/ Class:
/ Date:
Chapter 4 – Cost-Volume-Profit Analysis: A Managerial Planning Tool
1.At the break-even point, revenue is equal to the contribution margin.a. / True
b. / False
ANSWER: / False
2.Contribution margin ratio + variable cost ratio = 100%.
a. / True
b. / False
ANSWER: / True
3.Variable costs per unit consist of direct materials, direct labour, variable manufacturing overhead and variable selling and administrative costs.
a. / True
b. / False
ANSWER: / True
4.If fixed costs increase, the break-even point will decrease.
a. / True
b. / False
ANSWER: / False
5.If variable costs decrease and the sales price increases, the break-even point decreases.
a. / True
b. / False
ANSWER: / True
6.If variable costs per unit increase, the break-even point will increase.
a. / True
b. / False
ANSWER: / True
7.Most firms would like to earn operating income exactly equal to the income at the break-even point.
a. / True
b. / False
ANSWER: / False
8.The break-even point in sales dollars is equal to the break-even point in units multiplied by the variable cost per unit.
a. / True
b. / False
ANSWER: / False
9.The contribution margin income statement provides a good check to determine if the sale of a certain number of units really results in operating income of the given amount.
a. / True
b. / False
ANSWER: / True
10.In the equation to determine the number of units that must be sold to earn a target income, targeted income is added to fixed cost in the denominator.
a. / True
b. / False
ANSWER: / False
11.To determine the number of units that must be sold to earn a target operating income, one can use the equation for operating income and replace the operating income term with the target operating income.
a. / True
b. / False
ANSWER: / True
12.The impact on a firm’s income resulting from a change in the number of units sold can be assessed by multiplying the unit contribution margin by the change in units sold assuming that fixed costs remain the same.
a. / True
b. / False
ANSWER: / True
13.To find the number of units to sell to earn a targeted income, it is quicker to simply adjust the break-even point in units equation by adding target income to the variable cost.
a. / True
b. / False
ANSWER: / False
14.The linear equation for revenue is sales price multiplied by fixed cost.
a. / True
b. / False
ANSWER: / False
15.The linear equation for total cost is (unit variable cost × units) + (fixed cost / units).
a. / True
b. / False
ANSWER: / False
16.The cost–volume–profit graph shows the relationship between cost, volume, and operating income.
a. / True
b. / False
ANSWER: / True
17.The profit-volume graph shows the relationship between operating income and the number of units sold.
a. / True
b. / False
ANSWER: / True
18.The cost–volume–profit graph depicts the relationships among cost, volume, and profits by plotting the total revenue line and the total cost line on the graph.
a. / True
b. / False
ANSWER: / True
19.Even when you hold the sales mix constant, it is impossible to calculate the break-even point for individual products in a multiple product firm because many of the fixed costs are common to a number of products.
a. / True
b. / False
ANSWER: / False
20.If a multi-product company simply wants to know the overall break-even point and is willing to assume its product mix stays constant, it is easiest to use the break-even point in dollar sales revenue approach.
a. / True
b. / False
ANSWER: / True
21.In a multi-product firm, if the sales mix changes, the break-even points for each product will change.
a. / True
b. / False
ANSWER: / True
22.Direct fixed expenses are the fixed costs that are traceable to the segments and would remain even if one of the segments was eliminated.
a. / True
b. / False
ANSWER: / True
23.Common fixed expenses are the fixed costs that are traceable to the segments and would remain even if one of the segments was eliminated.
a. / True
b. / False
ANSWER: / False
24.Managers can use cost-volume-profit analysis to help handle risk and uncertainty.
a. / True
b. / False
ANSWER: / True
25.If the break-even point increases, the margin of safety increases.
a. / True
b. / False
ANSWER: / False
26.The operating leverage measures the difference between actual sales and break-even point in dollar sales.
a. / True
b. / False
ANSWER: / False
27.Operating leverage is the use of variable cost to extract higher percentage changes in profits as sales activity changes.
a. / True
b. / False
ANSWER: / False
28.Which of the following best describes the break-even point?
a. / the point at which total sales equal total cost
b. / the point at which fixed costs equal variable costs
c. / the point at which total sales are less than total cost
d. / the point at which total sales are greater than total cost
ANSWER: / a
29.What is the purpose of doing a cost–volume–profit (CVP) analysis?
a. / CVP analysis is effectively used by single-product firms only.
b. / CVP analysis provides managers with information used for control only.
c. / CVP analysis shows how revenues, expenses, and profits behave as volume changes.
d. / CVP analysis allows managers to do sensitivity analysis by examining the impact of various prices or costs on volume.
