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Cost Accounting, 15e Global Edition (Horngren/Datar/Rajan)
Chapter 3 Cost-Volume-Profit Analysis
Objective 3.1
1) Managers use cost-volume-profit (CVP) analysis to ________.
A) forecast the cost of capital for a given period of time
B) to study the behavior of and relationship among the elements such as total revenues, total costs, and
income
C) estimate the risks associated with a given job
D) analyse a firm's profitability and help to decide wealth distribution among its stakeholders
2) One of the first steps to take when using CVP analysis to help make decisions is ________.
A) calculating the break-even point
B) identifying the variable and fixed costs
C) calculation of the degree of operating leverage for the company
D) estimating the volume of sales to make a good profit
3) Which of the following is true of cost-volume-profit analysis?
A) The theory assumes that all costs are variable.
B) The theory assumes that units manufactured equal units sold.
C) The theory states that total variable costs remain the same over a relevant range.
D) The theory states that total costs remain the same over the relevant range.
4) The selling price per unit less the variable cost per unit is the ________.
A) fixed cost per unit
B) gross margin
C) margin of safety
D) contribution margin per unit
5) In the graph method of CVP analysis, the total revenues line always begins from the x-axis and the
total costs line begins from the fixed cost line.
6) Which of the following is an assumption of CVP analysis?
A) Total costs can be divided into a fixed component and a component that is variable with respect to the
level of output.
B) When graphed, total costs curve upward.
C) The unit-selling price is variable as it is subject to demand and supply.
D) Total costs can be divided into inventoriable and period costs with respect to the level of output.
7) Which of the following is true of CVP analysis?
A) Costs may be separated into separate inventoriable and period components with respect to the level of
output.
B) Total revenues and total costs are linear in relation to output units.
C) Unit selling price, unit variable costs, and unit fixed costs are known and remain constant.
D) Proportion of different products will vary according to demand and supply when multiple products
are sold.
8) A revenue driver is defined as ________.
A) any factor that affects costs and revenues
B) any factor that affects revenues
C) the only factor that can influence a change in selling price
D) the only factor that can influence a change in demand
9) As per CVP, operating income calculations use ________.
A) net income and dividends
B) income tax expense and net income
C) contribution margins and fixed costs
D) nonoperating revenues and nonoperating expenses
10) Which of the following is true about the assumptions underlying basic CVP analysis?
A) Selling price varies with demand and supply of the product.
B) Only selling price and variable cost per unit are known and constant.
C) Only selling price, variable cost per unit, and total fixed costs are known and constant.
D) Selling price, variable cost per unit, fixed cost per unit, and total fixed costs are known and constant.
11) The contribution margin income statement ________.
A) reports gross margin
B) is allowed for external reporting to shareholders
C) categorizes costs as either direct or indirect
D) can be used to predict future profits at different levels of activity
12) Contribution margin equals ________.
A) revenues minus period costs
B) revenues minus product costs
C) revenues minus variable costs
D) revenues minus fixed costs
Answer the following questions using the information below:
Shine Jewelry sells 400 units resulting in $7,000 of sales revenue, $3,000 of variable costs, and $1,500 of
fixed costs.
13) Contribution margin per unit is ________.
A) $4.00
B) $11.00
C) $10.00
D) $8.00
14) Calculate the variable cost per unit.
A) $11.00
B) $7.00
C) $8.00
D) $7.50
Answer the following questions using the information below:
Tally Corp. sells softwares during the recruiting seasons. During the current year, 11,000 softwares were
sold resulting in $440,000 of sales revenue, $110,000 of variable costs, and $48,000 of fixed costs.
15) Contribution margin per software is ________.
A) $10.00
B) $30.00
C) $40.00
D) $36.00
16) If sales increase by $60,000, operating income will increase by ________.
A) $10,000
B) $40,000
C) $45,000
D) $60,000
17) Pacific Company sells only one product for $11 per unit, variable production costs are $3 per unit, and
selling and administrative costs are $1.50 per unit. Fixed costs for 10,000 units are $5,000. The operating
income is ________.
