Deck 21: Cost-Volume-Profit Analysis

Question 1

Linear approximation is a method of converting nonlinear variable costs into linear fixed costs.

Answer 1

False

Question 2

Cost behavior analysis is not useful to a service business.

Answer 2

False

Question 3

Cost behavior is defined as the manner in which costs respond to changes in volume or activity.

Answer 3

True

Question 4

Electric power charges are an example of a mixed cost.

Question 5

Depreciation cost of a controller's computer calculated using the straight-line method is an example of a variable cost.

Question 6

An organization's normal capacity is the average annual level of operating capacity needed to meet its expected sales demand.

Question 7

The relevant range of activity is the range in which actual operations of a company are likely to occur.

Question 8

Unit fixed costs will be the same regardless of how many units are produced.

Question 9

Practical capacity and engineering capacity are synonymous terms.

Question 10

Unit fixed costs vary inversely with activity or volume.

Question 11

Within the relevant range,total fixed cost and variable cost per unit remain constant.

Question 12

Understanding cost behavior helps managers in planning the optimal mix of services or products to offer.

Question 13

Unit variable costs vary with changes in productive output,whereas total variable costs remain constant.

Question 14

An organization's practical capacity is its theoretical or ideal capacity reduced by normal and anticipated work stoppages,such as machine breakdowns.

Question 15

Cost can only be classified as either variable or fixed.

Question 16

Costs that change,in total,in direct proportion to changes in productive output,or activity,are called variable costs.

Question 17

Fixed costs remain constant in a relevant range of activity.

Question 18

An organization's theoretical operating capacity is the level at which its management expects to operate during a normal business environment.

Question 19

Depreciation calculated using the straight-line method is an example of a fixed cost.

Question 20

Costs are not affected by the changes in the volume of production.

Question 21

Cost-volume-profit analysis assumes costs and revenues have a close linear approximation.

Question 22

Contribution margin is calculated by deducting total fixed costs from total sales.

Question 23

To find out the breakeven point in dollars,we divide fixed costs by gross margin ratio.

Question 24

Gross margin and contribution margin are always equal.

Question 25

An increase in the unit sales price will increase unit variable price.

Question 26

Regression analysis takes into consideration only the highest and the lowest level of activities to predict cost behavior.

Question 27

When using the high-low method,the accountant assumes the fixed portion of mixed costs to be the lowest fixed amount incurred during the period under review.

Question 28

A mixed costs line,plotted on a graph,will start at the Y axis at the amount of fixed cost.

Question 29

The engineering method of separating costs is sometimes called a regression analysis.

Question 30

CVP analysis can also be applied by a company selling multiple products.

Question 31

Operating income is determined by deducting all fixed costs related to production,selling,and administration from contribution margin.

Question 32

All variable costs except manufacturing costs are subtracted from sales to determine the total contribution margin.

Question 33

Cost-volume-profit analysis assumes a constant sales mix.

Question 34

Contribution margin is calculated by deducting variable costs from sales.

Question 35

Contribution margin income statement helps managers to view revenue and cost relationships on a per unit basis or as a percentage of sales.

Question 36

The contribution margin equals zero at the breakeven point.

Question 37

A contribution margin income statement is formatted to emphasize cost behavior rather than organizational functions.

Question 38

The high-low method allows managers to differentiate between fixed and variable costs when dealing with mixed costs.

Question 39

A scatter diagram helps to determine if a linear relationship exists between a cost item and its related activity measure.

Question 40

The contribution margin income statement divides costs into variable and fixed costs.

Question 41

The weighted-average contribution margin is computed by multiplying each product's unit contribution margin by the sales mix percentage of each product.

Question 42

Adding a desired profit level to breakeven computations will lower the number of units required to be sold.

Question 43

Margin of safety is the excess of actual sales over break even sales.

Question 44

A product line's contribution margin represents its contribution to paying off variable costs and to generating a profit.

Question 45

The weighted-average breakeven point is the breakeven point for the entire company.

Question 46

The sales mix is the proportion of each product's unit sales relative to the company's total unit sales.

Question 47

Last year,RC Rancho's revenue was $120,000,000,variable costs were $90,000,000 and fixed costs were $15,000,000.RC Rancho's contribution margin ratio was 25 percent.

Question 48

Breakeven analysis helps in finding the level of activity at which sales revenue equals the sum of all variable and fixed costs.

Question 49

If fixed costs are $24,000,variable costs are $25 per unit,and the product sells for $45,the total contribution margin at the breakeven point is $24,000.

