Deck 6: Financial Modeling for Short-Term Decision Making

Question 1

How does cost-volume-profit analysis allows management to determine the relative profitability of a product?

A)By highlighting potential bottlenecks in the production process.
B)By keeping fixed costs to an absolute minimum.
C)By determining the contribution margin and projected profits at various levels of production.
D)By assigning costs to a product in a manner that maximizes the contribution margin.

Answer 1

C

Question 2

If a company has variable costs of $40 per unit,fixed costs of $3,000 per month and sells its product for $50,how many units must it sell to break-even?

A)300
B)250
C)100
D)50

Answer 2

A

Question 3

How can a company increase their break-even point?

A)Decrease fixed costs.
B)Increase the contribution margin ratio.
C)Increase variable costs.
D)Decrease in variable costs.

Answer 3

C

Question 4

Which statement is true concerning the cost-volume-profit (CVP)model?

A)The CVP model can be used to determine a desired selling price.
B)The CVP model can be used to determine a new break-even point when fixed costs increase.
C)The CVP model can be used to determine a new break-even point when variable costs decrease.
D)All of the answers are correct.

Question 5

The CVP model is one example of a financial model that can be used to calculate which of the following?

A)required selling price and conduct sensitivity analysis.
B)new break-even points and calculate multiple break-even points.
C)target profit points and compare alternatives.
D)All of the answers are correct.

Question 6

TopSail Company
TopSail Company produces one type of machine with the following costs and revenues for the year

Refer to the TopSail Company.Calculate the variable cost per unit.

A)$ 6
B)$ 2
C)$ 4
D)$12

Question 7

Which of the following are benefits of financial models to users?

A)Users can use the model for business purposes without becoming overwhelmed by the related number crunching.
B)Models allow an organization to study the impact of a possible business action by reviewing the potential results before taking action.
C)Models help managers identify a bad project or decision ahead of time,before it negatively impacts the company involved.
D)All of the answers are correct.

Question 8

TopSail Company
TopSail Company produces one type of machine with the following costs and revenues for the year

Refer to the TopSail Company.Calculate the selling price per unit.

A)$ 8
B)$ 6
C)$ 2
D)$12

Question 9

A company produces two products,A and

A)15,947
B)10,637
B)A sells for $16 and has variable costs of $10.B sells for $12 and has variable costs of $8.Fixed Costs for the period are $35,000.Normally four units of A are sold for every two units of B units.How many units of B must be sold if the company expects profits of $50,000?
C)5,313
D)Cannot be determined

Question 10

What enables analysts to test the interaction of economic variables in a variety of settings?

A)A benchmark
B)A PERT chart
C)The value chain
D)A financial model

Question 11

A basic financial model that summarizes the effects of volume changes on an organization's costs,revenue,and income is the

A)total revenue-total cost model.
B)break-even model.
C)cost-volume-profit model.
D)program,planning,and profit model.

Question 12

Calculate break-even when a company's selling price per unit is $15,variable costs per unit are $8,fixed costs for the year are $70,000.

A)8,750 units
B)4,667 units
C)7,000 units
D)10,000 units

Question 13

Financial modeling can be used by managers for which of the following purposes?

A)staff rotation planning purposes.
B)analyzing financial relationships that are useful for decision making.
C)forecasting political unrest.
D)employee cross-training purposes.

Question 14

TopSail Company
TopSail Company produces one type of machine with the following costs and revenues for the year

Refer to the TopSail Company.Calculate the contribution margin per unit.

A)$ 6
B)$ 2
C)$ 4
D)$12

Question 15

If a company's sales price per unit is $100,variable costs per unit are $60,and fixed costs for the year are $600,000.How many units must the company sell to break even?

A)36,000
B)22,500
C)15,000
D)9,000

Question 16

A company's selling price is $12 per unit,variable cost is $3 per unit,and fixed costs are $25,000.What is the break-even point in sales dollars?

A)$53,333
B)$44,444
C)$33,333
D)$ 1,333

Question 17

A company currently breaks even at 1,000 units.Its fixed costs are $40,000 and its variable costs are $10 per unit.What is the product's selling price per unit?

A)$100
B)$ 50
C)$ 35
D)$ 25

Question 18

The relative proportion of various products sold by a company is called the

A)marketing mix.
B)product mix.
C)operating mix.
D)output mix.

