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Chapter 21 Cost-Volume-Profit Analysis
MULTIPLE CHOICE QUESTIONS
1) Total variable costs change in proportion to changes in volume of activity.
A) True
B) False
2) Total fixed costs change in proportion to changes in volume of activity.
A) True
B) False
3) Variable costs per unit increase proportionately with increases in volume of activity.
A) True
B) False
4) Fixed costs per unit decrease proportionately with increases in volume of activity.
A) True
B) False
5) While the total amount of variable cost changes with the level of production, variable cost per unit
remains constant as volume changes.
A) True
B) False
6) While the total amount of fixed cost changes with the level of production, fixed cost per unit
remains constant as volume changes.
A) True
B) False
7) While the total amount of fixed cost remains constant with the level of production, fixed cost per
unit changes as volume changes.
A) True
B) False
8) Dividing a mixed cost into its separate fixed and variable cost components makes it more difficult
to perform cost-volume-profit analysis.
A) True
B) False
9) As the volume increases, fixed cost per unit of output remains constant.
A) True
B) False
10) As the level of volume of activity increases, the variable cost per unit remains constant.
A) True
B) False
11) A step-wise variable cost can be separated into a fixed component and a variable component.
A) True
B) False
12) Curvilinear costs increase as volume of activity increases, but at a nonconstant rate.
A) True
B) False
13) The relevant range of operations includes extremely high and low levels of production that are
unlikely to occur.
A) True
B) False
14) The relevant range of operations is a range of volume neither close to zero nor at maximum
capacity.
A) True
B) False
15) Cost-volume-profit analysis requires management to classify all costs as either fixed or variable
with respect to production or sales volume within the relevant range of operations.
A) True
B) False
16) Cost-volume-profit analysis is a predictive tool for determining the profit consequences of future
cost changes, price changes, and volume of activity changes.
A) True
B) False
17) Cost-volume-profit analysis is used to predict future costs to be incurred, volumes of activity, sales
to be made, and profit to be earned.
A) True
B) False
18) Cost-volume-profit analysis can be used to compute expected income from predicted sales and cost
levels.
A) True
B) False
19) The margin of safety is the amount that sales can drop before the company incurs a loss.
A) True
B) False
20) The dollar amount of sales needed to achieve a target income is computed by dividing the sum of
fixed costs plus the target pretax income by the contribution margin ratio.
A) True
B) False
21) The margin of safety can be expressed in units of product, in dollars, or as a percent of sales.
A) True
B) False
22) The method most likely to produce the most precise line of cost behavior and require the least
amount of judgment is the scatter diagram.
A) True
B) False
23) Contribution margin per unit is the amount by which a product's unit selling price exceeds its total
variable cost per unit.
A) True
B) False
24) The contribution margin ratio is the percent of each sales dollar that remains after deducting the
total unit variable cost.
A) True
B) False
25) The extent, or relative size, of fixed costs in the total cost structure is known as operating leverage.
A) True
B) False
26) Degree of operating leverage (DOL) is defined as total contribution margin in dollars divided by
pretax income.
A) True
B) False
27) Least-squares regression is a statistical method for identifying cost behavior.
A) True
B) False
28) The high-low method of deriving an estimated cost line uses all the data points available.
A) True
B) False
29) The high-low method can be used to estimate the cost equation using just two points.
A) True
B) False
30) A visual line fit to points in a scatter diagram may be used to identify the approximate relation
between past cost and unit data.
A) True
B) False
31) There are only two methods to derive an estimated line of cost behavior; the high-low method and
the scatter diagram.
A) True
B) False
32) Scatter diagrams plot volume (units) on the vertical axis and cost on the horizontal axis.
A) True
B) False
33) Scatter diagrams plot volume (units) on the horizontal axis and cost on the vertical axis.
A) True
B) False
34) To determine the slope of the variable cost from a scatter diagram, divide the change in units by the
change in cost.
A) True
B) False
35) To determine the slope of the variable cost from a scatter diagram, divide the change in cost by the
change in units.
A) True
B) False
36) The high-low method is used to derive the variable cost per unit and total fixed costs using just the
highest and lowest volume levels.
A) True
B) False
37) A break-even point can be calculated either in units or in dollars.
A) True
B) False
38) The basic form of cost-volume-profit analysis is often called break-even analysis.
A) True
B) False
39) The break-even point is the sales level at which a company neither earns a profit nor incurs a loss.
A) True
B) False
40) The contribution margin per unit is the price at which a unit must be sold in order for the company
to break even.
A) True
B) False
41) To calculate the break-even point in units, one must know unit fixed cost, unit variable cost, and
sales price.
A) True
B) False
42) The contribution margin ratio is the percent by which the margin of safety exceeds the break-even
point.
A) True
B) False
43) An important assumption in multiproduct CVP analysis is a constant sales mix.
A) True
B) False
44) A graphic depiction of the break-even point is known as a cost-volume-profit (CVP) chart.
A) True
B) False
45) A cost-volume-profit (CVP) chart is a graph that plots number of units produced on the horizontal
axis and dollars of costs and sales on the vertical axis.
A) True
B) False
46) 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.
A) True
B) False
47) Cost-volume-profit analysis cannot be used when a firm produces and sells more than one product.
A) True
B) False
48) The proportion of sales volumes for various products in a multiproduct company is known as the
composite mix.
A) True
B) False
49) The proportion of sales volumes for various products in a multiproduct company is known as the
sales mix.
A) True
B) False
50) An important assumption in multiproduct CVP analysis is a changing sales mix.
A) True
B) False
51) The variable costing method is required for external financial reporting.
A) True
B) False
52) The absorption costing method is required for external financial reporting.
A) True
B) False
53) Under variable costing, only costs that change in total with changes in production levels are
included in product costs.
A) True
B) False
54) Under variable costing, fixed overhead costs are excluded from product costs.
A) True
B) False
55) Under absorption costing, fixed overhead costs are excluded from product costs.
A) True
B) False
56) Managers can use variable costing information for internal decision making, but they must use
absorption costing for external reporting purposes.
A) True
B) False
57) A cost that remains unchanged in total despite variations in volume of activity within a relevant
range is a:
A) Curvilinear cost.
B) Standard cost.
C) Variable cost.
D) Step-wise variable cost.
E) Fixed cost.
58) A cost that changes in proportion to changes in volume of activity is a(n):
A) Incremental cost.
B) Product cost.
C) Fixed cost.
D) Variable cost.
E) Differential cost.
59) A cost that changes as volume changes, but at a nonconstant rate, is called a:
A) Step-wise variable cost.
B) Curvilinear cost.
C) Variable cost.
D) Differential cost.
E) Fixed cost.
