ESLSCA - ACCOUNTING MBA

Cost-Volume-Profit Analysis

True/False

1)In cost-volume-profit analysis, the volume index is always stated in units.

 

 

2. One characteristic common to all types of costs is the tendency to rise and fall in direct proportion to changes in the volume of business output.

 

 

3. Variable costs which increase in total amount in direct proportion to an increase in output represent a constant amount per unit of output.

 

 

4. Any business which operates at less than capacity will have smaller fixed costs than variable costs.

 

 

5. When cost-volume-profit analysis is used, the need for a cost accounting system is eliminated.

 

 

6. Variable costs are usually transformed into fixed costs when a business operates at less than full capacity.

 

 

7. With variable costs, the cost per unit varies with changes in volume.

 

 

8. The volume of output which causes fixed costs to be equal in amount to total revenue is called the break-even point.

 

 

9. The contribution margin is the difference between total revenue and fixed costs.

 

 

10. In a cost-volume-profit graph, the dollar amount by which actual sales exceed break-even sales volume is called the margin of safety. The margin of safety sales volume times the contribution margin ratio equals operating income.

 

 

11. With fixed costs, the cost per unit varies with changes in volume.

 

 

12. The higher the unit contribution margin, the higher the volume of unit sales required to cover a given amount of fixed costs.

 

13. Contribution margin is total revenue less variable costs.

 

 

14. Margin of safety is the dollar amount by which actual sales volume exceeds the break-even sales volume.

 

 

15. In cost-volume-profit analysis, the number of units sold is assumed to be equal to the number of units produced.

 

 

16. Executive salaries are typically considered variable costs.

 

 

17. As volume increases, per unit variable costs stay the same.

 

 

 

18. As volume increases per unit fixed costs stay the same.

 

19. Economies of scale can be achieved by using facilities more intensively.

 

20. The range over which output may be expected to vary is called the relevant range.

 

21. The break-even point is the level of activity at which operating income is equal to cost of goods sold.

 

 

22. The contribution margin is the amount by which revenue exceeds variable costs.

 

23. Contribution margin ratio is equal to contribution margin per unit divided by unit sales price.

 

Multiple Choice

 

24. When volume increases, fixed costs per unit:

1. Increase.
2. Decrease.
3. Stay the same.
4. Increase or decrease, depending upon the situation.

 

 

25. In cost-volume-profit analysis, income tax expense:

1. Is included among the monthly operating expenses as a variable cost.
2. Is considered a fixed cost of doing business.
3. Is treated as a semi-variable cost that is partially dependent upon sales volume.
4. Is generally ignored.

 

 

26. A semi-variable cost:

1. Increases and decreases directly and proportionately with changes in volume.
2. Changes in response to a change in volume, but not proportionately.
3. Increases if volume increases, but remains constant if volume decreases.
4. Changes inversely in response to a change in volume.

 

 

27. Which of the following is an example of a fixed cost for an airline?

1. Depreciation on the corporate headquarters.
2. Fuel costs.
3. Income taxes expense.
4. Passengers' meals.

 

 

28. In order to calculate break-even sales units, fixed costs are divided by:

1. Contribution margin per unit.
2. Contribution margin percentage.
3. Target operating income.
4. Sales volume.

 

30. The break-even point in a cost-volume-profit graph is always found:

1. At 50% of full capacity.
2. At the sales volume resulting in the lowest average unit cost.
3. At the volume at which total revenue equals total variable costs.
4. At the volume at which total revenue equals total fixed costs plus total variable costs.

 

31. Operating income can be calculated by:

1. Fixed costs divided by contribution margin ratio.
2. Fixed costs multiplied by contribution margin ratio.
3. Margin of safety multiplied by contribution margin ratio.
4. Margin of safety divided by contribution margin ratio.

 

32. The contribution ratio is computed as:

1. Sales minus variable costs, divided by sales.
2. Fixed costs plus variable costs, divided by sales.
3. Sales minus fixed costs, divided by sales.
4. Sales divided by variable costs.

 

 

35. The margin of safety is calculated by:

1. (Fixed costs plus target income) divided by contribution margin.
2. Current income minus break-even income.
3. Current sales minus break-even sales.
4. Current contribution margin minus fixed costs.

