Chapter 05 Cost-Volume-Profit Relationships
True / False Questions
2. / Incremental analysis is an analytical approach that focuses only on those revenues and costs that will change as a result of a decision. T
3. / To facilitate decision-making, fixed expenses should be expressed on a per-unit basis.F, it’s misleading, because fixed expenses remain constantin total and change on a per-unit basis
4. / On a CVP graph for a profitable company, the total revenue line will be steeper than the total expense line.T because it starts at 0 where as the total expense line starts at fixed cost level
5. / On a CVP graph for a profitable company, the total expense line will be steeper than the line representing fixed costs.T of course because the fixed expense line is flat.
6. / For a given level of sales, a low contribution margin ratio will produce less net operating income than a high contribution margin ratio.T because a low CM ratio for example 10% of sales will produce less NOI than a CM 20%.
7. / The impact on net operating income of a given dollar change in sales can be computed by applying the contribution margin ratio to the dollar change in sales.
T For example: A change in sales of $50 from 100 to 150 and applying a CMratio of 40% to the change in sales is equal to $20 on NOI. Proof (Sales 100, V 60 CM 40 F 10 NOI 30); if Sales 150, V 90=CVM 60-F 10=NOI 50; 20 more than 30
8. / The variable expense per unit is $12 and the selling price per unit is $40. Then the contribution margin ratio is 70%.T P 40-V 12=CM 28; 28/40= 70%
9. / Mark Company currently sells a video recorder with a selling price of $300 per unit. The variable expense per unit is $175 and fixed expenses are $100,000. If the company reduces variable expenses by $20 per unit and increases the fixed expenses by $10,000, the break-even point will increase.F Fix 100/UCM(300-175) = Break-even 80 units if Fix 110/UCM(300-155)= 75.9 units, the break-even point decreases.
10. / The total volume in sales dollars that would be required to attain a given target profit is determined by dividing the sum of the fixed expenses and the target profit by the contribution margin ratio.T
$Sales = (Target profit + Fixed expenses)/CM%
11. / The break-even point in units can be obtained by dividing total fixed expenses by the contribution margin ratio.F, that formula calculates the break-even point in sales $ see 10.
12. / At the break-even point: Sales - Variable expenses = Fixed expenses.Tprofit = 0
13. / If fixed expenses increase by $10,000 per year, then the level of sales needed to break even will also increase by $10,000.F
Break-even sales = Fixed/CM% not the increase in fixed expenses alone.
14. / If the fixed expenses increase in a company, and all other factors remain unchanged, then one would expect the margin of safety to decrease.T Margin of safety= Actual sales Minus Break-Even sales. An increase in fixed expenses creates a higher Break-Even sales therefore reducing the margin of safety.
15. / The margin of safety percentage is equal to the margin of safety in dollars divided by total sales in dollars.T
16. / If two companies produce the same product and have the same total sales and same total expenses, operating leverage will be lower in the company with a higher proportion of fixed expenses in its cost structure.F Let’s illustrate .
Companies A B
Sales 100 100 same total sales
Variables 40 50 same total expenses A (V 40 + F 30=70) B (V 50 + F 20= 70)
CM 60 50
Fixed 30 20 Ahas a higher proportion of fixed expenses 30/70, B has a lower 20/70
NOI 30 30
Operating
Leverage 2 1.67 A has a higher O.L. than B so the statement is false
17. / A company with a degree of operating leverage of 4 would expect net operating income to increase by 200% if sales increased from $100,000 to $150,000.T Sales increased by 50% =(150-100)/100
Therefore 50% * 4 = 200%.
18. / If two companies have the same total sales and total expenses and make the same product, the volatility of net operating income with changes in sales will tend to be greater in the company with a higher proportion of fixed expenses in its cost structure.T like 16. Let’s look at an example:
A B
Sales 100 100
Variables 40 50
CM 60 50
Fixed 30 20
NOI 30 30
Operating
Leverage 2 1.67
19. / A shift in the sales mix from products with a low contribution margin ratio toward products with a high contribution margin ratio will lower the break-even point in the company as a whole.
True Fixed/CM % High CM 30/60% = $50 Break-even point in sales
Where as Lower CM30/50% = $60 Break-even point in sales
So yes going from B’s lower CM% to A with a higher CM% lowers break-even point in sales
Multiple Choice Questions
A. / net operating income.
B. / net profit.
C. / the gross margin.
D. / the contribution margin.
21. / With regard to the CVP graph, which of the following statements is not correct?