Question 19

A financial model is only as good as

A)the rate of growth in the economy.
B)the company's operating leverage.
C)the assumptions it uses and the data it uses.
D)None of the answers are correct.

Question 20

How might a company with a negative contribution margin reach the break-even point?

A)Increase sales volume.
B)Decrease sales volume.
C)Decrease fixed costs.
D)Decrease variable costs.

Question 21

Sun Devil,Inc.
Sun Devil,Inc.is considering the introduction of a new product with the following price and cost characteristics

It expects to sell 70,000 units for the year.
Refer to Sun Devil,Inc;how many units must be sold to break even?

A)4,000
B)6,000
C)12,000
D)3,000

Question 22

What does sensitivity analysis refers to?

A)control.
B)what-if situations.
C)variable costs only.
D)fixed costs only.

Question 23

TopSail Company
TopSail Company produces one type of machine with the following costs and revenues for the year

Refer to the TopSail Company.Calculate the break-even point in units.

A)700,000
B)2,100,000
C)1,400,000
D)450,000

Question 24

Sensitivity analysis is used to show how the financial model responds to changes in which of the following?

A)any or all of its variables.
B)fixed costs,only.
C)variable costs,only.
D)operating profit.

Question 25

Sun Devil,Inc.
Sun Devil,Inc.is considering the introduction of a new product with the following price and cost characteristics

It expects to sell 70,000 units for the year.
Refer to Sun Devil,Inc;what would be the break-even point in units if the sales price decreased by 20%?

A)5,000
B)7,500
C)20,000
D)8,571

Question 26

What is the formula for Target Profit in Sales Dollars?

A)Total Fixed Costs / Unit Contribution Margin.
B)(Total Fixed Costs + Target Profit)/ Unit Contribution Margin.
C)(Total Fixed Costs + Target Profit)/ Contribution Margin Ratio.
D)Total Fixed Costs / Contribution Margin Ratio

Question 27

How is the contribution margin ratio calculated?

A)variable costs/contribution margin.
B)fixed costs/contribution margin.
C)sales/contribution margin.
D)contribution margin/sales.

Question 28

How is target profit volume calculated?

A)The sum of fixed costs and target profit divided by contribution margin per unit.
B)The sum of fixed costs and target profit divided by variable cost per unit.
C)The sum of fixed costs and target profit divided by sales price per unit.
D)None of the answers is correct.

Question 29

The profit-volume graph shows one line that represents which of the following?

A)operating profits of the company for a given sales volume.
B)operating revenues of the company for a given sales volume.
C)total costs of the company for a given sales volume.
D)total profits of the company for a given sales volume.

Question 30

What is the formula for Break-Even Point in Sales Dollars?

A)Total Fixed Costs / Unit Contribution Margin.
B)(Total Fixed Costs + Target Profit)/ Unit Contribution Margin.
C)Sales Units - Break-Even Sales Units.
D)Total Fixed Costs / Contribution Margin Ratio.

Question 31

Sun Devil,Inc.
Sun Devil,Inc.is considering the introduction of a new product with the following price and cost characteristics

It expects to sell 70,000 units for the year.
Refer to Sun Devil,Inc;what would be the break-even point in units if fixed costs were increased by $50,000?

A)7,000
B)4,667
C)14,000
D)3,500

Question 32

Which of the following is the correct formula to use to calculate the contribution margin per unit?

A)Selling price per unit less fixed costs and variable costs per unit.
B)Selling price per unit less fixed costs per unit.
C)Selling price per unit less variable costs per unit.
D)None of the answers is correct.

Question 33

Sun Devil,Inc.
Sun Devil,Inc.is considering the introduction of a new product with the following price and cost characteristics

It expects to sell 70,000 units for the year.
Refer to Sun Devil,Inc;if 7,000 units are sold,what operating profit is expected?

A)$ 225,000
B)$ 50,000
C)$ 525,000
D)$ 350,000

Question 34

What happens to the contribution margin if fixed expenses decrease while variable cost per unit remain constant.

A)Contribution margin will be unchanged.
B)Contribution margin will be higher.
C)Contribution margin will be lower.
D)Cannot determine the change.

Question 35

Sun Devil,Inc.
Sun Devil,Inc.is considering the introduction of a new product with the following price and cost characteristics

It expects to sell 70,000 units for the year.
Refer to Sun Devil,Inc;how many units must be sold to make an operating profit of $15,000?

