CHAPTER 5
COST-VOLUME-PROFIT
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
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Multiple Choice Questions
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Brief Exercises
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sg This question also appears in the Study Guide.
st This question also appears in a self-test at the student companion website.
a This question covers a topic in an appendix to the chapter.
Test Bank for Managerial Accounting, Sixth Edition
FOR INSTRUCTOR USE ONLY
5 – 2
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
Exercises
167.
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Completion Statements
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Matching Statements
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Short-Answer Essay
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SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
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Learning Objective 1
1.
TF
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2.
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Ex
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Learning Objective 2
7.
TF
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199.
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Learning Objective 3
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Learning Objective 4
16.
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Learning Objective 5
18.
TF
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150.
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177.
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183.
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TF
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TF
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Cost-Volume-Profit
FOR INSTRUCTOR USE ONLY
5 – 3
Learning Objective 6
22.
TF
100.
MC
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152.
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TF
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168.
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183.
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184.
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203.
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99.
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175.
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186.
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Learning Objective 7
27.
TF
126.
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MC
136.
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155.
MC
187.
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192.
Ex
28.
TF
127.
MC
132.
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137.
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175.
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188.
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128.
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138.
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178.
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189.
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129.
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134.
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139.
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179.
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190.
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125.
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135.
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154.
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185.
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191.
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Learning Objective 8
29.
TF
140.
MC
143.
MC
164.
BE
168.
Ex
184.
Ex
204.
C
30.
TF
141.
MC
144.
MC
165.
BE
181.
Ex
187.
Ex
37.
TF
142.
MC
156.
MC
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BE
183.
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193.
Ex
Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise MA = Matching
SA = Short-Answer Essay
CHAPTER LEARNING OBJECTIVES
1. Distinguish between variable and fixed costs. Variable costs are costs that vary in total
directly and proportionately with changes in the activity index. Fixed costs are costs that
remain the same in total regardless of changes in the activity index.
2. Explain the significance of the relevant range. The relevant range is the range of activity
in which a company expects to operate during a year. It is important in CVP analysis
because the behavior of costs is assumed to be linear throughout the relevant range.
3. Explain the concept of mixed costs. Mixed costs increase in total but not proportionately
with changes in the activity level. For purposes of CVP analysis, mixed costs must be
classified into their fixed and variable elements. One method that management may use to
classify these costs is the high-low method.
4. List the five components of cost-volume-profit analysis. The five components of CVP
analysis are (a) volume or level of activity, (b) unit selling prices, (c) variable cost per unit,
(d) total fixed costs, and (e) sales mix.
5. Indicate what contribution margin is and how it can be expressed. Contribution margin
is the amount of revenue remaining after deducting variable costs. It is identified in a CVP
income statement, which classifies costs as variable or fixed. It can be expressed as a total
amount, as a per unit amount, or as a ratio.
6. Identify the three ways to determine the break-even point. The break-even point can be
(a) computed from a mathematical equation, (b) computed by using a contribution margin
technique, and (c) derived from a CVP graph.
Test Bank for Managerial Accounting, Sixth Edition
5 – 4
7. Give the formulas for determining sales required to earn target net income. The
general formula for required sales is: Required sales = Variable costs + Fixed costs +
Target net income. Two other formulas are: Required sales in units = (Fixed costs + Target
net income) ÷ Contribution margin per unit, and Required sales in dollars = (Fixed costs +
Target net income) ÷ Contribution margin ratio.
8. Define margin of safety, and give the formulas for computing it. Margin of safety is the
difference between actual or expected sales and sales at the break-even point. The
formulas for margin of safety are: Actual (expected) sales – Break-even sales = Margin of
safety in dollars; Margin of safety in dollars ÷ Actual (expected) sales = Margin of safety
ratio.
TRUE-FALSE STATEMENTS
1. An activity index identifies the activity that has a causal relationship with a particular cost.
2. A variable cost remains constant per unit at various levels of activity.
3. A fixed cost remains constant in total and on a per unit basis at various levels of activity.
4. If volume increases, all costs will increase.
5. If the activity index decreases, total variable costs will decrease proportionately.
6. Changes in the level of activity will cause unit variable and unit fixed costs to change in
opposite directions.
7. For CVP analysis, both variable and fixed costs are assumed to have a linear relationship
within the relevant range of activity.
8. The relevant range of activity is the activity level where the firm will earn income.
9. Costs will not change in total within the relevant range of activity.
10. The high-low method is used in classifying a mixed cost into its variable and fixed
elements.
Cost-Volume-Profit
5 – 5
11. A mixed cost has both selling and administrative cost elements.
12. The fixed cost element of a mixed cost is the cost of having a service available.
13. For planning purposes, mixed costs are generally grouped with fixed costs.
14. The difference between the costs at the high and low levels of activity represents the fixed
cost element of a mixed cost.
15. When applying the high-low method, the variable cost element of a mixed cost is
calculated before the fixed cost element.
16. An assumption of CVP analysis is that all costs can be classified as either variable or
fixed.
17. In CVP analysis, the term “cost” includes manufacturing costs, and selling and
administrative expenses.
18. Contribution margin is the amount of revenues remaining after deducting cost of goods
sold.
19. Unit contribution margin is the amount that each unit sold contributes towards the
recovery of fixed costs and to income.
20. The contribution margin ratio is calculated by multiplying the unit contribution margin by
the unit sales price.
21. Both variable and fixed costs are included in calculating the contribution margin.
22. A CVP income statement shows contribution margin instead of gross profit.
23. The break-even point is where total sales equal total variable costs.
Test Bank for Managerial Accounting, Sixth Edition
5 – 6
24. The break-even point is where total sales equal total variable costs.
25. The break-even point is equal to the fixed costs plus net income.
26. If the unit contribution margin is $1 and unit sales are 10,000 units above the break-even
volume, then net income will be $10,000.
27. A target net income is calculated by taking actual sales minus the margin of safety.
28. Target net income is the income objective for an individual product line.
29. The margin of safety is the difference between sales at breakeven and sales at a
determined activity level.
30. The margin of safety is the difference between contribution margin and fixed costs.
31. The activity level is represented by an activity index such as direct labor hours, units of
output, or sales dollars.
32. The trend in most companies is to have more variable costs and fewer fixed costs.
33. For purposes of CVP analysis, mixed costs must be classified into their fixed and variable
elements.
34. The contribution margin ratio of 40% means that 60 cents of each sales dollar is available
to cover fixed costs and to produce a profit.
35. A cost-volume-profit graph shows the amount of net income or loss at each level of sales.
36. If variable costs per unit are 70% of sales, fixed costs are $290,000 and target net income
is $70,000, required sales are $1,200,000.
Cost-Volume-Profit
5 – 7
37. The margin of safety ratio is equal to the margin of safety in dollars divided by the actual
or (expected) sales.
Answers to True-False Statements
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MULTIPLE CHOICE QUESTIONS
38. For an activity base to be useful in cost behavior analysis,
a. the activity should always be stated in dollars.
b. there should be a correlation between changes in the level of activity and changes in
costs.
c. the activity should always be stated in terms of units.
d. the activity level should be constant over a period of time.
39. A variable cost is a cost that
a. varies per unit at every level of activity.
b. occurs at various times during the year.
c. varies in total in proportion to changes in the level of activity.
d. may or may not be incurred, depending on management’s discretion.
40. A cost which remains constant per unit at various levels of activity is a
a. variable cost.
b. fixed cost.
c. mixed cost.
d. manufacturing cost.
