ch12 Key
1. Estimates of sales price, variable costs per unit and profit targets are examples of a model’s parameter.
2. Generally, changing a model’s parameters will change the model’s outcomes.
3. When setting up a computer spread sheet model, the formulas in the analysis section should generally not
contain the actual numerical values.
4. The Theory of Constraints states that companies should emphasize the most productive aspects of the value
chain, as they are the most profitable.
5. If a company‘s sales mix changes from selling relatively high–margin items to relatively low–margin items, its
break-even point will increase.
6. Outsourcing should never be used to increase capacity because it defeats the theory of constraints.
7. An assumption made by break–even analysis is that total revenues are constant.
8. Operating Leverage is profit divided by the fixed cost.
9. Product-level activities are required for an organization to have the capacity to produce goods and services.
10. An increase in fixed costs will decrease the contribution margin.
11. An increase in building insurance will result in an increase in the break-even point.
12. If a company has a high level of operating leverage, a small decrease in sales will have a small effect on
operating income.
13. When a company has a scarce resource, they should allocate it all to the product that will provide the highest
contribution margin per unit produced.
14. Batch-level activities are performed to benefit multiple units of output equally and simultaneously.
15. Contribution margin is defined as total sales revenue minus total variable costs.
16. A strength of the CVP model is that it uses a single revenue driver and a single cost driver.
17. If practical capacity exceeds demand, the process is a bottleneck.
18. If demand exceeds practical capacity, the process is a bottleneck.
19. At the break-even point, contribution margin and total fixed costs are equal.
20. The salary of the company’s president is an example of a fixed cost.
21. Outsourcing can eliminate bottlenecks.
22. The break-even point lies at the intersection of the total revenue line and the fixed cost line on a CVP
graph.
23. Sensitivity analysis shows how the CVP model will respond to changes in the original variables or even
model assumptions.
24. (Appendix B. Linear programming can be used to help a company best allocate their scarce resources.
25. (Appendix B. The optimum point is a set of values that satisfies either the constraints or the objective
function.
26. An increase in the income tax rate will result in a decrease in the break-even point.
27. Variable costs per unit will decrease with a change in sales volume.
28. The theory of constraints applies to nonprofit organizations, since the primary goal of these organizations is
not profit maximization.
29. Which of the following is an example of a fixed cost?
30. How would an increase in fixed manufacturing costs and variable selling costs, respectively, affect the
contribution margin?
31. An increase in the production volume within the relevant range will result in:
32. Which of the following would be an example of a variable cost?
33. Contribution margin is:
34. Bates Corp. has the following information for its candy line:
Based on a market study, Bates estimates that it could increase the unit selling price by 15% and increase the
unit sales volume by 10% if $100,000 was spent on advertising. Based on the analysis, what would Bates’
operating income be from selling the candy if the decision is made to advertise?
35. Cost-volume profit (CVP) analysis is a key factor in many decisions, including choice of product lines,
pricing of products, marketing strategy, and use of productive facilities. A calculation used in a CVP analysis is
the break-even point. Once the break-even point has been reached, operating income will increase by the:
36. The breakeven point is decreased by:
37. Break-even analysis assumes that:
38. The contribution margin at the breakeven point
39. At the break-even point of 1,500 units, variable costs are $60,000, and fixed costs are $30,000. What would
operating income be if 1,501 units are sold?
40. Valdez and Sons has fixed costs of $90,000. Its contribution margin ratio is 60% and its one product sells
for $60. What is its break-even point in sales dollars?
41. Bigelow Industries manufactures swim caps. Their operating leverage is 3. Each cap sells for $10 and has a
contribution margin of $6. They expect to sell 37,500 swim caps. Their fixed costs are:
Use the following to answer questions 42-44:
The product that Menorah Corp. currently sells, candle operas, has fixed costs of $20,000, a sales price of $10
per candle opera and a variable cost of $4 per candle opera. If the fixed costs were to increase by 8 percent and
the sales price and variable costs were to increase by 10 percent, how would the breakeven point in units, the
contribution margin per unit, and the contribution margin ratio be affected?