A)4,200
B)12,600
C)6,300
D)3,150

Question 36

TopSail Company
TopSail Company produces one type of machine with the following costs and revenues for the year

Refer to the TopSail Company;how many units must be sold to make an operating profit of $300,000 for the year?

A)500,000
B)1,000,000
C)1,500,000
D)2,000,000

Question 37

What is the formula for the Break-Even Point in Units?

A)Total Fixed Costs / Unit Contribution Margin.
B)(Total Fixed Costs + Target Profit)/ Unit Contribution Margin.
C)Sales Units - Break-Even Sales Units.
D)None of the answers is correct.

Question 38

A company's selling price is $18 per unit,variable cost is $6 per unit,and fixed costs are $36,000.If fixed costs increased by $6,000,how many additional units must be sold to break even?

A)5,000
B)1,000
C)500
D)250

Question 39

Which of the following is the correct formula for the break-even sales volume?

A)Fixed costs divided by the variable costs per unit.
B)Fixed costs divided by the contribution margin per unit.
C)Variable costs divided by the contribution margin per unit.
D)Variable costs divided by the fixed costs per unit.

Question 40

What is the formula for the Target Profit in Units?

A)Total Fixed Costs / Unit Contribution Margin.
B)(Total Fixed Costs + Target Profit)/ Unit Contribution Margin.
C)Sales Units - Break-Even Sales Units.
D)None of the answers is correct.

Question 41

Shenandoah Company
Shenandoah Company is considering the introduction of a new product with the following price and cost characteristics

The company expects to sell 2,000 units for the year.
Refer to Shenandoah Company.If 2,000 units are sold,what operating profit is expected?

A)$100,000
B)$ 75,000
C)$ 15,000
D)$ 45,000

Question 42

What is the excess of projected sales units or dollars over the break-even point?

A)gross profit.
B)margin of safety.
C)contribution margin.
D)gross margin.

Question 43

Manufacturers using computer-integrated manufacturing systems have a large investment in plant and equipment.This results in which of the following cost structures?

A)high fixed costs.
B)high total costs.
C)high variable costs.
D)None of the answers is correct.

Question 44

Shenandoah Company
Shenandoah Company is considering the introduction of a new product with the following price and cost characteristics

The company expects to sell 2,000 units for the year.
Refer Shenandoah Company.How many units must be sold to break even?

A)900
B)2,250
C)2,000
D)1,500

Question 45

Which of the following statements best defines the contribution margin ratio?

A)Total contribution margin divided by total sales.
B)Unit contribution margin divided by unit sales price.
C)Total contribution margin divided by total sales and unit contribution margin divided by unit sales price.
D)None of the answers is correct.

Question 46

Shenandoah Company
Shenandoah Company is considering the introduction of a new product with the following price and cost characteristics

The company expects to sell 2,000 units for the year.
Refer to Shenandoah Company.How many units must be sold to make an operating profit of $15,000?

A)1,667
B)1,000
C)2,500
D)2,000

Question 47

What effect would an increase in fixed costs have on the break-even point and the contribution margin?
Break-even Point Contribution Margin

A)Increase Increase
B)Increase Decrease
C)Decrease Increase
D)Decrease Decrease

Question 48

Which of the following statements is the correct calculation for the margin of safety in dollars?

A)The excess of projected (or actual)sales dollars over the break-even sales dollars.
B)The excess of projected (or actual)sales price over the break-even sales price.
C)The excess of projected (or actual)cost of sales in dollars over the break-even costs of sales in dollars level.
D)None of the answers is correct.

Question 49

Which of the following represents the margin of safetyin units?

A)The excess of projected (or actual)sales units over the break-even unit sales level.
B)The excess of projected (or actual)sales price per unit over the break-even sales price in units.
C)The excess of projected (or actual)cost of sales in units over the break-even costs of sales level in units.
D)None of the answers is correct.

Question 50

Calculate margin of safety using the following assumptions:

A)1,000 units
B)$500,000
C)1,750 units
D)750 units

Question 51

Shenandoah Company
Shenandoah Company is considering the introduction of a new product with the following price and cost characteristics

The company expects to sell 2,000 units for the year.
Refer to Shenandoah Company.Calculate the break-even point in units if variable costs per unit increased by $10.00 and fixed costs increased to $140,000.