Test Bank for Managerial Accounting, Sixth Edition
5 – 8
41. Two costs at Bradshaw Company appear below for specific months of operation.
Month Amount Units Produced
Delivery costs September $ 40,000 40,000
October 55,000 60,000
Utilities September $ 84,000 40,000
October 126,000 60,000
Which type of costs are these?
a. Delivery costs and utilities are both variable.
b. Delivery costs and utilities are both mixed.
c. Utilities are mixed and delivery costs are variable.
d. Delivery costs are mixed and utilities are variable.
42. An increase in the level of activity will have the following effects on unit costs for variable
and fixed costs:
Unit Variable Cost Unit Fixed Cost
a. Increases Decreases
b. Remains constant Remains constant
c. Decreases Remains constant
d. Remains constant Decreases
43. A fixed cost is a cost which
a. varies in total with changes in the level of activity.
b. remains constant per unit with changes in the level of activity.
c. varies inversely in total with changes in the level of activity.
d. remains constant in total with changes in the level of activity.
44. Fixed costs normally will not include
a. property taxes.
b. direct labor.
c. supervisory salaries.
d. depreciation on buildings and equipment.
45. The increased use of automation and less use of the work force in companies has caused
a trend towards an increase in
a. both variable and fixed costs.
b. fixed costs and a decrease in variable costs.
c. variable costs and a decrease in fixed costs.
d. variable costs and no change in fixed costs.
Cost-Volume-Profit
5 – 9
46. Cost behavior analysis is a study of how a firm’s costs
a. relate to competitors’ costs.
b. relate to general price level changes.
c. respond to changes in the level of business activity.
d. respond to changes in the gross national product.
47. Cost behavior analysis applies to
a. retailers.
b. wholesalers.
c. manufacturers.
d. all entities.
48. If a firm increases its activity level,
a. costs should remain the same.
b. most costs will rise.
c. no costs will remain the same.
d. some costs will change, others will remain the same.
49. An activity index might be referred to as a cost
a. driver.
b. multiplier.
c. element.
d. correlation.
50. Cost activity indexes might help classify costs as
a. temporary.
b. permanent.
c. variable.
d. transient.
51. Which of the following is not a cost classification?
a. Mixed
b. Multiple
c. Variable
d. Fixed
52. If the activity level increases 10%, total variable costs will
a. remain the same.
b. increase by more than 10%.
c. decrease by less than 10%.
d. increase 10%.
Test Bank for Managerial Accounting, Sixth Edition
5 – 10
53. Which of the following costs are variable?
Cost 10,000 Units 30,000 Units
1. $100,000 $300,000
2. 40,000 240,000
3. 90,000 90,000
4. 50,000 150,000
a. 1 and 2
b. 1 and 4
c. only 1
d. only 2
54. Changes in activity have a(n) _________ effect on fixed costs per unit.
a. positive
b. negative
c. inverse
d. neutral
55. Which of the following is not a fixed cost?
a. Direct materials
b. Depreciation
c. Lease charge
d. Property taxes
56. Why is identification of a relevant range important?
a. It is required under GAAP.
b. Cost behavior outside of the relevant range is not linear, which distorts CVP analysis.
c. It directly impacts the number of units of product a customer buys.
d. It is a cost that is incurred by a company that must be accounted for.
57. The relevant range of activity refers to the
a. geographical areas where the company plans to operate.
b. activity level where all costs are curvilinear.
c. levels of activity over which the company expects to operate.
d. level of activity where all costs are constant.
58. Which of the following is not a plausible explanation of why variable costs often behave in
a curvilinear fashion?
a. Labor specialization
b. Overtime wages
c. Total variable costs are constant within the relevant range
d. Availability of quantity discounts
Cost-Volume-Profit
5 – 11
59. Firms operating at 100% capacity
a. are common.
b. are the exception rather than the rule.
c. have no fixed costs.
d. have no variable costs.
60. Which of the following would be the least controllable fixed costs?
a. Property taxes
b. Rent
c. Research and development
d. Management training programs
61. Which one of the following is a name for the range over which a company expects to
operate?
a. Mixed range
b. Fixed range
c. Variable range
d. Relevant range
62. If graphed, fixed costs that behave in a curvilinear fashion resemble a(n)
a. S-curve.
b. inverted S-curve.
c. straight line.
d. stair-step pattern.
63. The graph of variable costs that behave in a curvilinear fashion will
a. approximate a straight line within the relevant range.
b. be sharply kinked on both sides of the relevant range.
c. be downward sloping.
d. be a stair-step pattern.
64. Frazier Manufacturing Company collected the following production data for the past
month:
Units Produced Total Cost
1,600 $44,000
1,300 38,000
1,500 45,000
1,100 33,000
If the high-low method is used, what is the monthly total cost equation?
a. Total cost = $8,800 + $22/unit
b. Total cost = $11,000 + $20/unit
c. Total cost = $0 + $30/unit
d. Total cost = $6,600 + $24/unit
Test Bank for Managerial Accounting, Sixth Edition
5 – 12
65. A mixed cost contains
a. a variable element and a fixed element.
b. both selling and administrative costs.
c. both retailing and manufacturing costs.
d. both operating and nonoperating costs.
66. At the high level of activity in November, 7,000 machine hours were run and power costs
were $16,000. In April, a month of low activity, 2,000 machine hours were run and power
costs amounted to $8,000. Using the high-low method, the estimated fixed cost element of
power costs is
a. $16,000.
b. $8,000.
c. $4,800.
d. $11,200.
67. Gribble Company’s high and low level of activity last year was 60,000 units of product
produced in May and 20,000 units produced in November. Machine maintenance costs
were $104,000 in May and $40,000 in November. Using the high-low method, determine
an estimate of total maintenance cost for a month in which production is expected to be
45,000 units.
a. $90,000
b. $96,000
c. $78,000
d. $80,000
68. Which of the following is not true about the graph of a mixed cost?
a. It is possible to determine the amount of the fixed cost from the graph.
b. There is a total cost line on the graph.
c. The fixed cost portion of the graph is the same amount at all levels of activity.
d. The variable cost portion of the graph is rectangular in shape.
69. Which of the following is not a mixed cost?
a. Car rental fee
b. Electricity
c. Depreciation
d. Telephone Expense
Cost-Volume-Profit
5 – 13
70. In using the high-low method, the fixed cost
a. is determined by subtracting the total cost at the high level of activity from the total
cost at the low activity level.
b. is determined by adding the total variable cost to the total cost at the low activity level.
c. is determined before the total variable cost.
d. may be determined by subtracting the total variable cost from either the total cost at
the low or high activity level.
71. If Qualls Quality Airline cuts its domestic fares by 30%,
a. its fixed costs will decrease.
b. profit will increase by 30%.
c. a profit can only be earned by decreasing the number of flights.
d. a profit can be earned either by increasing the number of passengers or by decreasing
variable costs.
72. In applying the high-low method, which months are relevant?
Month Miles Total Cost
January 80,000 $144,000
February 50,000 120,000
March 70,000 141,000
April 90,000 195,000
a. January and February
b. January and April
c. February and April
d. February and March
73. In applying the high-low method, what is the unit variable cost?
Month Miles Total Cost
January 80,000 $144,000
February 50,000 120,000
March 70,000 141,000
April 90,000 195,000
a. $2.16
b. $1.88
c. $2.40
d. Cannot be determined from the information given.
