Chapter 21
COST-VOLUME-PROFIT ANALYSIS
1. Total variable costs change proportionately with changes in output activity.
2. Variable costs per unit increase proportionately with increases in output activity.
3. Dividing a mixed cost into its separate fixed and variable cost components makes it more
difficult to perform cost-volume-profit analysis.
4. As the level of output activity increases, fixed cost per unit remains constant.
5. As the level of output activity increases, the variable cost per unit remains constant.
6. A step-wise variable cost can be separated into a fixed component and a variable
component.
7. Curvilinear costs are also known as nonlinear costs.
8. The relevant range of operations includes extremely high and low levels of production that
are unlikely to occur.
9. The relevant range of operations excludes extremely high and low levels of production that
are not likely to occur.
10. Cost-volume-profit analysis is frequently based on the assumption that the production
level is the same as the sales level.
11. Cost-volume-profit analysis is a precise tool for perfectly predicting the profit
consequences of cost changes, price changes, and volume changes.
12. Cost-volume-profit analysis provides approximate, but not precise, answers to questions
about costs, volumes, and profits.
13. Cost-volume-profit analysis can be used to predict the effects of reduced selling prices,
increased fixed costs, and reduced variable costs on break-even points.
14. The margin of safety is the amount that sales can drop before the company incurs a loss.
15. The dollar amount of sales needed to achieve a target after-tax income is computed by
dividing the sum of fixed costs plus the desired after-tax income plus income taxes by the
contribution margin ratio.
16. The margin of safety can be expressed in units of product, in dollars, or as a percent of
sales.
17. The method most likely to produce the most precise line of cost behavior is the scatter
diagram.
18. Contribution margin is the amount of sales that exceeds total variable costs.
19. The contribution margin per unit is equal to the sales price per unit minus the variable
costs per unit.
20. The extent, or relative size, of fixed costs in the total cost structure is known as operating
leverage.
21. Degree of operating leverage (DOL) is defined as total contribution margin in dollars
divided by pretax income.
22. Least-squares regression is a statistical method for deriving an estimated line of cost
behavior.
23. The high-low method of deriving an estimated cost line uses all the data points available.
24. The high-low method can be used to derive an estimated line of cost behavior.
25. A visual line fit to points in a scatter diagram may be used to identify the approximate
relation between past cost and volume.
26. There are only two methods to derive an estimated line of cost behavior; the high-low
method and the scatter diagram.
27. Scatter diagrams plot volume on the vertical axis and cost on the horizontal axis.
28. To determine the slope of the variable cost from a scatter diagram, divide the change in
volume by the change in cost.
29. The high-low method is used to derive an estimated line of cost behavior by graphically
connecting the two cost amounts identified with the highest and lowest volume levels.
30. A break-even point can be calculated either in units or in dollars.
31. Break-even analysis is a special case of cost-volume-profit analysis.
32. The break-even point is the sales level at which a company neither earns a profit nor
incurs a loss.
33. The contribution margin per unit is the price at which a unit must be sold in order for the
company to break even.
34. To calculate the break-even point in units, one must know unit fixed cost, unit variable
cost, and sales price.
35. The contribution margin ratio is the percent by which the margin of safety exceeds the
break-even point.
36. A graphic depiction of the break-even point is known as a cost-volume-profit (CVP)
chart.
37. A cost-volume-profit (CVP) chart is a graph that plots volume on the horizontal axis and
costs and sales on the vertical axis.
38. On a typical cost-volume-profit graph, unit sales are shown on the horizontal axis and
both dollars of sales and dollars of costs are represented on the vertical axis.
39. Cost-volume-profit analysis cannot be used when a firm produces and sells more than one
product.
40. The proportion of sales volumes for various products is known as the composite mix.
41. An important assumption in multiproduct analysis is that the sales mix is known and
remains constant.
42. A cost that remains the same in total even when volume of activity varies is a:
A. Fixed cost.
B. Curvilinear cost.
C. Variable cost.
D. Step-wise variable cost.
E. Standard cost.
43. A cost that changes in proportion to changes in volume of activity is a(n):
A. Differential cost.
B. Fixed cost.
C. Incremental cost.
D. Variable cost.
E. Product cost.
44. A cost that changes with volume, but not at a constant rate, is called a:
A. Variable cost.
B. Curvilinear cost.
C. Step-wise variable cost.
D. Fixed cost.
E. Differential cost.
45. A cost that remains constant over a limited range of volume, but increases by a lump sum
when volume increases beyond a maximum amount, is a(n):
