Deck 3: Cost-Volume-Profit Analysis

Question 1

CVP calculations can only be used in companies that sell a single product.

Answer 1

False

Question 2

On a cost-volume-profit graph, the breakeven point is located where the fixed cost line intersects the x-axis.

Answer 2

False

Question 3

When an organization produces and sells a number of different products or services, the weighted average contribution margin per unit is used to determine the breakeven point or target profit in units.

Answer 3

True

Question 4

The contribution margin per unit is calculated as Selling Price per unit minus Variable Cost per unit.

Question 5

An assumption needed for CVP analysis in multiple-product companies is that the sales mix remains constant.

Question 6

The margin of safety is the excess of a firm's profits above the breakeven point.

Question 7

Managers implicitly assume that operations will be within the relevant range when using CVP analysis.

Question 8

Assumptions and limitations are irrelevant when using CVP analysis.

Question 9

For companies with multiple products, the sales mix should be stated as a proportion of units when performing CVP computations in units.

Question 10

The breakeven point is often expressed as a cost per unit.

Question 11

In CVP analysis, costs are assumed to be linear; that is, they can be expressed as "TC = F + VxQ" format, where F represents total fixed costs.

Question 12

Because managers cannot usually be certain about their cost function, they also cannot be certain about the level of sales needed to earn a target profit.

Question 13

A CVP analysis indicates that the breakeven point for Rebo Company is 2,000 units. If the company sells 2,100 units, then it will be guaranteed to earn a profit.

Question 14

The breakeven point can be expressed as a number of units or as total amount of revenue.

Question 15

Accountants typically do not perform CVP analysis; instead, they delegate that responsibility to production managers.

Question 16

Accountants develop CVP analysis to help managers decide which products or services to emphasize.

Question 17

If a company can produce and sell 500 units at $10 each and its variable costs are $6 per unit, expected profit using the profit equation will be $2,000.

Question 18

CVP analysis can assist in budgeting for discretionary expenditures, such as fixed costs for advertising.

Question 19

CVP analysis can be used in companies that sell multiple products.

Question 20

A linear revenue function is one of the assumptions involved in CVP analysis.

Question 21

A larger margin of safety gives managers greater confidence in making plans such as incurring additional fixed costs.

Question 22

The breakeven point can be defined as

A) The point at which sales equal variable costs
B) The point at which the total contribution margin equals the total fixed costs
C) The level of operations at which the firm earns a profit
D) The level of operations that equals budgeted sales

Question 23

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

A) I and III only
B) I and III only
C) I and II only
D) I, II, and III

Question 24

When using units as the measure, what proportion of the sales mix do picture holders represent? Round to the nearest whole percent.

A) 33%
B) 46%
C) Some other percentage
D) Cannot be determined

Question 25

Nunn Company produces a single product. Following is cost information: If the product sells for $60, how many units must be sold to break even?

A) 1,000
B) 2,375
C) 2,714
D) 3,800

Question 26

Managers can use cost-volume-profit analysis to I. Plan operating activity levels
II) Achieve targeted profits
III) Monitor organizational performance

A) I only
B) II and III only
C) I and III only
D) I, II, and III

Question 27

If sales are $80,000, variable costs are $50,000, and fixed costs are $20,000, the contribution margin ratio is

A) 37.5%
B) 12.5%
C) 62.5%
D) 25.0%

Question 28

CVP analysis can be used to make decisions about discretionary expenditures, such as

A) Advertising
B) Taxes
C) Direct materials purchases
D) City license fees

Question 29

When using revenues as the measure, what proportion of the sales mix do CD holders represent? Round to the nearest whole percent.

A) 44%
B) 38%
C) 31%
D) Cannot be determined

Question 30

CVP analysis is most likely to be used for which of the following decisions?

A) The amount of discretionary expenditures for the next period
B) The organizational vision
C) The exact level of operations at which the organization will operate
D) Whether to buy a business segment operating in Germany

Question 31

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?

A) y = $200 + $60x
B) y = $60x2
C) y = $60x
D) y = $200

Question 32

Which of the following techniques examine changes in profits in response to changes in volume, costs, and prices?

A) Activity-based costing
B) Financial statement analysis
C) Cost-volume-profit analysis
D) Balanced scorecard

Question 33

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

A) Greater than before
B) The same as before
C) Less than before
D) Cannot be determined

Question 34

The margin of safety can be expressed in units, dollars, or a percentage.

