Chapter 15—Cost-Volume-Profit Analysis: A Managerial Planning
Tool Key
1. The break-even point is where total sales revenue equals total cost.
2. The contribution margin ratio can be calculated by subtracting the variable cost ratio from one.
3. Variable expense per unit consists only of direct materials, direct labor, and variable overhead.
4. The break-even point in sales dollars is equal to the break-even units multiplied by cost.
5. If variable expenses decrease and the price increases, the break-even point decreases.
6. Most firms would like to earn operating income equal to the break-even point.
7. In the equation to determine the number of units that must be sold to earn a target income, targeted income is
subtracted from fixed expense in the numerator.
8. If one increases variable costs per unit, the break-even point will decrease.
9. The impact on a firm’s income resulting from a change in the number of units sold can be assessed by
multiplying the unit contribution margin by the change in units sold assuming that fixed costs remain the same.
10. To find the number of units to sell to earn a targeted income, it is acceptable to simply adjust the break-even
units equation by adding target income to the variable cost.
11. To determine the number of units that must be sold to earn a target operating income, one can use the
equation for operating income and replace the operating income term with the target operating income.
12. The contribution margin income statement provides a good check to determine if the sale of a certain
number of units really results in operating income of the given amount.
13. If fixed costs increase, the break-even point decreases.
14. The profit-volume graph shows the relationship between profits and units sold.
15. The profit-volume graph shows the relationship between operating income and the number of units sold.
16. The linear equation for revenue is price multiplied by fixed cost.
17. The linear equation for total cost is (Unit variable cost ´ Units) + Fixed cost.
18. The cost-volume profit graph depicts the relationships among cost, volume, and profits, by plotting the total
revenue line and the total cost line on the graph.
19. It is possible to calculate the break-even point for individual products in a multiple product firm by
separating the common and direct fixed expenses.
20. If a multi-product company simply wants to know the overall break-even point, it is easiest to use the break-
even in sales revenue approach.
21. In a multi-product firm, if the sales mix changes, the break-even points for each product will not change.
22. Direct fixed expenses are the fixed costs that are not traceable to the segments and would remain even if one
of the segments was eliminated.
23. Common fixed expenses are the fixed costs that are traceable to the segments and would be avoided if the
segment did not exist.
24. If the break-even point increases, the margin of safety increases.
25. Operating leverage is the use of fixed cost to extract higher percentage changes in profits as sales activity
changes.
26. The margin of safety measures the units sold or the revenue earned above the break-even volume.
27. Managers can use CVP analysis to handle risk and uncertainty.
28. Given the following numbers from Webster Company, match the correct value with its appropriate term.
Webster Company sells a product for $20. Unit cost information is as follows:
Direct materials
$7
Direct labor
$3
Variable overhead
$4
Fixed overhead
$1
Webster normally produces 50,000 units and the fixed overhead rate is based on this amount. Fixed selling and administrative expense is $37,000.
29. Match each item with the correct statement below.
1. the selling price per
4. measured in units
point where the total revenue line and the total cost
30. Match each item with the correct statement below.
Direct fixed
Contribution
Operating
Degree of
Common fixed
31. The difference between sales and variable expenses is called the ______________________.
32. The ________________________ is the point where total revenue equals total cost.
33. The ______________________ is the proportion of each sales dollar that must be used to cover variable
costs.
34. The _________________________ is the proportion of each sales dollar available to cover fixed costs and
provide for profit.
35. ___________________________________ is the income statement format that is based on the separation of
costs into fixed and variable components.
36. ______________ gives us a way to determine how many units must be sold, or how much sales revenue
must be generated to earn a particular target income.
37. Assuming that fixed costs remain unchanged, the _____________________ can be used to find the profit
impact of a change in sales revenue.
38. The amount of income an organization is trying to achieve during a particular period is known as the
_____________.
39. A ________________________ visually portrays the relationship between profits and units sold.
40. The _________________________ depicts the relationships among cost, volume, and profits by plotting the
total revenue line and the total cost line on a graph.
41. ______________________ are those fixed costs that can be traced to each segment and would be avoided if
the segment did not exist.
42. Fixed costs that are not traceable to the segments and would remain even if one of the segments was
eliminated are known as _____________________________.
43. __________ is the relative combination of products being sold by a firm.
44. The _________________ is the units sold or the revenue earned above the break-even volume.
45. If the break-even volume for a company is 600 units and the company is currently selling 1,000 units than
the 400 units would represent the company’s ____________________.
46. _____________________ is the use of fixed costs to extract higher percentage changes in profits as sales
activity changes.
47. The _________________________________ can be measured for a given level of sales by taking the ratio
of contribution margin to operating income.
48. The quantity at which two systems produce the same operating income is referred to as the
___________________.
49. The “what–if” process of altering certain key variables to assess the effect on the original outcome is also
called a __________________.
