31) How many dresses are sold when operating income is zero?
A) 225 dresses
B) 150 dresses
C) 100 dresses
D) 90 dresses
32) Dr. Charles Hunter, MD, performs a certain outpatient procedure for $1,000. His fixed costs are
$20,000, while his variable costs are $500 per procedure. Dr. Hunter currently plans to perform 200
procedures this month.What is the breakeven point for the month assuming that Dr. Hunter plans to
perform the procedure 200 times?
A) 40 times
B) 30 times
C) 20 times
D) 10 times
33) Pearl Lights sells only pearl necklaces. 8,000 units were sold resulting in $240,000 of sales revenue,
$60,000 of variable costs, and $40,000 of fixed costs. The breakeven point in total sales dollars is ________.
A) $40,000
B) $53,334
C) $100,000
D) $58,334
34) Zealz Manufacturing produces a single product that sells for $80. Variable costs per unit equal $30.
The company expects total fixed costs to be $70,000 for the next month at the projected sales level of 2,000
units. In an attempt to improve performance, management is considering a number of alternative actions.
Each situation is to be evaluated separately. What is the current breakeven point in terms of number of
units?
A) 1,400 units
B) 2,250 units
C) 3,333 units
D) 1725 units
35) Lights Manufacturing produces a single product that sells for $125. Variable costs per unit equal $50.
The company expects total fixed costs to be $75,000 for the next month at the projected sales level of 1,000
units. What is the current breakeven point in terms of number of units?
A) 800 units
B) 1033 units
C) 667 units
D) 1,000 units
36) Which of the following will increase a company’s breakeven point?
A) increasing variable cost per unit
B) increasing contribution margin per unit
C) reducing its total fixed costs
D) increasing the selling price per unit
37) The breakeven point is the quantity of output at which total revenues equal fixed costs.
38) Breakeven point is the point at which operating income is zero.
39) In the graph method of CVP analysis, the horizontal line above the x-axis represents the total cost line.
40) A profit-volume graph shows the impact on operating income from changes in the output level.
41) In the profit-volume graph the point at which the profit-volume line and x-axis intersect is the
breakeven point.
42) Digital Cellular sells phones for $100. The unit variable cost per phone is $50 plus a selling
commission of 10%. Fixed manufacturing costs total $1,250 per month, while fixed selling and
administrative costs total $2,500.
Required:
a. What is the contribution margin per phone?
b. What is the breakeven point in phones?
c. How many phones must be sold to earn pretax income of $7,500?
43) What is meant by the term breakeven point? Why should a manager be concerned about the
breakeven point and what helps them study the breakeven analysis?
Objective 3.3
1) 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. How many dresses must the Bridal Shoppe sell to
yield after-tax net income of $18,000, assuming the tax rate is 40%?
A) 200 dresses
B) 170 dresses
C) 150 dresses
D) 145 dresses
2) Zeta Corp’s most recent income statement is given below.
Sales (8,000 units) $160,000
Less variable expenses (68,000)
Contribution margin 92,000
Less fixed expenses (50,000)
Net income $ 42,000
Required:
a. Contribution margin per unit is $ ________ per unit
b. If sales are doubled to $240,000,
total variable costs will equal $ ________
c. If sales are doubled to $240,000,
total fixed costs will equal $ ________
d. If 20 more units are sold, profits will increase by $ ________
e. Compute how many units must be sold to break even. # ________
f. Compute how many units must be sold
to achieve profits of $60,000. # ________
3) Black Pearl, Inc., sells a single product. The company’s most recent income statement is given below.
Sales $50,000
Less variable expenses (30,000)
Contribution margin 20,000
Less fixed expenses (12,500)
Net income $ 7,500
Required:
a. Contribution margin ratio is ________%
b. Breakeven point in total sales dollars is $ ________
c. To achieve $40,000 in net income, sales must total $ ________
d. If sales increase by $50,000, net income will increase by $ ________
4) The selling price per unit is $25, variable cost per unit $15, and fixed cost per unit is $4. When this
company operates above the breakeven point, the sale of one more unit will increase net income by $6.
5) A company with sales of $50,000, variable costs of $35,000, and fixed costs of $25,000 will earn a net
income of $15,000.
6) Which of the following statements about net income (NI) is true?
A) NI = operating income plus nonoperating revenue.
B) NI = operating income plus operating costs.
C) NI = operating income less income taxes.
D) NI = operating income less cost of goods sold.
Answer the following questions using the information below:
Assume the following cost information for Fernandez Company:
Selling price $120 per unit
Variable costs $80 per unit
Total fixed costs $80,000
Tax rate 40%
7) What minimum volume of sales dollars is required to earn an after-tax net income of $30,000?
A) $465,000
B) $330,000
C) $390,000
D) $165,000
8) What is the number of units that must be sold to earn an after-tax net income of $42,000?
