Deck 7: Cost-Volume-Profit Analysis

Question 1

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.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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 10

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

Question 11

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

Question 12

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 13

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

Question 14

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.

Question 15

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 16

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 17

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 18

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 19

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 20

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

Question 21

The difference between sales and variable expenses is called the ______________________.

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

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 34

______________ 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 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

Managers can use CVP analysis to handle risk and uncertainty.

Question 41

John Wilson, a sole proprietor, has the following projected figures for next year:
What is the contribution margin ratio? (Note: Round answer to three decimal places.)

A) 0.250
B) 1.429
C) 0.429
D) 3.333
E) 0.700

Question 42

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 43

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 44

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 45

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 46

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 47

The income statement for Elite Manufacturing Company for the current year is as follows:


What is the contribution margin per unit? (Note: Round answer to two decimal places.)

A) $7.20
B) $1.20
C) $5.33
D) $6.56

Question 48

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.

Question 49

Taylor Company produces two products, X and Y, which account for 70% and 30%, respectively, of total sales dollars.Contribution margin ratios are 60% for X and 30% for Y.Total fixed costs are $140,000.What is Taylor's break-even point in sales dollars? (Note: Round answer to the nearest dollar.)

A) $274,510
B) $328,767
C) $342,856
D) $375,000

Question 50

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

Question 51

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 52

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

Question 53

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 54

Noel & Vang Company sells only one product at a regular price of $9.00 per unit.Variable expenses are 55% of sales, and fixed expenses are $40,000.Management has decided to decrease the selling price to $8.00 in the hope of increasing its volume of sales.What is the contribution margin ratio when the selling price is reduced to $8.00 per unit? (Note: Round answer to two decimal places.)

A) 38.13%
B) 40.50%
C) 75.46%
D) 60.50%

Question 55

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 56

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

Question 57

Learner Company sells its product for $100.It has a variable cost ratio of 70% and total fixed costs of $9,000.What is the break-even point in sales dollars for Learner Company?

A) $4,800
B) 32,000
C) $30,000
D) $8,000

Question 58

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

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

Question 59

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 60

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

Question 61

Pauley Company provides home health care.Pauley charges $35/hour for professional care.Variable costs are $21/hour and fixed costs are $78,000.Next year, Pauley expects to charge out 12,000 hours of home health care.

-What is the break-even point in sales dollars?

A) $130,000
B) $195,000
C) $252,000
D) $420,000
E) $342,000

Question 62

Pauley Company provides home health care.Pauley charges $35/hour for professional care.Variable costs are $21/hour and fixed costs are $78,000.Next year, Pauley expects to charge out 12,000 hours of home health care.

-What is the variable cost ratio?

A) 50%
B) 40%
C) 33%
D) 67%
E) 60%

Question 63

Which of the following is true of a contribution margin ratio?

A) If the contribution margin ratio increases, the variable cost ratio decreases
B) It is the proportion of each sales dollar available to cover variable costs.
C) It is complementary to the net profit ratio.
D) If the contribution margin ratio increases, the price must have decreased.
E) If the contribution margin ratio increases, more units must be sold to break even.

Question 64

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 65

Planet Company sells a product for $16 per unit, variable cost is $12 per unit, and the total fixed cost is $6,000.What is the break-even point in units?

A) 640 units
B) 1,500 units
C) 1,210 units
D) 1,360 units
E) 1,700 units

Question 66

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 67

Pauley Company provides home health care.Pauley charges $35/hour for professional care.Variable costs are $21/hour and fixed costs are $78,000.Next year, Pauley expects to charge out 12,000 hours of home health care.

-What is the break-even point in hours? (Round to the nearest whole hour.)

A) 2,229
B) 1,393
C) 3,714
D) 5,571
E) 12,000

Question 68

Greenwood Company sells a product for $17 per unit, variable cost is $12 per unit, and the total fixed cost is $6,000.What is the per unit contribution margin?

A) $4
B) $15
C) $20
D) $5

Question 69

Full Serve Company makes and sells power tools.The budgeted sales are $460,000, the budgeted variable costs are $160,000, and the budgeted fixed cost is $240,000.What is the budgeted contribution margin?

A) $190,000
B) $200,000
C) $136,000
D) $300,000
E) $273,000

Question 70

Forward Company makes and sells power tools.The budgeted sales are $480,000, budgeted variable costs are $175,000, and budgeted fixed costs are $260,000.What is the budgeted contribution margin ratio? (Note: Round answer to two decimal places.)

A) 35.64%
B) 63.54%
C) 54.45%
D) 89.50%
E) 50.20%

Question 71

Thompson Company makes and sells power tools.The budgeted sales are $450,000, the budgeted variable costs are $150,000, and the budgeted fixed cost is $230,000.What is the budgeted variable cost ratio? (Note: Round answer to two decimal places.)

A) 54.66%
B) 33.33%
C) 89.50%
D) 19.23%
E) 50.50%

Question 72

Rocha & Noel Company makes and sells dolls.The price is $15 and the variable expense per unit is $10.What is the contribution margin ratio? (Note: Round answer to two decimal places.)

A) 62.55%
B) 37.45%
C) 55.67%
D) 33.33%
E) 60.27%

Question 73

The contribution margin is

A) the difference between sales and variable costs.
B) the difference between target income and operating income.
C) the difference between operating income and margin of safety.
D) equal to sales.
E) when total sales equals total costs.

Question 74

Pauley Company provides home health care.Pauley charges $35/hour for professional care.Variable costs are $21/hour and fixed costs are $78,000.Next year, Pauley expects to charge out 12,000 hours of home health care.

-What is the contribution margin ratio?

A) 67%
B) 60%
C) 40%
D) 33%
E) 50%

Question 75

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 76

Foster Company makes power tools.The budgeted sales are $420,000, budgeted variable costs are $147,000, and budgeted fixed costs are $227,500.What is the break-even point in sales dollars?

A) $350,000
B) $420,000
C) $650,000
D) $780,000
E) $567,000

Question 77

Thompson Company makes and sells power tools.The budgeted sales are $450,000, the budgeted variable costs are $150,000, and the budgeted total fixed cost is $230,000.What is the budgeted operating income?

A) $73,000
B) $227,500
C) $70,000
D) $84,500
E) $567,000

Question 78

Atlas Company sells only one product at a regular price of $10.00 per unit.Variable expenses are 70% of sales, and fixed expenses are $50,000.Management has decided to decrease the selling price to $9.00 in the hope of increasing its volume of sales.What is the sales dollars level required to break even at the old price of $10.00? (Note: Round answer to two decimal places.)

A) $166,666.67
B) $126,000.50
C) $180,000.30
D) $150,000.25

Question 79

Pauley Company provides home health care.Pauley charges $35/hour for professional care.Variable costs are $21/hour and fixed costs are $78,000.Next year, Pauley expects to charge out 12,000 hours of home health care.

-What is the budgeted operating income?

A) $342,000
B) $174,000
C) $168,000
D) $90,000
E) $420,000

Question 80

Pauley Company provides home health care.Pauley charges $35/hour for professional care.Variable costs are $21/hour and fixed costs are $78,000.Next year, Pauley expects to charge out 12,000 hours of home health care.

-What is the contribution margin per hour?

A) $21
B) $35
C) $14
D) $56
E) $6.50