ANSWER: / c
30.Which statement best describes the break-even point?
a. / Profit is greater than zero.
b. / Total revenue minus total cost.
c. / Total contribution margin equals total fixed cost.
d. / Total contribution margin equals total variable cost.
ANSWER: / c
31.Which type of ratio reflects total variable cost divided by sales revenue?
a. / sales ratio
b. / revenue ratio
c. / variable cost ratio
d. / contribution rmargin ratio
ANSWER: / c
32.Which type of ratio reflects total contribution margin divided by sales revenue?
a. / the sales ratio
b. / the fixed cost ratio
c. / the variable cost ratio
d. / the contribution margin ratio
ANSWER: / d
33.Which of the following reflects the ratio of fixed costs to the contribution margin ratio?
a. / the margin of safety
b. / the variable cost ratio
c. / the break-even point in sales
d. / the break-even point in units
ANSWER: / c
34.Dollmaker manufactures dolls. The sales price of a doll is $15, and the variable cost is $7 per doll. What is the contribution margin ratio?
a. / 37.5%
b. / 40.0%
c. / 53.3%
d. / 60.0%
ANSWER: / c
35.What is a contribution margin?
a. / the difference between sales and variable costs
b. / the difference between fixed and variable costs
c. / the difference between sales and committed fixed costs
d. / the difference between sales and discretionary fixed costs
ANSWER: / a
36.What is the result when the contribution margin ratio increases?
a. / break-even point decreases
b. / variable cost ratio increases
c. / fixed costs will decrease
d. / (variable cost ratio + contribution margin ratio) will be greater than 100%
ANSWER: / a
37.The income statement for Thompson Manufacturing Company is as follows:
Sales (10,000 units) / $150,000
Variable costs / 102,000
Contribution margin / $48,000
Fixed costs / 36,000
Operating income / $12,000
What is the contribution margin per unit?
a. / $1.20
b. / $4.80
c. / $7.20
d. / $120,000.00
ANSWER: / b
38.Which formulat calculates the contribution margin?
a. / contribution margin = fixed costs
b. / contribution margin ratio = 100%- variable cost ratio
c. / contribution margin = sales revenue × variable cost ratio
d. / contribution margin ratio = contribution margin/variable costs
ANSWER: / b
39.Orbee Company sells a product for $24. Variable costs are $14 per unit, and total fixed costs are $6,000. What is the per unit contribution margin?
a. / $4
b. / $10
c. / $14
d. / $24
ANSWER: / b
40.What formula is used to calculate contribution margin ratio?
a. / 100% + variable cost ratio
b. / unit contribution margin/total revenues
c. / contribution margin per unit/sales price per unit
d. / contribution margin per unit/variable costs per unit
ANSWER: / c
41.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?
a. / 210
b. / 504
c. / 1,000
d. / 7,000
ANSWER: / c
42.Suppose variable costs per unit decrease. What will be the effect on sales volume at the break-even point?
a. / Sales volume will increase.
b. / Sales volume will decrease.
c. / Sales volume will remain the same.
d. / Sales volume will remain the same; however, contribution margin per unit will decrease.
ANSWER: / b
43.Suppose fixed costs increase. What will be the effect on the break-even point in units?
a. / The break-even point will increase.
b. / The break-even point will decrease.
c. / The break-even point will remain the same.
d. / The break-even point will remain the same; however, contribution per unit will decrease.
ANSWER: / a
44.Suppose the sales price per unit increases. What will be the effect on the break-even point in units?
a. / The units will increase.
b. / The units will decrease.
c. / The units will remain the same.
d. / The units will remain the same; however, contribution per unit will decrease.