37. All other things held constant, how will an increase in selling price affect the break even point measured in units?

1. The break even point will decrease.
2. The break even point will increase.
3. The break even point will remain constant.
4. The effect on the break even point can't be predicted with certainty.

 

38. A 45% contribution margin ratio means that:

1. The company should contribute 45% of its operating income to qualified charities for maximum tax benefits.
2. 55% of the company's revenue is consumed by fixed and variable costs.
3. The company's revenue has increased by 45% during the current accounting period.
4. 45% of the company's revenue is available to cover fixed costs and to contribute toward operating income.

 

 

40. A fixed cost may include all of the following except:

1. Rent for the warehouse.
2. Annual salary of the CEO.
3. Depreciation.
4. Sales commission expense.

 

41. Contribution margin may be expressed as:

1. A percentage of revenue.
2. A total dollar amount for the period.
3. A contribution margin per unit.
4. All of the above.

 

43. If a product sells for $6, variable costs are $4 and fixed costs are $100,000 what would total sales have to be in order to break-even?

A) $190,000.

B) $199,999.

C) $300,000.

D) $399,999.

 

 

 

44. Variable costs would include:

1. Rent expense.
2. Depreciation expense.
3. Sales commission expense.
4. Executive salaries expense.

45. Fixed costs:

1. Fall as sales volume falls.
2. Rise as sales volume rises.
3. Rise as sales volume falls.
4. Remain steady when sales volume changes.

 

46. If unit sales prices are $6 and variable costs are $4 per unit how many units would have to be sold to break even if fixed costs equal $6,000?

A) 1,000

B) 2,000

C) 3,000

D) 2,800

 

47. If unit sales are $5 and variable costs are $2, how many units have to be sold to earn a profit of $4,200 if fixed costs equal $6,000?

A) 1,200

B) 2,000

C) 3,000

D) 3,400

 

 

48. If unit sales are $14, variable costs are $7 per unit and fixed costs are $24,000 what is the contribution ratio per unit?

A) 40%

B) 50%

C) 60%

D) 70%

 

 

49. If unit sales are $14, variable costs are $7 per unit and fixed costs are $42,000 what are the sales in dollars in order to break even?

A) $105,000

B) $84,000

C) $70,000

D) $60,000

50. If unit sales are $14, variable costs are $7 per unit and fixed costs are $42,000, how many units must be sold to earn $250,000

A) 52,142

B) 41,715

C) 34,762

D) 29,796

 

 

60. Management expects total sales of $40 million, a margin of safety of $10 million, and a contribution margin ratio of 45%. Which of the following estimated amounts is not consistent with this information?

1. Variable costs, $22 million.
2. Fixed costs, $18 million.
3. Operating income, $6 million.
4. Break-even sales volume, $30 million.

 

 

 

 

61. Dorsey Company produces a single product which it sells for $86 a unit. If the fixed costs of manufacturing and selling the product are $64,200 a month and the variable costs are $54 a unit:

1. The fixed costs amount to $32 per unit at any level of output within a relevant volume range.
2. The company will break even with a sales volume of $64,200 a month.
3. An increase in sales volume above $64,200 a month will cause an increase in fixed costs.
4. The contribution margin per unit of product is $32.

 

62. A company with an operating income of $68,000 and a contribution margin ratio of 54% has a margin of safety of:

A) $36,720.

B) $125,925.

C) $147,826.

D) It is not possible to determine the margin of safety from the information provided.

63. The following information is available:

 

What is the operating income?

A) $0.

B) $40,000.

C) $8,000.

D) $10,000.

 

64. A company with monthly revenue of $120,000, variable costs of $50,000, and fixed costs of

$40,000 has a contribution margin of:

A) $120,000.

B) $80,000.

C) $70,000.

D) $35,000.

 

65. A company with monthly fixed costs of $160,000 expects to earn monthly operating income of $20,000 by selling 6,000 units per month. What is the company's expected unit contribution margin?

A) $30.

B) $28.

C) $2.

D) The information given is insufficient to determine unit contribution margin.

