Deck 4: Cost-Volume-Profit Analysis: a Managerial Planning Tool

Question 1

In the equation to determine the number of units that must be sold to earn a target income, targeted income is subtracted from fixed expense in the numerator.

Answer 1

False

Question 2

If fixed costs increase, the break-even point decreases.

Answer 2

False

Question 3

The linear equation for total cost is (Unit variable cost * Units) + Fixed cost.

Answer 3

True

Question 4

To find the number of units to sell to earn a targeted income, it is acceptable to simply adjust the break-even units equation by adding target income to the variable cost.

Question 5

If variable expenses decrease and the price increases, the break-even point decreases.

Question 6

Most firms would like to earn operating income equal to the break-even point.

Question 7

The profit-volume graph shows the relationship between profits and units sold.

Question 8

The contribution margin income statement provides a good check to determine if the sale of a certain number of units really results in operating income of the given amount.

Question 9

The break-even point in sales dollars is equal to the break-even units multiplied by cost.

Question 10

Variable expense per unit consists only of direct materials, direct labor, and variable overhead.

Question 11

The cost-volume profit graph depicts the relationships among cost, volume, and profits, by plotting the total revenue line and the total cost line on the graph.

Question 12

The linear equation for revenue is price multiplied by fixed cost.

Question 13

If one increases variable costs per unit, the break-even point will decrease.

Question 14

If a multi-product company simply wants to know the overall break-even point, it is easiest to use the break-even in sales revenue approach.

Question 15

It is possible to calculate the break-even point for individual products in a multiple product firm by separating the common and direct fixed expenses.

Question 16

The impact on a firm's income resulting from a change in the number of units sold can be assessed by multiplying the unit contribution margin by the change in units sold assuming that fixed costs remain the same.

Question 17

The contribution margin ratio can be calculated by subtracting the variable cost ratio from one.

Question 18

The break-even point is where total sales revenue equals total cost.

Question 19

To determine the number of units that must be sold to earn a target operating income, one can use the equation for operating income and replace the operating income term with the target operating income.

Question 20

The profit-volume graph shows the relationship between operating income and the number of units sold.

Question 21

Managers can use CVP analysis to handle risk and uncertainty.

Question 22

Match each item with the correct statement below.
a.break-even point
b.Common fixed expenses
c.Contribution margin
d.Direct fixed expenses
e.Margin of safety
f.Operating leverage
g.Degree of operating leverage
h.Sales mix
The relative combination of products (or services) being sold by an organization.

Question 23

Operating leverage is the use of fixed cost to extract higher percentage changes in profits as sales activity changes.

Question 24

If the break-even point increases, the margin of safety increases.

Question 25

Match each item with the correct statement below.
a.break-even point
b.Common fixed expenses
c.Contribution margin
d.Direct fixed expenses
e.Margin of safety
f.Operating leverage
g.Degree of operating leverage
h.Sales mix
Fixed expenses that cannot be directly traced to individual segments and that are unaffected by the elimination of any one segment.

Question 26

Match each item with the correct statement below.
a.horizontal-axis of CVP graph
b.vertical-axis of CVP graph
c.slope of revenue line
d.slope of cost line
e.point where the total revenue line and the total cost line intersect
break-even point

Question 27

Match each item with the correct statement below.
a.break-even point
b.Common fixed expenses
c.Contribution margin
d.Direct fixed expenses
e.Margin of safety
f.Operating leverage
g.Degree of operating leverage
h.Sales mix
A measure of the sensitivity of profit changes to changes in sales volume.

Question 28

Match each item with the correct statement below.
a.horizontal-axis of CVP graph
b.vertical-axis of CVP graph
c.slope of revenue line
d.slope of cost line
e.point where the total revenue line and the total cost line intersect
measured in units sold

Question 29

Match each item with the correct statement below.
a.break-even point
b.Common fixed expenses
c.Contribution margin
d.Direct fixed expenses
e.Margin of safety
f.Operating leverage
g.Degree of operating leverage
h.Sales mix
Fixed costs that are directly traceable to a given segment and, consequently, disappear if the segment is eliminated.

Question 30

Match each item with the correct statement below.
a.break-even point
b.Common fixed expenses
c.Contribution margin
d.Direct fixed expenses
e.Margin of safety
f.Operating leverage
g.Degree of operating leverage
h.Sales mix
The point where total sales revenue equals total cost.