A. / The CVP graph assumes that volume is the only factor affecting total cost.
B. / The CVP graph assumes that selling prices do not change.
C. / The CVP graph assumes that variable costs go down as volume goes up.
D. / The CVP graph assumes that fixed expenses are constant in total within the relevant range.
22. / East Company manufactures and sells a single product with a positive contribution margin. If the selling price and the variable expense per unit both increase 5% and fixed expenses do not change, what is the effect on the contribution margin per unit and the contribution margin ratio?
A. / Option A
B. / Option B
C. / Option C
D. / Option D
23. / Which of the following formulas is used to calculate the contribution margin ratio?
A. / (Sales - Fixed expenses) ÷ Sales
B. / (Sales - Cost of goods sold) ÷ Sales
C. / (Sales - Variable expenses) ÷ Sales
D. / (Sales - Total expenses) ÷ Sales
24. / Brasher Company manufactures and sells a single product that has a positive contribution margin. If the selling price and variable expenses both decrease by 5% and fixed expenses do not change, then what would be the effect on the contribution margin per unit and the contribution margin ratio?
A. / Option A
B. / Option B
C. / Option C
D. / Option D
25. / The break-even point in unit sales is found by dividing total fixed expenses by:
A. / the contribution margin ratio.
B. / the variable expenses per unit.
C. / the sales price per unit
D. / the contribution margin per unit.
26. / Break-even analysis assumes that:
A. / total costs are constant.
B. / the average fixed expense per unit is constant.
C. / the average variable expense per unit is constant.
D. / variable expenses are nonlinear.
27. / If Q equals the level of output, P is the selling price per unit, V is the variable expense per unit, and F is the fixed expense, then the break-even point in units is:
A. / Q ÷ (P-V).
B. / F ÷ (P-V).
C. / V ÷ (P-V).
D. / F ÷ [Q(P-V)].
28. / The break-even point in unit sales increases when variable expenses:
A. / increase and the selling price remains unchanged.
B. / decrease and the selling price remains unchanged.
C. / decrease and the selling price increases.
D. / remain unchanged and the selling price increases.
29. / The margin of safety percentage is computed as:
A. / Break-even sales ÷ Total sales.
B. / Total sales - Break-even sales.
C. / (Total sales - Break-even sales) ÷ Break-even sales.
D. / (Total sales - Break-even sales) ÷ Total sales.
30. / The amount by which a company's sales can decline before losses are incurred is called the:
A. / contribution margin.
B. / degree of operating leverage.
C. / margin of safety.
D. / contribution margin ratio.
31. /
The degree of operating leverage can be calculated as:
A. / contribution margin divided by sales.
B. / gross margin divided by net operating income.
C. / net operating income divided by sales.
D. / contribution margin divided by net operating income.
32. / All other things the same, which of the following would be true of the contribution margin and variable expenses of a company with high fixed costs and low variable costs as compared to a company with low fixed costs and high variable costs?
A. / Option A
B. / Option B
C. / Option C
D. / Option D
33. / James Company has a margin of safety percentage of 20% based on its actual sales. The break-even point is $200,000 and the variable expenses are 45% of sales. Given this information, the actual profit is:
A. / $27,500
B. / $18,000
C. / $22,500
D. / $22,000
34. /
A company has provided the following data:
If the sales volume decreases by 25%, the variable cost per unit increases by 15%, and all other factors remain the same, net operating income will:
A. / decrease by $31,875.
B. / decrease by $15,000.
C. / increase by $20,625.
D. / decrease by $3,125.
35. / Butteco Corporation has provided the following cost data for last year when 100,000 units were produced and sold:
All costs are variable except for $100,000 of manufacturing
overhead and $100,000 of selling and administrative expense.
There are no beginning or ending inventories. If the selling price
is $10 per unit, the net operating
income from producing and selling 110,000 units would be:
A. / $450,000
B. / $385,000
C. / $405,000
D. / $560,000
36. / Menlove Company had the following income statement for the most recent year:
Given this data, the unit contribution margin was:
A. / $2 per unit
B. / $15 per unit
C. / $6 per unit
D. / $4 per unit
37. / The following information relates to Clyde Corporation which produced and sold 50,000 units last month.
There were no beginning or ending inventories. Production and sales next month are expected to be 40,000 units. The company's unit contribution margin next month should be:
A. / $16.63
B. / $3.10
C. / $7.98
D. / $13.30
38. / Mancuso Corporation has provided its contribution format income statement for January. The company produces and sells a single product.
If the company sells 3,100 units, its total contribution margin should be closest to:
A. / $27,045
B. / $181,000
C. / $162,400
D. / $173,600
39. / Dimitrov Corporation, a company that produces and sells a single product, has provided its contribution format income statement for July.
If the company sells 6,900 units, its net operating income should be closest to:
A. / $35,979
B. / $34,500
C. / $36,500
D. / $32,000