Question 1

Which formula calculates operating income?

Accepted Answer

Operating income is calculated by subtracting all the variable and fixed costs from the total revenue. Therefore, option A is the correct formula. It subtracts unit variable cost and fixed cost from the product of sales price and units sold.

Question 2

What relationship is visually portrayed by a profit-volume graph?

Accepted Answer

The profit-volume graph visually portrays the relationship between profits and units sold.

Question 3

TriTech Company sells a product for $12. Variable costs are $6 per unit, and total fixed costs are $6,000. How many units must Melody sell to earn an operating profit of $240?

Accepted Answer

The answer of TriTech Company sells a product for $12....

Question 4

What formula calculates the sales dollars needed to earn a desired profit?

Accepted Answer

The formula that calculates the sales dollars needed to earn a desired profit is (fixed costs + desired profit)/(1 - variable cost ratio). Choice B matches this formula, making it the correct answer. Choices A, C, and D are all variations of the formula for calculating the breakeven point.

Question 5

Suppose variable costs per unit decrease. What will be the effect on sales volume at the break-even point?

Accepted Answer

When variable costs per unit decrease, the contribution margin per unit increases, which means fewer units need to be sold to cover fixed costs, thus decreasing the sales volume required at the break-even point.

Question 6

Suppose the sales price per unit increases. What will be the effect on the break-even point in units?

Accepted Answer

As the sales price per unit increases, the contribution margin per unit also increases. Therefore, the break-even point in units will decrease because fewer units need to be sold to cover fixed costs.

Question 7

Wendall Company sells only one product at a regular sales price of $7.50 per unit. At that sales price, variable costs are 60% of sales, and fixed costs are $30,000. Management has decided to decrease the sales price to $6 in hopes of increasing its volume of sales. What is the contribution margin ratio when the sales price is reduced to $6 per unit?

Accepted Answer

Contribution margin ratio = (Sales price - Variable cost) / Sales price= (6 - 0.6 * 6) / 6= 25%

Question 8

Bonda, Inc. sells its product for $90. It has a variable cost ratio of 50% and total fixed costs of $14,000. What is the break-even point in sales dollars?

Accepted Answer

The break-even point in sales dollars is calculated by dividing the total fixed costs by the contribution margin ratio. The contribution margin ratio is 1 minus the variable cost ratio, which is 50%. Therefore, the contribution margin ratio is 50%. The break-even point in sales dollars is $14,000 / 0.50 = $28,000.

Question 9

Go For It Company sells go-carts at $1,000 each, incurs a variable cost per unit of $600, and has a total fixed cost of $75,000. How many units must be sold to achieve a target operating income of $55,000?

Accepted Answer

First, calculate the contribution margin per unit:
Contribution margin per unit = Selling price per unit - Variable cost per unit
Contribution margin per unit = $1,000 - $600
Contribution margin per unit = $400

Then, calculate the required number of units to achieve the target operating income:
Target operating income = (Contribution margin per unit x Number of units) - Fixed cost
$55,000 = ($400 x Number of units) - $75,000
$55,000 + $75,000 = $400 x Number of units
$130,000 = $400 x Number of units
Number of units = $130,000 / $400
Number of units = 325

Therefore, the best choice is C, 325 units, as this is the number of units that must be sold to achieve the target operating income of $55,000.

Question 10

Assume the following information: Variable cost ratio 80%
Total fixed costs $60,000
What volume of sales dollars is needed to break even?

Accepted Answer

To find the break-even point in sales dollars, use the formula: Break-even sales = Total fixed costs / (1 - Variable cost ratio). Here, it is $60,000 / (1 - 0.80) = $300,000.

Question 11

Suppose the contribution margin ratio increases. What will be the effect on the break-even point in sales dollars?

Accepted Answer

An increase in the contribution margin ratio means that each dollar of sales revenue will contribute more to covering the fixed costs and generating a profit. Therefore, the break-even point in sales dollars will decrease, as less overall sales revenue is needed to cover the fixed costs and reach the break-even point.

Question 12

Diamonds in the Ruff sells only one product at a regular sales price of $7.50 per unit. Variable costs are 60% of sales, and fixed costs are $30,000. What is the break-even point in sales dollars?

Accepted Answer

The break-even point in sales dollars is calculated by dividing the fixed costs by the contribution margin ratio. The contribution margin ratio is 40% (100% - 60% variable costs). So, $30,000 / 0.40 = $75,000.

Question 13

Suppose fixed costs increase. What will be the effect on the break-even point in units?

Accepted Answer

Fixed costs are costs that do not vary with the production level. So, if fixed costs increase, the total cost will increase, and the break-even point will increase as well. This means the business will need to sell more units to cover its costs and reach the break-even point.

Question 14

How can a profit-volume graph be distinguished from a cost-volume-profits graph?

Accepted Answer

A profit-volume graph only shows the relationship between sales volume and operating income, while a cost-volume-profits graph graphs both revenues and costs on the y-axis against sales volume. Therefore, Option C is the correct answer.

Question 15

East Side Company produces two products, X and Y, which account for 60% and 40%, respectively, of total sales dollars. Contribution margin ratios are 50% for X and 25% for Y. Total fixed costs are $120,000. What is the break-even point in sales dollars?

Accepted Answer

The answer of East Side Company produces two products, X...

Question 16

What formula calculates the number of units needed to earn a desired profit?

Accepted Answer

The formula to calculate the number of units needed to earn a desired profit is (fixed costs + desired profit)/contribution margin per unit. This takes into account the fixed costs, the desired profit, and the contribution margin per unit, which is the amount left over after subtracting variable costs from the sales price. This formula allows businesses to determine the sales volume necessary to achieve a desired profit.

Question 17

Assume the following information: $$\begin{array} { l r } 
\text { Sales price per unit } & \$ 100 \
\text { Contribution margin ratio } & 50 \% \
\text { Total fixed costs } & \$ 250,000
\end{array}$$ How many units must be sold to generate a before-tax profit of $45,000?

Accepted Answer

The answer of Assume the following information: \[\begin{array} { l...

Question 18

Roundstreet Company sells a product for $14. Variable costs are $7 per unit, and total fixed costs are $7,000. What is the break-even point in units?

Accepted Answer

The break-even point in units is calculated by dividing total fixed costs by the contribution margin per unit. The contribution margin per unit is the selling price per unit minus the variable cost per unit, which is $14 - $7 = $7. Therefore, the break-even point is $7,000 / $7 = 1,000 units.

Question 19

Suppose the contribution margin per unit decreases. What will be the effect on the break-even point in units?

Accepted Answer

If the contribution margin per unit decreases, it means that there will be a lower amount of profit per unit sold. Therefore, a higher number of units will need to be sold in order to reach the break-even point. As a result, the break-even point in units will increase.

Question 20

Which statement best describes a profit-volume graph?

Accepted Answer

It fails to reveal how costs change as sales volume changes.

Quiz 4: Cost-Volume-Profit Analysis: a Managerial Planning Tool