Question 1

The sales required to achieve a target profit can be determined by using the contribution margin,contribution margin ratio,or break even approaches.

Accepted Answer

Sales required to achieve a target profit can be determined by using the equation, contribution margin,or contribution margin ratio approaches.

Question 2

Clay Earth Company sells ceramic pottery at a wholesale price of $5 per unit.The variable cost of manufacture is $2.50 per unit.The fixed costs are $6200 per month.It sold 5700 units during this month.Calculate Clay Earth's operating income (loss)for this month.

Accepted Answer

Total revenue = 5700 x $5 = $28,500
Total variable cost = 5700 x $2.50 = $14,250
Total fixed cost = $6200
Operating income = Total revenue - Total variable cost - Total fixed cost = $28,500 - $14,250 - $6200 = $8050. Therefore, the answer is B.

Question 3

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

Accepted Answer

This statement is correct. The formula for calculating the breakeven point in unit sales is:

Breakeven Point in Units = Fixed Costs / Contribution Margin Per Unit

Therefore, if we know the fixed costs and the contribution margin per unit, we can calculate the breakeven point in unit sales.

Question 4

Cost-volume-profit analysis is NOT useful in ________.

Accepted Answer

Cost-volume-profit analysis is not useful in calculating operating expenses. It is primarily used to determine the relationship between the cost of producing a product, the volume of production, and the profits that can be generated from that production. While operating expenses do play a role in determining the profitability of a product, they are not a direct factor in the cost-volume-profit relationship.

Question 5

The breakeven point represents the sales level at which the company's operating income is zero.

Accepted Answer

The statement is true. The breakeven point is the level of sales required for a company to cover all of its costs and expenses, resulting in zero operating income. Once the company surpasses the breakeven point, any additional sales will result in a positive operating income.

Question 6

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

Accepted Answer

CVP analysis assumes that inventory levels remain constant. This is because changes in inventory levels can affect both the cost of goods sold and the amount of revenue generated. Therefore, to simplify the analysis, inventory levels are assumed to be constant.

Question 7

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

Accepted Answer

This statement is correct as the breakeven point in sales dollars can be calculated by dividing the fixed costs by the contribution margin ratio.

Question 8

Drenning Manufacturing produces flooring material.The monthly fixed costs are $10,000 per month.The unit sales price is $75,and variable cost per unit is $35.Drenning wishes to earn an operating income of $25,000.Using the contribution margin ratio,calculate the total sales revenue that is needed.(Round intermediate calculations to five decimal places.)

Accepted Answer

The answer of Drenning Manufacturing produces flooring material.The monthly fixed...

Question 9

List the cost-volume-profit (CVP)assumptions.

Accepted Answer

The answer of List the cost-volume-profit (CVP)assumptions....

Question 10

Martin was a professional classical guitar player until a motorcycle accident left him disabled.After long months of therapy,he hired an experienced luthier and started a small shop to make and sell Spanish guitars.The guitars sell for $900,and the fixed monthly operating costs are as follows: $$\begin{array} { | l | r | } 
\hline \text { Rent and utilities } & \$ 800 \
\hline \text { Wages and benefits to luthier } & 2000 \
\hline \text { Other expenses } & 474 \
\hline
\end{array}$$ Martin's accountant told him about contribution margin ratios,and Martin understood clearly that for every dollar of sales,$0.65 went to cover his fixed costs,and anything above that point was profit.
Martin wishes to earn $4000 of operating profit each month.Calculate the number of guitars Martin will need to sell to achieve the target profit.(Round your answer up to the nearest whole guitar.)

Accepted Answer

To achieve a target profit, Martin needs to cover his fixed costs and the desired profit. The fixed costs are $800 + $2000 + $474 = $3274. With a target profit of $4000, the total amount needed is $3274 (fixed costs) + $4000 (profit) = $7274. Since $0.65 of every dollar goes to cover fixed costs, $0.35 contributes to profit. The price of one guitar is $900, so the contribution per guitar is $900 * 0.35 = $315. To find the number of guitars needed to reach the target, divide the total needed by the contribution per guitar: $7274 / $315 ≈ 23.1. Since Martin can't sell a fraction of a guitar, he needs to sell 24 guitars to meet his target.

Question 11

Target profit is the operating income that results when sales revenue minus variable and fixed costs equals management's profit goal.

Accepted Answer

This is an accurate definition of target profit. It is the amount of operating income a company aims to achieve by adjusting its pricing and cost structure to meet the necessary profit margin.

Question 12

Carolina Timber,Inc.produces flooring material.The monthly fixed costs are $10,000 per month.The unit sales price is $75,and variable cost per unit is $35.How many units should Carolina sell in order to earn $10,000 as operating income?

