CHAPTER 18
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 Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTRUCTOR USE ONLY
18 – 2
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
Exercises
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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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Learning Objective 2
7.
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Learning Objective 3
10.
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Learning Objective 4
16.
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Learning Objective 5
18.
TF
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183.
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TF
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Cost-Volume-Profit
FOR INSTRUCTOR USE ONLY
18 – 3
Learning Objective 6
22.
TF
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184.
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Learning Objective 7
27.
TF
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MC
136.
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155.
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187.
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192.
Ex
28.
TF
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188.
Ex
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190.
Ex
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154.
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185.
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191.
Ex
Learning Objective 8
29.
TF
140.
MC
143.
MC
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BE
168.
Ex
184.
Ex
204.
C
30.
TF
141.
MC
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BE
181.
Ex
187.
Ex
37.
TF
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MC
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BE
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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.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
18 – 4
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.
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.
Cost-Volume-Profit
18 – 5
10. The high-low method is used in classifying a mixed cost into its variable and fixed
elements.
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.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
18 – 6
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.
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.
Cost-Volume-Profit
18 – 7
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.
37. The margin of safety ratio is equal to the margin of safety in dollars divided by the actual
or (expected) sales.
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 Accounting, Tools for Business Decision Making Fifth Edition
18 – 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
18 – 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 Accounting, Tools for Business Decision Making Fifth Edition
18 – 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
18 – 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 Accounting, Tools for Business Decision Making Fifth Edition
18 – 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
18 – 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.
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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
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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.
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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
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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.
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
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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.
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.
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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.
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.
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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.
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