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COST PROFIT ANALYSIS 1) The contribution margin per unit is how much profit each unit contributes after fixed costs are considered

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COST PROFIT ANALYSIS

1) The contribution margin per unit is how much profit each unit contributes after fixed costs are considered.

2) CVP stands for Company-Volume-Profit.

3) CVP assumes that inventory levels will not change.

4) When using the contribution margin ratio, managers project operating income based upon sales units.

5) A product's contribution margin per unit is the excess of the selling price per unit over the variable cost of obtaining and selling each unit.

6) The contribution margin derived from different products is not used to motivate the sales force to increase sales of the most profitable products.

7) The contribution margin ratio is the unit contribution margin divided by the variable cost per unit.

8) If a unit sells for $12.50 and has a variable cost of $3.25, its contribution margin per unit is $9.25.

9) Contribution margin on an income statement is equal to sales revenue minus fixed expenses.

10) Gross margin is another term for net income.

11) CVP analysis assumes that the only factor that affects costs is a change in sale price.

12) Total contribution margin less total fixed expenses equals

A) contribution margin ratio.

B) operating income.

C) gross profit.

D) sales revenue.

13) The unit contribution margin is computed by

A) subtracting the variable cost per unit from the sales price per unit.

B) dividing the sales revenue by variable cost per unit.

C) dividing the variable cost per unit by the sales revenue.

D) subtracting the sales price per unit from the variable cost per unit.

14) The contribution margin ratio explains the percentage of each sales dollar that

A) contributes towards variable costs.

B) contributes towards sales revenue.

C) contributes towards period expenses.

D) contributes towards fixed costs and generating a profit.

 

15) CVP analysis assumes all of the following except

A) the mix of products will not change.

B) revenues are linear throughout the relevant range.

C) inventory levels will increase.

D) a change in volume is the only factor that affects costs.

 

16) ________ should be subtracted from the sales price per unit to compute the unit contribution margin.

A) All variable costs

B) Only variable inventoriable product costs

C) Only variable period costs

D) All fixed costs

 

17) By multiplying ________ and then subtracting fixed costs, managers can quickly forecast the operating income.

A) projected sales units by the contribution margin ratio

B) projected sales revenue by the contribution margin ratio

C) projected sales revenue by the unit contribution margin

D) projected sales units by the variable cost ratio

 

18) Managers can quickly forecast the total contribution margin by multiplying the

A) projected sales units by the variable cost ratio.

B) projected sales units by the contribution margin ratio.

C) projected sales revenue by the unit contribution margin.

D) projected sales revenue by the contribution margin ratio.

 

19) Which of the following represents the excess of the selling price per unit of a product over the variable cost of obtaining and selling each unit?

A) Gross margin

B) Operating income

C) Net income

D) Unit contribution margin

20) Contribution margin ratio is computed by

A) dividing contribution margin by operating income.

B) dividing contribution margin by sales revenue.

C) dividing sales revenue by contribution margin.

D) dividing operating income by contribution margin.

 

21) What is contribution margin equal to on a contribution margin income statement?

A) Fixed expenses plus variable expenses

B) Fixed expenses minus variable expenses

C) Sales revenues minus variable expenses

D) Sales revenues minus fixed expenses

 

22) The breakeven point is the sales level where operating income is positive.

23) Only the income statement approach may be used to calculate the breakeven point.

 

24) The breakeven point represents the minimum number of units a company must sell before it earns a profit.

 

25) On a CVP graph, the vertical distance between the total expense line and the total fixed cost line equals the variable expenses.

 

26) On a CVP graph, total fixed costs are shown as a horizontal line.

 

27) The breakeven point on a CVP graph is the point where the sales revenue line intersects the total expense line.

 

 

28) Fixed costs of $15,750 divided by the contribution margin ratio of 50% would yield the dollar amount of breakeven sales as $31,500.

 

29) The breakeven point can either be calculated in terms of number of units or in terms of sales revenue.

 

30) A company that sells one product would be more likely to calculate breakeven in terms of sales units, rather than sales revenue.

 

31) When calculating the breakeven point in terms of units, fixed costs should be divided by the contribution per unit.

 

32) When calculating the breakeven point in terms of sales revenue, variable costs should be divided by the contribution margin ratio.

 

33) To the left of the breakeven point on a CVP graph, the area between the total expense line and the sales revenue line represents which of the following?

A) Operating loss

B) Operating income

C) Slope of variable costs per unit

D) Slope of fixed costs per unit

 

34) To find the number of units that need to be sold in order to breakeven or generate a target profit, the formula used is

A) (fixed expenses + operating income) ÷ contribution margin per unit.

B) (fixed expenses + operating income) ÷ contribution margin ratio.