Test Bank for Managerial Accounting, Sixth Edition
5 – 14
74. In applying the high-low method, what is the fixed cost?
Month Miles Total Cost
January 80,000 $144,000
February 50,000 120,000
March 70,000 141,000
April 90,000 195,000
a. $26,250
b. $54,000
c. $21,000
d. $75,000
75. For analysis purposes, the high-low method usually produces a(n)
a. reasonable estimate.
b. precise estimate.
c. overstated estimate.
d. understated estimate.
76. The high-low method is criticized because it
a. is not a graphical method.
b. is a mathematical method.
c. ignores much of the available data by concentrating on only the extreme points.
d. doesn’t provide reasonable estimates.
77. The high-low method is often employed in analyzing
a. fixed costs.
b. mixed costs.
c. variable costs.
d. conversion costs.
78. Portman Company’s activity for the first three months of 2013 are as follows:
Machine Hours Electrical Cost
January 2,100 $3,600
February 2,600 $4,350
March 2,900 $4,800
Using the high-low method, how much is the cost per machine hour?
a. $1.50
b. $2.25
c. $1.69
d. $1.34
Cost-Volume-Profit
5 – 15
79. Ponszko Nursery used high-low data from June and July to determine its variable cost of
$18 per unit. Additional information follows:
Month Units produced Total costs
June 2,000 $48,000
July 1,000 30,000
If Ponszko’s produces 2,300 units in August, how much is its total cost expected to be?
a. $12,000
b. $59,400
c. $41,400
d. $53,400
80. In CVP analysis, the term “cost”
a. includes only manufacturing costs.
b. means cost of goods sold.
c. includes manufacturing costs plus selling and administrative expenses.
d. excludes all fixed manufacturing costs.
81. Which one of the following is not an assumption of CVP analysis?
a. All units produced are sold.
b. All costs are variable costs.
c. Sales mix remains constant.
d. The behavior of costs and revenues are linear within the relevant range.
82. CVP analysis does not consider
a. level of activity.
b. fixed cost per unit.
c. variable cost per unit.
d. sales mix.
83. Which of the following is not an underlying assumption of CVP analysis?
a. Changes in activity are the only factors that affect costs.
b. Cost classifications are reasonably accurate.
c. Beginning inventory is larger than ending inventory.
d. Sales mix is constant.
84. CVP analysis is not important in
a. calculating depreciation expense.
b. setting selling prices.
c. determining the product mix.
d. utilizing production facilities.
Test Bank for Managerial Accounting, Sixth Edition
5 – 16
85. To which function of management is CVP analysis most applicable?
a. Planning
b. Motivating
c. Directing
d. Controlling
86. Hollis Industries produces flash drives for computers, which it sells for $20 each. Each
flash drive costs $12 of variable costs to make. During April, 1,000 drives were sold. Fixed
costs for March were $2 per unit for a total of $1,000 for the month. How much is the
contribution margin ratio?
a. 30%
b. 40%
c. 60%
d. 70%
87. Contribution margin
a. is always the same as gross profit margin.
b. excludes variable selling costs from its calculation.
c. is calculated by subtracting total manufacturing costs per unit from sales revenue per
unit.
d. equals sales revenue minus variable costs.
88. If a company had a contribution margin of $750,000 and a contribution margin ratio of
40%, total variable costs must have been
a. $1,125,000.
b. $450,000.
c. $1,875,000.
d. $300,000.
89. Which of the following would not be an acceptable way to express contribution margin?
a. Sales minus variable costs
b. Sales minus unit costs
c. Unit selling price minus unit variable costs
d. Contribution margin per unit divided by unit selling price
90. A company has contribution margin per unit of $90 and a contribution margin ratio of 40%.
What is the unit selling price?
a. $150
b. $225
c. $36
d. Cannot be determined.
Cost-Volume-Profit
5 – 17
91. Sales are $500,000 and variable costs are $350,000. What is the contribution margin ratio?
a. 43%
b. 30%
c. 70%
d. Cannot be determined because amounts are not expressed per unit.
92. Dunbar Manufacturing’s variable costs are 30% of sales. The company is contemplating
an advertising campaign that will cost $44,000. If sales are expected to increase $80,000,
by how much will the company’s net income increase?
a. $36,000
b. $56,000
c. $24,000
d. $12,000
93. Weatherspoon Company has a product with a selling price per unit of $200, the unit
variable cost is $90, and the total monthly fixed costs are $300,000. How much is
Weatherspoon’s contribution margin ratio?
a. 55%
b. 45%
c. 150%
d. 222%
94. Armstrong Industries has a contribution margin of $300,000 and a contribution margin
ratio of 30%. How much are total variable costs?
a. $90,000
b. $700,000
c. $210,000
d. $1,000,000
95. Zehms, Inc. has a contribution margin per unit of $21 and a contribution margin ratio of
60%. How much is the selling price of each unit?
a. $35.00
b. $52.50
c. $12.60
d. Cannot be determined without more information.
Test Bank for Managerial Accounting, Sixth Edition
5 – 18
96. A division sold 100,000 calculators during 2013:
Sales $2,000,000
Variable costs:
Materials $380,000
Order processing 150,000
Billing labor 110,000
Selling expenses 60,000
Total variable costs 700,000
Fixed costs 1,000,000
How much is the contribution margin per unit?
a. $2
b. $7
c. $17
d. $13
97. At the break-even point of 2,000 units, variable costs are $110,000, and fixed costs are
$64,000. How much is the selling price per unit?
a. $87
b. $23
c. $32
d. Not enough information
98. The following information is available for Wade Corp.:
Sales $550,000 Total fixed expenses $150,000
Cost of goods sold 390,000 Total variable expenses 360,000
A CVP income statement would report
a. gross profit of $160,000.
b. contribution margin of $400,000.
c. gross profit of $190,000.
d. contribution margin of $190,000.
99. Which is the true statement?
a. In a CVP income statement, costs and expenses are classified only by function.
b. The CVP income statement is prepared for both internal and external use.
c. The CVP income statement shows contribution margin instead of gross profit.
d. In a traditional income statement, costs and expenses are classified as either variable
or fixed.
Cost-Volume-Profit
5 – 19
100. The equation which reflects a CVP income statement is
a. Sales = Cost of goods sold + Operating expenses + Net income.
b. Sales + Fixed costs = Variable costs + Net income.
c. Sales – Variable costs + Fixed costs = Net income.
d. Sales – Variable costs – Fixed costs = Net income.
101. The CVP income statement
a. is distributed internally and externally.
b. classifies costs by functions.
c. discloses contribution margin in the body of the statement.
d. will reflect a different net income than the traditional income statement.
102. O’Malley Company sells 100,000 units for $13 a unit. Fixed costs are $350,000 and net
income is $250,000. What should be reported as variable expenses in the CVP income
statement?
a. $600,000.
b. $700,000.
c. $950,000.
d. $1,050,000.
103. A company has total fixed costs of $200,000 and a contribution margin ratio of 20%. The
total sales necessary to break even are
a. $800,000.
b. $1,000,000.
c. $250,000.
d. $240,000.
104. A company sells a product which has a unit sales price of $5, unit variable cost of $3 and
total fixed costs of $180,000. The number of units the company must sell to break even is
a. 90,000 units.
b. 36,000 units.
c. 360,000 units.
d. 60,000 units.
105. The break-even point is where
a. total sales equal total variable costs.
b. contribution margin equals total fixed costs.
c. total variable costs equal total fixed costs.
d. total sales equal total fixed costs.
