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FOR INSTRUCTOR USE ONLY
CHAPTER 19
COST-VOLUME-PROFIT ANALYSIS: ADDITIONAL ISSUES
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
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True-False Statements
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Multiple Choice Questions
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Brief Exercises
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Exercises
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Completion Statements
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aThis topic is dealt with in an Appendix to the chapter.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTRUCTOR USE ONLY
19 - 2
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
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Learning Objective 1
1.
TF
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C
Learning Objective 2
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TF
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C
Learning Objective 3
5.
TF
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TF
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MC
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Ex
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C
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TF
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Learning Objective 4
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BE
142.
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TF
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Learning Objective 5
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Learning Objective 6a
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Learning Objective 7a
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TF
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TF
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Learning Objective 8a
28.
TF
30.
TF
122.
MC
124.
MC
152.
Ex
165.
C
29.
TF
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MC
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MC
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Ex
Note: TF = True-False C = Completion Ex = Exercise
MC = Multiple Choice BE = Brief Exercise
The chapter also contains four Short-Answer Essay questions.
Cost-Volume-Profit Analysis: Additional Issues
FOR INSTRUCTOR USE ONLY
19 - 3
CHAPTER LEARNING OBJECTIVES
1. Describe the essential features of a cost-volume-profit income statement. The CVP
income statement classifies costs and expenses as variable or fixed and reports contribution
margin in the body of the statement.
2. Apply basic CVP concepts. Contribution margin is the amount of revenue remaining after
deducting variable costs. It can be expressed as a per unit amount or as a ratio. The break-
even point in units is fixed costs divided by contribution margin per unit. The break-even
point in dollars is fixed costs divided by the contribution margin ratio. These formulas can
also be used to determine units or sales dollars needed to achieve target net income, simply
by adding target net income to fixed costs before dividing by the contribution margin. Margin
of safety indicates how much sales can decline before the company is operating at a loss. It
can be expressed in dollar terms or as a percentage.
3. Explain the term sales mix and its effects on break-even sales. Sales mix is the relative
proportion in which each product is sold when a company sells more than one product. For a
company with a small number of products, break-even sales in units is determined by using
the weighted-average unit contribution margin of all the products. If the company sells many
different products, then calculating the break-even point using unit information is not
practical. Instead, in a company with many products, break-even sales in dollars is
calculated using the weighted-average contribution margin ratio.
4 Determine sales mix when a company has limited resources. When a company has
limited resources, it is necessary to find the contribution margin per unit of limited resource.
This amount is then multiplied by the units of limited resource to determine which product
maximizes net income.
5. Understand how operating leverage affects profitability. Operating leverage refers to the
degree to which a company’s net income reacts to a change in sales. Operating leverage is
determined by a company’s relative use of fixed versus variable costs. Companies with high
fixed costs relative to variable costs have high operating leverage. A company with high
operating leverage will experience a sharp increase (decrease) in net income with a given
increase (decrease) in sales. The degree of operating leverage can be measured by dividing
contribution margin by net income.
a6. Explain the difference between absorption costing and variable costing. Under
absorption costing, fixed manufacturing costs are product costs. Under variable costing, fixed
manufacturing costs are period costs.
a7. Discuss net income effects under absorption costing versus variable costing. If
production volume exceeds sales volume, net income under absorption costing will exceed
net income under variable costing by the amount of fixed manufacturing costs included in
ending inventory that results from units produced but not sold during the period. If production
volume is less than sales volume, net income under absorption costing will be less than
under variable costing by the amount of fixed manufacturing costs included in the units sold
during the period that were not produced during the period.
a8. Discuss the merits of absorption versus variable costing for management decision-
making. The use of variable costing is consistent with cost-volume-profit analysis. Net
income under variable costing is unaffected by changes in production levels. Instead, it is
closely tied to changes in sales. The presentation of fixed costs in the variable costing
approach makes it easier to identify fixed costs and to evaluate their impact on the
company’s profitability.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
19 - 4
TRUE-FALSE STATEMENTS
1. The CVP income statement classifies costs as variable or fixed and computes a
contribution margin.
2. In CVP analysis, cost includes manufacturing costs but not selling and administrative
expenses.
3. When a company is in its early stages of operation, its primary goal is to generate a target
net income.
4. The margin of safety tells a company how far sales can drop before it will be operating at
a loss.
