Chapter 4 – Cost-Volume-Profit Analysis: A Managerial Tool
1. The break-even point is where total sales revenue equals total cost.
a.
True
b.
False
True
2. The contribution margin ratio can be calculated by subtracting the variable cost ratio from one.
a.
True
b.
False
True
3. Variable expense per unit consists only of direct materials, direct labor, and variable overhead.
a.
True
b.
False
False
4. The break-even point in sales dollars is equal to the break-even units multiplied by cost.
a.
True
b.
False
False
The break-even point in sales dollars is equal to the break-even units multiplied by price.
5. If variable expenses decrease and the price increases, the break-even point decreases.
a.
True
b.
False
True
6. Most firms would like to earn operating income equal to the break-even point.
a.
True
b.
False
False
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.
a.
True
b.
False
False
8. If one increases variable costs per unit, the break-even point will decrease.
a.
True
b.
False
False
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.
Chapter 4 – Cost-Volume-Profit Analysis: A Managerial Tool
a.
True
b.
False
True
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.
a.
True
b.
False
False
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.
a.
True
b.
False
True
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.
a.
True
b.
False
True
13. If fixed costs increase, the break-even point decreases.
a.
True
b.
False
False
14. The profit-volume graph shows the relationship between profits and units sold.
a.
True
b.
False
True
15. The profit-volume graph shows the relationship between operating income and the number of units sold.
a.
True
b.
False
True
16. The linear equation for revenue is price multiplied by fixed cost.
a.
True
b.
False
False
17. The linear equation for total cost is (Unit variable cost × Units) + Fixed cost.
a.
True
b.
False
Chapter 4 – Cost-Volume-Profit Analysis: A Managerial Tool
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.
a.
True
b.
False
True
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.
a.
True
b.
False
True
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.
a.
True
b.
False
True
21. In a multi-product firm, if the sales mix changes, the break-even points for each product will not change.
a.
True
b.
False
False
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.
a.
True
b.
False
False
23. Common fixed expenses are the fixed costs that are traceable to the segments and would be avoided if the segment did
not exist.
a.
True
b.
False
False
24. If the break-even point increases, the margin of safety increases.
a.
True
b.
False
False
25. Operating leverage is the use of fixed cost to extract higher percentage changes in profits as sales activity changes.
a.
True
True
Chapter 4 – Cost-Volume-Profit Analysis: A Managerial Tool
b.
False
True
26. The margin of safety measures the units sold or the revenue earned above the break-even volume.
a.
True
b.
False
True
27. Managers can use CVP analysis to handle risk and uncertainty.
a.
True
b.
False
True
28. The difference between sales and variable expenses is called the ______________________.
29. The ________________________ is the point where total revenue equals total cost.
30. The ______________________ is the proportion of each sales dollar that must be used to cover variable costs.
31. The _________________________ is the proportion of each sales dollar available to cover fixed costs and provide for
profit.
32. ___________________________________ is the income statement format that is based on the separation of costs into
fixed and variable components.
33. ______________ 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.
34. Assuming that fixed costs remain unchanged, the _____________________ can be used to find the profit impact of a
change in sales revenue.
35. The amount of income an organization is trying to achieve during a particular period is known as the _____________.
36. A ________________________ visually portrays the relationship between profits and units sold.
37. The _________________________ depicts the relationships among cost, volume, and profits by plotting the total
revenue line and the total cost line on a graph.
Chapter 4 – Cost-Volume-Profit Analysis: A Managerial Tool
38. ______________________ are those fixed costs that can be traced to each segment and would be avoided if the
segment did not exist.
Direct fixed expenses
39. Fixed costs that are not traceable to the segments and would remain even if one of the segments was eliminated are
known as _____________________________.
common fixed expenses
40. __________ is the relative combination of products being sold by a firm.
Sales mix
41. The _________________ is the units sold or the revenue earned above the break-even volume.
margin of safety
42. 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 ____________________.
margin of safety
43. _____________________ is the use of fixed costs to extract higher percentage changes in profits as sales activity
changes.
Operating leverage
44. The _________________________________ can be measured for a given level of sales by taking the ratio of
contribution margin to operating income.