Test Bank for Managerial Accounting, Sixth Edition
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106. The break-even point cannot be determined by
a. computing it from a mathematical equation.
b. computing it using contribution margin.
c. reading the prior year’s financial statements.
d. deriving it from a CVP graph.
107. Select the correct statement concerning the
cost-volume-profit graph at right:
a. The point identified by “B” is the break-
even point.
b. Line F is the variable cost line.
c. At point B, profits equal total costs.
d. Line E is the total cost line.
108. Fixed costs are $600,000 and the variable costs are 75% of the unit selling price. What is
the break-even point in dollars?
a. $1,400,000
b. $1,800,000
c. $2,400,000
d. $800,000
109. Fixed costs are $2,400,000 and the contribution margin per unit is $150. What is the
break-even point?
a. $6,000,000
b. $16,000,000
c. 6,000 units
d. 16,000 units
110. Nelson Manufacturing has the following data:
Variable costs are 60% of the unit selling price.
The contribution margin ratio is 40%.
The contribution margin per unit is $500.
The fixed costs are $300,000.
Which of the following does not express the break-even point?
a. $300,000 + .60X = X
b. $300,000 + .40X = X
c. $300,000 ÷ $500 = X
d. $300,000 ÷ .40 = X
Cost-Volume-Profit
5 – 21
111. A CVP graph does not include a
a. variable cost line.
b. fixed cost line.
c. sales line.
d. total cost line.
112. Boswell company reported the following information for the current year: Sales (50,000
units) $1,000,000, direct materials and direct labor $500,000, other variable costs
$50,000, and fixed costs $270,000. What is Boswell’s contribution margin ratio?
a. 68%.
b. 45%.
c. 32%.
d. 55%.
113. Boswell company reported the following information for the current year: Sales (50,000
units) $1,000,000, direct materials and direct labor $500,000, other variable costs
$50,000, and fixed costs $270,000. What is Boswell’s break-even point in units?
a. 24,546.
b. 30,000.
c. 38,334.
d. 42,188.
114. Walters Corporation sells radios for $50 per unit. The fixed costs are $420,000 and the
variable costs are 60% of the selling price. As a result of new automated equipment, it is
anticipated that fixed costs will increase by $100,000 and variable costs will be 50% of the
selling price. The new break-even point in units is:
a. 21,000
b. 20,800
c. 20,600
d. 16,800
115. Cunningham, Inc. sells MP3 players for $60 each. Variable costs are $40 per unit, and
fixed costs total $90,000. What sales are needed by Cunningham to break even?
a. $120,000.
b. $225,000.
c. $270,000.
d. $360,000.
Test Bank for Managerial Accounting, Sixth Edition
5 – 22
116. Cunningham, Inc. sells MP3 players for $60 each. Variable costs are $40 per unit, and
fixed costs total $90,000. How many MP3 players must Cunningham sell to earn net
income of $210,000?
a. 15,000.
b. 5,250.
c. 3,750.
d. 4,500.
117. Gall Manufacturing sells a product for $50 per unit. The fixed costs are $735,000 and the
variable costs are 60% of the selling price. As a result of new automated equipment, it is
anticipated that fixed costs will increase by $175,000 and variable costs will be 50% of the
selling price. The new break-even point in units is:
a. 36,750.
b. 36,400.
c. 36,050.
d. 29,400.
118. Pascal, Inc. is planning to sell 800,000 units for $1.50 per unit. The contribution margin
ratio is 20%. If Pascal will break even at this level of sales, what are the fixed costs?
a. $240,000.
b. $560,000.
c. $800,000.
d. $960,000.
119. April Industries sells a product with a contribution margin of $12 per unit, fixed costs of
$148,800, and sales for the current year of $200,000. How much is April’s break–even
point?
a. 9,200 units
b. $51,200
c. 12,400 units
d. 4,267 units
120. Kaplan, Inc. produces flash drives for computers, which it sells for $20 each. The variable
cost to make each flash drive is $13. During April, 700 drives were sold. Fixed costs for
April were $2 per unit for a total of $1,400 for the month. How much is the monthly break-
even level of sales in dollars for Kaplan?
a. $200
b. $4,000
c. $14,000
d. $8,400
Cost-Volume-Profit
5 – 23
121. Vintage Wines has fixed costs of $15,000 per year. Its warehouse sells wine with variable
costs of 80% of its unit selling price. How much in sales does Vintage need to break even
per year?
a. $12,000
b. $3,000
c. $18,750
d. $75,000
122. Bruno & Court is a nonprofit organization that captures stray deer bewildered within
residential communities. Fixed costs are $15,000. The variable cost of capturing each
deer is $10 each. Bruno & Court is funded by a local philanthropy in the amount of
$48,000 for 2013. How many deer can Bruno & Court capture during 2013?
a. 3,300
b. 4,800
c. 6,300
d. 3,000
123. At the break-even point of 2,000 units, variable costs are $55,000, and fixed costs are
$32,000. How much is the selling price per unit?
a. $43.50
b. $11.50
c. $16.00
d. $27.50
124. Variable costs for Abbey, Inc. are 25% of sales. Its selling price is $80 per unit. If Abbey
sells one unit more than break-even units, how much will profit increase?
a. $60
b. $20
c. $25
d. $320
125. A company requires $1,360,000 in sales to meet its net income target. Its contribution
margin is 30%, and fixed costs are $240,000. What is the target net income?
a. $408,000
b. $312,000
c. $560,000
d. $168,000
Test Bank for Managerial Accounting, Sixth Edition
5 – 24
126. Montoya Manufacturing has fixed costs of $2,500,000 and variable costs are 40% of
sales. What are the required sales if Montoya desires net income of $250,000?
a. $4,583,333
b. $4,166,667
c. $6,875,000
d. $6,250,000
127. Aero, Inc. requires sales of $2,000,000 to cover its fixed costs of $400,000 and to earn net
income of $500,000. What percent are variable costs of sales?
a. 25%
b. 55%
c. 20%
d. 45%
128. Lansbury Manufacturing produces hair brushes. The selling price is $20 per unit and the
variable costs are $8 per brush. Fixed costs per month are $4,800. If Lansbury sells 25
more units beyond breakeven, how much does profit increase as a result?
a. $300
b. $500
c. $200
d. $1,000
129. Hayduke Corporation reported the following results from the sale of 6,000 units in May:
sales $300,000, variable costs $180,000, fixed costs $90,000, and net income $30,000.
Assume that Hayduke increases the selling price by 10% on June 1. How many units will
have to be sold in June to maintain the same level of net income?
a. 4,800.
b. 5,160.
c. 5,400.
d. 6,000.
130. Keene, Inc. produces flash drives for computers, which it sells for $20 each. Each flash
drive costs $6 of variable costs to make. During March, 1,000 drives were sold. Fixed costs
for March were $4.90 per unit for a total of $4,900 for the month. If variable costs decrease
by 10%, what happens to the break-even level of units per month for Keene?
a. It is 10% higher than the original break-even point.
b. It decreases about 14 units.
c. It decreases about 35 units.
d. It depends on the number of units the company expects to produce and sell.