C) (fixed expenses - operating income) ÷ contribution margin ratio.

D) (fixed expenses - operating income) ÷ contribution margin per unit.

 

35) To find the sales revenue (sales in dollars) needed in order to breakeven or generate a target profit, the formula used is

A) (fixed expenses + operating income) ÷ contribution margin per unit.

B) (fixed expenses + operating income) ÷ contribution margin ratio.

C) (fixed expenses - operating income) ÷ contribution margin ratio.

D) (fixed expenses - operating income) ÷ contribution margin per unit.

 

36) To find the breakeven point using the shortcut formulas, you use

A) zero for the contribution margin per unit.

B) zero for the fixed expenses.

C) zero for the contribution margin ratio.

D) zero for the operating income.

 

37) To find the sales revenue needed to breakeven, the formula used could be

A) fixed expenses ÷ contribution margin ratio.

B) contribution margin per unit ÷ fixed expenses.

C) contribution margin ratio ÷ fixed expenses.

D) fixed expenses ÷ contribution margin per unit.

 

38) To find the number of units that need to be sold to breakeven, the formula used could be

A) fixed expenses ÷ contribution margin per unit.

B) contribution margin per unit ÷ fixed expenses.

C) fixed expenses ÷ contribution margin ratio.

D) contribution margin ratio ÷ fixed expenses.

 

39) When using the income statement approach to finding breakeven, which of the following is true?

A) (variable expenses × number of units) - fixed expenses = operating income

B) sales revenue - variable expenses - fixed expenses = operating income

C) fixed expenses + variable expenses + sales revenue = operating income

D) fixed expenses + variable expenses - sales revenue = operating income

 

40) On a CVP graph, the total cost line intersects the total revenue line at which of the following points?

A) The breakeven point

B) The level of the variable costs

C) The level of the fixed costs

D) None of the above

 

41) Which of the following is not an approach used to calculate the breakeven point?

A) The income statement approach

B) The shortcut approach using the unit contribution margin

C) The balance sheet approach

D) The shortcut approach using the contribution margin ratio

 

42) The breakeven point may be defined as the number of units a company must sell to do which of the following?

A) Generate a net loss

B) Generate a zero profit

C) Earn more net income than the previous accounting period

D) Generate a net income

 

43) Sales above the breakeven point indicate a ________, whereas sales below the breakeven point indicate a ________.

A) loss; loss

B) loss; profit

C) profit; profit

D) profit; loss

 

44) The horizontal line intersecting the vertical y-axis at the level of total cost on a CVP graph represents

A) total costs.

B) total variable costs.

C) total fixed costs.

D) breakeven point.

45) The line that begins at the origin on a CVP graph represents

A) total fixed expenses.

B) total sales revenues.

C) total expenses.

D) both the total expenses and the total sales revenues.

 

46) The intersection of the sales revenue line and the variable expense line on a CVP graph is known as

A) the margin of safety point.

B) the unit contribution margin.

C) the breakeven point.

D) none of the above.

 

47) Which of the following is an underlying assumption of the cost-volume-profit graph?

A) Total fixed expenses will change during the accounting period.

B) The sales mix of products is constantly changing.

C) Volume is the only cost driver.

D) Inventory levels are constantly changing.

 

48)CVP analysis helps managers prepare for and respond to economic changes, such as increasing costs and pressure to drop sales price.

 

49) If all other factors are constant, any decrease in fixed costs will decrease the breakeven point.

 

50)  Holding all other factors constant, the breakeven point will always double if fixed expenses increase by 25%.

 

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

 

52) If total fixed expenses are $65,000, the target operating income is $15,000 and the contribution margin is $25 per unit, the sales needed to achieve the target operating income will be 3,200 units.

 

53) 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.

 

54) Variable costs are $17 per unit and the sales price is $20 per unit. If volume would triple as a result of decreasing the sales price to $16 per unit, the business should strongly consider decreasing the sales price to $16 per unit.

 

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

A) The contribution margin increases and the breakeven point decreases.

B) The contribution margin decreases and the breakeven point decreases.

C) The contribution margin increases and the breakeven point increases.

D) The contribution margin decreases and the breakeven point increases.

 

56) If the sales price per unit increases while the variable cost per unit and total fixed costs remain constant, which of the following statements is true?

A) The contribution margin decreases and the breakeven point decreases.

B) The contribution margin increases and the breakeven point decreases.

C) The contribution margin increases and the breakeven point increases.

D) The contribution margin decreases and the breakeven point increases.

 

57) If the variable cost per unit decreases while the sales price per unit and total fixed costs remain constant, which of the following statements is true?

A) The contribution margin decreases and the breakeven point increases.

B) The contribution margin decreases and the breakeven point decreases.