Question 31

Match each item with the correct statement below.
a.horizontal-axis of CVP graph
b.vertical-axis of CVP graph
c.slope of revenue line
d.slope of cost line
e.point where the total revenue line and the total cost line intersect
measured in dollars

Question 32

The margin of safety measures the units sold or the revenue earned above the break-even volume.

Question 33

Match each item with the correct statement below.
a.break-even point
b.Common fixed expenses
c.Contribution margin
d.Direct fixed expenses
e.Margin of safety
f.Operating leverage
g.Degree of operating leverage
h.Sales mix
The use of fixed costs to extract higher percentage changes in profits as sales activity changes.

Question 34

Match each item with the correct statement below.
a.break-even point
b.Common fixed expenses
c.Contribution margin
d.Direct fixed expenses
e.Margin of safety
f.Operating leverage
g.Degree of operating leverage
h.Sales mix
The units sold or expected to be sold or sales revenue earned or expected to be earned above the break-even volume.

Question 35

Direct fixed expenses are the fixed costs that are not traceable to the segments and would remain even if one of the segments was eliminated.

Question 36

Match each item with the correct statement below.
a.break-even point
b.Common fixed expenses
c.Contribution margin
d.Direct fixed expenses
e.Margin of safety
f.Operating leverage
g.Degree of operating leverage
h.Sales mix
Sales revenue minus total variable cost or price minus unit variable cost.

Question 37

Common fixed expenses are the fixed costs that are traceable to the segments and would be avoided if the segment did not exist.

Question 38

Match each item with the correct statement below.
a.horizontal-axis of CVP graph
b.vertical-axis of CVP graph
c.slope of revenue line
d.slope of cost line
e.point where the total revenue line and the total cost line intersect
variable cost per unit

Question 39

In a multi-product firm, if the sales mix changes, the break-even points for each product will not change.

Question 40

Match each item with the correct statement below.
a.horizontal-axis of CVP graph
b.vertical-axis of CVP graph
c.slope of revenue line
d.slope of cost line
e.point where the total revenue line and the total cost line intersect
the selling price per unit

Question 41

The _________________________ is the proportion of each sales dollar available to cover fixed costs and provide for profit.

Question 42

A ________________________ visually portrays the relationship between profits and units sold.

Question 43

If the break-even volume for a company is 600 units and the company is currently selling 1,000 units than the 400 units would represent the company's ____________________.

Question 44

The _________________________________ can be measured for a given level of sales by taking the ratio of contribution margin to operating income.

Question 45

___________________________________ is the income statement format that is based on the separation of costs into fixed and variable components.

Question 46

______________________ are those fixed costs that can be traced to each segment and would be avoided if the segment did not exist.

Question 47

The _________________________ depicts the relationships among cost, volume, and profits by plotting the total revenue line and the total cost line on a graph.

Question 48

The quantity at which two systems produce the same operating income is referred to as the ___________________.

Question 49

__________ is the relative combination of products being sold by a firm.

Question 50

A company's mix of fixed costs relative to variable costs is referred to as its _______________.

Question 51

______________ gives us a way to determine how many units must be sold, or how much sales revenue must be generated to earn a particular target income.

Question 52

The amount of income an organization is trying to achieve during a particular period is known as the _____________.

Question 53

Match each item with the correct statement below.
a.break-even point
b.Common fixed expenses
c.Contribution margin
d.Direct fixed expenses
e.Margin of safety
f.Operating leverage
g.Degree of operating leverage
h.Sales mix
The difference between sales and variable expenses is called the ______________________.

Question 54

The ______________________ is the proportion of each sales dollar that must be used to cover variable costs.

Question 55

Assuming that fixed costs remain unchanged, the _____________________ can be used to find the profit impact of a change in sales revenue.

Question 56

Fixed costs that are not traceable to the segments and would remain even if one of the segments was eliminated are known as _____________________________.

Question 57

The "what-if" process of altering certain key variables to assess the effect on the original outcome is also called a __________________.

Question 58

_____________________ is the use of fixed costs to extract higher percentage changes in profits as sales activity changes.

Question 59

The _________________ is the units sold or the revenue earned above the break-even volume.

Question 60

The ________________________ is the point where total revenue equals total cost.

Question 61

The income statement for Thomas Manufacturing Company for 2011 is as follows: What is the contribution margin per unit?