A. Step-wise cost.
B. Fixed cost.
C. Curvilinear cost.
D. Incremental cost.
E. Opportunity cost.
46. A cost that can be separated into fixed and variable components is called a:
A. Mixed cost.
B. Step-variable cost.
C. Composite cost.
D. Curvilinear cost.
E. Differential cost.
47. Curvilinear costs always increase:
A. With decreases in volume.
B. In constant proportion to changes in production levels.
C. When management performs break-even analysis.
D. When volume increases, but not at a constant rate.
E. On a per unit basis when volume of activity goes down.
48. Which one of the following statements is not true?
A. Total fixed costs remain the same regardless of volume within the relevant range.
B. Total variable costs change with volume.
C. Total variable costs decrease as the volume increases.
D. Fixed costs per unit increase as the volume decreases.
E. Variable costs per unit remain the same regardless of the volume.
49. An important tool in predicting the volume of activity, the costs to be incurred, the sales to
be earned, and the profit to be received is:
A. Target income analysis.
B. Cost-volume-profit analysis.
C. Least-squares regression of costs.
D. Variance analysis.
E. Process costing.
50. Select cost information for Winfrey Enterprises is as follows:
1,000 units of output 5,000 units of output
Total Cost/Unit Total Cost/Unit
Direct materials $5,000 $5.00 $25,000 $5.00
Utilities expense $1,000 $1.00 $ 3,750 $0.75
Rent expense $4,000 $4.00 $ 4,000 $0.80
Based on this information:
A. Both direct materials and rent expense are variable costs.
B. Utilities expense is a mixed cost and rent expense is a variable cost.
C. Utilities expense is a mixed cost and rent expense is a fixed cost.
D. Direct materials is a fixed cost and utilities expense is a mixed cost.
E. Both direct materials and utilities expense are mixed costs.
51. A company’s normal operating range, which excludes extremely high and low volumes
that are not likely to occur, is called the:
A. Margin of safety.
B. Contribution range.
C. Break-even point.
D. Relevant range.
E. High-low point.
52. A term describing a firm’s normal range of operating activities is:
A. Relevant range of operations.
B. Break-even level of operations.
C. Margin of safety of operations.
D. Relevant operating analysis.
E. High-low level of operations.
53. Cost-volume-profit analysis is based on three basic assumptions. Which of the following
is not one of these assumptions?
A. Total fixed costs remain constant over changes in volume.
B. Curvilinear costs change proportionately with changes in volume throughout the relevant
range.
C. Variable costs per unit of output remain constant as volume changes.
D. Sales price per unit remains constant as volume changes.
E. All of these are basic assumptions.
21–16
54. A target income refers to:
A. Income at the break-even point.
B. Income from the most recent period.
C. Income planned for a future period.
D. Income only in a multiproduct environment.
E. Income at the minimum contribution margin.
55. The margin of safety is the excess of:
A. Break-even sales over expected sales.
B. Expected sales over variable costs.
C. Expected sales over fixed costs.
D. Fixed costs over expected sales.
E. Expected sales over break-even sales.
56. If a firm’s forecasted sales are $250,000 and its break-even sales are $190,000, the margin
of safety in dollars is:
A. $ 60,000.
B. $250,000.
C. $190,000.
D. $440,000.
E. $ 24,000.
57. The excess of expected sales over the sales level at the break-even point is known as the:
A. Sales turnover.
B. Profit margin.
C. Contribution margin.
D. Relevant range.
E. Margin of safety.
58. A firm expects to sell 25,000 units of its product at $11 per unit. Pretax income is
predicted to be $60,000. If the variable costs per unit are $5, total fixed costs must be:
A. $ 65,000.
B. $ 90,000.
C. $125,000.
D. $215,000.
E. $275,000.
59. During its most recent fiscal year, Simon Enterprises sold 200,000 electric screwdrivers at
a price of $15 each. Fixed costs amounted to $400,000 and pretax income was $600,000.
What amount should have been reported as variable costs in the company’s contribution
margin income statement for the year in question?
A. $2,400,000.
B. $1,600,000.
C. $3,000,000.
D. $2,000,000.
E. $1,000,000.
60. Hartman Co. has fixed costs of $36,000 and a contribution margin ratio of 24%. If
expected sales are $200,000, what is the margin of safety as a percent of sales?
A. 6%.
B. 25%.
C. 33%.
D. 50%.
E. 75%.
61. A product sells for $200 per unit, and its variable costs per unit are $130. The fixed costs
are $420,000. If the firm wants to earn $35,000 pretax income, how many units must be sold?
A. 6,500.
B. 6,000.
C. 500.
D. 5,000.
E. 5,500.
62. Management anticipates fixed costs of $72,500 and variable costs equal to 40% of sales.
What will pretax income equal if sales are $325,000?
A. $ 57,500.
B. $122,500.
C. $130,000.
D. $181,250.
E. $252,500.
63. Conan Company has total fixed costs of $112,000. Its product sells for $35 per unit and
variable costs amount to $25 per unit. Next year Conan Company wishes to earn a pretax
income that equals 10% of fixed costs. How many units must be sold to achieve this target
income level?
A. 1,120.
B. 8,214.
C. 11,200.
D. 12,320.
E. 14,080.
64. Ivan Company has a goal of earning $70,000 after-tax income. Ivan would need to pay
$20,000 of income taxes at the target level of income. The contribution margin ratio is 30%.
What amount of dollar sales must be achieved to reach the goal if fixed costs are $36,000?
A. $ 23,333.
B. $ 36,000.
C. $300,000.
D. $353,333.
E. $420,000.