5. Sales mix is a measure of the percentage increase in sales from period to period.
6. Sales mix is not important to managers when different products have substantially
different contribution margins.
7. The weighted-average contribution margin of all the products is computed when
determining the break-even sales for a multi-product firm.
8. If Buttercup, Inc. sells two products with a sales mix of 75% : 25%, and the respective
contribution margins are $80 and $240, then weighted-average unit contribution margin is
$120.
9. If fixed costs are $100,000 and weighted-average unit contribution margin is $50, then the
break-even point in units is 2,000 units.
10. Net income can be increased or decreased by changing the sales mix.
11. The break-even point in dollars is variable costs divided by the weighted-average
contribution margin ratio.
Cost-Volume-Profit Analysis: Additional Issues
FOR INSTRUCTOR USE ONLY
19 - 5
12. When a company has limited resources, management must decide which products to
make and sell in order to maximize net income.
13. When a company has limited resources to manufacture products, it should manufacture
those products which have the highest contribution margin per unit.
14. If a company has limited machine hours available for production, it is generally more
profitable to produce and sell the product with the highest contribution margin per machine
hour.
15. According to the theory of constraints, a company must identify its constraints and find
ways to reduce or eliminate them.
16. Cost structure refers to the relative proportion of fixed versus variable costs that a
company incurs.
17. Operating leverage refers to the extent to which a company’s net income reacts to a given
change in fixed costs.
18. The degree of operating leverage provides a measure of a company’s earnings volatility.
19. If Sprinkle Industries has a margin of safety ratio of .60, it could sustain a 60 percent
decline in sales before it would be operating at a loss.
20. A company with low operating leverage will experience a sharp increase in net income
with a given increase in sales.
a21. Variable costing is the approach used for external reporting under generally accepted
accounting principles.
a22. The difference between absorption costing and variable costing is the treatment of fixed
manufacturing overhead.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTRUCTOR USE ONLY
19 - 6
a23. Selling and administrative costs are period costs under both absorption and variable
costing.
a24. Manufacturing cost per unit will be higher under variable costing than under absorption
costing.
a25. Some fixed manufacturing costs of the current period are deferred to future periods
through ending inventory under variable costing.
a26. When units produced exceed units sold, income under absorption costing is higher than
income under variable costing.
a27. When units sold exceed units produced, income under absorption costing is higher than
income under variable costing.
a28. When absorption costing is used for external reporting, variable costing can still be used
for internal reporting purposes.
a29. When absorption costing is used, management may be tempted to overproduce in a given
period in order to increase net income.
a30. The use of absorption costing facilitates cost-volume-profit analysis.
Answers to True-False Statements
Cost-Volume-Profit Analysis: Additional Issues
19 - 7
MULTIPLE CHOICE QUESTIONS
31. Cost-volume-profit analysis is the study of the effects of
a. changes in costs and volume on a company’s profit.
b. cost, volume, and profit on the cash budget.
c. cost, volume, and profit on various ratios.
d. changes in costs and volume on a company’s profitability ratios.
32. The CVP income statement classifies costs
a. as variable or fixed and computes contribution margin.
b. by function and computes a contribution margin.
c. as variable or fixed and computes gross margin.
d. by function and computes a gross margin.
33. Contribution margin is the amount of revenue remaining after deducting
a. cost of goods sold.
b. fixed costs.
c. variable costs.
d. contra-revenue.
34. Moonwalker’s CVP income statement included sales of 4,000 units, a selling price of
$100, variable expenses of $60 per unit, and fixed expenses of $88,000. Contribution
margin is
a. $400,000.
b. $240,000.
c. $160,000.
d. $72,000.
35. Moonwalker’s CVP income statement included sales of 4,000 units, a selling price of
$100, variable expenses of $60 per unit, and fixed expenses of $88,000. Net income is
a. $400,000.
b. $160,000.
c. $152,000.
d. $72,000.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
19 - 8
36. For Buffalo Co., at a sales level of 5,000 units, sales is $75,000, variable expenses total
$50,000, and fixed expenses are $21,000. What is the contribution margin per unit?
a. $4.20
b. $5.00
c. $10.00
d. $15.00
37. If contribution margin is $120,000, sales is $300,000, and net income is $40,000, then
variable and fixed expenses are
Variable Fixed
a. $180,000 $260,000
b. $180,000 $80,000
c. $80,000 $180,000
d. $420,000 $260,000
38. In a CVP income statement, cost of goods sold is generally
a. completely a variable cost.
b. completely a fixed cost.
c. neither a variable cost nor a fixed cost.
d. partly a variable cost and partly a fixed cost.
