Question 1

Fixed costs divided by contribution margin per unit equals breakeven point in unit sales.

Accepted Answer

This is the formula for calculating the breakeven point in unit sales.

Question 2

Fixed costs divided by the contribution margin ratio equals the breakeven point in sales dollars.

Accepted Answer

This formula is known as the breakeven analysis and is used to calculate the amount of sales needed to cover fixed costs. The contribution margin ratio is the percentage of each sales dollar that contributes to covering fixed costs and ultimately profits. By dividing fixed costs by the contribution margin ratio, we can determine the total amount of sales needed to cover fixed costs and reach the breakeven point.

Question 3

The sales level at which operating income is zero is called breakeven point.

Accepted Answer

This is a correct definition of the breakeven point.

Question 4

The breakeven point is the point where the sales revenues are equal to the fixed costs.

Accepted Answer

The breakeven point is the point where total sales revenues equal total costs (both fixed and variable), not just fixed costs.

Question 5

Pluto Company sold 2,000 units in October at a price of $35 per unit. The variable cost is $20 per unit. The monthly fixed costs are $10,000. What is the operating income earned in October?

Accepted Answer

We can use the formula for calculating operating income:

Operating Income = (Sales Price per Unit x Number of Units) - (Variable Cost per Unit x Number of Units) - Fixed Costs

Plugging in the given values, we get:

Operating Income = ($35 x 2,000) - ($20 x 2,000) - $10,000
Operating Income = $70,000 - $40,000 - $10,000
Operating Income = $20,000

Therefore, the operating income earned in October was $20,000.

Question 6

The breakeven point represents the sales volume at which the company's net income is zero.

Accepted Answer

The breakeven point is the point at which the company's total revenue equals its total costs, resulting in zero net income.

Question 7

CVP analysis assumes that the selling price per unit does not change as volume changes.

Accepted Answer

CVP analysis assumes that the selling price per unit remains constant regardless of changes in volume, making it a very simplified model. In reality, selling prices may change due to factors like competition, changes in production costs, or changes in customer demand. However, CVP analysis can still be a useful tool for providing insights into the relationship between costs, sales volume, and profits.

Question 8

Young Company has provided the following information:  What is the contribution margin ratio?

Accepted Answer

The answer of Young Company has provided the following information:...

Question 9

Pluto Company sold 2,000 units in October at a price of $35 per unit. The variable cost is $20 per unit. Calculate the total contribution margin.

Accepted Answer

The answer of Pluto Company sold 2,000 units in October...

Question 10

Margaret sells hand-knit scarves at a flea market. Each scarf sells for $25. Margaret pays $30 to rent a vending space for one day. The variable costs are $15 per scarf. How many scarves should she sell each day in order to break even?

Accepted Answer

To break even, Margaret needs to cover both her fixed costs ($30 for the vending space) and her variable costs ($15 per scarf). The selling price per scarf is $25. Therefore, the profit per scarf is $25 - $15 = $10. To cover the $30 fixed cost, she needs to sell $30 / $10 = 3 scarves.

Question 11

If all other factors remain constant, an increase in fixed costs will increase the breakeven point.

Accepted Answer

Fixed costs are expenses that do not vary based on the level of production or sales volume. Therefore, if fixed costs increase, the total cost of production will increase, which in turn will increase the breakeven point – the point at which the total revenue equals the total costs.

Question 12

Perfect Fit Company sells hand-sewn shirts for $40 per shirt. It incurs monthly fixed costs of $5,000. The contribution margin ratio is calculated to be 20%. What is the variable cost per shirt?

Accepted Answer

The answer of Perfect Fit Company sells hand-sewn shirts for...

Question 13

The fundamental assumption of cost-volume-profit (CVP)analysis is that in the long-run fixed costs become variable costs.

Accepted Answer

The fundamental assumption of CVP analysis is actually that within the relevant range, total costs can be divided into a fixed component and a variable component. This means that fixed costs remain fixed within the relevant range and do not become variable costs.

Question 14

Margaret sells hand-knit scarves at the flea market. Each scarf sells for $25. Margaret pays $30 to rent a vending space for one day. The variable costs are $15 per scarf. What total revenue amount does she need to earn to break even?

Accepted Answer

To break even, Margaret needs to earn enough revenue to cover her fixed cost (vending space) and variable costs (materials, etc.). 
Let's set up the equation:

Revenue = Cost
25x = 30 + 15x
10x = 30 
x = 3

Margaret needs to sell 3 scarves to break even. 
Total revenue needed: 
3 x $25 = $75 
Therefore, choice B is the best choice.

Question 15

A CVP graph shows how changes in the level of sales will affect profits.

Accepted Answer

A CVP (Cost-Volume-Profit) graph shows the relationship between sales volume, costs, and profits. It illustrates how changes in sales volume will affect a company's profitability by examining the fixed and variable costs associated with producing goods or providing services at different levels of output. The graph plots total revenue, total cost (both fixed and variable), and total profit, allowing decision-makers to analyze the break-even point and determine the optimal sales volume necessary to achieve their desired profit target. Thus, a CVP graph shows how changes in the level of sales will affect profits.

Question 16

Pluto Company sells a product for $80 per unit. Variable costs are $25 per unit and fixed costs are $4,000 per month. Pluto sold 2,000 units in October, 2014. Prepare an income statement for October using the contribution margin format.

Accepted Answer

The answer of Pluto Company sells a product for $80...

Question 17

Which of the following formulae is the right formula for calculating contribution margin ratio?

Accepted Answer

The formula for calculating contribution margin ratio is Contribution margin ÷ Net sales revenue. Option B is the only formula that follows this formula. Options A, C, and D are incorrect formulas for calculating contribution margin ratio.

Question 18

Garcia Company provides the following information about its product:  What is the contribution margin ratio?

Accepted Answer

The answer of Garcia Company provides the following information about...

Question 19

The breakeven point is the point where the sales revenues are equal to the total variable costs plus the total fixed costs.

Accepted Answer

This is a correct definition of the breakeven point. It is where the company is neither making a profit nor incurring a loss as all costs have been covered by the sales revenue.

Question 20

One of the assumptions of cost-volume-profit (CVP)analysis is that there are no changes in the:

Accepted Answer

One of the assumptions of CVP analysis is that there are no changes in inventory levels. This means that the company is able to sell all of its inventory during the period analyzed and does not have any leftover inventory at the end of that period. This assumption allows for a more accurate analysis of the relationship between costs, volume, and profits. Changes in accounts payable, cash balance, and accounts receivables can still occur while maintaining a stable inventory level.

Quiz 21: Cost-Volume-Profit Analysis