A) $6.50 per unit
B) $6.00 per unit
C) $5.50 per unit
D) $5.00 per unit
18) The contribution income statement highlights ________.
A) gross margin
B) the segregation of costs into period costs and inventoriable costs
C) different product lines
D) variable and fixed costs
19) Fixed costs equal $15,000, unit contribution margin equals $25, and the number of units sold equal
1,150. Operating income is ________.
A) $28,750
B) $13,750
C) $15,000
D) $14,750
20) The contribution margin per unit is ________.
A) $11.00
B) $12.00
C) $4.00
D) $14.00
21) If direct labor and direct material costs increase by $1 each, contribution margin ________.
A) increases by $20,000
B) increases by $14,000
C) decreases by $24,000
D) decreases by $14,000
Answer the following questions using the information below:
Bell Company sells several products. Information of average revenue and costs is as follows:
Selling price per unit $28.50
Variable costs per unit:
Direct material $5.25
Direct manufacturing labor $1.15
Manufacturing overhead $0.25
Selling costs $1.85
Annual fixed costs $110,000
The company sells 10,000 units.
22) The contribution margin per unit is ________.
A) $15
B) $20
C) $22
D) $125
23) What is the proportion of variable costs to total costs?
A) 45.00%
B) 48.56%
C) 53.56%
D) 43.56%
Answer the following questions using the information below:
Alex Furniture sells a table for $850. His fixed costs are $25,000, while his variable costs are $500 per table.
He currently plans to sell 175 tables this month.
24) What is the budgeted revenue for the month assuming that Alex sells 175 tables?
A) $145,750
B) $148,750
C) $150,000
D) $142,250
25) What is the budgeted operating income for the month assuming that Alex sells 175 tables?
A) $45,250
B) $37,000
C) $36,250
D) $36,750
26) Winnz sells 8,000 units resulting in $100,000 of sales revenue, $35,000 of variable costs, and $45,000 of
fixed costs. The contribution margin percentage is ________.
A) 66.67%
B) 65.0%
C) 37.5%
D) 75.0%
27) Which of the following is the mathematical expression of contribution margin ratio?
A) Contribution margin ratio = Contribution margin percentage × Revenues (in dollars)
B) Contribution margin ratio = Contribution margin percentage × Fixed costs (in dollars)
C) Contribution margin ratio = Contribution margin percentage × Variable costs (in dollars)
D) Contribution margin ratio = Contribution margin percentage × Operating leverage
28) While doing cost-volume-profit analysis, a company should separate costs into fixed and variable
components.
29) Sales margin = Contribution margin percentage × Revenues (in dollars).
30) It is assumed in CVP analysis that the unit selling price, unit variable costs, and unit fixed costs are
known and constant.
31) In CVP analysis, the number of output units is the only revenue driver.
32) In CVP analysis, the graph of total revenues versus total costs is linear in nature relation to units sold
within a relevant range and time period.
33) The difference between total revenues and total variable costs is called profit margin.
34) The shorter the time horizon, the lower the percentage of total costs considered fixed.
35) The three methods used to study CVP analysis are graphical method, contribution method, and
equation method.
36) Contribution margin = Contribution margin percentage × Revenues (in dollars).
37) A revenue driver is a variable, such as volume, that causally affects revenues.
38) Operating income plus total fixed costs equals the contribution margin.
39) A revenue driver is a variable, such as volume, that causally affects revenues.
40) The classification of costs as variable and fixed depends on the relevant range, the length of the time
horizon, and the specific decision situation.
41) The difference between total revenues and total variable costs is called contribution margin.
42) Contribution margin per unit is a useful tool for calculating contribution margin and operating
income.
43) Arthur's Plumbing reported the following:
Revenues $4,500
Variable manufacturing costs $ 900
Variable nonmanufacturing costs $ 810
Fixed manufacturing costs $ 630
Fixed nonmanufacturing costs $ 545
Required:
a. Compute contribution margin.
b. Compute contribution margin percentage.
c. Compute gross margin.
d. Compute gross margin percentage.
e. Compute operating income.
