Chapter 3—Cost-Volume-Profit Analysis: A Managerial Planning
Tool Key
1. At the breakeven point, contribution margin equals revenue.
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. In the equation to determine the number of units that must be sold to earn a target income, targeted income is
added to fixed expense in the numerator.
5. The breakeven point in sales dollars is equal to the breakeven units multiplied by price.
6. If fixed costs increase, the breakeven point also increases.
7. If variable expenses decrease and the price increases, the breakeven point decreases.
8. It is impossible to calculate the breakeven point for individual products in a multiple product firm because
many of the fixed costs are common to a number of products.
9. If a multi-product company simply wants to know the overall breakeven point, it is easiest to use the
breakeven in sales revenue approach.
10. In a multi-product firm, if the sales mix changes, the breakeven points for each product will change.
11. If one increases variable costs per unit, the breakeven point will increase.
12. Most firms would like to earn operating income equal to the break-even point.
13. 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.
14. 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.
15. The profit-volume graph shows the relationship between profits and break-even point.
16. The profit-volume graph shows the relationship between operating income and the number of units sold.
17. If the breakeven point increases, the margin of safety increases.
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. The linear equation for revenue is price multiplied by fixed cost.
20. The linear equation for total cost is (Unit variable cost ´ Units) + Fixed cost.
21. Operating leverage is the use of fixed cost to extract higher percentage changes in profits as sales activity
changes.
22. The margin of safety measures the difference between operating income and breakeven income.
23. 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.
24. Common fixed expenses are the fixed costs that are not traceable to the segments and would remain even if
one of the segments was eliminated.
25. Managers can use CVP analysis to handle risk and uncertainty.
26. 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.
27. To find the number of units to sell to earn a targeted income, it is quicker to simply adjust the break-even
units equation by adding target income to the variable cost.
28. The break-even point is the point where
29. Total contribution margin divided by sales revenue is
30. Total variable cost divided by sales revenue is
31. Which statement is not true about cost-volume profit (CVP) analysis?
32. Melody Company sells a product for $14, variable costs are $10 per unit, and total fixed costs are $5,040.
What is the breakeven point in units?
33. 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?
34. Melody Company sells a product for $14, variable costs are $10 per unit, and total fixed costs are $5,040. If
Melody wants to earn an operating profit of $880, how many units must it sell?
35. Stepford Company makes dolls. The price is $10 and the variable expense per unit is $6. What is the
contribution margin ratio?
36. The contribution margin is
37. Which is the equation for operating income?
38. Rover Company sells go-carts at $500 each, incurs variable cost per unit of $300, and has a total fixed
expense of $50,000. How many units must be sold to achieve a target operating income of $43,000?
39. If the contribution margin ratio increases
40. If actual sales equal break-even sales
41. Fixed expenses that cannot be directly traced to individual segments are called
42. A graph that depicts the relationships among total variable costs, total fixed costs, number of units and
operating income is the
43. The units sold or expected to be sold or sales revenue earned or expected to be earned above the break-even
volume is called
44. The margin of safety in dollars is
45. ____ is a measure of the sensitivity of profit changes to changes in sales volume. It measures the percentage
change in profits resulting from a percentage change in sales.
46. Figure 3-1.
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 3-1. What is the budgeted operating income?
47. Figure 3-1.
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 3-1. What is the variable cost ratio?
48. Figure 3-1.
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 3-1. What is the breakeven point in sales dollars?
49. Figure 3-1.
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 3-1. What is the contribution margin?
50. Figure 3-1.
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 3-1. What is the contribution ratio?
51. Figure 3-2.
Pauley Company provides home health care. Pauley charges $35/hour for professional care. Variable casts 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 3-2. What is the breakeven point in hours? (round to the nearest whole hour)
52. Figure 3-2.
Pauley Company provides home health care. Pauley charges $35/hour for professional care. Variable casts 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 3-2. What is the breakeven point in sales dollars?
53. Figure 3-2.
Pauley Company provides home health care. Pauley charges $35/hour for professional care. Variable casts 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 3-2. What is the contribution margin ratio?
54. Figure 3-2.
Pauley Company provides home health care. Pauley charges $35/hour for professional care. Variable casts 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 3-2. What is the contribution margin per unit?
55. Figure 3-2.
Pauley Company provides home health care. Pauley charges $35/hour for professional care. Variable casts 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 3-2. What is the variable cost ratio?
56. Figure 3-2.
Pauley Company provides home health care. Pauley charges $35/hour for professional care. Variable casts 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 3-2. What is the budgeted operating income?
57. Figure 3-3.
Paney Company makes calendars. Information on cost per unit is as follows:
Direct materials
$1.50
Direct labor
1.20
Variable overhead
0.90
Fixed overhead
1.00
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 3-3. What is the contribution margin per unit?
58. Figure 3-3.
Paney Company makes calendars. Information on cost per unit is as follows:
Direct materials
$1.50
Direct labor
1.20
Variable overhead
0.90
Fixed overhead
1.00
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 3-3. What is the variable product expense per unit?
59. Figure 3-3.
Paney Company makes calendars. Information on cost per unit is as follows:
Direct materials
$1.50
Direct labor
1.20
Variable overhead
0.90
Fixed overhead
1.00
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 3-3. What is the variable expense per unit?
60. Figure 3-3.
Paney Company makes calendars. Information on cost per unit is as follows:
Direct materials
$1.50
Direct labor
1.20
Variable overhead
0.90
Fixed overhead
1.00
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 3-3. What is the breakeven point in units?
61. Figure 3-3.
Paney Company makes calendars. Information on cost per unit is as follows:
Direct materials
$1.50
Direct labor
1.20
Variable overhead
0.90
Fixed overhead
1.00
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 3-3. What is the breakeven point in sales dollars?