A)2,000
B)934
C)1,750
D)1,500

Question 52

Shenandoah Company
Shenandoah Company is considering the introduction of a new product with the following price and cost characteristics

The company expects to sell 2,000 units for the year.
Refer to Shenandoah Company.Calculate the break-even point in units if the sales price decreased by 20%.

A)1,500
B)2,250
C)2,000
D)1,000

Question 53

Which of the following represents the formula for the margin of safety?

A)Total Fixed Costs / Unit Contribution Margin.
B)(Total Fixed Costs + Target Profit)/ Unit Contribution Margin.
C)Sales Units - Break-Even Sales Units.
D)None of the answers is correct.

Question 54

What effect would a decrease in wage rates (applicable to direct,strictly variable,labor)have on the break-even point and the contribution margin?
Break-even Point Contribution Margin

A)Increase Increase
B)Increase Decrease
C)Decrease Increase
D)Decrease Decrease

Question 55

What effect would an increase in building insurance rates have on the break-even point and the contribution margin?
Break-even Point Contribution Margin

A)Increase Increase
B)Increase Decrease
C)Increase No effect
D)Decrease Decrease

Question 56

SunDevil Co.plans to sell 200,000 special Rose Bowl footballs with fixed costs of $400,000 and variable expenses at 60% of sales.To have a net income of $100,000 SunDevil management must set the sales price at

A)$3.75
B)$4.17
C)$5.00
D)$6.25

Question 57

What effect would an increase in the selling price of the product have on the break-even point and the contribution margin?
Break-even Point Contribution Margin

A)Increase Increase
B)Increase Decrease
C)Decrease Increase
D)Decrease Decrease

Question 58

The cost structureof an organization refers to the which of the following?

A)proportion of fixed and variable costs to total costs.
B)proportion of total revenue to total costs.
C)proportion of profits to total costs.
D)None of the answers is correct.

Question 59

Calculate margin of safety using the following assumptions:

A)2,000 units
B)10,000 units
C)7,500 units
D)8,000 units

Question 60

Which of the following is a typical cost structure for home builders?

A)high fixed costs relative to variable costs.
B)high variable costs relative to fixed costs.
C)high profits relative to total costs.
D)None of the answers is correct.

Question 61

What does (Contribution Margin for Product 1 ´ Sales Volume for Product 1)+ (Contribution Margin for Product 2 ´ Sales Volume for Product 2)+ (Contribution Margin for Product n ´ Sales volume for Product n)- Fixed Costs equal?

A)Net sales
B)Target sales
C)Operating profit
D)Target profits

Question 62

When sales dollars are used as the measure of volume in the cost-volume-profit equation,the focus is on solving for total revenue required to break even or a target profit rather than total units.Break-Even Point in Sales Dollars equals which of the following?

A)total contribution margin divided by total sales.
B)unit contribution margin divided by unit sales price.
C)total fixed costs divided by the contribution margin ratio.
D)(sum of total fixed costs plus target profit)divided by the contribution margin ratio.

Question 63

The cost structure of an organization is the proportion of which of the following?

A)opportunity and variable costs to total costs.
B)fixed and opportunity costs to total costs.
C)variable and opportunity costs to total costs.
D)fixed and variable costs to total costs.

Question 64

Deering Company is contemplating an expansion program based on the following budget data:

Calculate the budgeted break-even point in sales dollars.

A)$200,000
B)$210,000
C)$270,000
D)$330,000

Question 65

The extent to which an organization's cost structure is made up of fixed costs is called its

A)fixed cost leverage.
B)operating leverage.
C)fixed cost multiple.
D)long-term leverage.

Question 66

Multiple products make using financial models more complex.To deal with this,managers can do which of the following?

A)assume that all products have the same contribution margin.
B)assume that a particular product mix does not change.
C)treat each product line as a separate entity.
D)All of the answers are correct.

Question 67

When sales dollars are used as the measure of volume in the cost-volume-profit equation,the focus is on solving for total revenue required to break even or a target profit rather than total units.The contribution margin ratio is defined as which of the following?

A)total contribution margin divided by total sales.
B)unit contribution margin divided by unit sales price.
C)total contribution margin divided by total sales and unit contribution margin divided by unit sales price.
D)the sum of fixed costs plus target profits divided by unit sales price.

Question 68

When will the contribution margin ratio increase?