45. The quantity at which two systems produce the same operating income is referred to as the ___________________.
indifference point
46. The “what–if” process of altering certain key variables to assess the effect on the original outcome is also called a
__________________.
sensitivity analysis
47. A company’s mix of fixed costs relative to variable costs is referred to as its _______________.
cost structure
48. The break-even point is when
a.
the company is operating at a loss.
b.
total revenue equals total cost.
c.
the company is earning a small profit.
d.
total sales equal variable costs.
e.
total sales equals operating income.
49. Total contribution margin divided by total sales is the
a.
indifference point.
b.
margin of safety.
Chapter 4 – Cost-Volume-Profit Analysis: A Managerial Tool
c.
sales ratio.
d.
target income.
e.
contribution margin ratio.
e
50. At the break-even point,
a.
total revenue equals variable cost.
b.
total fixed cost equals variable cost.
c.
total contribution margin equals total fixed cost.
d.
total sales equals total fixed cost.
e.
total margin of safety equals variable cost.
c
51. If variable costs per unit decrease, sales volume at the break-even point will
a.
decrease.
b.
stay constant.
c.
double.
d.
increase.
a
52. Contribution margin ratio can be calculated in all of the following ways except
a.
fixed costs / Contribution margin per unit.
b.
1 − Variable cost ratio.
c.
contribution margin per unit / price.
d.
total contribution margin / Total sales.
e.
All of these are correct.
a
53. Assume the following information:
Variable cost ratio
80%
Total fixed costs
$60,000
What volume of sales dollars is needed to break even?
a.
$75,000
b.
$300,000
c.
$48,000
d.
$12,000
54. Which of the following equations is true?
a.
Contribution margin = Sales revenue × Variable cost ratio
b.
Contribution margin ratio = Contribution margin / Variable costs
c.
Contribution margin = Fixed costs
d.
Contribution margin ratio = 1 − Variable cost ratio
Chapter 4 – Cost-Volume-Profit Analysis: A Managerial Tool
55. If the selling price per unit increases, the break-even point in units will
a.
decrease.
b.
increase.
c.
remain the same.
d.
remain the same; however, contribution per unit will decrease.
a
56. Patricia Company produces two products, X and Y, which account for 60% and 40%, respectively, of total sales
dollars. Contribution margin ratios are 50% for X and 25% for Y. Total fixed costs are $120,000. What is Patricia’s break–
even point in sales dollars?
a.
$300,000
b.
$328,767
c.
$342,856
d.
$375,000
$120,000 / 0.4 = $300,000
57. Clean Company sells its product for $80. In addition, it has a variable cost ratio of 60% and total fixed costs of $8,000.
What is the break-even point in sales dollars for Baker Company?
a.
$4,800
b.
$32,000
c.
$20,000
d.
$8,000
58. 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?
a.
0.300
b.
1.429
c.
0.429
d.
3.333
e.
0.70
$45 / $150 = 0.300
59. The ratio of fixed expenses to the contribution margin ratio is the
Chapter 4 – Cost-Volume-Profit Analysis: A Managerial Tool
a.
indifference point.
b.
break-even point in units.
c.
fixed cost ratio.
d.
break-even point in sales.
e.
sensitivity analysis.
60. If the contribution margin per unit decreases, the break-even point in units
a.
will increase.
b.
will decrease.
c.
will remain the same.
d.
cannot be determined from the information given.
a
61. The income statement for Thomas Manufacturing Company for the current year 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?
a.
$7.20
b.
$1.20
c.
$4.80
d.
$120,000
62. 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?
a.
25%
b.
40%
c.
75%
d.
60%
63. If the contribution margin ratio increases, the break-even point in sales dollars will
a.
increase.
b.
decrease.
c.
remain the same.
d.
double.
Chapter 4 – Cost-Volume-Profit Analysis: A Managerial Tool
64. 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?
a.
$75,000
b.
$12,000
c.
$18,000
d.
$50,000
$30,000 / 0.4 = $75,000
65. If fixed costs increase, the break-even point in units will
a.
increase.
b.
decrease.
c.
remain the same.
d.
remain the same; however, contribution per unit will decrease.
a
66. Total variable cost divided by price is
a.
variable cost ratio.
b.
revenue ratio.
c.
contribution ratio.
d.
sales ratio.
e.
degree of operating leverage.
a
67. Which statement is true about cost-volume profit (CVP) analysis?
a.
CVP analysis is a powerful tool for planning and decision making.
b.