Cost-Volume-Profit
5 – 25
131. Reliable Manufacturing wants to sell a sufficient quantity of products to earn a profit of
$80,000. If the unit sales price is $10, unit variable cost is $8, and total fixed costs are
$160,000, how many units must be sold to earn income of $80,000?
a. 120,000 units
b. 80,000 units
c. 30,000 units
d. 1,200,000 units
132. How much sales are required to earn a target income of $160,000 if total fixed costs are
$200,000 and the contribution margin ratio is 40%?
a. $600,000
b. $400,000
c. $900,000
d. $660,000
133. Farmers’ Industries has fixed costs of $400,000 and variable costs are 60% of sales. How
much will Farmers report as sales when its net income equals $40,000?
a. $1,100,000
b. $733,333
c. $1,040,000
d. $264,000
134. Murphy Company produces flash drives for computers, which it sells for $20 each. Each
flash drive costs $8 of variable costs to make. During April, 700 drives were sold. Fixed
costs for April were $4 per unit for a total of $2,800 for the month. How much does
Murphy’s operating income increase for each $1,000 increase in revenue per month?
a. $600
b. $400
c. $14,000
d. Not enough information to determine the answer.
135. Greg’s Golf Carts produces two models: Model 24 has sales of 500 units with a
contribution margin of $40 each; Model 26 has sales of 350 units with a contribution
margin of $50 each. If sales of Model 26 increase by 100 units, how much will profit
change?
a. $5,000 increase
b. $17,500 increase
c. $22,500 increase
d. $35,000 increase
Test Bank for Managerial Accounting, Sixth Edition
5 – 26
136. Wendy Industries produces only one product. Monthly fixed expenses are $12,000,
monthly unit sales are 2,500, and the unit contribution margin is $10. How much is
monthly net income?
a. $25,000
b. $37,000
c. $0
d. $13,000
137. A company desires to sell a sufficient quantity of products to earn a profit of $300,000. If
the unit sales price is $20, unit variable cost is $12, and total fixed costs are $600,000,
how many units must be sold to earn net income of $300,000?
a. 168,750 units
b. 112,500 units
c. 90,000 units
d. 67,500 units
138. Stephanie, Inc. sells its product for $40. The variable costs are $18 per unit. Fixed costs
are $16,000. The company is considering the purchase of an automated machine that will
result in a $2 reduction in unit variable costs and an increase of $5,000 in fixed costs.
Which of the following is true about the break-even point in units?
a. It will remain unchanged.
b. It will decrease.
c. It will increase.
d. It cannot be determined from the information provided.
139. How much sales are required to earn a target net income of $160,000 if total fixed costs
are $200,000 and the contribution margin ratio is 40%?
a. $500,000
b. $810,000
c. $900,000
d. $400,000
140. The following monthly data are available for Lumberyard Company. which produces only
one product: Selling price per unit, $42; Unit variable expenses, $14; Total fixed expenses,
$84,000; Actual sales for the month of June, 4,000 units. How much is the margin of
safety for the company for June?
a. $84,000
b. $42,000
c. $126,000
d. $1,000
Cost-Volume-Profit
5 – 27
141. Danny’s Lawn Equipment has actual sales of $800,000 and a break-even point of
$600,000. How much is its margin of safety ratio?
a. 25%
b. 33%
c. 67%
d. 75%
142. The following monthly data are available for Seasons Company which produces only one
product: Selling price per unit, $42; Unit variable expenses, $14; Total fixed expenses,
$84,000; Actual sales for the month of June, 5,000 units. How much is the margin of
safety for the company for June?
a. $56,000
b. $84,000
c. $126,000
d. $2,000
143. The amount by which actual or expected sales exceeds break-even sales is referred to as
a. contribution margin.
b. unanticipated profit.
c. margin of safety.
d. target net income.
144. In evaluating the margin of safety, the
a. break-even point is not relevant.
b. higher the margin of safety ratio, the greater the margin of safety.
c. higher the dollar amount, the lower the margin of safety.
d. higher the margin of safety ratio, the lower the fixed costs.
145. Within the relevant range, the variable cost per unit
a. differs at each activity level.
b. remains constant at each activity level.
c. increases as production increases.
d. decreases as production increases.
146. An example of a mixed cost is
a. direct materials.
b. supervisory salaries.
c. utility costs.
d. property taxes.
Test Bank for Managerial Accounting, Sixth Edition
5 – 28
147. In the Restin Company, maintenance costs are a mixed cost. At the low level of activity
(160 direct labor hours), maintenance costs are $600. At the high level of activity (400
direct labor hours), maintenance costs are $1,100. Using the high-low method, what is the
variable maintenance cost per unit and the total fixed maintenance cost?
Variable Cost Per Unit Total Fixed Cost
a. $2.08 $268
b. $2.08 $500
c. $2.75 $220
d. $2.75 $400
148. Cost-volume-profit analysis includes all of the following assumptions except
a. the behavior of costs is curvilinear throughout the relevant range.
b. costs can be classified accurately as either variable or fixed.
c. changes in activity are the only factors that affect costs.
d. all units produced are sold.
149. The contribution margin ratio increases when
a. fixed costs increase.
b. fixed costs decrease.
c. variable costs as a percentage of sales decrease.
d. variable costs as a percentage of sales increase.
150. Contribution margin is
a. the amount of revenue remaining after deducting fixed costs.
b. available to cover fixed costs and contribute to income for the company.
c. sales less fixed costs.
d. unit selling price less unit fixed costs.
151. Chung, Inc. sells 100,000 wrenches for $18 per unit. Fixed costs are $525,000 and net
income is $375,000. What should be reported as variable expenses in the CVP income
statement?
a. $810,000
b. $900,000
c. $1,425,000
d. $1,275,000
Cost-Volume-Profit
5 – 29
152. Sweet Manufacturing is planning to sell 400,000 hammers for $3 per unit. The contribution
margin ratio is 20%. If Sweet will break even at this level of sales, what are the fixed
costs?
a. $240,000
b. $560,000
c. $800,000
d. $960,000
153. At the break-even point,
a. sales equal total variable costs.
b. contribution margin equals total variable costs.
c. contribution margin equals total fixed costs.
d. sales equal total fixed costs.
154. Wilton Co. reported the following results from the sale of 5,000 hammers in May: sales
$200,000, variable costs $120,000, fixed costs $60,000, and net income $20,000. Assume
that Wilton increases the selling price of hammers by 10% on June 1. How many
hammers will have to be sold in June to maintain the same level of net income?
a. 4,000
b. 4,300
c. 4,500
d. 5,000
155. Required sales in dollars to meet a target net income is computed by dividing
a. fixed costs plus target net income by contribution margin per unit.
b. variable costs plus target net income by contribution margin per unit.
c. fixed costs plus target net income by contribution margin ratio.
d. total costs plus target net income by contribution margin ratio.
156. Bolton Industries had actual sales of $750,000 when break-even sales were $600,000.
What is the margin of safety ratio?
a. 20%
b. 25%
c. 75%
d. 80%
Test Bank for Managerial Accounting, Sixth Edition
5 – 30
Answers to Multiple Choice Questions
BRIEF EXERCISES
BE 157
Dollywood Corporation accumulates the following data concerning a mixed cost, using miles as
the activity level.
Miles Driven
Total Cost
Miles Driven
Total Cost
January
10,000
$15,000
March
9,000
$12,500
February
8,000
$14,500
April
7,500
$12,000
Instructions
Compute the variable and fixed cost elements using the high-low method.
Cost-Volume-Profit
FOR INSTRUCTOR USE ONLY
5 – 31
BE 158
Sandel Company makes 2 products, footballs and baseballs. Additional information follows:
Footballs Baseballs
Units 4,000 2,500
Sales $60,000 $25,000
Variable costs 36,000 7,000
Fixed costs 9,000 9,000
Net income $15,000 $ 9,000
Profit per unit $3.75 $3.60
Instructions
Sandel has unlimited demand for both products. Therefore, which product should Sandel tell his
sales people to emphasize?
