Question 1

Cost-volume-profit analysis is most useful for determining costs.

Accepted Answer

Cost-volume-profit analysis is not intended for estimating cost, but to provide an analytical framework for profit planning, especially during the early stages of planning.

Question 2

Fixed costs, variable costs, and revenues are all included in profitability analysis?

Accepted Answer

Profit is the difference between revenue and total costs, which includes both variable and fixed costs.

Question 3

Cost-volume-profit analysis is not typically used to determine the break-even point.

Accepted Answer

Indeed, one of the key reasons for cost-volume-profit analysis is to determine the point of break even.

Question 4

One of the basic assumptions underlying the cost-volume-profit analysis model is that the total revenue function is curvilinear, reflecting changing prices as volume changes.

Accepted Answer

The total revenue function is assumed to be linear, within the relevant range, not curvilinear. CVP analysis assumes selling price per unit is constant throughout the range of the model.

Question 5

Functional income statements that classify expenses based on business function (production, sales, administration), and are typically found in corporate annual reports.

Accepted Answer

Corporate annual reports include income statements that follow the functional format.

Question 6

A cost-volume-profit graph includes lines for total revenues, total fixed cost, total variable cost, and total profit.

Accepted Answer

Total profit is not show as a plotted line on a cost-volume-profit graph. It is the area between the lines for total revenues and total costs.

Question 7

If prices are assumed to increase by 10%, the slope of the cost line will increase (be steeper) by 10%, but there will be no changes in the cost line.

Accepted Answer

Changing sales prices affect the revenue line but not the cost line on a CVP graph.

Question 8

The break-even point for a company with multiple products cannot be determined using a unit contribution margin calculation since there are multiple products each of which has a different unit contribution margin.

Accepted Answer

One method for calculating break-even point for a multi-product firm is to calculate a weighted average unit contribution margin, which is divided into total fixed costs to determine break-even point.

Question 9

A company that has only fixed cost has no operating leverage.

Accepted Answer

Operating leverage is best described as a measure of the extent to which an organization's costs are fixed.
Multiple Choice

Question 10

A basic assumption of the cost-volume-profit model is that:

Accepted Answer

The basic CVP model requires all cost to be treated as either fixed or variable.

Question 11

Which of the following is an assumption used in cost-volume-profit analysis?

Accepted Answer

The CVP model assumes linearity of both the revenue and cost functions, and it assumes that all costs are either fixed or variable.

Question 12

A unit contribution margin measures:

Accepted Answer

Unit selling price minus unit variable cost is the definition of unit contribution margin.

Question 13

The portion of each dollar that can be used to cover fixed costs and provide a profit is known as:

Accepted Answer

Contribution margin ratio is the portion (or percent) of revenues available for covering fixed costs and providing a profit. It is calculated as contribution margin dollars divided by sales.

Question 14

In a contribution income statement:

Accepted Answer

Contribution margin minus fixed costs equals net income; therefore net income plus fixed costs equals contribution margin.

Question 15

Costs are classified according to behavior on a(n):

Accepted Answer

The definition of a contribution income statement is that it classifies costs by variable and fixed, and shows both contribution margin and net income.

Question 16

Herman's income statement is as follows:
 What is the unit contribution margin?

Accepted Answer

Contribution margin of $51,000 divided by 5,000 units equals a unit contribution margin of $10.20.

Question 17

Herman's income statement is as follows:
 What is the contribution margin ratio?

Accepted Answer

$51,000 divided by $75,000 equals 68 percent.

Question 18

Herman's income statement is as follows:
 If sales increase by 1,000 units, profits will:

Accepted Answer

The unit contribution margin is the $51,000 Contribution Margin divided by 5,000 units, or $10.20 per unit. If sales increase by 1,000 units, total contribution margin and total profits will increase by 1,000 units times $10.20, or $10,200, because fixed costs will remain unchanged.

Question 19

Herman's income statement is as follows:
 If sales increase by $10,000, profits will:

Accepted Answer

Contribution margin will increase by $4,000, which is equal to $10,000 of increased sales times the 40% contribution margin percentage (calculated as contribution margin of $16,000 divided by $40,000 of sales). Since fixed costs will remain unchanged, net income also increases by $4,000.

Question 20

A profit-volume graph:

Accepted Answer

A profit-volume graph plots total activity volume on the X axis and total profit on the Y axis.

Quiz 3: Cost-Volume-Profit Analysis and Planning