A) 3,750 units
B) 4,625 units
C) 3,050 units
D) 1,875 units
9) In CVP analysis, focusing on target net income rather than operating income ________.
A) will increase the breakeven point
B) will decrease the breakeven point
C) will not change the breakeven point
D) will help managers construct a better capital policy
10) Which of the following is true of net income?
A) Net income is operating income divided by income tax rate.
B) Net income is operating income plus operating revenues minus operating costs minus income taxes.
C) Net income is operating income plus nonoperating revenues minus nonoperating costs minus income
taxes.
D) Net income is operating income minus nonoperating revenues minus nonoperating costs minus sales
taxes.
11) If selling price per unit is $40, variable costs per unit are $25, total fixed costs are $20,000, the tax rate
is 30%, and the company sells 5,000 units, net income is ________.
A) $32,158
B) $26,548
C) $28,500
D) $38,500
12) The planned operating income is calculated by ________.
A) dividing net income by tax rate
B) dividing net income by 1 − tax rate
C) multiplying net income by tax rate
D) multiplying net income by 1 − tax rate
13) If Beta Corp’s net income is $210,000 and the tax rate is 30%, then the company’s planned operating
income is ________.
A) $325,000
B) $300,000
C) $273,000
D) $357,000
14) The Marietta Company has fixed costs of $60,000 and variable costs are 75% of the selling price. To
realize profits of $10,000 from sales of 50,000 units, the selling price per unit ________.
A) must be $1.20
B) must be $6.00
C) must be $5.60
D) must be $4.23
15) An increase in the tax rate will increase the breakeven point.
16) A firm operating at breakeven point will pay an income tax of 10%.
17) All else being constant, an increase in operating income will result in an increase in net income.
18) If planned net income is $30,000 and the tax rate is 30%, then planned operating income would be
$39,000.
19) The Holiday Card Company, a producer of specialty cards, has asked you to complete several
calculations based upon the following information:
Income tax rate 30%
Selling price per unit $6.60
Variable cost per unit $5.28
Total fixed costs $46,200.00
Required:
a. What is the breakeven point in cards?
b. What sales volume is needed to earn an after-tax net income of $13,028.40?
c. How many cards must be sold to earn an after-tax net income of $18,480?
20) James Corporation gathered the following information:
Variable costs $550,000
Income tax rate 40%
Contribution-margin ratio 30%
Required:
a. Compute total fixed costs assuming a breakeven volume in dollars of $2,000,000.
b. Compute sales volume in dollars to produce an after-tax net income of $150,000.
21) Explain net income and what implications can tax have on it that influences a manager’s decision?
Objective 3.4
1) Assume only the specified parameters change in a cost-volume-profit analysis. If the contribution
margin increases by $6 per unit, then ________.
A) fixed costs increases by $6 per unit
B) operating profits decreases by $6 per unit
C) fixed costs decreases by $6 per unit
D) operating profits increases by $6 per unit
2) Which of the following forms a part of decision making in CVP analysis?
A) selection of inventory method for financial reporting purposes
B) decision to form a capital policy
C) decision to advertise
D) decision to improve the efficiency of the work force
3) All else being equal, a reduction in selling price will ________.
A) increase contribution margin
B) reduce fixed costs
C) increase variable costs
D) reduce operating income
4) All else being equal, an increase in advertising expenditures will ________.
A) reduce operating income
B) reduce contribution margin
C) increase variable costs
D) increase selling price
5) Blistre Company operates on a contribution margin of 20% and currently has fixed costs of $500,000.
Next year, sales are projected to be $3,000,000. An advertising campaign is being evaluated that costs an
additional $80,000. How much would sales have to increase to justify the additional expenditure?
A) $320,000
B) $380,000
C) $400,000
D) $600,000
6) Tony Manufacturing produces a single product that sells for $80. Variable costs per unit equal $30. The
company expects total fixed costs to be $78,000 for the next month at the projected sales level of 2,500
units. In an attempt to improve performance, management is considering a number of alternative actions.
Each situation is to be evaluated separately.Suppose management believes that a $75,000 increase in the
monthly advertising expense will result in a considerable increase in sales. Sales must increase by
________ to justify this additional expenditure?
A) 1,698 units
B) 1,500 units
C) 1,550 units
D) 1,339 units
7) Tony Manufacturing produces a single product that sells for $80. Variable costs per unit equal $30. The
company expects total fixed costs to be $78,000 for the next month at the projected sales level of 2,500
units. In an attempt to improve performance, management is considering a number of alternative
actions. Each situation is to be evaluated separately.Suppose that management believes that a 10%
reduction in the selling price will result in a 10% increase in sales. If this proposed reduction in selling
price is implemented ________.
A) operating income will decrease by $9,500
B) operating income will increase by $10,000
C) operating income will decrease by $6,000
D) operating income will increase by $11,300
8) Craylon Manufacturing produces a single product that sells for $100. Variable costs per unit equal $25.