C) The contribution margin increases and the breakeven point increases.

D) The contribution margin increases and the breakeven point decreases.

 

58) If the fixed costs increase while the sales price per unit and variable costs per unit remain constant, which of the following statements is true?

A) The contribution margin stays the same and the breakeven point increases.

B) The contribution margin decreases and the breakeven point increases.

C) The contribution margin stays the same and the breakeven point decreases.

D) The contribution margin increases and the breakeven point decreases.

 

59) What will be the effect on the contribution margin ratio if the selling price per unit decreases and variable cost per unit remains the same?

A) It will decrease.

B) It will increase.

C) It will remain the same.

D) It is impossible to determine with the given information.

60) If the variable cost per unit increases while the sale price per unit and total fixed costs remain constant, which of the following statements is true?

A) Breakeven point in units remains the same.

B) Breakeven point in units decreases.

C) Breakeven point in units increases.

D) Contribution margin ratio increases.

 

61) If total fixed costs decrease while the selling price per unit and variable costs per unit remain constant, which of the following statements is true?

A) Contribution margin increases.

B) Contribution margin decreases.

C) Breakeven point in units increases.

D) Breakeven point in units decreases.

 

62) If both fixed expenses and the selling price per unit increase while variable costs per unit are unchanged, which of the following statements is true?

A) Breakeven point in units increases.

B) Breakeven point in units could increase, decrease, or remain the same.

C) Breakeven point in units decreases.

D) Breakeven point in units remains unchanged.

 

63) Assuming no other changes in the cost-volume-profit relationship, which of the following will decrease the breakeven point in units?

A) A decrease in the selling price per unit

B) An increase in the selling price per unit

C) An increase in total fixed costs

D) An increase in the variable costs per unit

 

64) The difference between sales dollars and total costs after breakeven point on a CVP graph is the representation of

A) operating loss.

B) slope of variable costs per unit.

C) operating income.

D) slope of fixed costs per unit.

 

65) 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.

 

Production Category	Lower Limit	Upper Limit
Units of Production	4,000 units	6,000 units
Direct Materials	$60,000	$90,000
Direct Labor	$80,000	$120,000
Manufacturing Overhead:
Indirect materials	$25,000	$37,500
Indirect labor	$40,000	$50,000
Depreciation	$20,000	$20,000
Selling and Admin. Expenses:
Sales salaries	$50,000	$65,000
Office salaries	$30,000	$30,000
Advertising	$45,000	$45,000
Other	$15,000	$20,000
Totals	$365,000	$477,500

 

The fixed expenses for this company are

A) depreciation, office salaries, and advertising.

B) indirect materials, indirect labor, and depreciation.

C) direct materials, direct labor, and depreciation.

D) sales salaries, office salaries, and advertising.

 

66) 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.

 

Production Category	Lower Limit	Upper Limit
Units of Production	4,000 units	6,000 units
Direct Materials	$60,000	$90,000
Direct Labor	$80,000	$120,000
Manufacturing Overhead:
Indirect materials	$25,000	$37,500
Indirect labor	$40,000	$50,000
Depreciation	$20,000	$20,000
Selling and Admin. Expenses:
Sales salaries	$50,000	$65,000
Office salaries	$30,000	$30,000
Advertising	$45,000	$45,000
Other	$15,000	$20,000
Totals	$365,000	$477,500

 

The only variable expenses for this company are

 

A) indirect materials, direct materials, and direct labor.

B) all categories of selling and administrative expenses.

C) indirect materials, indirect labor, direct materials, and direct labor.

D) none of the above.

 

 

67) All else being equal, a company earns more income by selling low-contribution margin products than by selling an equal number of high-contribution margin products.

 

68) Gray Company sells two products, X and Y. For the coming year, Gray predicts the sale of 10,000 units of X and 20,000 units of Y. The contribution margins of the two products are $4 and $6, respectively. The weighted average contribution margin per unit would be $5.00.

 

69) The sales mix cannot significantly affect CVP relationships.

 

70) To calculate the weighted average contribution margin, divide the sum of the individual product contribution margins by the sales mix in units.

 

71) If unit sales prices, unit variable costs and total fixed costs all remain the same, but the sales mix changes, there is an effect on the breakeven point.

 

72) A breakeven mix is the combination of products that are available for sale.

 

73) All else being equal, a company earns more income by selling high-contribution margin products than by selling an equal number of low-contribution margin products.

 

74) The same CVP formulas that are used to perform CVP analysis for a company with a single product can be used for any company that sells more than one product, as long as a company uses the weighted average contribution margin of all products, rather than the contribution margin of a sole product.

 

75) To find the weighted average contribution margin, a company adds up the individual unit contribution margins of the different products and then divides by the number of different products.