50. A company’s mix of fixed costs relative to variable costs is referred to as its _______________.
51. The break-even point is when
52. Total contribution margin divided by total sales is the
53. At the break-even point,
54. If variable costs per unit decrease, sales volume at the break-even point will
55. Contribution margin ratio can be calculated in all of the following ways except
56. Assume the following information:
Variable cost ratio
80%
Total fixed costs
$60,000
What volume of sales dollars is needed to break even?
57. Which of the following equations is true?
58. If the selling price per unit increases, the break-even point in units will
59. Patricia Company produces two products, X and Y, which account for 60 percent and 40 percent,
respectively, of total sales dollars. Contribution margin ratios are 50 percent for X and 25 percent for Y. Total
fixed costs are $120,000. What is Patricia’s break-even point in sales dollars?
60. Clean Company sells its product for $80. In addition, it has a variable cost ratio of 60 percent and total fixed
costs of $8,000. What is the break-even point in sales dollars for Baker Company?
61. Sarah Smith, a sole proprietor, has the following projected figures for next year:
Selling price per unit
$150.00
Contribution margin per unit
$ 45.00
Total fixed costs
$630,000
What is the contribution margin ratio?
62. The ratio of fixed expenses to the contribution margin ratio is the
63. If the contribution margin per unit decreases, the break-even point in units
64. The income statement for Thomas Manufacturing Company for 2011 is as follows:
Sales (10,000 units)
$120,000
Variable expenses
72,000
Contribution margin
$ 48,000
Fixed expenses
36,000
Operating income
$ 12,000
What is the contribution margin per unit?
65. Dirth Company sells only one product at a regular price of $7.50 per unit. Variable expenses are 60% of
sales and fixed expenses are $30,000. Management has decided to decrease the selling price to $6.00 in hopes
of increasing its volume of sales. What is the contribution margin ratio when the selling price is reduced to $6
per unit?
66. If the contribution margin ratio increases, the break-even point in sales dollars will
67. Dirth Company sells only one product at a regular price of $7.50 per unit. Variable expenses are 60% of
sales and fixed expenses are $30,000. Management has decided to decrease the selling price to $6.00 in hopes
of increasing its volume of sales. What is the sales dollars level required to break even at the old price of
$7.50?
68. If fixed costs increase, the break-even point in units will
69. Total variable cost divided by price is
70. Which statement is not true about cost-volume profit (CVP) analysis?
71. Melody Company sells a product for $14, variable costs are $10 per unit, and total fixed costs are $5,040.
What is the break-even point in units?
72. Melody Company sells a product for $14, variable costs are $10 per unit, and total fixed costs are $5,040.
What is the per unit contribution margin?
73. If the contribution margin ratio increases
74. Stepford Company makes dolls. The price is $10 and the variable expense per unit is $6. What is the
contribution margin ratio?
75. The contribution margin is
76. Figure 4-1.
Foster Company makes power tools. The budgeted sales are $420,000, budgeted variable costs are $147,000,
and budgeted fixed costs are $227,500.
Refer to Figure 4-1. What is the budgeted operating income?
77. Figure 4-1.
Foster Company makes power tools. The budgeted sales are $420,000, budgeted variable costs are $147,000,
and budgeted fixed costs are $227,500.
Refer to Figure 4-1. What is the variable cost ratio?
78. Figure 4-1.
Foster Company makes power tools. The budgeted sales are $420,000, budgeted variable costs are $147,000,
and budgeted fixed costs are $227,500.
Refer to Figure 4-1. What is the break-even point in sales dollars?
79. Figure 4-1.
Foster Company makes power tools. The budgeted sales are $420,000, budgeted variable costs are $147,000,
and budgeted fixed costs are $227,500.
Refer to Figure 4-1. What is the contribution margin?
80. Figure 4-1.
Foster Company makes power tools. The budgeted sales are $420,000, budgeted variable costs are $147,000,
and budgeted fixed costs are $227,500.
Refer to Figure 4-1. What is the contribution margin ratio?
81. Figure 4-2.
Pauley Company provides home health care. Pauley charges $35/hour for professional care. Variable costs are
$21/hour and fixed costs are $78,000. Next year, Pauley expects to charge out 12,000 hours of home health
care.
Refer to Figure 4-2. What is the break-even point in hours? (round to the nearest whole hour)
82. Figure 4-2.
Pauley Company provides home health care. Pauley charges $35/hour for professional care. Variable costs are
$21/hour and fixed costs are $78,000. Next year, Pauley expects to charge out 12,000 hours of home health
care.
Refer to Figure 4-2. What is the break-even point in sales dollars?