Question 50

Using or not using the contribution margin for cost-volume-profit computations will not change the resulting amount of breakeven units in a given situation.

Question 51

In a breakeven graph,the slope the total cost line is dependent on the variable costs per unit.

Question 52

If fixed costs are $180,000,variable costs are $38 per unit,and the product sells for $70,the breakeven point in sales dollars is $5,625.

Question 53

"Breakeven" is the point at which a company can begin to earn a profit.

Question 54

The breakeven point is the level of activity at which only variable costs are recovered.

Question 55

In cost-volume-profit analysis,sales revenue is computed by multiplying units sold by the selling price per unit,and the targeted profit is projected by management.

Question 56

Breakeven is when total fixed costs equal total revenues.

Question 57

A project breaks even when total revenues less variable costs equals fixed costs.

Question 58

The unit contribution margin of a product cannot be more than its selling price.

Question 59

The point at which the total cost line intersects with the total revenue line is the breakeven point.

Question 60

In a breakeven scatter diagram,the loss area continues till the total costs line is below total revenues line.

Question 61

Which of the following best describes the typical relationship between variable costs and volume?

A)Total variable costs increase in an erratic,unpredictable fashion with changes in volume.
B)Total variable costs stay constant with changes in volume.
C)Unit variable costs increase with changes in volume up to a certain point and then remain constant.
D)Total variable costs increase in direct proportion to increases in volume.

Question 62

Cost-volume-profit analysis is not appropriate for service businesses,as they do not have any direct manufacturing costs.

Question 63

Theoretical capacity reduced by normal and expected work stoppages is called

A)practical capacity.
B)normal capacity.
C)ideal capacity.
D)excess capacity.

Question 64

Suppose a company rents a building for $225,000 a year for the purpose of manufacturing between 100,000 and 180,000 units (the relevant range of activity).The rental cost per unit of production will __________ with increase in production level.

A)behave in a nonlinear fashion
B)increase
C)decrease
D)remain fixed

Question 65

Cost-volume-profit analysis cannot be used to estimate a targeted profit for service businesses.

Question 66

If direct materials costs are increased,the breakeven point will decrease.

Question 67

Breakeven sales in dollars can be obtained without knowing the dollar value of contribution margin per unit.

Question 68

Which of the following decreases with increase in number of units sold?

A)Total variable costs
B)Total fixed costs
C)Unit variable cost
D)Unit fixed cost

Question 69

In breakeven analysis adjusted for a profit factor,increasing the unit sales price will decrease the number of units needed to meet the targeted profit.

Question 70

One of the assumptions of CVP analysis assumes production and sales to be approximately equal.

Question 71

Which of the following statements most accurately explains the behavior of costs?

A)Costs can be fixed,variable,or a combination of both.
B)The majority of costs are variable per unit of production.
C)The majority of costs are fixed per unit of production.
D)Mixed costs are treated as variable costs.

Question 72

Service businesses do not have any overhead costs.

Question 73

Which of the following costs is a variable manufacturing cost?

A)Machinery depreciation (calculated with the units-of-production method)
B)Rent expenses for factory building
C)Factory equipment depreciation (calculated with the straight line method)
D)Telephone charges

Question 74

Which of the following would not require the use of cost behavior analysis?

A)Recording the transfer of production costs from one department to another
B)Projecting anticipated costs of a new project
C)Buying an existing business
D)Changing an existing product or service

Question 75

As production decreases,fixed costs per unit will

A)increase.
B)decrease.
C)remain the same.
D)either increase or decrease,depending on the variable cost.

Question 76

Which of the following statements is true of fixed and variable costs?

A)Both costs are constant when considered on a total basis.
B)Variable costs are constant in total,and fixed costs are constant per unit.
C)Both costs are constant when considered on a per unit basis.
D)Fixed costs are constant in total,and variable costs are constant per unit.

Question 77

If a company wants to know how many units of a certain product it must sell to make a desired level of profit,it should add the amount of profit to the numerator in the breakeven analysis.

Question 78

If fixed costs are increased,then a breakeven analysis with an adjustment for profit will yield an increase in targeted sales units.

Question 79

Speed Zone Inc. ,dealers in automobiles,pays its employees a commission of 5 percent on each sale.What is the proper classification of the cost of sales commissions?

A)Scattered cost
B)Variable cost
C)Mixed cost
D)Fixed cost

Question 80

If targeted sales are 12,000 units,the sales price per unit is $70,fixed costs are $130,000,and variable costs are $40 per unit,then planned profit must be $360,000.