CVP analysis allows managers to do sensitivity analysis by examining the impact of various prices or cost
levels on profit.
c.
CVP analysis shows how revenues, expenses, and profits behave as volume changes.
d.
CVP analysis can be used in both single-product and multi-product firms.
e.
All of these statements are true.
e
68. 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?
a.
640
b.
1,260
c.
210
d.
360
e.
504
$5,040 / ($14 − $10) = 1,260
Chapter 4 – Cost-Volume-Profit Analysis: A Managerial Tool
69. 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?
a.
$14
b.
$10
c.
$24
d.
$4
70. If the contribution margin ratio increases
a.
the variable cost ratio decreases.
b.
the break-even point increases.
c.
fixed costs must have decreased.
d.
price must have decreased.
e.
more units must be sold to break even.
a
71. Stepford Company makes dolls. The price is $10 and the variable expense per unit is $6. What is the contribution
margin ratio?
a.
62.5%
b.
37.5%
c.
55%
d.
40%
e.
60%
($10 − $6) / $10 = 40%
72. The contribution margin is
a.
the difference between sales and variable costs.
b.
the difference between target income and operating income.
c.
the difference between operating income and margin of safety.
d.
equal to sales.
e.
when total sales equals total costs.
a
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.
73. Refer to Figure 4-1. What is the budgeted operating income?
a.
$273,000
b.
$227,500
c.
$45,500
d.
$374,500
e.
$567,000
Chapter 4 – Cost-Volume-Profit Analysis: A Managerial Tool
74. Refer to Figure 4-1. What is the variable cost ratio?
a.
54%
b.
35%
c.
89%
d.
19%
e.
50%
$147,000 / $420,000 = 35%
75. Refer to Figure 4-1. What is the break-even point in sales dollars?
a.
$350,000
b.
$420,000
c.
$650,000
d.
$780,000
e.
$567,000
$227,500 / 0.65 = $350,000
76. Refer to Figure 4-1. What is the contribution margin?
a.
$90,000
b.
$183,000
c.
$36,000
d.
$273,000
e.
$374,500
$420,000 − $147,000 = $273,000
77. Refer to Figure 4-1. What is the contribution margin ratio?
a.
35%
b.
65%
c.
54%
d.
89%
e.
50%
$273,000 / $420,000 = 65%
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.
78. Refer to Figure 4-2. What is the break-even point in hours? (Round to the nearest whole hour.)
a.
2,229
b.
1,393
c.
3,714
$420,000 − $147,000 − $227,500 = $45,500
Chapter 4 – Cost-Volume-Profit Analysis: A Managerial Tool
d.
5,571
e.
12,000
79. Refer to Figure 4-2. What is the break-even point in sales dollars?
a.
$130,000
b.
$195,000
c.
$252,000
d.
$420,000
e.
$342,000
80. Refer to Figure 4-2. What is the contribution margin ratio?
a.
67%
b.
60%
c.
40%
d.
33%
e.
50%
100% − 60% = 40% or $14 / $35 = 40%
81. Refer to Figure 4-2. What is the contribution margin per hour?
a.
$21
b.
$35
c.
$14
d.
$56
e.
$6.50
82. Refer to Figure 4-2. What is the variable cost ratio?
a.
50%
b.
40%
c.
33%
d.
67%
e.
60%
$21 / $35 = 60%
83. Refer to Figure 4-2. What is the budgeted operating income?
a.
$342,000
b.
$174,000
c.
$168,000
Chapter 4 – Cost-Volume-Profit Analysis: A Managerial Tool
d.
$90,000
e.
$420,000
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.
84. Refer to Figure 4-3. What is the contribution margin per unit?
a.
$6.30
b.
$5.00
c.
$6.40
d.
$6.00
e.
$5.40
85. Refer to Figure 4-3. What is the variable product expense per unit?
a.
$5.00
b.
$4.00
c.
$3.60
d.
$1.30
e.
$4.60
$1.50 + $1.20 + $0.90 = $3.60
86. Refer to Figure 4-3. What is the variable cost per unit?
a.
$5.00
b.
$4.00
c.
$3.70
d.
$1.30
e.
$4.60
$1.50 + $1.20 + $0.90 + $0.40 = $4.00
87. Refer to Figure 4-3. What is the break-even point in units?
a.
2,167
b.
5,833
c.
8,000
Chapter 4 – Cost-Volume-Profit Analysis: A Managerial Tool
d.