Hilton – Chapter 12
42. Breakeven point in units
43. Contribution margin per unit
44. Given these changes, to earn a profit of $10,000, the company must sell how many candle operas.
(Remember they cannot sell partial candle operas)
45. If production volume increases within the relevant range, variable costs per unit will _____ and total fixed
costs will __________
46. Gamba Corp. sells its product for $30. Variable costs are $10 per unit. At the current volume of 40,000 units
sold per year, the company is just breaking even. Given these data, the annual fixed costs are:
47. Ramirez Corp. sells a product for $10 per unit. The fixed costs are $240,000 and the unit variable costs are
60% of the selling price. What sales would be necessary in order for Flom Corp. to realize a profit of 10% of
sales?
48. Reyes Company produces a product that sells for $50. Variable manufacturing costs are $22 per unit. Fixed
manufacturing costs are $7 per unit based on the current level of activity, and fixed selling and administrative
costs are $4 per unit. A sales commission of 10% of the selling price is paid on each unit sold. The contribution
margin per unit is:
49. A high level of operating leverage indicates a company has:
50. (Appendix B. Elite Company has unlimited demand for either Candy Coin or Candy Bars. However, they
have a limited capacity of machine hours to produce either product. Candy Coins sells for $10 per unit, has a
variable cost of $6 per unit and it takes 6 minutes to produce one unit. Candy Bars sells for $15 per unit, has a
variable cost of $3 per unit and it takes 10 minutes to produce one unit. Which of the following decisions would
maximize Elite‘s net income?
51. When using a computer spreadsheet model it is necessary to
52. A company that desires after tax income of $1,000,000 with a 40% tax rate, needs a before tax income of
Use the following to answer questions 53-56:
(CMA adapted) Ruben Corporation manufactures and sells T-shirts imprinted with college names and slogans.
Last year, the shirts sold for $7.50 each, and the variable cost to manufacture them was $2.25 per unit. The
company needed to sell 20,000 shirts to break even. The net income last year was $5,040. Ruben’s expectations
for the coming year include the following:
Ⴠ The sales price of the T-shirts will be $9
Ⴠ Variable costs to manufacture will increase by one-third
Ⴠ Fixed costs will increase by 10%
Ⴠ The income tax rate of 40% will be unchanged
Hilton – Chapter 12
53. The selling price that would maintain the same contribution margin ratio as last year is:
54. The number of T–shirts Ruben Corporation must sell to break even in the coming year is:
55. Sales for the coming year are expected to exceed last year‘s by 1,000 units. If this occurs, Ruben’s sales
volume in the coming year will be:
56. If Ruben Corporation wishes to earn $22,500 in net income for the coming year, the company sales volume
in dollars must be:
57. Chocolate Extreme sells both hard candy and chocolate candy. The current sales mix is 2 units of hard
candy for every 3 units of chocolate candy. Hard candy has a contribution margin of $4 per unit, while
chocolate candy has a contribution margin of $2 per unit. If fixed cost are $420,000 what are the total units sold
at the break-even point (rounded)?
58. Spreadsheets are a useful tool in financial modeling because they
Use the following to answer questions 59-60:
HiCal Candies, a candy producer using an activity based costing system, sells 20,000 almond chocolate bars per
month at $2 per bar. Unit level costs are $0.50 per bars; facility costs are $5,000 per month; six set-ups are
required per month at a cost of $500 per set-up. Product level activities for the moth consist of $200 per month
for product maintenance, $800 per month for product promotion.
Hilton – Chapter 12
59. What are HiCal’s monthly higher level costs?
60. What is HiCal’s break-even quantity (rounded)?
61. The cost of operating an employee fitness center is an example of a:
62. You are given the following information concerning scarces resources of a particularly high skilled
computer expert in an for an audit firm
The best use of the computer expert‘s time is to work on