 

76) When a company sells more than one product, it does not have a unique breakeven point.

 

77) The weighted average contribution margin will always be the same as the contribution margin of the highest-volume product.

 

78) If a company sells 13 of Product A for every 3 of Product B that it sells, the sales mix can be stated as

A) 13:3.

B) 13/16 A and 3/16 B.

C) both "13:3" and " 13/16 A and 3/16 B" are correct.

D) neither "13:3" nor " 13/16 A and 3/16 B" is correct.

 

79) If a company sells 15 of Product A for every 2 of Product B that it sells, the sales mix can be stated as

A) 15:2.

B) 15/17 A and 2/17 B.

C) neither "15:2" nor " 15/17 A and 2/17 B" is correct.

D) both "15:2" and " 15/17 A and 2/17 B" are correct.

80) Fixed costs divided by weighted average contribution margin per unit equals

A) breakeven sales in units.

B) margin of safety ratio.

C) breakeven sales in dollars.

D) contribution margin ratio.

 

81) Contribution margin less fixed costs yields

A) sales.

B) operating income.

C) variable costs.

D) none of the above.

 

82) Jackie's Creamery sells fudge, cookies, and popcorn to patrons in the local community. The manager at the creamery sold 12,000 total boxes of merchandise last year. The popcorn outsold fudge by a margin of 2 to 1. The sales of caramels equaled the sales of popcorn. Total fixed costs for Jackie's Creamery total $14,000. The managerial accountant at Jackie's Creamery reported the following information:

 

Product	Unit Sales Prices	Unit Variable Cost
Fudge	$5.00	$4.00
Caramels	$8.00	$5.00
Popcorn	$6.00	$4.00

 

Which formula should the managerial accountant use to determine the number of boxes of each different snack sold?

A) 3x + 2x + x = 12,000

B) x + y + z = 12,000

C) x + 2x + 2x = 12,000

D) none of the above

 

83) The margin of safety is the "cushion," or drop in sales, a company can absorb without incurring a loss.

 

84) The margin of safety is the excess of expected sales over breakeven sales.

 

85) The margin of safety can be expressed in units, in sales dollars, or as a percentage.

 

86) Companies with high operating leverages generally have lower fixed costs than variable costs.

 

87) Operating leverage refers to the relative amount of fixed and variable costs that make up total costs for a company.

 

88) The operating leverage factor indicates the percentage change in operating income that will occur from a 5% change in volume.

 

89) The operating leverage factor will be exactly "1" only if a company has no fixed costs.

 

90) Companies with low operating leverage have relatively higher variable costs and lower fixed costs.

 

91) A hotel would be an example of a company with high operating leverage.

 

92) Company A has a higher margin of safety while Company B has a lower margin of safety. Company A would be considered ________ Company B when considering only margin of safety.

A) more risky than

B) less risky than

C) to have the same level of risk as

D) Unable to judge based on margin on safety.

 

93) A company's margin of safety can be stated

A) in units.

B) in dollars.

C) as a percentage of sales.

D) any of the above.

 

94) A company's margin of safety is computed as

A) actual sales - expected sales.

B) expected sales - actual sales.

C) expected sales - sales at breakeven.

D) sales at breakeven - expected sales.

 

95) All else being equal, a company with a high operating leverage will have

A) relatively low fixed costs.

B) relatively high variable costs.

C) relatively high contribution margin ratio.

D) relatively low risk.

 

96) All else being equal, a company with a low operating leverage will have

A) relatively high fixed costs.

B) relatively high contribution margin ratio.

C) relatively high risk.

D) relatively high variable costs.

 

97) To find a firm's operating leverage factor at a given level of sales, you

A) divide the contribution margin by fixed expenses.

B) divide the contribution margin by operating income.

C) divide variable expenses by fixed expenses.

D) divide relatively operating income by contribution margin.

 

98) By multiplying the operating leverage factor by the anticipated percentage change in volume, one can find

A) the anticipated change in operating income.

B) the anticipated change in contribution margin.

C) the anticipated change in fixed expenses.

D) the anticipated change in sales revenue.

 

99) The higher the operating leverage factor, the

A) lessen the impact of volume on operating income.

B) greater the impact of volume on operating income.

C) more likely operating income is to stay constant.

D) none of the above.

 

100) All of the following would be considered a company with high operating leverage, except

A) retailer.

B) golf course.

C) theme park.

D) hotel.

 

101) Total predicted sales (in units) minus total breakeven sales in units divided by total predicted sales (in units) yields

A) contribution margin ratio.

B) contribution margin per unit.

C) percent of sales mix.

D) margin of safety percentage.

 

102) The lowest possible operating leverage factor for a company is

A) zero.

B) -1.

C) +1.

D) somewhere between zero and +1.