BE 159
Determine the missing amounts.
Unit Selling Price
Unit Variable Costs
Contribution Margin
per Unit
Contribution
Margin Ratio
1.
$300
$195
A.
B.
2.
$600
C.
$150
D.
3.
E.
F.
$480
40%
Test Bank for Managerial Accounting, Sixth Edition
FOR INSTRUCTOR USE ONLY
5 – 32
BE 160
Kipling Company has sales of $1,500,000 for the first quarter of 2013. In making the sales, the
company incurred the following costs and expenses.
Variable
Fixed
Product costs
$500,000
$550,000
Selling expenses
100,000
75,000
Administrative expenses
80,000
67,000
Instructions
Calculate net income under CVP for 2013.
BE 161
Hurly Co. has fixed costs totaling $132,000. Its contribution margin per unit is $1.50, and the
selling price is $5.50 per unit.
Instructions
Compute the break-even point in units.
BE 162
Salem Bakery sells boxes of donuts each with a variable cost percentage of 35%. Its fixed costs
are $54,600 per year.
Instructions
Determine the sales dollars Salem needs to break even per year.
Cost-Volume-Profit
FOR INSTRUCTOR USE ONLY
5 – 33
BE 163
Cannon Co. has a unit selling price of $500, variable cost per unit $300, and fixed costs of
$210,000.
Instructions
Compute the break-even point in units and in sales dollars.
BE 164
Oakbrook, Inc. reported actual sales of $2,000,000, and fixed costs of $350,000. The contribution
margin ratio is 25%.
Instructions
Compute the margin of safety in dollars and the margin of safety ratio.
BE 165
The following monthly data are available for Fortner Industries which produces only one product
which it sells for $18 each. Its unit variable costs are $8, and its total fixed expenses are $16,000.
Actual sales for the month of May totaled 2,000 units.
Instructions
Compute the margin of safety in dollars for the company for May.
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BE 166
At break-even point, a company sells 1,200 widgets. Its selling price is $6 per widget, variable
cost is $2 per widget, and its fixed cost is $4 per widget.
Instructions
If it sells 200 additional widgets, determine the company’s incremental profit.
EXERCISES
Ex. 167
Sandburg Manufacturing manufactures a single product. Annual production costs incurred in the
manufacturing process are shown below for the production of 2,000 units. The Utilities and
Maintenance are mixed costs. The fixed portions of these costs are $300 and $200, respectively.
Costs Incurred
Production in Units 2,000 4,000
Production Costs
a. Direct Materials $ 4,000 ?
b. Direct Labor 16,000 ?
c. Utilities 1,000 ?
d. Rent 3,000 ?
e. Indirect Labor 4,200 ?
f. Supervisory Salaries 1,500 ?
g. Maintenance 900 ?
h. Depreciation 2,500 ?
Instructions
Calculate the expected costs to be incurred when production is 4,000 units. Use your knowledge
of cost behavior to determine which of the other costs are fixed or variable.
Cost-Volume-Profit
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Solution 167 (12–18 min.)
Costs Incurred
Production in Units 2,000 4,000
Production Costs
a. Direct Materials $ 4,000 $ 8,000
b. Direct Labor 16,000 32,000
c. Utilities 1,000 1,700
d. Rent 3,000 3,000
e. Indirect Labor 4,200 8,400
f. Supervisory Salaries 1,500 1,500
g. Maintenance 900 1,600
h. Depreciation 2,500 2,500
a. Variable $4,000 ÷ 2,000 = $2.00 per unit; 4,000 × $2.00 = $8,000
b. Variable $16,000 ÷ 2,000 = $8.00 per unit; 4,000 × $8.00 = $32,000
c. Mixed $1,000 – $300 = $700; $700 ÷ 2,000 = $.35 per unit of variable costs;
4,000 × $.35 = $1,400 + $300 (fixed) = $1,700
d. Fixed $3,000
e. Variable $4,200 ÷ 2,000 = $2.10 per unit; 4,000 × $2.10 = $8,400
f. Fixed $1,500
g. Mixed $900 – $200 = $700 variable portion; $700 ÷ 2,000 = $.35
4,000 × $.35 = $1,400 + $200 (fixed portion) = $1,600
h. Fixed $2,500
Ex. 168
Bill Braddock is considering opening a Fast ‘n Clean Car Service Center. He estimates that the
following costs will be incurred during his first year of operations: Rent $9,200, Depreciation on
equipment $7,000, Wages $16,400, Motor oil $2.00 per quart. He estimates that each oil change
will require 5 quarts of oil. Oil filters will cost $3.00 each. He must also pay The Fast ‘n Clean
Corporation a franchise fee of $1.10 per oil change, since he will operate the business as a
franchise. In addition, utility costs are expected to behave in relation to the number of oil changes
as follows:
Number of Oil Changes Utility Costs
4,000 $ 6,000
6,000 $ 7,300
9,000 $ 9,600
12,000 $12,600
14,000 $15,000
Bill Braddock anticipates that he can provide the oil change service with a filter at $25 each.
Instructions
(a) Using the high-low method, determine variable costs per unit and total fixed costs.
(b) Determine the break-even point in number of oil changes and sales dollars.
(c) Without regard to your answers in parts (a) and (b), determine the oil changes required to
earn net income of $20,000, assuming fixed costs are $32,000 and the contribution margin
per unit is $8.
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Ex. 169
Jane Botosan operates a bed and breakfast hotel in a resort area near Lake Michigan.
Depreciation on the hotel is $60,000 per year. Jane employs a maintenance person at an annual
salary of $32,000 and a cleaning person at an annual salary of $24,000. Real estate taxes are
$10,000 per year. The rooms rent at an average price of $60 per person per night including
breakfast. Other costs are laundry and cleaning service at a cost of $10 per person per night and
the cost of food which is $5 per person per night.
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Ex. 169 (Cont.)
Instructions
(a) Determine the number of rentals and the sales revenue Jane needs to break even using the
contribution margin technique.
(b) If the current level of rentals is 3,500, by what percentage can rentals decrease before Jane
has to worry about having a net loss?
(c) Jane is considering upgrading the breakfast service to attract more business and increase
prices. This will cost an additional $3 for food costs per person per night. Jane feels she can
increase the room rate to $66 per person per night. Determine the number of rentals and the
sales revenue Jane needs to break even if the changes are made.
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Ex. 170
Corris Co. accumulates the following data concerning a mixed cost, using miles as the activity
level. Miles Driven Total Cost
January 10,000 $17,000
February 8,000 13,500
March 9,000 14,400
April 7,000 12,500
Instructions
Compute the variable and fixed cost elements using the high-low method.
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Ex. 171
Moresan Co. gathered the following information on power costs and factory machine usage for
the last six months:
Month Power Cost Factory Machine Hours
January $24,400 13,900
February 29,200 17,600
March 29,000 16,800
April 22,340 13,200
May 19,900 11,600
June 14,900 6,600
Instructions
Using the high-low method of analyzing costs, answer the following questions and show
computations to support your answers.
(a) What is the estimated variable portion of power costs per factory machine hour?
(b) What is the estimated fixed power cost each month?
(c) If it is estimated that 10,000 factory machine hours will be run in July, what is the expected
total power cost for July?
