

Saira, Inc.is planning to sell 800,000 units for $1.50 per unit.The contribution margin ratio is 20%.If Saira will break even at this level of sales, what are the fixed costs?

A)$240,000
B)$560,000
C)$800,000
D)$960,000

Question 44

The formula for margin of safety in sales dollars is

A)current unit sales minus breakeven unit sales.
B)actual sales minus budgeted sales.
C)current sales revenue minus breakeven sales revenue.
D)breakeven sales revenue minus budgeted sales revenue.

Question 45

On the breakeven graph, if sales price and the unit variable cost remain constant and fixed costs decrease, the fixed cost line will shift

A)to the right.
B)to the left.
C)upward.
D)downward.

Question 46

On the breakeven graph, the fixed cost line

A)increases with sales volume.
B)decreases with sales volume.
C)remains the same regardless of sales volume.
D)moves to the right as fixed cost increase.

Question 47

A company has total fixed costs of $200,000 and a contribution margin ratio of 20%.The total sales necessary to break even are

A)$800,000.
B)$1,000,000.
C)$250,000.
D)$240,000.

Question 48

Assume a sales volume of 6,000 units, unit selling price of $20, unit variable cost of $12, and total fixed costs of $20,000.What is the margin of safety in sales dollars?

A)$25,000
B)$50,000
C)$70,000
D)$120,000

Question 49

Assume a sales volume of 6,000 units, unit selling price of $20, unit variable cost of $12, and total fixed costs of $20,000.What is the margin of safety in units?

A)2,500
B)3,500
C)6,000
D)8,000

Question 50

If sales price and the unit variable cost remain constant and fixed costs decrease, contribution margin will

A)increase.
B)decrease.
C)remain the same.
D)vary, depending on the circumstances.

Question 51

When both fixed and variable costs go down,

A)operating income goes down.
B)operating income goes up.
C)contribution margin goes down.
D)revenue goes up.

Question 52

On the breakeven graph, if sales price and the unit variable cost remain constant and fixed costs decrease, the breakeven point will

A)shift upward.
B)not change.
C)shift to the right.
D)shift to the left.

Question 53

Nomad Company sells camera bags.The company purchases the bags from its supplier for $12 a bag and sells them to electronics stores for $25 a bag.Nomad's fixed costs are $39,000.What is Nomad's breakeven point in sales dollars?

A)$30,000
B)$75,000
C)$81,250
D)$97,500

Question 54

On the breakeven graph, if sales price and the unit variable cost remain constant and fixed costs decrease, the total cost line will shift

A)upward.
B)downward.
C)to the right.
D)to the left.

Question 55

The formula for margin of safety in units is

A)current unit sales minus breakeven unit sales.
B)actual net income minus budgeted net income.
C)actual sales minus budgeted sales.
D)breakeven sales minus budgeted sales.

Question 56

On the breakeven graph, any level of sales to the left of the breakeven point represents

A)a fixed cost.
B)a variable cost.
C)operating income.
D)an operating loss.

Question 57

Assume a sales price per unit of $25, variable cost per unit $15, and total fixed costs of $18,000.If no units are sold, how much cost would the company incur?

A)Zero.
B)The amount of variable costs at the breakeven point.
C)$18,000.
D)$27,000.

Question 58

Fixed costs are $600,000 and the variable costs are 75% of the unit selling price.What is the break-even point in dollars?

A)$1,400,000
B)$1,800,000
C)$2,400,000
D)$800,000

Question 59

Benny Books sells first edition books.Benny purchases the books from his supplier for $100 a book and sells them through his website for $225 a book.Benny's fixed costs are $87,000.Benny's breakeven point in sales dollars is nearest to

A)$195,750.
B)$156,600.
C)$87,075.
D)$60,300.

Question 60

Martin Company has a current breakeven point of 47,000 units.To reduce the breakeven point, Martin should

A)reduce the contribution margin per unit.
B)increase the contribution margin per unit.
C)reduce the sales price per unit.
D)increase variable costs.

Question 61

Assume total fixed costs of $160,000, variable costs per unit of $6, and contribution margin per unit of $4.What are the sales dollars required to earn a target net income of $50,000 assuming a tax rate of 20%?

A)$350,000
B)$556,250
C)$525,000
D)$500,000

Question 62

Barbara's Boutique wants to know what it takes to have $20,000 in operating income.If her selling price is $20, variable cost is $8 and fixed costs total $40,000, what must her sales revenue be in order to reach her goal?

