Question 1

Black Pearl, Inc., sells a single product. The company's most recent income statement is given below.
 
Required:
a. Contribution margin ratio is ________ %
b. Break-even point in total sales dollars is $ ________
c. To achieve $40,000 in net income, sales must total $ ________
d. If sales increase by $50,000, net income will increase by $ ________

Accepted Answer

The answer of Black Pearl, Inc., sells a single product....

Question 2

If total fixed expenses are $50,000, the target operating income is $10,000 and the contribution margin is $15 per unit, the sales needed to achieve the target operating income will be 4,000 units.

Accepted Answer

The contribution margin is the difference between the selling price and the variable cost per unit. The target operating income is the desired profit after deducting all fixed and variable costs. To achieve the target operating income, the company needs to sell enough units to cover the fixed expenses and generate the desired profit. The number of units needed to achieve the target operating income can be calculated by dividing the target operating income by the contribution margin per unit. In this case, the target operating income is $10,000 and the contribution margin per unit is $15, so the number of units needed to achieve the target operating income is 10,000 / 15 = 4,000 units.

Question 3

If all other factors are constant, any increase in fixed costs will increase the break-even point.

Accepted Answer

Fixed costs are costs that do not vary with changes in production levels or sales volume. These costs are incurred regardless of whether the company produces or sells any units. Since fixed costs are not affected by changes in production or sales, an increase in fixed costs will increase the total costs and, consequently, the break-even point. This is because the break-even point is the level of sales at which total revenue equals total costs, and an increase in fixed costs will raise the total costs, which means that the break-even point must also increase to reach the same level of total revenue.

Question 4

After break-even on a CVP graph, the difference between sales dollars and total costs is the representation of

Accepted Answer

After the break-even point on a CVP graph, any sales dollars in excess of total costs represent operating income. This means that the company is generating a profit. Conversely, any sales dollars below the break-even point will result in operating losses. The slope of variable and fixed costs per unit is calculated differently and is not relevant to this scenario.

Question 5

Use the information below to answer the following question(s).
Monroe Manufacturing produces and sells a product with a price of $100/unit. The following data has been prepared for its estimated upper and lower levels of activity.
 
-The fixed expenses for Monroe Manufacturing are

Accepted Answer

The fixed expenses listed are not directly related to the production of the product, so they are considered period costs rather than product costs. The three listed period costs are depreciation, office salaries, and advertising.

Question 6

Say variable costs are $10 per unit and the sales price is $16 per unit. If volume would triple as a result of decreasing the sales price to $9 per unit, the business should strongly consider decreasing the sales price to $9 per unit.

Accepted Answer

Decreasing the sales price to $9 per unit would result in selling each unit at a loss, since the variable costs alone are $10 per unit, which is higher than the proposed sales price. This means the business would lose money on each unit sold, making it an unfavorable decision.

Question 7

What is meant by the term break-even point? Why should a manager be concerned about the break-even point?

Accepted Answer

The answer of What is meant by the term break-even...

Question 8

The addition of a specified target operating income to contribution margin analysis has the same effect on required sales in units as increasing fixed expenses.

Accepted Answer

Both adding a specified target operating income and increasing fixed expenses will increase the required sales in units. This is because both actions will increase the breakeven point, which is the point at which total sales revenue equals total costs (including fixed expenses and target operating income).

Question 9

Sensitivity analysis is a "what if" technique that asks what a result will be if an underlying assumption changes.

Accepted Answer

This is an accurate definition of sensitivity analysis.

Question 10

Which of the following statements is TRUE if both fixed expenses and the sale price per unit increase while variable costs per unit are unchanged?

Accepted Answer

The break-even point in units could increase, decrease, or remain the same depending on the magnitude of the increase in fixed expenses and the sale price per unit. If the sale price per unit increases more significantly relative to the increase in fixed expenses, the break-even point could decrease. Conversely, if fixed expenses increase substantially while the sale price per unit increases marginally, the break-even point could increase. If the increases offset each other perfectly, the break-even point could remain unchanged.