Test Bank for Managerial Accounting, Sixth Edition
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Ex. 172
The Bradshaw Law Office has the following monthly telephone records and costs:
Calls Costs
2,000 $2,400
1,500 2,000
2,200 2,600
2,500 2,800
2,300 2,700
1,700 2,200
Instructions
Identify the fixed and variable cost elements using the high-low method.
Ex. 173
Determine the missing amounts.
Contribution Contribution
Unit Selling Price Unit Variable Costs Margin Per Unit Margin Ratio
1. $300 $180 A B
2. $600 C $210 D
3. E F $300 30%
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Ex. 174
Henderson Farms reports the following results for the month of November:
Sales (10,000 units) $600,000
Variable costs 420,000
Contribution margin 180,000
Fixed costs 110,000
Net income $ 70,000
Management is considering the following independent courses of action to increase net income.
1. Increase selling price by 5% with no change in total variable costs.
2. Reduce variable costs to 66
23
% of sales.
3. Reduce fixed costs by $10,000.
Instructions
If maximizing net income is the objective, which is the best course of action?
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Ex. 175
Marvin Co. had a net loss of $150,000 in 2012 when the selling price per unit was $20, the
variable costs per unit were $14, and the fixed costs were $600,000. Management expects per
unit data and total fixed costs to be the same in 2013. Management has set a goal of earning net
income of $150,000 in 2013.
Instructions
(a) Compute the units sold in 2012.
(b) Compute the number of units that would have to be sold in 2013 to reach management’s
desired net income level.
(c) Assume that Marvin Co. sells the same number of units in 2013 as it did in 2012. What would
the selling price have to be in order to reach the target net income? Use the mathematical
equation.
Ex. 176
In the month of September, Matlock Industries sold 800 units of product. The average sales price
was $30. During the month, fixed costs were $6,300 and variable costs were 70% of sales.
Instructions
(a) Determine the contribution margin in dollars, per unit, and as a ratio.
(b) Using the contribution margin technique, compute the break-even point in dollars and in
units.
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Ex. 177
In 2012, Stallman Co. had a break-even point of $800,000 based on a selling price of $10 per unit
and fixed costs of $240,000. In 2013, the selling price and variable costs per unit did not change,
but the break-even point increased to $850,000.
Instructions
(a) Compute the variable cost per unit and the contribution margin ratio for 2012.
(b) Using the contribution margin ratio, compute the increase in fixed costs for 2013.
Test Bank for Managerial Accounting, Sixth Edition
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Ex. 178
The income statement for Bradford Machine Company for 2012 appears below.
BRADFORD MACHINE COMPANY
Income Statement
For the Year Ended December 31, 2012
——————————————————————————————————————————
Sales (40,000 units) ……………………………………………………………………….. $1,000,000
Variable expenses ………………………………………………………………………….. 700,000
Contribution margin ………………………………………………………………………… 300,000
Fixed expenses ……………………………………………………………………………… 360,000
Net income (loss) ……………………………………………………….………………….. $ (60,000)
Instructions
Answer the following independent questions and show computations using the contribution
margin technique to support your answers:
1. What was the company’s break-even point in sales dollars in 2012?
2. How many additional units would the company have had to sell in 2013 in order to earn net
income of $45,000?
3. If the company is able to reduce variable costs by $2.50 per unit in 2013 and other costs and
unit revenues remain unchanged, how many units will the company have to sell in order to
earn a net income of $45,000?
Cost-Volume-Profit
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Ex. 179
Webber, Inc. developed the following information for its product:
Per Unit
Sales price $90
Variable cost 63
Contribution margin $27
Total fixed costs $1,080,000
Instructions
Answer the following independent questions and show computations using the contribution
margin technique to support your answers.
1. How many units must be sold to break even?
2. What is the total sales that must be generated for the company to earn a profit of $60,000?
3. If the company is presently selling 45,000 units, but plans to spend an additional $108,000 on
an advertising program, how many additional units must the company sell to earn the same
net income it is now making?
4. Using the original data in the problem, compute a new break-even point in units if the unit
sales price is increased 20%, unit variable cost is increased by 10%, and total fixed costs are
increased by $210,000.
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Ex. 180
Werth & Garza Manufacturing’s sales slumped badly in 2013 due to so many people purchasing
gifts online. The company’s income statement showed the following results from selling 500,000
units of product: net sales $2,125,000; total costs and expenses $2,500,000; and net loss
$375,000. Costs and expenses consisted of the following:
Total Variable Fixed
Cost of goods sold $2,000,000 $1,300,000 $700,000
Selling expenses 200,000 50,000 150,000
Administrative expenses 300,000 150,000 150,000
$2,500,000 $1,500,000 $1,000,000
Management is considering the following alternative for 2013:
Purchase new automated equipment that will change the proportion between variable and
fixed expenses sold to 45% variable and 55% fixed.
Instructions
(a) Compute the break-even point in dollars for 2013.
(b) Compute the break-even point in dollars under the alternative course of action.
Ex. 181
Henning Co. estimates that variable costs will be 60% of sales and fixed costs will total
$2,160,000. The selling price of the product is $10, and 600,000 units will be sold.
Instructions
Using the mathematical equation,
(a) Compute the break-even point in units and dollars.
(b) Compute the margin of safety in dollars and as a ratio.
(c) Compute net income.
Cost-Volume-Profit
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Ex. 182
Norton, Inc. has the following information available for September 2013.
Unit selling price of video game consoles $ 400
Unit variable costs $ 280
Total fixed costs $48,000
Units sold 500
Instructions
(a) Prepare a CVP income statement that shows both total and per unit amounts.
(b) Compute Norton’s breakeven in units.
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Ex. 183
In the month of April, Avante Salon gave 2,500 haircuts, shampoos, and permanents at an
average price of $40. During the month, fixed costs were $21,000 and variable costs were 70% of
sales.
Instructions
(a) Determine the contribution margin in dollars, per unit, and as a ratio.
(b) Using the contribution margin technique, compute the break-even point in dollars and in
units.
(c) Compute the margin of safety dollars and as a ratio.
Ex. 184
Taveras Industries developed the following information for the product it sells:
Sales price $50 per unit
Variable cost of goods sold $28 per unit
Fixed cost of goods sold $650,000
Variable selling expense 10% of sales price
Variable administrative expense $2.00 per unit
Fixed selling expense $400,000
Fixed administrative expense $300,000
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For the year ended December 31, 2013, Taveras produced and sold 100,000 units of product.
Instructions
(a) Prepare a CVP income statement using the contribution margin format for Taveras
Industries for 2013.
(b) What was the company’s break-even point in units in 2013? Use the contribution margin
technique.
(c) What was the company’s margin of safety in dollars in 2013?
Ex. 185
Gordon Manufacturing earned net income of $100,000 during 2012. The company wants to earn
net income of $40,000 more during 2013. The company’s fixed costs are expected to be
$126,000, and variable costs are expected to be 30% of sales.
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Instructions
(a) Determine the required sales to meet the target net income during 2013.
(b) Fill in the dollar amounts for the summary income statement for 2013 below, based on your
answer to part (a).
Sales revenue
$
Variable costs
Contribution margin
Fixed costs
Net income
$
Ex. 186
Ferris, Inc. has a unit selling price of $500, variable cost per unit of $300, and fixed costs of
$260,000.
Instructions
Compute the break-even point in units and in sales dollars.
Ex. 187
Erickson, Inc. makes student book bags that sell for $20 each. For the coming year, management
expects fixed costs to be $225,000. Variable costs are $15 per unit.