A)$33,340
B)$50,000
C)$100,000
D)$150,000

Question 63

The formula for converting desired net income into operating income is

A)desired net income times the income tax rate.
B)the income tax rate divided by the desired net income.
C)desired net income divided by (1 − tax rate).
D)desired net income divided by (1 + tax rate).

Question 64

At the breakeven point, the total contribution margin equals

A)gross margin.
B)variable costs.
C)fixed costs.
D)total costs.

Question 65

A company requires $1,360,000 in sales to meet its operating income target.Its contribution margin is 30%, and fixed costs are $240,000.What is the target operating income?

A)$408,000
B)$312,000
C)$560,000
D)$168,000

Question 66

Contribution margin is the amount

A)that is available to cover fixed costs and provide a profit.
B)of total variable costs and total fixed costs.
C)of sales less cost of goods sold.
D)that is available to cover period costs and provide a profit.

Question 67

At the break-even point of 2,000 units, variable costs are $55,000, and fixed costs are $32,000.How much is the selling price per unit?

A)$43.50
B)$11.50
C)$16.00
D)$27.50

Question 68

Assume total fixed costs of $160,000, variable costs per unit of $6, and contribution margin per unit of $4.How many units must be sold to meet a target operating income of $50,000?

A)5,000 units
B)25,000 units
C)40,000 units
D)52,500 units

Question 69

Assume total fixed costs of $160,000, variable costs per unit of $6, and contribution margin per unit of $4.What are the sales dollars required to meet a target operating income of $50,000?

A)$525,000
B)$315,000
C)$210,000
D)$160,000

Question 70

On the breakeven graph, the point at which the total sales revenue line and the total cost line intersect is called

A)contribution margin.
B)the breakeven point.
C)net income.
D)operating income.

Question 71

Assume Buddy's Farm Supply wants to make $45,000 in net income.If the tax rate is 25%, how much operating income must Buddy have?

A)$56,250
B)$60,000
C)$180,000
D)$360,000

Question 72

Barbara's Boutique wants to know what it takes to have $20,000 in operating income.If her selling price is $20, variable cost is $8, and fixed costs total $40,000, how many units must she sell to reach her goal?

A)1,667 units
B)2,500 units
C)5,000 units
D)7,500 units

Question 73

The formula for operating income is

A)sales revenue - variable costs - fixed costs.
B)sales revenue - variable costs - fixed costs - profit.
C)sales revenue - contribution margin - variable costs.
D)sales revenue - gross margin - fixed costs.

Question 74

Assume total fixed costs of $160,000, variable costs per unit of $6, and contribution margin per unit of $4.How many units must be sold to meet a target net income of $50,000, assuming a tax rate of 20%?

A)55,625
B)52,500
C)50,000 d, 35,000

Question 75

Bonita Corporation produces only one product.Monthly data includes: selling price per unit, $42; unit variable expenses, $14; total fixed expenses, $84,000; actual sales for the month of June, 4,000 units.What is the margin of safety?

A)$84,000
B)$42,000
C)$126,000
D)$1,000

Question 76

Miguel Manufacturing has fixed costs of $2,500,000 and variable costs are 40% of sales.What are the required sales if Montoya desires an operating income of $250,000?

A)$4,583,333
B)$4,166,667
C)$6,875,000
D)$6,250,000

Question 77

Cross Creek Company sells concrete culverts.Currently, the company's sales revenue is $900,000, variable costs total $450,000, and fixed costs total $300,000.If Cross Creek's controller has calculated the company's breakeven point to be $597,000, what is the company's margin of safety?

A)$15,000
B)$153,000
C)$303,000
D)$447,000

Question 78

The formula for calculating units required to meet target operating income is

A)(total fixed costs plus target operating income) divided by contribution margin per unit.
B)total fixed costs divided by (contribution margin plus target operating income).
C)contribution margin per unit divided by (total fixed costs plus target operating income).
D)(contribution margin plus target operating income) divided by total fixed costs.

Question 79

Breakeven point can be expressed in terms of

A)units.
B)unit sales price.
C)unit contribution margin.
D)unit fixed costs.

Question 80

The formula for calculating the sales dollars required to meet target operating income is

A)(total fixed costs plus target operating income) divided by contribution margin per unit.
B)(total fixed costs plus target operating income) divided by contribution margin ratio.
C)(total fixed costs plus target operating income) divided by total variable costs.
D)(contribution margin plus target operating income) divided by total fixed costs.