Objective 3.2
1) Winnz sells 8,000 units resulting in $100,000 of sales revenue, $35,000 of variable costs, and $45,000 of
fixed costs. To achieve $150,000 in operating income, sales must total ________.
A) $440,000
B) $160,000
C) $130,000
D) $300,000
Answer the following questions using the information below:
Star Jewelry sells 500 units resulting in $75,000 of sales revenue, $28,000 of variable costs, and $18,000 of
fixed costs.
2) Breakeven point in units is ________.
A) 196 units
B) 203 units
C) 185 units
D) 192 units
3) The number of units that must be sold to achieve $40,000 of operating income is ________.
A) 677 units
B) 717 units
C) 617 units
D) 650 units
4) Sky High sells helicopters. During the current year, 100 helicopters were sold resulting in $820,000 of
sales revenue, $250,000 of variable costs, and $342,000 of fixed costs. Breakeven point in units is ________.
A) 80 units
B) 64 units
C) 60 units
D) 78 units
5) Sky High sells helicopters. During the current year, 100 helicopters were sold resulting in $820,000 of
sales revenue, $250,000 of variable costs, and $342,000 of fixed costs. The number of helicopters that must
be sold to achieve $300,000 of operating income is ________.
A) 113 units
B) 102 units
C) 96 units
D) 100 units
6) At the breakeven point of 2,000 units, variable costs total $4,000 and fixed costs total $6,000. The 2,001st
unit sold will contribute ________ to profits.
A) $1
B) $2
C) $3
D) $5
7) The breakeven point is the activity level where ________.
A) revenues equal fixed costs
B) revenues equal variable costs
C) contribution margin equals total costs
D) revenues equal the sum of variable and fixed costs
8) Breakeven point in units is ________.
A) total costs divided by profit margin per unit
B) contribution margin per unit divided by total cost per unit
C) fixed costs divided by contribution margin per unit
D) the sum of fixed and variable costs divided by contribution margin per unit
9) Sales total $400,000 when variable costs total $300,000 and fixed costs total $50,000. The breakeven
point in sales dollars is ________.
A) $200,000
B) $120,000
C) $170,000
D) $210,000
10) The breakeven point revenues is calculated by dividing ________.
A) fixed costs by total revenues
B) fixed costs by contribution margin percentage
C) total revenues by fixed costs
D) contribution margin percentage by fixed costs
11) At breakeven point, ________.
A) operating income is equal to zero
B) contribution margin minus fixed costs is equal to profits earned
C) revenues equal fixed costs minus variable costs
D) breakeven revenues equal fixed costs divided by the variable cost per unit
12) The breakeven point decreases if ________.
A) the variable cost per unit increases
B) the total fixed costs decrease
C) the contribution margin per unit decreases
D) the selling price per unit decreases
13) Assume only the specified parameters change in a CVP analysis. The contribution margin percentage
increases when ________.
A) total fixed costs increase
B) total fixed costs decrease
C) variable costs per unit increase
D) variable costs per unit decrease
14) What is the breakeven point in units, assuming a product's selling price is $100, fixed costs are
$16,000, unit variable costs are $20, and operating income is $5,200?
A) 100 units
B) 300 units
C) 400 units
D) 200 units
15) If unit outputs exceed the breakeven point ________.
A) there will be an increase in fixed costs
B) total sales revenue will exceed fixed costs
C) total sales revenue will exceed variable costs
D) there will be a profit
16) How many units would have to be sold to yield a target operating income of $23,000, assuming
variable costs are $25 per unit, total fixed costs are $2,000, and the unit selling price is $30?
A) 4,800 units
B) 4,400 units
C) 5,000 units
D) 5,200 units
17) If the breakeven point is 1,000 units and each unit sells for $50, then ________.