39. In a CVP income statement, a selling expense is generally
a. completely a variable cost.
b. completely a fixed cost.
c. neither a variable cost nor a fixed cost.
d. partly a variable cost and partly a fixed cost.
40. Hinge Manufacturing’s cost of goods sold is $420,000 variable and $240,000 fixed. The
company’s selling and administrative expenses are $300,000 variable and $360,000 fixed.
If the company’s sales is $1,480,000, what is its contribution margin?
a. $160,000
b. $760,000
c. $820,000
d. $880,000
Cost-Volume-Profit Analysis: Additional Issues
19 - 9
41. Hinge Manufacturing’s cost of goods sold is $420,000 variable and $240,000 fixed. The
company’s selling and administrative expenses are $300,000 variable and $360,000 fixed.
If the company’s sales is $1,480,000, what is its net income?
a. $160,000
b. $760,000
c. $820,000
d. $880,000
42. Woolford’s CVP income statement included sales of 4,000 units, a selling price of $50,
variable expenses of $30 per unit, and net income of $25,000. Fixed expenses are
a. $55,000.
b. $80,000.
c. $120,000.
d. $200,000.
43. The contribution margin ratio is
a. sales divided by contribution margin.
b. sales divided by fixed expenses.
c. sales divided by variable expenses.
d. contribution margin divided by sales.
44. For Pierce Company, sales is $500,000, variable expenses are $330,000, and fixed
expenses are $140,000. Pierce’s contribution margin ratio is
a. 10%.
b. 28%.
c. 34%.
d. 66%.
45. For Sanborn Co., sales is $1,000,000, fixed expenses are $300,000, and the contribution
margin per unit is $48. What is the break-even point?
a. $2,083,334 sales dollars
b. $625,000 sales dollars
c. 20,834 units
d. 6,250 units
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
19 - 10
46. For Franklin, Inc., sales is $1,500,000, fixed expenses are $450,000, and the contribution
margin ratio is 36%. What is net income?
a. $90,000
b. $162,000
c. $378,000
d. $540,000
47. For Franklin, Inc., sales is $1,500,000, fixed expenses are $450,000, and the contribution
margin ratio is 36%. What are the total variable expenses?
a. $288,000
b. $540,000
c. $960,000
d. $1,500,000
48. In 2013, Teller Company sold 3,000 units at $400 each. Variable expenses were $280 per
unit, and fixed expenses were $160,000. What was Teller’s 2013 net income?
a. $200,000
b. $360,000
c. $840,000
d. $1,200,000
49. In 2012, Teller Company sold 3,000 units at $400 each. Variable expenses were $280 per
unit, and fixed expenses were $180,000. The same selling price, variable expenses, and
fixed expenses are expected for 2013. What is Teller’s break-even point in sales dollars
for 2013?
a. $600,000
b. $1,200,000
c. $1,200,000
d. $1,714,286
50. In 2012, Teller Company sold 3,000 units at $400 each. Variable expenses were $280 per
unit, and fixed expenses were $180,000. The same selling price, variable expenses, and
fixed expenses are expected for 2013. What is Teller’s break-even point in units for 2013?
a. 1,500
b. 3,375
c. 4,500
d. 7,500
Cost-Volume-Profit Analysis: Additional Issues
19 - 11
51. The required sales in units to achieve a target net income is
a. (sales + target net income) divided by contribution margin per unit.
b. (sales + target net income) divided by contribution margin ratio.
c. (fixed cost + target net income) divided by contribution margin per unit.
d. (fixed cost + target net income) divided by contribution margin ratio.
52. For Wickham Co., sales is $2,000,000, fixed expenses are $600,000, and the contribution
margin ratio is 36%. What is required sales in dollars to earn a target net income of
$400,000?
a. $1,111,111
b. $1,666,666
c. $2,777,778
d. $5,555,556
53. Warner Manufacturing reported sales of $2,000,000 last year (100,000 units at $20 each),
when the break-even point was 75,000 units. Warner’s margin of safety ratio is
a. 25%.
b. 33%.
c. 75%.
d. 125%.