ANSWER: / b
45.Suppose the contribution margin per unit decreases. What will be the effect on the break-even point in units?
a. / The units will increase.
b. / The units will decrease.
c. / The units will remain the same.
d. / The units cannot be determined from the information given.
ANSWER: / a
46.Suppose the contribution margin ratio increases. What will be the effect on the break-even point in sales dollars?
a. / The dollar value will double.
b. / The dollar value will increase.
c. / The dollar value will decrease.
d. / The dollar value will remain the same.
ANSWER: / c
47.Assume the following information:
Variable cost ratio 80%
Total fixed costs $60,000
What volume of sales dollars is needed to break even?
a. / $12,000
b. / $48,000
c. / $75,000
d. / $300,000
ANSWER: / d
48.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?
a. / $3,600
b. / $7,000
c. / $14,000
d. / $28,000
ANSWER: / d
49.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?
a. / $12,000
b. / $18,000
c. / $50,000
d. / $75,000
ANSWER: / d
50.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?
a. / $300,000
b. / $328,767
c. / $342,856
d. / $375,000
ANSWER: / a
51.Which formula calculates operating income?
a. / (sales price × units sold)- (unit variable cost × units sold)- fixed cost
b. / (sales price × units sold) + (unit variable cost × units sold) + fixed cost
c. / (sales price + units sold)- (unit variable cost + units sold)- fixed cost
d. / (sales price- units sold) + (unit variable cost- units sold) + fixed cost
ANSWER: / a
52.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?
a. / 25%
b. / 40%
c. / 60%
d. / 75%
ANSWER: / a
53.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?
a. / 62
b. / 1,040
c. / 1,260
d. / 1,480
ANSWER: / b
54.What formula calculates the number of units needed to earn a desired profit?
a. / (fixed costs + variable costs)/sales
b. / (fixed costs + desired profit)/sales
c. / (fixed costs + desired profit)/contribution margin per unit
d. / (fixed costs + variable costs)/contribution margin per unit
ANSWER: / c
55.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?
a. / 215
b. / 250
c. / 325
d. / 600
ANSWER: / c
56.Assume the following information:
Sales price per unit / $100
Contribution margin ratio / 50%
Total fixed costs / $250,000
How many units must be sold to generate a before-tax profit of $45,000?
a. / 2,500 units
b. / 3,000 units
c. / 3,750 units
d. / 5,900 units
ANSWER: / d
57.What formula calculates the sales dollars needed to earn a desired profit?
a. / (fixed costs + contribution margin)/(1- variable cost ratio)
b. / (fixed costs + desired profit)/(1- variable cost ratio)
c. / (fixed costs + variable costs)/(1- variable cost ratio)
d. / (fixed costs + desired profit)/(1- sales ratio)
ANSWER: / b
58.How can a profit–volume graph be distinguished from a cost–volume–profits graph?
a. / Revenues are expected at targeted sales levels.
b. / Costs are graphed on the y-axis against sales volume.
c. / Operating income is graphed on the y-axis against sales volume.
d. / Revenues and costs are graphed on the y-axis against sales volume.
ANSWER: / c
59.What relationship is visually portrayed by a profit-volume graph?
a. / profits and units sold
b. / total sales and total cost
c. / total sales and units sold
d. / fixed costs and variable costs
ANSWER: / a
60.Which statement best describes a profit–volume graph?
a. / It is difficult to interpret.
b. / It can be plotted only if fixed costs are known.
c. / It can be plotted only if the break-even point is known.
d. / It fails to reveal how costs change as sales volume changes.
ANSWER: / d
61.Where is the break-even point on a cost–volume–profit graph?
a. / at the intersection of the revenue line and the profit line
b. / at the intersection of the revenue line and the total cost line
c. / at the intersection of the fixed cost line and the variable cost line
d. / at the intersection of the contribution margin line and the fixed cost line
ANSWER: / b
62.Which statement is NOT an assumption used to prepare a cost–volume–profit graph?
a. / The sales mix is constant.
b. / The constant cost fluctuates.
c. / Units produced equals units sold.
d. / Linear costs are within the relevant range.
ANSWER: / b
63.Which statement describes a characteristic of the cost–volume–profit graph?
a. / It is hard to interpret.
b. / It cannot be plotted if the break-even point is known.
c. / It shows the relationship among cost, volume, and profits.
d. / It reveals how costs change as sales volume remains the same.