12,000
e.
2,800
88. Refer to Figure 4-3. What is the break-even point in sales dollars?
a.
$120,000
b.
$80,000
c.
$58,330
d.
$21,670
e.
$28,000
89. Refer to Figure 4-3. What is the variable expense ratio?
a.
40%
b.
36%
c.
50%
d.
60%
e.
46%
$4 / $10 = 40%
90. Refer to Figure 4-3. What is the contribution margin ratio?
a.
36%
b.
40%
c.
50%
d.
60%
e.
44%
$6 / $10 = 60%
91. Refer to Figure 4-3. How many units must be sold to yield targeted income of $36,000?
a.
6,000
b.
5,833
c.
8,167
d.
14,000
e.
12,000
Figure 4-7.
A company provided the following data:
Chapter 4 – Cost-Volume-Profit Analysis: A Managerial Tool
Selling price per unit
$ 60
Variable cost per unit
40
Total fixed costs
400,000
92. Refer to Figure 4-7. What is the break-even point in units?
a.
20,000
b.
10,000
c.
6,667
d.
13,333
e.
12,000
$400,000 / ($60 per unit − $40 per unit) = 20,000 units
93. Refer to Figure 4-7. How many units must be sold to earn a profit of $40,000?
a.
8,500
b.
23,333
c.
22,000
d.
2,000
e.
20,000
($400,000 + $40,000) / ($60 per unit − $40 per unit) = 22,000 units
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 units
94. Refer to Figure 4-8. What is the break-even point in sales dollars?
a.
$498,000
b.
$400,000
c.
$171,429
d.
$112,500
e.
$150,000
95. Refer to Figure 4-8. How much sales in dollars is necessary to generate a profit of $30,000?
a.
$528,000
b.
$500,000
c.
$214,286
d.
$100,000
e.
$150,000
Chapter 4 – Cost-Volume-Profit Analysis: A Managerial Tool
Figure 4-4.
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.
96. Refer to Figure 4-4. Using the lowest whole numbers, what is the sales mix of gyms and tree houses?
a.
4:1
b.
3:1
c.
3:2
d.
2:3
e.
1:4
97. Refer to Figure 4-4. Now suppose that Yerke expects tree house demand to increase from 4,000 to 8,000 units. What
is the new (combined, overall or package) contribution margin ratio (rounded to two decimal places)?
a.
38%
b.
62%
c.
40%
d.
60%
e.
50%
98. Refer to Figure 4-4. 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 break-even?
a.
1,750
b.
668
c.
2,625
d.
1,002
e.
875
99. Refer to Figure 4-4. 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 break-even?
a.
1,750
b.
668
c.
2,625
d.
1,002
e.
875
Chapter 4 – Cost-Volume-Profit Analysis: A Managerial Tool
100. Refer to Figure 4-4. Now suppose that Yerke expects tree house demand to increase from 4,000 to 8,000 units. What
is the sales revenue at break-even?
a.
$411,250
b.
$253,700
c.
$1,076,250
d.
$665,000
e.
$140,000
($120 × 2,625) + ($200 × 1,750) = $665,000
875 × ($360 + $400) = $665,000
Figure 4-5.
Standlar Company makes wireless speakers. The standard model price is $360 and variable expenses are $210. The deluxe
model price is $500 and variable expenses are $300. The superior model price is $1,600 and variable expense per unit is
$600. Total fixed expenses are $300,000. Generally, Standlar sells 8 standard models and 4 deluxe models for every
superior model sold.
101. Using the sales mix stated in the facts from Figure 4-5 to form a package, what is the total package contribution
margin?
a.
$2,000
b.
$1,110
c.
$3,000
d.
$900
e.
$1,200
($150 × 8) + ($200 × 4) + ($1,000 × 1) = $3,000
102. Refer to Figure 4-5. What is the number of standard models sold at break-even?
a.
100
b.
800
c.
180
d.
1,000
e.
250
$300,000 / $3,000 = 100 packages
103. Refer to Figure 4-5. What is the number of deluxe models sold at break-even?
a.
250
b.
500
c.
400
d.
100
e.
1,000
$273,750 / $290 = 875 packages
Chapter 4 – Cost-Volume-Profit Analysis: A Managerial Tool
104. Refer to Figure 4-5. What is the number of superior models sold at break-even?
a.