The company expects total fixed costs to be $60,000 for the next month at the projected sales level of 1,000
units. In an attempt to improve performance, management is considering a number of alternative actions.
Each situation is to be evaluated separately. Suppose that management believes that a $10,000 increase in
the monthly advertising expense will result in a considerable increase in sales. Sales must increase by
________ to justify this additional expenditure.
A) 123 units
B) 134 units
C) 243 units
D) 143 units
9) Craylon Manufacturing produces a single product that sells for $100. Variable costs per unit equal $25.
The company expects total fixed costs to be $60,000 for the next month at the projected sales level of 1,000
units. In an attempt to improve performance, management is considering a number of alternative actions.
Each situation is to be evaluated separately. What is the effect on operating income with the increase of
advertising expenses?
A) Operating income will decrease by $10,000.
B) Operating income will increase by $11,000.
C) Operating income will decrease by $18,000.
D) Operating income will increase by $17,000.
10) If contribution margin decreases by $1 per unit, then operating profits will increase by $1 per unit.
11) If variable costs per unit increase, then the breakeven point will decrease.
12) A planned increase in advertising would be considered an increase in variable costs in CVP analysis.
13) A planned decrease in selling price would be expected to cause an increase in the quantity sold.
14) In 2015, Craylon Company has sales of $1,000,000, variable costs of $250,000, and fixed costs of
$200,000. In 2016, the company expects annual property taxes to decrease by $15,000.
Required:
a. Calculate operating income and the breakeven point for 2015.
b. Calculate the breakeven point for 2016.
15) Furniture, Inc., sells lamps for $30. The unit variable cost per lamp is $22. Fixed costs total $9,600.
Required:
a. What is the contribution margin per lamp?
b. What is the breakeven point in lamps?
c. How many lamps must be sold to earn a pretax income of $8,000?
d. What is the margin of safety, assuming 1,500 lamps are sold?
16) Tom’s Tire Tower, Inc., sells tires for $110. The unit variable cost per tire is $85. Fixed costs total
$475,000.
Required:
a. What is the contribution margin per tire?
b. What is the breakeven point in tires?
c. How many tires must be sold to earn a pretax income of $450,000?
d. What is the margin of safety, assuming 33,000 tires are sold?
Objective 3.5
1) The margin of safety is the difference between ________.
A) budgeted expenses and breakeven expenses
B) budgeted revenues and breakeven revenues
C) actual operating income and budgeted operating income
D) actual sales margin and budgeted sales margin
2) To apply CVP analysis in the hotel industry, which of the following is the most important measure of
output?
A) number of room-nights occupied
B) number of visitors
C) number of dishes on the menu
D) number of employees
3) Stones Manufacturing, sells a marble slab for $1,000. Fixed costs are $30,000, while the variable costs
are $400 per slab. The company currently plans to sell 200 slabs this month. What is the margin of safety
assuming 75 slabs are budgeted?
A) $40,000
B) $38,000
C) $25,000
D) $33,000
4) Globus Autos sells a single product. 8,000 units were sold resulting in $80,000 of sales revenue, $20,000
of variable costs, and $10,000 of fixed costs. If variable costs decrease by $1 per unit, the new margin of
safety is ________.
A) $65,000
B) $73,567
C) $68,235
D) $66,765
5) Globus Autos sells a single product. 8,000 units were sold resulting in $80,000 of sales revenue, $20,000
of variable costs, and $10,000 of fixed costs. If a change is made in one parameter of CVP analysis, it is an
example of ________.
A) sensitivity analysis
B) incremental budgeting
C) variance analysis
D) multiple cost drivers
6) Sensitivity analysis is a “what-if” technique that managers use to examine how a result will change if
the originally predicted data are not achieved or if an underlying assumption changes.
7) Margin of safety measures the difference between budgeted revenues and breakeven revenues.
8) If a company’s breakeven revenue is $1,000 and its budgeted revenue is $1,250, then its margin of
safety percentage is 20%.
9) Sensitivity analysis helps to evaluate the risk associated with decisions.
10) Alex Miller, Inc., sells car batteries to service stations for an average of $30 each. The variable cost of
each battery is $20 and monthly fixed manufacturing costs total $10,000. Other monthly fixed costs of the
company total $8,000.
Required:
a. What is the breakeven point in batteries?
b. What is the margin of safety, assuming sales total $60,000?
c. What is the breakeven level in batteries, assuming variable costs increase by 20%?
d. What is the breakeven level in batteries, assuming the selling price goes up by 10%, fixed
manufacturing costs decline by 10%, and other fixed costs decline by $100?
11) Explain sensitivity analysis and how do managers use sensitivity analysis to evaluate its implications?
12) ________ is the process of varying key estimates to identify those estimates that are the most critical to
a decision.
A) The graph method
B) A sensitivity analysis
C) The degree of operating leverage
D) Sales mix