ANSWER: / c
64.Which statement describes a characteristic of the cost–volume–profit graph?
a. / It is difficult to interpret.
b. / It plots three separate lines.
c. / It plots the total revenue line and the total cost line.
d. / The vertical axis is measured in units sold, and the horizontal axis is measured in dollars.
ANSWER: / c
65.Which graph depicts the relationships among total variable costs, total fixed costs, number of units, and operating income?
a. / cost graph
b. / volume graph
c. / break-even graph
d. / cost–volume–profit graph
ANSWER: / d
66.Which statement is an assumption of a cost-volume-profit analysis?
a. / Revenue and costs behave in a linear manner.
b. / More inventory is produced than is sold in the period.
c. / Sales price and costs vary within the relevant range.
d. / Sales price and costs cannot be accurately identified.
ANSWER: / a
67.The following data pertain to the three products produced by Rona Corporation:
A / B / C
Sales price per unit / $5.00 / $7.00 / $6.00
Variable costs per unit / 4.00 / 5.00 / 3.00
Contribution margin per unit / $1.00 / $2.00 / $3.00
Fixed costs are $90,000 per month.
Of all units sold, 60% are Product A, 30% are Product B, and 10% are Product C.
What is the monthly break-even point for total units?
a. / 36,000 units
b. / 45,000 units
c. / 60,000 units
d. / 180,000 units
ANSWER: / c
68.Acme Company sells two products. Product X has a contribution margin of $6.00 per unit, and Product Y has a contribution margin of $7.50 per unit. Total fixed costs are $400,000. Sales mix and total volume varies from one period to another. Which statement best describes this situation?
a. / Selling less than 25,000 units of each product will result in a loss.
b. / Variable costs are $1.50 higher for Product X than for Product Y.
c. / The ratio of contribution to total sales always will be larger for Product X than for Product Y.
d. / The ratio of net profit to total sales for Product Y will be larger than the ratio of net profit to total sales for Product X.
ANSWER: / a
69.Information about the K-9 Salon’s two products is as follows:
Dog Brush / Cat Toy
Unit sales price / $9.00 / $9.00
Unit variable costs:
Manufacturing / $5.25 / $6.75
Selling / .75 / .75
Total / $6.00 / $7.50
Monthly fixed costs are as follows:
Manufacturing / $82,500
Selling and administrative / 45,000
Total / $127,500
Suppose the sales mix in units is 70% Product X and 30% Product Y. What total monthly sales volume in units is required to break even?
a. / 8,333 units
b. / 16,667 units
c. / 50,000 units
d. / 56,667 units
ANSWER: / c
70.Which term best describes fixed costs that can be directly traced to individual segments?
a. / contribution margin
b. / direct fixed expenses
c. / overall fixed expenses
d. / common fixed expenses
ANSWER: / b
71.What items is the sales mix the relative combination of?
a. / products sold by a firm
b. / outputs produced by a firm
c. / distribution channels used by a firm
d. / inputs required to produce a product
ANSWER: / a
72.How is the sales mix expressed?
a. / in terms of units but not revenues
b. / in terms of revenues but not units
c. / in terms of either revenues or units
d. / in terms of neither units nor revenue
ANSWER: / c
73.What should be used to compute the sales mix so that the break-even computation is meaningful to management?
a. / the expected mix
b. / the traditional mix
c. / the least desirable mix
d. / the most desirable mix
ANSWER: / a
74.Firm X and Firm Y compete within the same industry and have the same sales volumes and costs other than the following items: Firm X manufactures its product using large amounts of direct labour. Firm Y has replaced direct labour with investment in machinery. Projected sales for both firms are 15% less than in the previous year. What will be the projected profits for Firm X compared to Firm Y?
a. / Firm X will lose more profit than Firm Y.
b. / Firm Y will lose more profit than Firm X.
c. / Neither Firm X nor Firm Y will lose profit.
d. / Firm X and Firm Y will lose the same amount of profit.
ANSWER: / b
75.What “what-if” technique examines the impact on an answer as a result of changes in underlying assumptions?