54. For Wilder Corporation, sales is $1,200,000 (6,000 units), fixed expenses are $360,000,
and the contribution margin per unit is $80. What is the margin of safety in dollars?
a. $60,000
b. $300,000
c. $540,000
d. $840,000
55. Margin of safety in dollars is
a. expected sales divided by break-even sales.
b. expected sales less break-even sales.
c. actual sales less expected sales.
d. expected sales less actual sales.
56. The margin of safety ratio is
a. expected sales divided by break-even sales.
b. expected sales less break-even sales.
c. margin of safety in dollars divided by expected sales.
d. margin of safety in dollars divided by break-even sales.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
19 - 12
57. In 2012, Hagar Corp. sold 3,000 units at $500 each. Variable expenses were $350 per
unit, and fixed expenses were $455,000. The same variable expenses per unit and fixed
expenses are expected for 2013. If Hagar cuts selling price by 4%, what is Hagar’s break-
even point in units for 2013?
a. 3,033
b. 3,159
c. 3,360
d. 3,500
58. In 2012, Carow sold 3,000 units at $500 each. Variable expenses were $250 per unit, and
fixed expenses were $250,000. The same selling price is expected for 2013. Carow is
tentatively planning to invest in equipment that would increase fixed costs by 20%, while
decreasing variable costs per unit by 20%. What is Carow’s break-even point in units for
2013?
a. 1,000
b. 1,200
c. 1,250
d. 1,500
59. In 2012, Raleigh sold 1,000 units at $500 each, and earned net income of $50,000.
Variable expenses were $300 per unit, and fixed expenses were $150,000. The same
selling price is expected for 2013. Raleigh’s variable cost per unit will rise by 10% in 2013
due to increasing material costs, so they are tentatively planning to cut fixed costs by
$15,000. How many units must Raleigh sell in 2013 to maintain the same income level as
2012?
a. 794
b. 971
c. 1,176
d. 1,088
60. Sales mix is
a. the relative percentage in which a company sells its multiple products.
b. the trend of sales over recent periods.
c. the mix of variable and fixed expenses in relation to sales.
d. a measure of leverage used by the company.
61. In a sales mix situation, at any level of units sold, net income will be higher if
a. more higher contribution margin units are sold than lower contribution margin units.
b. more lower contribution margin units are sold than higher contribution margin units.
c. more fixed expenses are incurred.
d. weighted-average unit contribution margin decreases.
Cost-Volume-Profit Analysis: Additional Issues
19 - 13
62. Ramirez Corporation sells two types of computer chips. The sales mix is 30% (Q-Chip)
and 70% (Q-Chip Plus). Q-Chip has variable costs per unit of $60 and a selling price of
$100. Q-Chip Plus has variable costs per unit of $70 and a selling price of $130. The
weighted-average unit contribution margin for Ramirez is
a. $46.
b. $50.
c. $54.
d. $100.
63. Capitol Manufacturing sells 3,000 units of Product A annually, and 7,000 units of Product
B annually. The sales mix for Product A is
a. 30%.
b. 43%.
c. 70%.
d. Cannot determine from information given.
64. Ramirez Corporation sells two types of computer chips. The sales mix is 30% (Q-Chip)
and 70% (Q-Chip Plus). Q-Chip has variable costs per unit of $60 and a selling price of
$100. Q-Chip Plus has variable costs per unit of $70 and a selling price of $130.
Ramirez’s fixed costs are $540,000. How many units of Q-Chip would be sold at the
break-even point?
a. 3,000
b. 3,522
c. 5,000
d. 7,000
65. Roosevelt Corporation has a weighted-average unit contribution margin of $40 for its two
products, Standard and Supreme. Expected sales for Roosevelt are 40,000 Standard and
60,000 Supreme. Fixed expenses are $1,800,000.
How many Standards would Roosevelt sell at the break-even point?
a. 18,000
b. 27,000
c. 30,000
d. 45,000
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
19 - 14
66. Roosevelt Corporation has a weighted-average unit contribution margin of $40 for its two
products, Standard and Supreme. Expected sales for Roosevelt are 40,000 Standard and
60,000 Supreme. Fixed expenses are $1,800,000.
At the expected sales level, Roosevelt’s net income will be
a. $(200,000).
b. $ - 0 -.
c. $2,200,000.
d. $4,000,000.