Question 35

The weighted average contribution margin ratio, rounded to the nearest whole percent, is

A) 57%
B) 59%
C) 60%
D) Some other number

Question 36

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

A) Actual costs will be exactly the amount that we predict in the analysis
B) Operations are within the relevant range
C) The revenue function is linear
D) The cost function is linear

Question 37

Which of the following is an uncertainty faced by managers in CVP analysis? I. Unexpected changes in costs
II) How quickly demand for new products will change
III) The amount of budgeted advertising costs

A) III only
B) I and II only
C) I and III only
D) I, II, and III

Question 38

RKH Corporation's fixed costs total $10,000, while EMO Corporation's fixed costs total $12,000 for the same period of time. Therefore, EMO has a higher margin of safety than RKH.

Question 39

At the breakeven point

A) Sales will be equal to variable costs plus target profit
B) Sales will be equal to variable costs plus fixed costs
C) Sales will be equal to fixed costs plus target profit
D) Fixed costs will be equal to variable costs

Question 40

CVP analysis can be used in the following type(s) of organization I. Manufacturing
II) Service
III) Not-for-profit

A) I and III only
B) II and III only
C) I and II only
D) I, II, and III

Question 41

The margin of safety is

A) The difference between estimated sales and breakeven sales.
B) Not a useful measure for management in understanding the risk associated with a product line.
C) The amount sales can drop before the target profit is met.
D) How far sales must increase to earn a profit.

Question 42

The solid line intersects the y-axis at the

A) Fixed cost per unit
B) Variable cost per unit
C) Total fixed cost
D) Total variable cost

Question 43

The horizontal ("x") axis shows

A) Fixed costs
B) Revenues
C) Units
D) Variable costs

Question 44

Use the following information for the next 4 questions.
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

A) Fixed cost
B) Margin of safety
C) Estimated profit at actual volume
D) Breakeven point

Question 45

What is the relationship between the margin of safety percentage and the degree of operating leverage?

A) They are unrelated
B) They are always the same
C) They are reciprocals
D) They are both subject to management bias

Question 46

The area to the right of the point where the two lines intersect, where the dashed line is above the solid line, shows where TXC

A) Operates at a loss
B) Operates at a profit
C) Breaks even if product mix remains constant
D) Cannot be determined

Question 47

Use the following information for the next 4 questions.
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:

If the total contribution margin decreases and fixed costs do not change, pretax income

A) Decreases by an equal amount
B) Increases by an equal amount
C) Does not change
D) Increases by some other amount

Question 48

The ratio of contribution margin / profit is used to compute a company's

A) Expected fixed costs
B) Degree of operating leverage
C) Margin of safety
D) Margin of safety percentage

Question 49

If fixed costs increase by 10% and management increases its billing rate by 10%, what is the effect on the breakeven point, in billable hours?

A) It increases the breakeven point
B) The breakeven point will not change
C) It decreases the breakeven point
D) Cannot be determined

Question 50

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

A) Fixed cost per unit increases as revenue decreases
B) Variable cost per unit is linear with respect to total revenue
C) The sales mix and all of the prices remain constant
D) The sales mix remains constant, but prices decrease as volumes increase

Question 51

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.

A) I only
B) I and II only
C) I, II, and III
D) III only

Question 52

The vertical ("y") axis shows

A) Dollars
B) Units
C) Contribution margin
D) Total profit

Question 53

Use the following information for the next 4 questions.
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

A) Fixed cost
B) Margin of safety
C) Estimated profit at actual volume
D) Breakeven point

Question 54

The area to the left of the point where the two lines intersect, where the dashed line is below the solid line, shows where TXC

A) Operates at a loss
B) Operates at a profit
C) Breaks even if product mix remains constant
D) Cannot be determined

Question 55

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

A) Managers are normally uncertain about the relevant range
B) In CVP analysis, operations are assumed to be within the relevant range
C) The relevant range is irrelevant to CVP analysis
D) The relevant range affects costs but not revenues

Question 56

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

A) I and II only
B) II and III only
C) I, II, and III
D) I and III only

Question 57

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

A) Operating leverage
B) Total contribution margin
C) Margin of safety
D) Incremental sales

Question 58

A firm selling three products has the following data: If the firm can change the sales mix from 60,000 P, 40,000Q, and 20,000 R to 60,000 P, 20,000 Q, and 40,000 R, pretax income will be

A) Lower
B) Higher
C) Unchanged
D) Cannot be determined

Question 59

Use the following information for the next 4 questions.
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

A) Fixed cost
B) Margin of safety
C) Estimated profit at actual volume
D) Breakeven point

Question 60

Use the following information for the next 4 questions.
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

A) Fixed cost
B) Margin of safety
C) Estimated profit at actual volume
D) Breakeven point

Question 61

If all other factors remain unchanged, a 10% decrease in both the selling price and variable costs for a product will

A) Lower the breakeven point in dollars
B) Raise the breakeven point in dollars
C) Have no effect on the breakeven point in dollars
D) Cannot be determined

Question 62

Use the following information for the next 5 questions.
SXF 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:

If SXF increases its volume of sales by 10%, what will happen to its degree of operating leverage?

