Question 1

The cost function for Liao Ltd is: TC = $800 + 0.375 × Revenue. If Liao expects after-tax income of $600 and the tax rate is 40%, what is the firm's margin of safety?

Accepted Answer

The answer of The cost function for Liao Ltd is:...

Question 2

The breakeven point can be defined as

Accepted Answer

The breakeven point is the level of operations at which total contribution margin is equal to total fixed costs. This means that the company is not making a profit yet, but it is not incurring any losses either. Once sales exceed the breakeven point, then the company will start making a profit. Choice A is incorrect because the breakeven point is when sales equal both variable and fixed costs, not just variable costs. Choice C is incorrect because the breakeven point does not necessarily mean that the company is earning a profit, it just means that it is not incurring a loss. Choice D is incorrect because the breakeven point is not related to budgeted sales, but rather to the fixed and variable costs of producing those sales.

Question 3

Which of the following is the amount by which sales could drop before profits reach the breakeven point?

Accepted Answer

Margin of safety is the amount by which sales can drop before the profits reach the breakeven point. Operating leverage is a measure of how sensitive the company's profits are to changes in sales. Total contribution margin is the difference between total sales revenue and total variable costs. Incremental sales refer to the additional sales generated by a particular marketing initiative or promotional campaign. Therefore, option C - Margin of safety is the correct answer.

Question 4

At the breakeven point

Accepted Answer

At the breakeven point, sales will be equal to the total of variable costs and fixed costs, as this is the point where total revenue equals total costs. Target profits are not a factor in calculating the breakeven point. Therefore, option B is the correct choice.

Question 5

The margin of safety is

Accepted Answer

The margin of safety is the difference between estimated or budgeted sales and breakeven sales. It indicates the amount by which sales can drop before the company incurs losses. It is a useful measure for management in understanding the risk associated with a product line. Option B is incorrect because the margin of safety is a crucial measure for management to assess the level of risk. Option C is incorrect as it defines the margin of safety as the drop in sales before the target profit is met, which is incorrect. Option D is incorrect as it defines the margin of safety as how much sales must increase to earn a profit, which is incorrect.

Question 6

At a breakeven point of 200 units, the variable costs were $400 and the fixed costs were $200. What will the next (i.e., 401st) unit sold contribute to profit before income taxes?

Accepted Answer

At the breakeven point of 200 units, the total cost is:

Total Cost = Fixed Cost + Variable Cost
Total Cost = $200 + ($400/200) * 200
Total Cost = $200 + $400
Total Cost = $600

So, to make a profit, the selling price per unit should be higher than $3 per unit.

For the 401st unit, the variable cost remains at $2 per unit. Thus, the profit before income taxes for the 401st unit will be:

Profit = Selling Price - Variable Cost - Fixed Cost
Profit = $3 - $2 - $200
Profit = $1

Therefore, the answer is C, the contribution to profit before income taxes for the 401st unit sold is $1.

Question 7

In CVP analysis, managers usually assume that the cost function is linear. Which of the following equations best represents a linear function for total cost if the cost is a mixed cost?

Accepted Answer

A mixed cost includes both fixed and variable components. The equation y = $200 + $60x represents a linear function for total cost as it includes both a fixed component ($200) and a variable component ($60x). Option B is not a linear function and option C only includes a variable component, which is not sufficient for a mixed cost. Option D only includes a fixed component and does not account for any variable component, making it inappropriate for a mixed cost.

Question 8

Baldwin's Bagel Shop had the following activity for December: Total bagels sold 17,000
Total revenues $595,000
Total fixed costs 99,000
Total variable costs 357,000
What was Baldwin's margin of safety, in dollars?

Accepted Answer

The margin of safety is calculated as Total Revenues minus Break-even Sales. Break-even Sales = Fixed Costs / (1 - (Variable Costs / Total Revenues)). Here, Break-even Sales = $99,000 / (1 - ($357,000 / $595,000)) = $247,500. Therefore, Margin of Safety = $595,000 - $247,500 = $347,500.

Question 9

When the assumption of linearity is applied to revenue in CVP analyses

Accepted Answer

In CVP analysis, the assumption of linearity implies that the sales mix and prices remain constant, allowing for straightforward calculations of costs, volume, and profit relationships.

Question 10

SXF Corporation sells its single product for $14 per unit, and its variable cost per unit is $4. Total fixed costs are $800. Its CVP graph is as follows: Area C is best described as

Accepted Answer

Area C represents the estimated profit at the actual volume, which is the difference between total revenue and total costs at the given sales level. Since it is above the breakeven point, it indicates that the company is earning a profit at this level of sales.

Question 11

How is the relevant range of activity related to CVP analysis?

Accepted Answer

In CVP analysis, operations are assumed to be within the relevant range, which is the range of activity where the company expects to operate. This is important because CVP analysis is based on certain assumptions that are valid only within the relevant range. If the company operates outside of this range, its cost structure and the relationship between costs and revenues may change, rendering CVP analysis invalid. Therefore, it's important to identify and understand the relevant range of activity when performing CVP analysis.

Question 12

Managers should consider which of the following in CVP analysis
I Assumptions
II Uncertainties
III Biases

Accepted Answer

Managers should consider assumptions, uncertainties, and biases in CVP analysis to ensure accurate and reliable decision-making. Assumptions form the basis of the analysis, uncertainties can affect outcomes, and biases can skew interpretations.