 

66. If the monthly sales volume required to break even is $189,000 and monthly fixed costs are

$54,900, the contribution margin ratio is: A) 29%.

B) 71%.

C) 42.9%.

D) 333.33%.

67. If monthly fixed costs are $19,000 and the contribution margin ratio is 40%, the monthly sales volume required to break even is:

A) $7,600.

B) $47,500.

C) $76,000.

D) $26,600.

 

 

68. Product X sells for $30 per unit and has related variable costs of $20 per unit. The fixed costs of producing product X are $60,000 per month. How many units of product X must be sold each month to earn a monthly operating income of $80,000?

A) 4,667.

B) 7,000.

C) 14,000.

D) 9,000.

 

 

The following data are available for product no. CF72, manufactured and sold by Gold Corporation:

 

 

69. Refer to the above information. The contribution margin per unit for product no. CF72 is:

A) $27.

B) $81.

C) $118.

D) $64.  

 

 

70. Refer to the above information. The number of units of CF72 that Gold must sell to break even is (rounded, if necessary):

A) 30,000.

B) 20,500.

C) 8,200.

D) 12,300.

 

 

71. Refer to the above information. The dollar sales volume to produce operating income of

$247,500 is:

A) $2,073,000.

B) $4,146,000.

C) $2,487,600.

D) $3,109,500.

 

 

Use the following to answer questions 72-76

All County Associates sells only one product, with a current selling price of $70 per unit. Variable costs are 40% of this selling price, and fixed costs are $12,000 per month. Management has decided to reduce the selling price to $65 per unit in an effort to increase sales. Assume that the cost of the product and fixed operating expenses are not changed by this reduction in selling price.

 

72. Refer to the above information. At the current selling price of $70 per unit, the contribution margin ratio is:

A) 60%.

B) 40%.

C) 67%.

D) 120%.

 

 

73. Refer to the above information. At the current selling price of $70 per unit, the dollar volume of sales per month necessary for All County to break even is:

A) $12,000.

B) $20,000.

C) $30,000.

D) Some other amount.

 

74. Refer to the above information. At the current selling price of $70 per unit, what dollar volume of sales per month is required for All County to earn a monthly operating income of

$15,000?

A) $25,000.

B) $30,000.

C) $45,000.

D) Some other amount.

 

75. Refer to the above information. At the reduced selling price of $65 per unit, the contribution margin ratio is (rounded, if necessary):

A) 43.1%.

B) 56.9%.

C) 52.8%.

D) Some other percentage.

 

 

 

76. Refer to the above information. At the reduced selling price of $65 per unit, what dollar volume of sales per month is required to break even? (Rounded)

A) $27,842.

B) $22,727.

C) $21,090.

D) $27,842.

 

Use the following to answer 77-81

Great Gadget Company produces a single product with a current selling price of $160. Variable costs are $120 per unit, and fixed costs per month average $5,180. Management is considering increasing the selling price to $180 per unit. Assume that the cost of the product and monthly fixed expenses will not change as a result of the proposed increase in selling price.

 

77. Refer to the above information. At the current selling price of $160 per unit, the contribution margin ratio is:

A) 25%.

B) 75%.

C) 33 1/3%.

D) 30%.

 

78. Refer to the above information. At the current selling price of $160 per unit, what dollar volume of sales per month is required for Great Gadget to break even?

A) $5,120.

B) $6,907.

C) $20,720.

D) $15,556.

 

79. Refer to the above information. At the current selling price of $160 per unit, what dollar volume of sales per month is necessary for Great Gadget to generate monthly operating income of

$9,000?

A) $36,000.

B) $18,907.

C) $59,200

D) $56,720.

 

80. Refer to the above information. At the proposed increased selling price of $180 per unit, the contribution margin ratio is:

A) 60%.

B) 33.3%.

C) 66 2/3%.

D) 50%.

 

81. Refer to the above information. At the proposed increased selling price of $180 per unit, what dollar volume of sales per month is required to break even?

A) $15,556.

B) $14,400.

C) $13,440.

D) $14,940.

 

Use the following to answer 82-86

Empress Company produces a single product. The selling price is $50 per unit, and variable costs amount to $20 per unit. Empress 's fixed costs per month total $80,000.