A)when the break-even point increases.
B)when the break-even point decreases.
C)when the variable expenses as a percentage of sales decrease.
D)when the variable expenses as a percentage of sales increase.

Question 69

The formula used in performing cost-volume-profit (CVP)analysis for the Target Profit in Units,where t is the tax rate,is

A)(Total Fixed Costs + Before-Tax Target Profit)/ Unit Contribution Margin.
B)(Total Fixed Costs + Before-Tax Target Profit)/ Contribution Margin Ratio.
C)(Total Fixed Costs ´ t)/ Unit Contribution Margin.
D)(Total Fixed Costs + (Target Profit ´ t))/ Unit Contribution Margin.

Question 70

When sales dollars are used as the measure of volume in the cost-volume-profit equation,the focus is on solving for total revenue required to break even or a target profit rather than total units.Target Profit in Sales Dollars equals which of the following?

A)total contribution margin divided by total sales.
B)unit contribution margin divided by unit sales price.
C)total fixed costs divided by the contribution margin ratio.
D)(sum of total fixed costs plus target profit)divided by the contribution margin ratio.

Question 71

In planning its operations for next year based on a sales forecast of $3,000,000,Jan's Auto Company,Inc.prepared the following estimated costs and expenses:

Calculate sales dollars at the break-even point.

A)$1,125,000
B)$1,750,000
C)$2,000,000
D)$2,650,000

Question 72

Operating leverage is high in firms with:
Fixed Costs Variable Costs Contribution Margin Per Unit

A)small proportion high proportion high
B)high proportion small proportion high
C)small proportion high proportion low
D)high proportion small proportion low

Question 73

When sales dollars are used as the measure of volume in the cost-volume-profit equation,the focus is on solving for which of the following?

A)total revenue required to break even rather than total units.
B)a target profit rather than total units.
C)total revenue required to break even rather than total units and a target profit rather than total units.
D)One cannot utilize cost-volume-profit relationships to solve for sales dollars.

Question 74

Multiple products make using financial models more complex.To deal with this,managers can

A)treat each product line as a separate entity.
B)assume a weighted average contribution margin.
C)use sales dollars as a measure of volume.
D)All of the answers are correct.

Question 75

The formula used in performing cost-volume-profit (CVP)analysis for the Target Profit in Sales Dollars,where t is the tax rate,is

A)(Total Fixed Costs + Before-Tax Target Profit)/ Unit Contribution Margin.
B)(Total Fixed Costs + Before-Tax Target Profit)/ Contribution Margin Ratio.
C)(Total Fixed Costs ´ t)/ Unit Contribution Margin.
D)(Total Fixed Costs + (Target Profit ´ t))/ Unit Contribution Margin.

Question 76

Multiple products make using financial models more complex.To deal with this,managers can do which of the following?

A)assume that all products have the a different contribution margin.
B)assume a weighted average contribution margin.
C)use contribution margin as a measure of volume.
D)All of the answers are correct.

Question 77

When sales dollars are used as the measure of volume in the cost-volume-profit equation,the focus is on solving for total revenue required to break even or a target profit rather than total units.The contribution margin ratio is defined as which of the following?

A)total contribution margin divided by total sales.
B)unit contribution margin divided by unit sales price.
C)total contribution margin divided by total sales and unit contribution margin divided by unit sales price.
D)the sum of fixed costs plus target profits divided by unit sales price.

Question 78

The formula used in performing cost-volume-profit (CVP)analysis for the "before-tax target",where t is the tax rate,is

A)(Total Fixed Costs ´ t)/ Unit Contribution Margin.
B)(Total Fixed Costs + (Target Profit ´ t))/ Unit Contribution Margin.
C)(Total Fixed Costs + Target Profit)/ Contribution Margin Ratio.
D)After-Tax Profit / (1-t).

Question 79

Which of the following statements is true?

A)The higher the firm's leverage,the higher the degree of sensitivity of profits to cost changes.
B)The higher the firm's leverage,the lower the degree of sensitivity of profits to cost changes.
C)The higher the firm's leverage,the higher the degree of sensitivity of profits to volume changes.
D)The higher the firm's leverage,the lower the degree of sensitivity of profits to volume changes.

Question 80

Multiple products make using financial models more complex.To deal with this,managers can do which of the following?

A)assume that all products have the same contribution margin.
B)use contribution margin as a measure of volume.
C)assume a weighted-average sales volume.
D)All of the answers are correct.