A) It will decrease
B) It will increase
C) It will stay the same
D) Cannot be determined

Question 63

Use the following information for the next 5 questions.
SXF 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:

If SXF increases its sales volume by 10%, what will happen to its breakeven point?

A) It will decrease
B) It will increase
C) It will stay the same
D) Cannot be determined

Question 64

The breakeven sales volume of the Patin Co. is $800,000. If the variable cost per unit increases next year, then the new breakeven point will be

A) The same
B) Higher
C) Lower
D) Cannot be determined

Question 65

Use the following information for the next 5 questions.
SXF 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:

Stuart, Inc. produces one item which sells for $2.40 and costs $1.40 per unit to make. All manufacturing costs are variable. If fixed selling and administrative costs total $140,000, how many units must be sold in order to break even?

A) 100,000
B) 140,000
C) 58,333
D) None of the above

Question 66

The Martinez Game Co. produces and sells parlor games. In 2005 sales were $400,000, total variable costs were $200,000, and total fixed costs were $150,000. What is the total revenue required to increase pretax profits by $40,000 and to cover an expected increase of $20,000 in fixed costs?

A) $300,000
B) $400,000
C) $480,000
D) $520,000

Question 67

Use the following information for the next 5 questions.
SXF 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:

If SXF increases its sales volume by 10%, what will happen to its margin of safety?

A) It will decrease
B) It will increase
C) It will stay the same
D) Cannot be determined

Question 68

The contribution margin ratio of Yoshi enterprises is 60%. If total fixed costs are $200,000, then what is the cost of producing and selling $1,000,000 of Yoshi's product?

A) $600,000
B) $400,000
C) $900,000
D) None of the above

Question 69

A limiting assumption in CVP analysis is that

A) The behavior of both revenues and costs is linear throughout the entire relevant range
B) Inventories change in breakeven computations
C) The sales mix is not constant
D) Efficiency in operations is not constant

Question 70

The breakeven point for a service organization will decrease if

A) The variable cost ratio increases
B) The mix of less profitable services increases
C) The contribution margin ratio increases
D) Fixed costs increase

Question 71

Use the following information for the next 5 questions.
SXF 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:

Which of the following actions will move Point B higher on the y axis?

A) An increase in the price of materials
B) A decrease in the number of units sold
C) Purchase of new equipment
D) An increase in variable overhead cost

Question 72

Once a firm reaches the breakeven point, the next unit sold will increase profit by an amount equal to the

A) Selling price per unit
B) Variable cost per unit
C) Contribution margin per unit
D) Difference between contribution margin and fixed costs

Question 73

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. If Ryan raises its selling price by 10% in response to a 10% increase in variable costs, and income taxes are 40%, its new breakeven point in sales dollars (relative to that of the original data above) will be

A) Higher
B) Unchanged
C) Lower
D) Cannot be determined

Question 74

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

A) y = $200 + $60x
B) y = $60x2
C) y = $60x
D) y = $200

Question 75

Use the following information for the next 5 questions.
SXF 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:

Which of the following actions will move Point A to the right on the x axis?

A) An increase in the number of units sold
B) A decrease in the number of units sold
C) An increase in the product's selling price
D) An increase in the variable cost per unit

Question 76

The breakeven point for a service organization will decrease if

A) Volume increases
B) The variable cost ratio decreases
C) Fixed costs increase
D) The contribution margin ratio decreases

Question 77

The breakeven point occurs when

A) Sales equal fixed costs plus contribution margin
B) Total variable costs equal total contribution margin
C) Fixed costs plus profit equals sales
D) Total costs equal total revenue

Question 78

The breakeven sales volume of the Tuck Co. is 800,000 units. If the variable cost per unit increases by $1.50 and the selling price per unit increases by $2.00 next year, then the new breakeven point will be

A) The same
B) Higher
C) Lower
D) Cannot be determined

Question 79

If the selling price per unit and the variable cost per unit both increase by 5%, what is the effect on the contribution margin per unit and on the contribution margin ratio?

Question 80

The Jean Company expects sales of $500,000 and total variable costs of $200,000 in 2005. Total budgeted fixed costs are $180,000. What is the breakeven volume in sales dollars?

A) $450,000
B) $300,000
C) $360,000
D) None of the above