200
b.
800
c.
400
d.
1,600
e.
100
105. Refer to Figure 4-5. What is the overall sales revenue at break-even?
a.
$778,800
b.
$387,200
c.
$648,000
d.
$550,000
e.
$480,000
($360 × 800) + ($500 × 400) + ($1,600 × 100) = $648,000
106. 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?
a.
1,480
b.
1,260
c.
1,040
d.
62
e.
247
($5,040 + $880) / ($14 − $10) = 1,480
107. The formula used to calculate the number of units needed in order to earn a target income is
a.
(Fixed costs + Variable costs) / Sales.
b.
(Fixed costs + Target income) / Sales.
c.
(Fixed costs + Target income) / Contribution margin per unit.
d.
(Fixed costs + Variable costs) / Contribution margin per unit.
e.
(Fixed costs + Target income) / Contribution margin ratio.
c
108. The formula that can be used to calculate sales dollars necessary in order to earn a target income is
a.
(Fixed costs + Contribution margin) / (Contribution margin ratio).
b.
(Fixed costs + Target income) / (Contribution margin ratio).
c.
(Fixed costs + Variable costs) / (1 − Variable cost ratio).
Chapter 4 – Cost-Volume-Profit Analysis: A Managerial Tool
d.
(Fixed costs + Target income ) / (1 − Sales ratio).
e.
All of these are correct.
109. Assume the following information:
Selling price per unit
$150
Contribution margin ratio
40%
Total fixed costs
$225,000
How many units must be sold to generate a profit of $45,000?
a.
3,000 units
b.
2,500 units
c.
4,500 units
d.
3,750 units
110. Which is the equation for operating income?
a.
(Price × Units sold) − (Unit variable cost × Units sold) − Fixed cost
b.
(Price × Units sold) + (Unit variable cost × Units sold) + Fixed cost
c.
(Price + Units sold) − (Unit variable cost + Units sold) − Fixed cost
d.
(Price − Units sold) + (Unit variable cost − Units sold) + Fixed cost
e.
(Price × Units sold) + (Unit variable cost × Units sold) − Fixed cost
111. Rachel Company sells office chairs at $350 each, incurs variable cost per unit of $100, and has a total fixed expense
of $30,000. How many units must be sold to achieve a target operating income of $55,000?
a.
200
b.
340
c.
180
d.
450
e.
275
Units = ($30,000 + $55,000) / ($350 − 100) = 340 units
112. A graph that depicts the relationships among cost, volume and profits (operating income) is the
a.
Cost graph.
b.
Volume graph.
c.
Cost-volume-profit graph.
d.
Profit-volume graph.
e.
break-even graph.
113. A profit-volume graph differs from a cost-volume-profits graph in that a profit-volume graph displays only
a.
costs associated with units produced.
Chapter 4 – Cost-Volume-Profit Analysis: A Managerial Tool
b.
operating income associated with expected sales.
c.
revenues and costs associated with sales volume.
d.
revenues expected at targeted sales levels.
e.
All of these are correct.
114. On a cost-volume-profit graph, the break-even point is where
a.
the revenue line intersects the profit line.
b.
the revenue line intersects the total cost line.
c.
the fixed cost line intersects the variable cost line.
d.
the contribution margin line intersects the fixed cost line.
e.
All of these are correct.
115. Which of the following is not an assumption used to prepare a cost-volume-profit graph?
a.
costs are linear within the relevant range
b.
units produced equals units sold
c.
constant sales mix
d.
constant cost fluctuation
e.
All of these are assumptions used in preparing cost-volume-profit graphs.
116. Which of the following is not an assumption of a cost-volume-profit analysis?
a.
Selling price and costs can be accurately identified.
b.
Selling price and costs remain constant within the relevant range.
c.
Inventory levels can increase or decrease.
d.
Selling price and costs behave in a linear manner.
117. A profit-volume graph visually portrays the relationship between
a.
total sales and fixed cost.
b.
profits and units sold.
c.
total sales and margin of safety.
d.
total sales and variable costs.
e.
profits and degree of operating leverage.
118. The profit-volume graph
a.
is difficult to interpret.
b.
fails to reveal how costs change as sales volume changes.
c.
can be only plotted using the break-even point.
d.
can be only plotted using fixed costs.
e.
shows the relationship between operating income and variable costs.