 

82. Refer to the above information. What is the contribution margin ratio of Empress 's product? A) 25%.

B) 75%.

C) 60%.

D) 40%.

 

 

83. Refer to the above information. What is the monthly sales volume in dollars necessary to break even? (Rounded)

A) $320,000.

B) $106,667.

C) $200,000.

D) $133,333.

84. Refer to the above information. How many units must be sold each month to earn a monthly operating income of $25,000?

A) 833.

B) 2,300.

C) 3,500.

D) Some other amount.

 

85. Refer to the above information. What will be the monthly margin of safety (in dollars) if 3,000 units are sold each month?

A) $16,667.

B) $100,000.

C) $12,000.

D) $150,000.

86. Refer to the above information. What will be Empress 's monthly operating income if 3,700 units are sold each month?

A) $15,000.

B) $31,000.

C) $75,000.

D) $105,000.

 

87. Bergen Company earns an average contribution margin ratio of 40% on its sales. The local store manager estimates that he can increase monthly sales volume by $35,000 by spending an additional $5,000 per month for direct mail advertising. Compute the monthly increase in operating income if the manager's estimate about the increased sales volume is accurate.

A) $9,000.

B) $21,000.

C) $14,000.

D) $16,000.

 

88. Collins & Sons generates an average contribution margin ratio of 45% on its sales. Management estimates that by spending $3,500 more per month to rent additional facilities, the business will be able to increase operating income by $10,000 per month. Management must feel that the additional facilities will increase monthly sales volume (in dollars) by:

A) $4,725.

B) $8,775.

C) $13,500.

D) $30,000.

 

 

Use the following to answer 89-93

Russ Corporation manufactures a single product. The selling price is $80 per unit, and variable costs amount to $64 per unit. The fixed costs are $16,000 per month.

 

89. Refer to the above information. What is the contribution margin ratio of Russ 's product? A) 65%.

B) 80%.

C) 72%.

D) 20%.

 

90. Refer to the above information. What is the monthly sales volume in dollars necessary to break even?

A) $80,000.

B) $64,000.

C) $56,250.

D) $73,000.

 

 

91. Refer to the above information. How many units must be sold each month to earn a monthly operating income of $6,000?

A) 1,000.

B) 1,375.

C) 80,000.

D) 417.

 

 

92. Refer to the above information. What will be the monthly margin of safety (in dollars) if 1,600 units are sold each month?

A) $80,000.

B) $48,000.

C) $13,000.

D) $16,000.

 

 

93. Refer to the above information. What will be Russ's monthly operating income if 1,600 units are sold each month?

A) $112,000.

B) $25,600.

C) $24,800.

D) $9,600.

 

94. Refer to the above information. Gwynne’s monthly break-even point expressed in sales dollars is:

A) $1,111,111.

B) $1,282,051.

C) $1,301,586.

D) $1,428,571.

 

 

95. Refer to the above information. In order to earn an operating income of $182,500, Gwynne must generate total sales of approximately:

A) $1,600,000.

B) $1,725,000.

C) $1,750,000.

D) $1,800,000.

Essay

 

96. Accounting terminology

Listed below are nine technical accounting terms introduced or emphasized in this chapter:

 

 

 

 

Each of the following statements may (or may not) describe one of these technical terms. In the space provided below each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms.

        (a) The amount by which sales revenue exceeds total variable cost expressed as a percentage of sales.

        (b) The amount by which sales volume exceeds the break-even point.

        (c) The study of financial statements by a potential investor or creditor as a means of evaluating the profitability and solvency of a business.

        (d) A type of activity that has a causal effect in the occurrence of a particular cost.

        (e) The level of sales at which revenue equals operating expenses.

        (f) A cost that responds to changes in sales volume by less than a proportionate amount.

        (g) A mathematical technique used to determine the fixed and variable elements of a mixed or semivariable cost.

 

97. Cost-volume-profit analysis

Sylvia Company, a sole proprietorship, sells only one product. The regular price is $140. Variable costs are 55% of this selling price, and fixed costs are $7,400 a month.

