Chapter 4—Cost-Volume-Profit Analysis: A Managerial Planning Tool
TRUE/FALSE
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.
MATCHING
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.
a.
$6
b.
30%
c.
$14
d.
70%
e.
$290,000
f.
14,500
1. Variable cost per unit
2. Contribution margin per unit
3. break-even point (in units)
4. Variable cost ratio
5. Contribution margin ratio
6. break-even point (in dollars)
Match each item with the correct statement below.
a.
horizontal-axis of CVP graph
b.
vertical-axis of CVP graph
c.
slope of revenue line
d.
slope of cost line
e.
point where the total revenue line and the total cost line intersect
7. variable cost per unit
8. the selling price per unit
9. measured in dollars
10. measured in units sold
11. break-even point
Match each item with the correct statement below.
a.
break-even point
b.
Common fixed expenses
c.
Contribution margin
d.
Direct fixed expenses
e.
Margin of safety
f.
Operating leverage
g.
Degree of operating leverage
h.
Sales mix
12. Fixed costs that are directly traceable to a given segment and, consequently, disappear if the segment
is eliminated.
13. The relative combination of products (or services) being sold by an organization.
14. Sales revenue minus total variable cost or price minus unit variable cost.
15. The use of fixed costs to extract higher percentage changes in profits as sales activity changes.
16. The point where total sales revenue equals total cost.
17. A measure of the sensitivity of profit changes to changes in sales volume.
18. Fixed expenses that cannot be directly traced to individual segments and that are unaffected by the
elimination of any one segment.
19. The units sold or expected to be sold or sales revenue earned or expected to be earned above the break–
even volume.
COMPLETION
1. The difference between sales and variable expenses is called the ______________________.
2. The ________________________ is the point where total revenue equals total cost.
3. The ______________________ is the proportion of each sales dollar that must be used to cover
variable costs.
4. The _________________________ is the proportion of each sales dollar available to cover fixed costs
and provide for profit.
5. ___________________________________ is the income statement format that is based on the
separation of costs into fixed and variable components.
6. ______________ 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.
7. Assuming that fixed costs remain unchanged, the _____________________ can be used to find the
profit impact of a change in sales revenue.
8. The amount of income an organization is trying to achieve during a particular period is known as the
_____________.
9. A ________________________ visually portrays the relationship between profits and units sold.
10. The _________________________ depicts the relationships among cost, volume, and profits by
plotting the total revenue line and the total cost line on a graph.
11. ______________________ are those fixed costs that can be traced to each segment and would be
avoided if the segment did not exist.
12. Fixed costs that are not traceable to the segments and would remain even if one of the segments was
eliminated are known as _____________________________.
13. __________ is the relative combination of products being sold by a firm.
14. The _________________ is the units sold or the revenue earned above the break-even volume.
15. 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 ____________________.
16. _____________________ is the use of fixed costs to extract higher percentage changes in profits as
sales activity changes.
17. The _________________________________ can be measured for a given level of sales by taking the
ratio of contribution margin to operating income.
18. The quantity at which two systems produce the same operating income is referred to as the
___________________.
19. The “what–if” process of altering certain key variables to assess the effect on the original outcome is
also called a __________________.
20. A company’s mix of fixed costs relative to variable costs is referred to as its _______________.
MULTIPLE CHOICE
1. 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.
2. Total contribution margin divided by total sales is the
a.
indifference point.
b.
margin of safety.
c.
sales ratio.
d.
target income.
e.
contribution margin ratio.
3. 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.
4. If variable costs per unit decrease, sales volume at the break-even point will
a.
decrease.
b.
stay constant.
c.
double.
d.
increase.
5. 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.
6. 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
7. 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
8. 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.
9. 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
10. 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
11. Sarah Smith, a sole proprietor, has the following projected figures for next year:
$150.00
$ 45.00
$630,000
What is the contribution margin ratio?
a.
0.300
b.
1.429
c.
0.429
d.
3.333
12. The ratio of fixed expenses to the contribution margin ratio is the
a.
indifference point.
b.
break-even point in units.
c.
fixed cost ratio.
d.
break-even point in sales.
e.
sensitivity analysis.
13. 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.
14. The income statement for Thomas Manufacturing Company for 2011 is as follows:
$120,000
72,000
$ 48,000
36,000
$ 12,000
What is the contribution margin per unit?
a.
$7.20
b.
$1.20
c.
$4.80
d.
$120,000
15. 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%
16. If the contribution margin ratio increases, the break-even point in sales dollars will
a.
increase.
b.
decrease.
c.
remain the same.
d.
double.
17. 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
18. 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.
19. 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.
20. 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.
21. 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
22. 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.
$10
e.
$4
23. 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.
24. 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%
25. 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.
26. 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
27. Refer to Figure 4-1. What is the variable cost ratio?
a.
54%
b.
35%
c.
89%
d.
19%
e.
50%
28. 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
29. 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
30. Refer to Figure 4-1. What is the contribution margin ratio?
a.
35%
b.
65%
c.
54%
d.
89%
e.
50%
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.
31. 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
d.
5,571
e.
12,000
32. 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
33. Refer to Figure 4-2. What is the contribution margin ratio?
a.
67%
b.
60%
c.
40%
d.
33%
e.
50%
34. Refer to Figure 4-2. What is the contribution margin per hour?
a.
$21
b.
$35
c.
$14
d.
$56
e.
$6.50