62. Figure 3-3.
Paney Company makes calendars. Information on cost per unit is as follows:
Direct materials
$1.50
Direct labor
1.20
Variable overhead
0.90
Fixed overhead
1.00
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 3-3. What is the variable expense ratio?
63. Figure 3-3.
Paney Company makes calendars. Information on cost per unit is as follows:
Direct materials
$1.50
Direct labor
1.20
Variable overhead
0.90
Fixed overhead
1.00
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 3-3. What is the contribution margin ratio?
64. Figure 3-3.
Paney Company makes calendars. Information on cost per unit is as follows:
Direct materials
$1.50
Direct labor
1.20
Variable overhead
0.90
Fixed overhead
1.00
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 3-3. How many units must be sold to yield targeted income of $36,000?
65. Figure 3-4.
Yerke Company makes jungle gyms and tree houses for children. For jungle gyms, the price is $120 and
variable expenses are $90 per unit. For tree houses, the price is $200 and variable expenses are $100. Total
fixed expenses are $253,750. Last year, Yerke sold 12,000 gyms and 4,000 tree houses.
Refer to Figure 3-4. Using the lowest whole numbers, what is the sales mix of Gyms and Tree houses.
66. Figure 3-4.
Yerke Company makes jungle gyms and tree houses for children. For jungle gyms, the price is $120 and
variable expenses are $90 per unit. For tree houses, the price is $200 and variable expenses are $100. Total
fixed expenses are $253,750. Last year, Yerke sold 12,000 gyms and 4,000 tree houses.
Refer to Figure 3-4. Now suppose that Yerke expects tree house demand to increase from 4,000 to 8,000 units.
What is the new contribution margin ratio (rounded to two decimal places).
67. Figure 3-4.
Yerke Company makes jungle gyms and tree houses for children. For jungle gyms, the price is $120 and
variable expenses are $90 per unit. For tree houses, the price is $200 and variable expenses are $100. Total
fixed expenses are $253,750. Last year, Yerke sold 12,000 gyms and 4,000 tree houses.
Refer to Figure 3-4. Now suppose that Yerke expects tree house demand to increase from 4,000 to 8,000 units.
What is the number of jungle gyms sold at breakeven?
68. Figure 3-4.
Yerke Company makes jungle gyms and tree houses for children. For jungle gyms, the price is $120 and
variable expenses are $90 per unit. For tree houses, the price is $200 and variable expenses are $100. Total
fixed expenses are $253,750. Last year, Yerke sold 12,000 gyms and 4,000 tree houses.
Refer to Figure 3-4. Now suppose that Yerke expects tree house demand to increase from 4,000 to 8,000 units.
What is the number of tree houses sold at breakeven?
69. Figure 3-4.
Yerke Company makes jungle gyms and tree houses for children. For jungle gyms, the price is $120 and
variable expenses are $90 per unit. For tree houses, the price is $200 and variable expenses are $100. Total
fixed expenses are $253,750. Last year, Yerke sold 12,000 gyms and 4,000 tree houses.
Refer to Figure 3-4. Now suppose that Yerke expects tree house demand to increase from 4,000 to 8,000 units.
What is the sales revenue at breakeven?
70. Figure 3-5.
Xeller Company makes electronic keyboards. The practice model price is $220 and variable expenses are $190.
The deluxe model price is $340 and variable expenses are $250. The professional model price is $1,200 and
variable expense per unit is $800. Total fixed expenses are $187,000. Generally, Xeller sells 6 practice models
and 3 deluxe models for every professional model sold.
Refer to Figure 3-5. Using the sales mix stated in the facts from Figure 3-5 to form a package, what is the total
package contribution margin?
71. Figure 3-5.
Xeller Company makes electronic keyboards. The practice model price is $220 and variable expenses are $190.
The deluxe model price is $340 and variable expenses are $250. The professional model price is $1,200 and
variable expense per unit is $800. Total fixed expenses are $187,000. Generally, Xeller sells 6 practice models
and 3 deluxe models for every professional model sold.
Refer to Figure 3-5. What is the number of practice models sold at breakeven?
72. Figure 3-5.
Xeller Company makes electronic keyboards. The practice model price is $220 and variable expenses are $190.
The deluxe model price is $340 and variable expenses are $250. The professional model price is $1,200 and
variable expense per unit is $800. Total fixed expenses are $187,000. Generally, Xeller sells 6 practice models
and 3 deluxe models for every professional model sold.
Refer to Figure 3-5. What is the number of deluxe models sold at breakeven
73. Figure 3-5.
Xeller Company makes electronic keyboards. The practice model price is $220 and variable expenses are $190.
The deluxe model price is $340 and variable expenses are $250. The professional model price is $1,200 and
variable expense per unit is $800. Total fixed expenses are $187,000. Generally, Xeller sells 6 practice models
and 3 deluxe models for every professional model sold.
Refer to Figure 3-5. What is the number of professional models sold at breakeven?
74. Figure 3-5.
Xeller Company makes electronic keyboards. The practice model price is $220 and variable expenses are $190.
The deluxe model price is $340 and variable expenses are $250. The professional model price is $1,200 and
variable expense per unit is $800. Total fixed expenses are $187,000. Generally, Xeller sells 6 practice models
and 3 deluxe models for every professional model sold.
Refer to Figure 3-5. What is the overall sales revenue at breakeven?
75. At the break-even point,
76. Sales mix is the relative combination of
77. Sales mix can be expressed in terms of
78. In order for the break-even computation to be meaningful to management, sales mix should be computed
using the
79. A profit-volume graph differs from a cost-volume-profits graph in that a profit-volume graph displays only