A) selling 1,040 units will result in a loss
B) selling $60,000 will result in a loss
C) selling $50,000 will result in zero profit
D) selling $45,000 will result in profit
18) If breakeven point is 1,000 units, each unit sells for $30, and fixed costs are $10,000, then on a graph
the ________.
A) total revenue line and the total cost line will intersect at $30,000 of revenue
B) total cost line will be zero at zero units sold
C) revenue line will start at $10,000
D) total revenue line and the total cost line will intersect at $40,000 of revenue
19) When fixed costs are $50,000 and variable costs are 60% of the selling price, then breakeven sales are
________.
A) $115,000
B) $125,000
C) $175,000
D) $275,000
Answer the following questions using the information below:
Ruben intends to sell his customers a special round-trip airline ticket package. He is able to purchase the
package from the airline carrier for $150 each. The round-trip tickets will be sold for $200 each and the
airline intends to reimburse Ruben for any unsold ticket packages. Fixed costs include $5,000 in
advertising costs.
20) What is the contribution margin per ticket package?
A) $50
B) $100
C) $150
D) $200
21) How many ticket packages will Ruben need to sell to break even?
A) 34 packages
B) 50 packages
C) 100 packages
D) 150 packages
22) How many ticket packages will Ruben need to sell in order to achieve $60,000 of operating income?
A) 367 packages
B) 434 packages
C) 1,100 packages
D) 1,300 packages
23) For every $25,000 of ticket packages sold, operating income will increase by ________.
A) $6,250
B) $12,500
C) $18,750
D) $15,000
24) Bovous Stores, Inc., sells several products. Information of average revenue and costs is as follows:
Selling price per unit $20.00
Variable costs per unit:
Direct material $4.00
Direct manufacturing labor $1.60
Manufacturing overhead $0.40
Selling costs $2.00
Annual fixed costs $96,000
What is the contribution margin percentage?
A) 60%
B) 66%
C) 33%
D) 55%
25) Bovous Stores, Inc., sells several products. Information of average revenue and costs is as follows:
Selling price per unit $20.00
Variable costs per unit:
Direct material $4.00
Direct manufacturing labor $1.60
Manufacturing overhead $0.40
Selling costs $2.00
Annual fixed costs $96,000
The revenues that the company must earn annually to make a profit of $144,000 are ________.
A) $378,000
B) $425,000
C) $400,000
D) $450,000
26) Frazer Corp sells several products. Information of average revenue and costs is as follows:
Selling price per unit $28.50
Variable costs per unit:
Direct material $5.50
Direct manufacturing labor $1.15
Manufacturing overhead $0.85
Selling costs $2.50
Annual fixed costs $125,000
What is the operating income earned if the company sells 15,000 units?
A) $162,750
B) $150,000
C) $148,500
D) $152,500
27) Frazer Corp sells several products. Information of average revenue and costs is as follows:
Selling price per unit $28.50
Variable costs per unit:
Direct material $5.50
Direct manufacturing labor $1.15
Manufacturing overhead $0.85
Selling costs $2.50
Annual fixed costs $125,000
If the company decides to lower its selling price by 12.25%, the operating income is reduced by ________.
A) $52,500
B) $50,500
C) $55,500
D) $29,500
Answer the following questions using the information below:
The following information is for High Corp:
Selling price $60 per unit
Variable costs $40 per unit
Total fixed costs $125,000
28) The number of units that High Corp must sell to reach targeted operating income of $25,000 is
________.
A) 6,000 units
B) 7,500 units
C) 3,334 units
D) 4,334 units
29) If targeted operating income is $50,000, then targeted sales revenue is ________.
A) $525,052
B) $533,333
C) $498,133
D) $517,072
Answer the following questions using the information below:
Stephanie's Bridal Shoppe sells wedding dresses. The average selling price of each dress is $1,000,
variable costs are $400, and fixed costs are $90,000.
30) What is the Bridal Shoppe's operating income when 200 dresses are sold?
A) $30,000
B) $80,000
C) $200,000
D) $100,000