Question 13

The assumption of cost function linearity means I Fixed costs remain fixed.
II Sales mix remains constant.
III The average cost per unit remains constant.

Accepted Answer

The answer of The assumption of cost function linearity means...

Question 14

Which of the following business conditions may violate an assumption of CVP analysis? I Supplier volume discounts
II Learning curves
III Customer discounts

Accepted Answer

CVP (Cost-Volume-Profit) analysis assumes that costs are fixed or variable and that the unit selling price, unit variable costs, and fixed costs are constant. Supplier volume discounts, learning curves, and customer discounts all introduce variability in costs or revenues that violate these assumptions. Supplier volume discounts and customer discounts affect the costs and selling price per unit, respectively, making them variable rather than constant. Learning curves imply that the more a task is performed, the lower the cost per unit due to increased efficiency, which also contradicts the assumption of constant costs.

Question 15

Ryan Company manufactures a single product. The product sells for $10. The variable manufacturing cost per unit is $2 and the variable selling cost is $2 per unit. Ryan incurs monthly fixed costs of $100,000 for manufacturing and $140,000 for administration and selling. Ryan is considering changes to its production and distribution procedures. If the changes are made, total variable costs (manufacturing and selling) will be $3 and total fixed costs (manufacturing, administration, and selling) will be $350,000 per month. The selling price will remain at $10. If the changes are made, the number of units required to break even will be

Accepted Answer

The break-even point is calculated as fixed costs divided by the contribution margin per unit. Initially, the contribution margin is $6 ($10 - $4), and fixed costs are $240,000. After changes, the contribution margin is $7 ($10 - $3), but fixed costs increase to $350,000. The increase in fixed costs is proportionally larger than the increase in contribution margin, resulting in a higher break-even point.

Question 16

SXF Corporation sells its single product for $14 per unit, and its variable cost per unit is $4. Total fixed costs are $800. Its CVP graph is as follows: Area D is best described as

Accepted Answer

Area D represents the margin of safety, which is the difference between the actual sales volume and the breakeven point.

Question 17

SXF Corporation sells its single product for $14 per unit, and its variable cost per unit is $4. Total fixed costs are $800. Its CVP graph is as follows: Point B is best described as

Accepted Answer

The answer of SXF Corporation sells its single product for...

Question 18

SXF Corporation sells its single product for $14 per unit, and its variable cost per unit is $4. Total fixed costs are $800. Its CVP graph is as follows:  Point A is best described as

Accepted Answer

Point A is the breakeven point, which represents the level of sales at which the company's total revenue equals total cost (fixed and variable). At this point, the company neither makes a profit nor incurs a loss.

Question 19

The Nunn Co. produces a single product. Its cost structure is:  If the firm sells 5,000 units per period, what price should be charged to earn $35,000?

Accepted Answer

The answer of The Nunn Co. produces a single product....

Question 20

Which of the following is not an assumption in CVP analysis?

Accepted Answer

Actual costs may differ from the predicted costs in CVP analysis due to various factors such as changes in market conditions, unexpected events, etc.

Quiz 4: Cost-Volume-Profit Cvp Analysis

The cost function for Liao Ltd is: TC = $800 + 0.375 × Revenue. If Liao expects after-tax income of $600 and the tax rate is 40%, what is the firm's margin of safety?

The breakeven point can be defined as

Which of the following is the amount by which sales could drop before profits reach the breakeven point?

At the breakeven point

The margin of safety is

At a breakeven point of 200 units, the variable costs were $400 and the fixed costs were $200. What will the next (i.e., 401st) unit sold contribute to profit before income taxes?

In CVP analysis, managers usually assume that the cost function is linear. Which of the following equations best represents a linear function for total cost if the cost is a mixed cost?

Baldwin's Bagel Shop had the following activity for December: Total bagels sold 17,000 Total revenues $595,000 Total fixed costs 99,000 Total variable costs 357,000 What was Baldwin's margin of safety, in dollars?

When the assumption of linearity is applied to revenue in CVP analyses

SXF Corporation sells its single product for $14 per unit, and its variable cost per unit is $4. Total fixed costs are $800. Its CVP graph is as follows: Area C is best described as

How is the relevant range of activity related to CVP analysis?

Managers should consider which of the following in CVP analysis I Assumptions II Uncertainties III Biases

The assumption of cost function linearity means I Fixed costs remain fixed. II Sales mix remains constant. III The average cost per unit remains constant.

Which of the following business conditions may violate an assumption of CVP analysis? I Supplier volume discounts II Learning curves III Customer discounts

SXF Corporation sells its single product for $14 per unit, and its variable cost per unit is $4. Total fixed costs are $800. Its CVP graph is as follows: Area D is best described as

SXF Corporation sells its single product for $14 per unit, and its variable cost per unit is $4. Total fixed costs are $800. Its CVP graph is as follows: Point B is best described as

SXF Corporation sells its single product for $14 per unit, and its variable cost per unit is $4. Total fixed costs are $800. Its CVP graph is as follows: Point A is best described as

The Nunn Co. produces a single product. Its cost structure is: If the firm sells 5,000 units per period, what price should be charged to earn $35,000?

Which of the following is not an assumption in CVP analysis?