Question 11

If variable costs increase then the volume needed to break even or achieve target profits also increase.

Accepted Answer

This is because variable costs are costs that increase as production volume increases. Therefore, if variable costs increase, the breakeven point or target profit level will increase as well, as the company will need to sell more units to cover the increased costs and reach its profit goals.

Question 12

Which of the following statements is TRUE if total fixed costs decrease while the sale price per unit and variable costs per unit remain constant?

Accepted Answer

When total fixed costs decrease while the sale price per unit and variable costs per unit remain constant, the break-even point in units decreases. This is because the break-even point is calculated as fixed costs divided by the contribution margin per unit. With lower fixed costs, fewer units need to be sold to cover those costs.

Question 13

Holding all other factors constant, if fixed expenses increase by 25%, the break-even point will always double.

Accepted Answer

The break-even point depends not only on fixed expenses but also on variable costs and selling price. If those other factors stay constant, then a 25% increase in fixed expenses would result in an increase in the break-even point, but it would not necessarily double. The exact impact on the break-even point would depend on the specific numbers involved.

Question 14

Which of the following statements is TRUE if the fixed costs increase while the sales price per unit and variable costs per unit remain constant?

Accepted Answer

The contribution margin, defined as sales price per unit minus variable cost per unit, remains unchanged because neither the sales price per unit nor the variable costs per unit are affected by changes in fixed costs. However, the break-even point, which is the level of sales at which total revenues equal total costs, increases because higher fixed costs require higher sales to cover these increased costs.

Question 15

Which of the following statements is TRUE if the variable cost per unit decreases while the sales price per unit and total fixed costs remain constant?

Accepted Answer

The contribution margin is the sales price per unit minus the variable cost per unit. If the variable cost per unit decreases while the sales price per unit and total fixed costs remain constant, the contribution margin will increase. This means that each unit sold will contribute more towards covering the fixed costs and generating a profit. As a result, the break-even point will decrease, as fewer units need to be sold to cover the fixed costs.

Question 16

Which of the following statements is TRUE if the variable cost per unit increases while the sale price per unit and total fixed costs remain constant?

Accepted Answer

If the variable cost per unit increases while the sale price per unit and total fixed costs remain constant, the contribution margin per unit will decrease. This means that more units will need to be sold to cover the same amount of fixed costs, increasing the break-even point in units.

Question 17

Which of the following statements is TRUE if the sales price per unit increases while the variable cost per unit and total fixed costs remain constant?

Accepted Answer

When the sales price per unit increases while the variable cost per unit and total fixed costs remain constant, the contribution margin per unit increases because there is more revenue per unit to cover the same amount of variable costs. As a result, the break-even point decreases because the contribution margin per unit is higher and fewer units need to be sold to cover the fixed costs.

Question 18

If the sale price per unit decreases and variable costs remain the same, what will be the effect on the contribution margin ratio?

Accepted Answer

The contribution margin ratio is calculated as contribution margin divided by sales. If the sale price per unit decreases while variable costs remain the same, the contribution margin per unit will decrease. As a result, the contribution margin ratio will decrease because the contribution margin as a percentage of sales will decrease.

Question 19

Use the information below to answer the following question(s).
Monroe Manufacturing produces and sells a product with a price of $100/unit. The following data has been prepared for its estimated upper and lower levels of activity.
 
-The variable expenses for Monroe Manufacturing are

Accepted Answer

Variable expenses typically include costs that vary with production levels, such as direct materials and direct labour. Indirect materials can also be variable if they change with production levels.

Question 20

Which of the following will decrease the break-even point in units assuming no other changes in the cost-volume-profit relationship?

Accepted Answer

An increase in the sale price per unit will increase the contribution margin per unit, which is the difference between the sale price per unit and the variable cost per unit. As a result, the break-even point in units will decrease.

Quiz 4: Cost-Volume-Profit Analysis