67. Swanson Company has two divisions; Sporting Goods and Sports Gear. The sales mix is
65% for Sporting Goods and 35% for Sports Gear. Swanson incurs $4,440,000 in fixed
costs. The contribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is
50%.
The weighted-average contribution margin ratio is
a. 37%.
b. 40%.
c. 43%.
d. 50%.
68. Swanson Company has two divisions; Sporting Goods and Sports Gear. The sales mix is
65% for Sporting Goods and 35% for Sports Gear. Swanson incurs $4,440,000 in fixed
costs. The contribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is
50%.
The break-even point in dollars is
a. $1,642,800.
b. $10,325,582.
c. $11,100,000.
d. $12,000,000.
Cost-Volume-Profit Analysis: Additional Issues
19 - 15
69. Swanson Company has two divisions; Sporting Goods and Sports Gear. The sales mix is
65% for Sporting Goods and 35% for Sports Gear. Swanson incurs $4,440,000 in fixed
costs. The contribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is
50%.
What will sales be for the Sporting Goods Division at the break-even point?
a. $3,600,000
b. $4,200,000
c. $6,711,628
d. $7,800,000
70. Swanson Company has two divisions; Sporting Goods and Sports Gear. The sales mix is
65% for Sporting Goods and 35% for Sports Gear. Swanson incurs $4,440,000 in fixed
costs. The contribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is
50%.
What will be the total contribution margin at the break-even point?
a. $3,820,466
b. $4,440,000
c. $4,480,000
d. $5,160,000
71. A shift from low-margin sales to high-margin sales
a. may increase net income, even though there is a decline in total units sold.
b. will always increase net income.
c. will always decrease net income.
d. will always decrease units sold.
72. A shift from high-margin sales to low-margin sales
a. may decrease net income, even though there is an increase in total units sold.
b. will always decrease net income.
c. will always increase net income.
d. will always increase units sold.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
19 - 16
73. MacCloud Industries has two divisions—Standard and Premium. Each division has
hundreds of different types of tennis racquets and tennis products. The following
information is available:
Standard Division Premium Division Total
Sales $400,000 $600,000 $1,000,000
Variable costs 280,000 360,000
Contribution margin $120,000 $240,000
Total fixed costs $320,000
What is the weighted-average contribution margin ratio?
a. 34%
b. 35%
c. 36%
d. 50%
74. MacCloud Industries has two divisions—Standard and Premium. Each division has
hundreds of different types of tennis racquets and tennis products. The following
information is available:
Standard Division Premium Division Total
Sales $400,000 $600,000 $1,000,000
Variable costs 280,000 360,000
Contribution margin $120,000 $240,000
Total fixed costs $320,000
What is the break-even point in dollars?
a. $115,200
b. $888,889
c. $914,286
d. $941,117
75. The sales mix percentages for Novotna’s Boston and Seattle Divisions are 70% and 30%.
The contribution margin ratios are: Boston (40%) and Seattle (30%). Fixed costs are
$1,110,000. What is Novotna’s break-even point in dollars?
a. $388,500
b. $3,000,000
c. $3,171,428
d. $3,363,636
Cost-Volume-Profit Analysis: Additional Issues
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76. A company can sell all the units it can produce of either Product A or Product B but not
both. Product A has a unit contribution margin of $16 and takes two machine hours to make
and Product B has a unit contribution margin of $30 and takes three machine hours to
make. If there are 3,000 machine hours available to manufacture a product, income will be
a. $6,000 more if Product A is made.
b. $6,000 less if Product B is made.
c. $6,000 less if Product A is made.
d. the same if either product is made.
77. Brooks Corporation can sell all the units it can produce of either Plain or Fancy but not both.
Plain has a unit contribution margin of $120 and takes two machine hours to make and
Fancy has a unit contribution margin of $150 and takes three machine hours to make.
There are 2,400 machine hours available to manufacture a product. What should Brooks
do?
a. Make Fancy which creates $30 more profit per unit than Plain does.
b. Make Plain which creates $10 more profit per machine hour than Fancy does.
c. Make Plain because more units can be made and sold than Fancy.
d. The same total profits exist regardless of which product is made.