Instructions
(a) Compute break-even sales in dollars using the mathematical equation.
(b) Compute break-even sales using the contribution margin ratio.
(c) Compute margin of safety ratio assuming actual sales are $1,200,000.
(d) Compute the sales required to earn net income of $150,000, using the mathematical
equation.
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Ex. 188
Melody Manufacturing produces a hip-hop CD that is sold for $20. The contribution margin ratio is
40%. Fixed expenses total $9,200.
Instructions
(a) Compute the variable cost per unit.
(b) Compute how many CDs Melody Manufacturing will have to sell in order to break even.
(c) Compute how many CDs Melody Manufacturing will have to sell in order to make a target net
income of $16,200.
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Ex. 189
Usher, Inc. has prepared the following cost-volume-profit graph:
Instructions
For the items listed below, enter to the left of the item, the letter in the graph which best
corresponds to the item.
____ 1. Activity base
____ 2. Break-even point
____ 3. Dollars
____ 4. Fixed costs
____ 5. Loss
____ 6. Profit
____ 7. Revenues
____ 8. Total costs
____ 9. Variable costs
I
BH
D
G
EA
F
C
Cost-Volume-Profit
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Ex. 190
Holder Manufacturing had $125,000 of net income in 2012 when the selling price per unit was
$100, the variable costs per unit were $70, and the fixed costs were $475,000. Management
expects per unit data and total fixed costs to remain the same in 2013. The president of Holder
Manufacturing is under pressure from stockholders to increase net income by $60,000 in 2013.
Instructions
(a) Compute the number of units sold in 2012.
(b) Compute the number of units that would have to be sold in 2013 to reach the stockholders’
desired profit level.
(c) Assume that Holder Manufacturing sells the same number of units in 2013 as it did in 2012.
What would the selling price have to be in order to reach the stockholders’ desired profit
level.
Ex. 191
Englehart, Inc. reports the following operating results for the month of August: Sales $400,000
(units 5,000); variable costs $280,000; and fixed costs $95,000. Management is considering the
following independent courses of action to increase net income.
1. Increase selling price by 10% with no change in total variable costs.
2. Reduce variable costs to 65% of sales.
3. Reduce fixed costs by $15,000.
Instructions
Compute the net income to be earned under each alternative. Which course of action will produce
the highest net income?
Test Bank for Managerial Accounting, Sixth Edition
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Ex. 192
Kreter, Inc. earned net income of $300,000 last year. This year it wants to earn net income of
$450,000. The company’s fixed costs are expected to be $300,000, and variable costs are
expected to be 70% of sales.
Instructions
(a) Determine the required sales to meet the target net income of $450,000 using the
mathematical equation.
(b) Using a CVP income statement format, prove your answer.
Ex. 193
Cunningham Industries reported actual sales of $2,000,000, and fixed costs of $510,000. The
contribution margin ratio is 30%.
Instructions
Compute the margin of safety in dollars and the margin of safety ratio.
Cost-Volume-Profit
5 – 55
Solution 193 (7 min.)
COMPLETION STATEMENTS
194. Knowledge of cost behavior is important in ______________________ analysis.
195. A _________________ cost remains constant per unit at every level of activity.
196. Unit fixed costs __________________ with the changes in the level of activity.
197. Total fixed costs are ___________ over various levels of activities, whereas total variable
costs __________________ directly and ________________ with changes in the activity
level.
198. An assumption of CVP analysis is that variable and fixed costs have a _______________
relationship with an activity base.
199. The range over which a company expects to operate is referred to as the _____________
range.
200. A cost that has both variable and fixed elements is referred to as a _________________
cost.
201. The amount of revenue remaining after deducting total variable costs is called the
_________________________.
202. The _______________ point is when total revenues equal total costs.
203. _________________ divided by the contribution margin ratio will give the amount of
_________________ to break even.
204. The difference between actual or expected sales and break-even sales is called the
__________________________.
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Answers to Completion Statements
MATCHING
205. Match the items in the two columns below by entering the appropriate code letter in the
space provided.
A. Activity index F. Mixed costs
B. Variable costs G. Break-even point
C. Fixed costs H. Contribution margin
D. High-low method I. Margin of safety
E. Relevant range J. Contribution margin ratio
____ 1. The amount of revenue remaining after deducting variable costs.
____ 2. Costs that contain both a variable and a fixed element.
____ 3. The percentage of sales dollars available to cover fixed costs and produce income.
____ 4. Identifies the activity which causes changes in the behavior of costs.
____ 5. The difference between actual or expected sales and sales at the break-even point.
____ 6. Costs that vary in total directly and proportionately with changes in the activity level.
____ 7. The level of activity at which total revenues equal total costs.
____ 8. The range over which the company expects to operate during the year.
____ 9. Costs that remain the same in total regardless of changes in the activity level.
____ 10. A method that uses the total costs incurred at the high and low levels of activity.
Cost-Volume-Profit
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SHORT-ANSWER ESSAY QUESTIONS
S-A E 206
A cost-volume-profit graph is frequently used in business meetings because it presents a picture
of cost relationships within a company. Briefly describe the type of information and data that you
would need in order to prepare a CVP graph. After a CVP graph is prepared, what are the major
points that could be made from the graph that would be of interest to management?
S-A E 207
A CVP income statement is frequently prepared for internal use by management. Describe the
features of the CVP income statement that make it more useful for management decision-making
than the traditional income statement that is prepared for external users.
S-A E 208
(a) Matt Sampson asks your help in understanding the term “activity index.” Explain the
meaning and importance of this term for Matt.
(b) State the two ways that variable costs may be defined.
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S-A E 209
How should mixed costs be classified in CVP analysis? What approach is used to effect the
appropriate classification?
S-A E 210 (Ethics)
Hanson, Inc. requires its marketing managers to submit estimated cost-volume-profit data on all
requests for new products, or expansions of a product line.
Nancy Stephens is a new manager. Her calculations show a fixed cost for a new project at
$100,000 and a variable cost of $5. Since the selling price is only $15 for the proposed product,
10,000 would need to be sold to break even. That is approximately twice the volume estimate for
the first year. She shares her dismay with Patti Patterson, another manager.
Patti strongly advises her to revise her estimates. She points out that several of the costs that had
been classified as fixed costs could be considered variable, since they are step costs and mixed
costs. When the data has been revised classifying those costs as variable costs, the project
appears viable.
Required:
1. Who are the stakeholders in this decision?
2. Is it ethical for Nancy to revise the costs as indicated? Briefly explain.
3. What should Nancy do?
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S-A E 211 (Communication)
For two years, Annette Larson has been the manager of the production department of a company
manufacturing toys made of plastic-coated cardboard. One of the toys is a paper doll, whose
“clothes” are made of acetate, and stay on the doll with static electricity. The company’s sales
were mainly to large educational institutions until last year, when the dolls were sold for the first
time to a large discount retailer. The dolls were sold out immediately, and enough orders were
received to keep the department at full capacity for the immediate future.
The fixed costs for the department are $50,000, with $1 per unit variable costs. A paper doll and
one set of clothes sell for $3. The maximum volume is 80,000 units. With the increased volume,
Ms. Larson is considering two options to improve profitability. One would reduce variable costs to
$0.75, and the other would reduce fixed costs to $35,000.
Required:
Given the fact that sales are increasing, make a short (one paragraph) recommendation to Ms.
Larson about which option she should choose. Support your recommendation with a calculation
showing her how profitability will change with each option.