Accepted Answer

The answer of Carolina Timber,Inc.produces flooring material.The monthly fixed costs...

Question 13

Which of the following is an assumption of cost-volume-profit (CVP)analysis?

Accepted Answer

CVP analysis assumes that the price per unit remains constant regardless of changes in volume.

Answer: C 
 CVP analysis assumes that total fixed costs remain constant within the relevant range of production or sales.

Answer: D 
 This statement is not an assumption of CVP analysis.

Question 14

CVP is also sometimes referred to as cost-volume-loss analysis because changes in sales
prices also affect profits (or losses).

Accepted Answer

CVP stands for Cost-Volume-Profit analysis, which focuses on how changes in costs, volume, and price affect a company's profits, not specifically losses. The term "cost-volume-loss" is not a standard term in accounting or finance.

Question 15

Sunlight Design Corporation sells glass vases at a wholesale price of $4.50 per unit.The variable cost to manufacture is $1.75 per unit.The monthly fixed costs are $8500.Its current sales are 29,000 units per month.If the company wants to increase its operating income by 20%,how many additional units must it sell? (Round any intermediate calculations to two decimal places and your final answer up to the nearest whole unit.)

Accepted Answer

To achieve a 20% increase in operating income, first calculate the current operating income. The contribution margin per unit is $4.50 - $1.75 = $2.75. Current operating income is (29,000 units * $2.75) - $8,500 = $71,750. A 20% increase is $71,750 * 20% = $14,350 additional income needed. To find additional units required: $14,350 / $2.75 = 5,218 units (rounded up).

Question 16

Companies can use the contribution margin ratio approach to compute required sales in terms of units rather than in sales dollars.

Accepted Answer

Companies can use the contribution margin ratio approach to compute required sales in terms of sales dollars rather than in units.

Question 17

Zeke was a professional classical guitar player until a motorcycle accident left him disabled.After long months of therapy,he hired an experienced luthier and started a small shop to make and sell Spanish guitars.The guitars sell for $800,and the fixed monthly operating costs are as follows: $$\begin{array} { | l | r | } 
\hline \text { Rent and utilities } & \$ 700 \
\hline \text { Wages and benefits to luthier } & 2300 \
\hline \text { Other expenses } & 479 \
\hline
\end{array}$$ Zeke's accountant told him about contribution margin ratios,and Zeke understood clearly that for every dollar of sales,$0.75 went to cover his fixed costs,and anything above that point was profit.
Zeke wishes to earn $5100 of operating profit each month.Calculate the amount of sales revenue required to achieve the target profit.(Round your answer to the nearest dollar.)

Accepted Answer

To find the sales revenue required to achieve the target profit, we use the formula: Required Sales = (Fixed Costs + Target Profit) / Contribution Margin Ratio. Fixed Costs = $700 + $2300 + $479 = $3479. Target Profit = $5100. Contribution Margin Ratio = 0.75. Thus, Required Sales = ($3479 + $5100) / 0.75 = $8579 / 0.75 = $11,439.

Question 18

Which of the following is NOT an assumption of cost-volume-profit (CVP)analysis?

Accepted Answer

The price per unit does not change as volume changes.

Question 19

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

Accepted Answer

The statement is true. The breakeven point represents the level of sales at which the total revenue equals the total cost, and the operating income is zero, meaning that the company is neither making a profit nor incurring a loss.

Question 20

A planning tool that expresses the relationships among costs,volume,and prices and their effects on profits and losses is called ________.

Accepted Answer

Cost-volume-profit (CVP) analysis is a planning tool that enables managers to determine the relationships among costs, volume, and prices and their effects on profits and losses. This analysis is used to identify the breakeven point, target profit levels, and the amount of sales required to achieve these goals. The analysis incorporates factors such as variable cost, fixed cost, contribution margin, and the margin of safety to provide a comprehensive picture of a company's financial health. Option B, target profit analysis, is a specific application of CVP analysis used to determine the amount of sales required to achieve a desired profit level. Options C and D are closely related to CVP analysis but do not provide as comprehensive an analysis of a company's financial position. Contribution margin ratio analysis focuses on the contribution margin as a percentage of sales, while breakeven point analysis only determines the level of sales required to cover a company's fixed costs.

Quiz 21: Cost-Volume-Profit Analysis

The sales required to achieve a target profit can be determined by using the contribution margin,contribution margin ratio,or break even approaches.

Clay Earth Company sells ceramic pottery at a wholesale price of $5 per unit.The variable cost of manufacture is $2.50 per unit.The fixed costs are $6200 per month.It sold 5700 units during this month.Calculate Clay Earth's operating income (loss) for this month.