78. What is the key factor in determining sales mix if a company has limited resources?
a. Contribution margin per unit of limited resource
b. The amount of fixed costs per unit
c. Total contribution margin
d. The cost of limited resources
79. Greg’s Breads can produce and sell only one of the following two products:
Oven Contribution
Hours Required Margin Per Unit
Muffins 0.2 $3
Coffee Cakes 0.3 $4
The company has oven capacity of 1,200 hours. How much will contribution margin be if it
produces only the most profitable product?
a. $12,000
b. $16,000
c. $18,000
d. $24,000
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
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80. Curtis Corporation’s contribution margin is $20 per unit for Product A and $24 for Product
B. Product A requires 2 machine hours and Product B requires 4 machine hours. How
much is the contribution margin per unit of limited resource for each product?
A B
a. $10.00 $6.00
b. $10.00 $6.66
c. $8.00 $6.00
d. $8.00 $6.66
81. Cost structure
a. refers to the relative proportion of fixed versus variable costs that a company incurs.
b. generally has little impact on profitability.
c. cannot be significantly changed by companies.
d. refers to the relative proportion of operating versus nonoperating costs that a company
incurs.
82. Outsourcing production will
a. reduce fixed costs and increase variable costs.
b. reduce variable costs and increase fixed costs.
c. have no effect on the relative proportion of fixed and variable costs.
d. make the company more susceptible to economic swings.
83. Reducing reliance on human workers and instead investing heavily in computers and
online technology will
a. reduce fixed costs and increase variable costs.
b. reduce variable costs and increase fixed costs.
c. have no effect on the relative proportion of fixed and variable costs.
d. make the company less susceptible to economic swings.
84. Cost structure refers to the relative proportion of
a. selling expenses versus administrative expenses.
b. selling and administrative expenses versus cost of goods sold.
c. contribution margin versus sales.
d. none of the above.
Cost-Volume-Profit Analysis: Additional Issues
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85. Mercantile Corporation has sales of $2,000,000, variable costs of $1,100,000, and fixed
costs of $750,000.
Mercantile’s degree of operating leverage is
a. 1.22.
b. 1.47.
c. 1.20.
d. 6.00.
86. Mercantile Corporation has sales of $2,000,000, variable costs of $1,100,000, and fixed
costs of $750,000.
Mercantile’s margin of safety ratio is
a. .08.
b. .17.
c. .20.
d. .83.
87. Which of the following statements is not true?
a. Operating leverage refers to the extent to which a company’s net income reacts to a
given change in sales.
b. Companies that have higher fixed costs relative to variable costs have higher
operating leverage.
c. When a company’s sales revenue is increasing, high operating leverage is good
because it means that profits will increase rapidly.
d. When a company’s sales revenue is decreasing, high operating leverage is good
because it means that profits will decrease at a slower pace than revenues decrease.
88. Miller Manufacturing’s degree of operating leverage is 1.5. Warren Corporation’s degree
of operating leverage is 6. Warren’s earnings would go up (or down) by ________ as
much as Miller’s with an equal increase (or decrease) in sales.
a. 1/4
b. 4.5 times
c. 4 times
d. 7.5 times
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTRUCTOR USE ONLY
19 - 20
89. The margin of safety ratio
a. is computed as actual sales divided by break-even sales.
b. indicates what percent decline in sales could be sustained before the company would
operate at a loss.
c. measures the ratio of fixed costs to variable costs.
d. is used to determine the break-even point.
90. A cost structure which relies more heavily on fixed costs makes the company
a. more sensitive to changes in sales revenue.
b. less sensitive to changes in sales revenue.
c. either more or less sensitive to changes in sales revenue, depending on other factors.
d. have a lower break-even point.
91. A company with a higher contribution margin ratio is
a. more sensitive to changes in sales revenue.
b. less sensitive to changes in sales revenue.
c. either more or less sensitive to changes in sales revenue, depending on other factors.
d. likely to have a lower breakeven point.
92. The degree of operating leverage
a. does not provide a reliable measure of a company’s earnings volatility.
b. cannot be used to compare companies.
c. is computed by dividing total contribution margin by net income.
d. measures how much of each sales dollar is available to cover fixed expenses.
a93. Only direct materials, direct labor, and variable manufacturing overhead costs are
considered product costs when using
a. full costing.
b. absorption costing.
c. variable costing.
d. product costing.
a94. When a company assigns the costs of direct materials, direct labor, and both variable and
fixed manufacturing overhead to products, that company is using
a. operations costing.
b. absorption costing.
c. variable costing.
d. product costing.