Management decides to decrease the selling price from $140 to $125 per unit. Assume that the cost of the product and the fixed operating expenses are not changed by this pricing decision.

1. At the original selling price of $140 a unit, what is the contribution margin ratio?

                            %

2. At the original selling price of $140 a unit, what dollar volume of sales per month is required for Sylvia Company to break even? $                             
3. At the original selling price of $140 a unit, what dollar volume of sales per month is required for Sylvia Company to earn a monthly operating income of $5,500? $                         
4. At the reduced selling price of $125 a unit, what is the contribution margin ratio?

                            %

5. At the reduced selling price of $125 a unit, what dollar volume of sales per month is required to break even? $                             

Computations Answer:

Computations

 

 

98. Cost-volume-profit relationships

Clean-Up, Inc., sells only one product. The sales price per unit is $60, with variable cost per unit of $50. Fixed costs are $70,000 per month. Maximum capacity is 44,000 units per month. Answer the following questions:

1. To break even, how many units must Clean-Up sell per month?                    units
2. If Clean-Up, Inc., sold 25,000 units, what would be its operating income for the month?

$                             

3. At present capacity, what is the maximum operating income Clean-Up can expect to earn per month? $                            
4. Assuming that direct labor cost can be reduced by $2 per unit, what would Clean-Up’s maximum operating income be per month? $                   

Computations

 

 

 

99. Using cost-volume-profit formulas

Brian Corporation manufactures a single product. The selling price is $104 per unit, and variable costs amount to $78 per unit. The fixed costs are $36,000 per month.

1. What is the contribution margin per unit? $                     per unit
2. What is the contribution margin ratio?                      %
3. What is the monthly sales volume (in dollars) at the break-even point? $                  
4. How many units must be sold each month to earn a monthly operating income of $32,000?

                            units

5. What is the monthly margin of safety (in dollars) if 3,000 units are sold each month?

$                           

6. What will be the monthly operating income if 3,000 units are sold each month?

$                            Computations

 

 

 

 

 

100. Using cost-volume-profit formulas

Rainbow Corporation manufactures a single product. The selling price is $120 per unit, and variable costs amount to $76 per unit. The fixed costs are $28,400 per month.

1. What is the contribution margin per unit? $                      per unit
2. What is the contribution margin ratio?                      % (Rounded to 1 decimal place)
3. What is the monthly sales volume (in dollars) at the break-even point? $                  
4. How many units must be sold each month to earn a monthly operating income of $40,000?

                            units

5. What is the monthly margin of safety (in dollars) if 1,500 units are sold each month?

$                           

6. What will be the monthly operating income if 1,500 units are sold each month?

$                            Computations

 

 

 

101. Estimating costs and profit

World-Wide, Inc. expects total sales of $55 million, a margin of safety of $25 million, and a contribution margin ratio of 25%. Compute the following:

1. Variable costs: $                             
2. Break-even sales volume (in dollars): $                          
3. Fixed costs: $                              
4. Operating income: $                              

 

 

 

 

102. Estimating costs and profit

Always Ready Company sells a single product. The unit selling price is $275, and variable costs are 60% of this selling price.  Fixed costs are currently $55,000 per month.

1. Calculate the monthly break even point in units.                Units.
2. Always Ready is considering the acquisition of new robotic equipment. Depreciation on the new robots will increase monthly fixed costs by $6,000, but reduce variable costs to 50% of the current selling price. If Always Ready acquires the robots what will be the new monthly break even point in units?                                                                  Units.

 

 

 

 

103. Ralph Byrd, Inc. wants to manufacture a new cell phone that can be worn on the wrist. Information from doing market research shows that he can sell this phone for $30 each. His fixed costs would be $135,000 a year and variable costs would amount to $12 per phone.

1. What would the contribution margin ratio be?
2. What sales volume in units would Ralph need to break-even?
3. What sales volume in units would Ralph need to earn $200,000 profit?
4. What would be the margin of safety if he sold 25,000 units?

 

 

104. A manufacturing company produced the following report:

 

Required:

1. How many units would have to be sold to break even?
2. If fixed overhead were to increase by $1,800 what would breakeven be in units?
3. What is operating income if sales increase by 25%?