A) $7.20
B) $1.20
C) $4.80
D) $120,000

Question 62

If the contribution margin per unit decreases, the break-even point in units

A) will increase.
B) will decrease.
C) will remain the same.
D) cannot be determined from the information given.

Question 63

The ratio of fixed expenses to the contribution margin ratio is the

A) indifference point.
B) break-even point in units.
C) fixed cost ratio.
D) break-even point in sales.
E) sensitivity analysis.

Question 64

Clean Company sells its product for $80. In addition, it has a variable cost ratio of 60% and total fixed costs of $8,000. What is the break-even point in sales dollars for Baker Company?

A) $4,800
B) $32,000
C) $20,000
D) $8,000

Question 65

At the break-even point,

A) total revenue equals variable cost.
B) total fixed cost equals variable cost.
C) total contribution margin equals total fixed cost.
D) total sales equals total fixed cost.
E) total margin of safety equals variable cost.

Question 66

Assume the following information: What volume of sales dollars is needed to break even?

A) $75,000
B) $300,000
C) $48,000
D) $12,000

Question 67

Dirth Company sells only one product at a regular price of $7.50 per unit. Variable expenses are 60% of sales and fixed expenses are $30,000. Management has decided to decrease the selling price to $6.00 in hopes of increasing its volume of sales. What is the contribution margin ratio when the selling price is reduced to $6 per unit?

A) 25%
B) 40%
C) 75%
D) 60%

Question 68

Which of the following equations is true?

A) Contribution margin = Sales revenue * Variable cost ratio
B) Contribution margin ratio = Contribution margin/Variable costs
C) Contribution margin = Fixed costs
D) Contribution margin ratio = 1 - Variable cost ratio

Question 69

Sarah Smith, a sole proprietor, has the following projected figures for next year: What is the contribution margin ratio?

A) 0.300
B) 1.429
C) 0.429
D) 3.333

Question 70

Which statement is true about cost-volume profit (CVP) analysis?

A) CVP analysis is a powerful tool for planning and decision making.
B) CVP analysis allows managers to do sensitivity analysis by examining the impact of various prices or cost levels on profit.
C) CVP analysis shows how revenues, expenses, and profits behave as volume changes.
D) CVP analysis can be used in both single-product and multi-product firms.
E) All of these statements are true.

Question 71

Total variable cost divided by price is

A) variable cost ratio.
B) revenue ratio.
C) contribution ratio.
D) sales ratio.
E) degree of operating leverage.

Question 72

If fixed costs increase, the break-even point in units will

A) increase.
B) decrease.
C) remain the same.
D) remain the same; however, contribution per unit will decrease.

Question 73

If the selling price per unit increases, the break-even point in units will

A) decrease.
B) increase.
C) remain the same.
D) remain the same; however, contribution per unit will decrease.

Question 74

Patricia Company produces two products, X and Y, which account for 60% and 40%, respectively, of total sales dollars. Contribution margin ratios are 50% for X and 25% for Y. Total fixed costs are $120,000. What is Patricia's break-even point in sales dollars?

A) $300,000
B) $328,767
C) $342,856
D) $375,000

Question 75

Dirth Company sells only one product at a regular price of $7.50 per unit. Variable expenses are 60% of sales and fixed expenses are $30,000. Management has decided to decrease the selling price to $6.00 in hopes of increasing its volume of sales. What is the sales dollars level required to break even at the old price of $7.50?

A) $75,000
B) $12,000
C) $18,000
D) $50,000

Question 76

If the contribution margin ratio increases, the break-even point in sales dollars will

A) increase.
B) decrease.
C) remain the same.
D) double.

Question 77

The break-even point is when

A) the company is operating at a loss.
B) total revenue equals total cost.
C) the company is earning a small profit.
D) total sales equal variable costs.
E) total sales equals operating income.

Question 78

If variable costs per unit decrease, sales volume at the break-even point will

A) decrease.
B) stay constant.
C) double.
D) increase.

Question 79

Contribution margin ratio can be calculated in all of the following ways except

A) fixed costs/Contribution margin per unit.
B) 1 - Variable cost ratio.
C) contribution margin per unit/price.
D) total contribution margin/Total sales.
E) All of these are correct.

Question 80

Total contribution margin divided by total sales is the

A) indifference point.
B) margin of safety.
C) sales ratio.
D) target income.
E) contribution margin ratio.