83. Figure 4-2.
Pauley Company provides home health care. Pauley charges $35/hour for professional care. Variable costs are
$21/hour and fixed costs are $78,000. Next year, Pauley expects to charge out 12,000 hours of home health
care.
Refer to Figure 4-2. What is the contribution margin ratio?
84. Figure 4-2.
Pauley Company provides home health care. Pauley charges $35/hour for professional care. Variable costs are
$21/hour and fixed costs are $78,000. Next year, Pauley expects to charge out 12,000 hours of home health
care.
Refer to Figure 4-2. What is the contribution margin per hour?
85. Figure 4-2.
Pauley Company provides home health care. Pauley charges $35/hour for professional care. Variable costs are
$21/hour and fixed costs are $78,000. Next year, Pauley expects to charge out 12,000 hours of home health
care.
Refer to Figure 4-2. What is the variable cost ratio?
86. Figure 4-2.
Pauley Company provides home health care. Pauley charges $35/hour for professional care. Variable costs are
$21/hour and fixed costs are $78,000. Next year, Pauley expects to charge out 12,000 hours of home health
care.
Refer to Figure 4-2. What is the budgeted operating income?
87. Figure 4-3.
Paney Company makes calendars. Information on cost per unit is as follows:
Direct materials
$1.50
Direct labor
1.20
Variable overhead
0.90
Variable marketing expense
0.40
Fixed marketing expense totaled $13,000 and fixed administrative expense totaled $35,000. The price per calendar is $10.
Refer to Figure 4-3. What is the contribution margin per unit?
88. Figure 4-3.
Paney Company makes calendars. Information on cost per unit is as follows:
Direct materials
$1.50
Direct labor
1.20
Variable overhead
0.90
Variable marketing expense
0.40
Fixed marketing expense totaled $13,000 and fixed administrative expense totaled $35,000. The price per calendar is $10.
Refer to Figure 4-3. What is the variable product expense per unit?
89. Figure 4-3.
Paney Company makes calendars. Information on cost per unit is as follows:
Direct materials
$1.50
Direct labor
1.20
Variable overhead
0.90
Variable marketing expense
0.40
Fixed marketing expense totaled $13,000 and fixed administrative expense totaled $35,000. The price per calendar is $10.
Refer to Figure 4-3. What is the variable cost per unit?
90. Figure 4-3.
Paney Company makes calendars. Information on cost per unit is as follows:
Direct materials
$1.50
Direct labor
1.20
Variable overhead
0.90
Variable marketing expense
0.40
Fixed marketing expense totaled $13,000 and fixed administrative expense totaled $35,000. The price per calendar is $10.
Refer to Figure 4-3. What is the break-even point in units?
91. Figure 4-3.
Paney Company makes calendars. Information on cost per unit is as follows:
Direct materials
$1.50
Direct labor
1.20
Variable overhead
0.90
Variable marketing expense
0.40
Fixed marketing expense totaled $13,000 and fixed administrative expense totaled $35,000. The price per calendar is $10.
Refer to Figure 4-3. What is the break-even point in sales dollars?
92. Figure 4-3.
Paney Company makes calendars. Information on cost per unit is as follows:
Direct materials
$1.50
Direct labor
1.20
Variable overhead
0.90
Variable marketing expense
0.40
Fixed marketing expense totaled $13,000 and fixed administrative expense totaled $35,000. The price per calendar is $10.
Refer to Figure 4-3. What is the variable expense ratio?
93. Figure 4-3.
Paney Company makes calendars. Information on cost per unit is as follows:
Direct materials
$1.50
Direct labor
1.20
Variable overhead
0.90
Variable marketing expense
0.40
Fixed marketing expense totaled $13,000 and fixed administrative expense totaled $35,000. The price per calendar is $10.
Refer to Figure 4-3. What is the contribution margin ratio?
94. Figure 4-3.
Paney Company makes calendars. Information on cost per unit is as follows:
Direct materials
$1.50
Direct labor
1.20
Variable overhead
0.90
Variable marketing expense
0.40
Fixed marketing expense totaled $13,000 and fixed administrative expense totaled $35,000. The price per calendar is $10.
Refer to Figure 4-3. How many units must be sold to yield targeted income of $36,000?
95. Figure 4-7.
A company provided the following data:
Selling price per unit
$60
Variable cost per unit
$40
Total fixed costs
$400,000
Refer to Figure 4-7. What is the break-even point in units?
96. Figure 4-7.
A company provided the following data:
Selling price per unit
$60
Variable cost per unit
$40
Total fixed costs
$400,000
Refer to Figure 4-7. How many units must be sold to earn a profit of $40,000?
97. Figure 4-8.
A company provided the following data:
Sales
$540,000
Variable costs
$378,000
Fixed costs
$120,000
Expected production and sales in units
40,000
Refer to Figure 4-8. What is the break-even point in sales dollars?