Chapter 6—Cost-Volume-Profit Analysis
MULTIPLE CHOICE
1. The traditional income statement focuses on:
a.
cost function.
b.
cost behavior.
c.
contribution margin.
d.
variable costing.
2. Which of the following would you not find on a traditional income statement?
a.
Net operating income
b.
Gross profit
c.
Contribution margin
d.
Sales revenue
3. Which of the following would you not find on a contribution margin income statement?
a.
Net operating income
b.
Gross profit
c.
Contribution margin
d.
Sales revenue
4. The difference between sales and cost of goods sold is called:
a.
net income.
b.
gross profit.
c.
contribution margin.
d.
finished goods inventory.
5. The difference between sales and variable costs is called:
a.
net income.
b.
gross profit
c.
contribution margin.
d.
cost of goods sold.
6. The contribution margin income statement is structured in such a way as to emphasize:
a.
cost functionality.
b.
cost behavior.
c.
organizational efficiency.
d.
cost drivers.
7. While preparing a contribution margin income statement, the costs are shown into which of the two
categories?
a.
Direct materials and indirect materials
b.
Product and period
c.
Variable and fixed
d.
Avoidable and unavoidable
8. While preparing a traditional income statement, the costs are shown into which of the two categories?
a.
Direct materials and indirect materials
b.
Product and period
c.
Variable and fixed
d.
Avoidable and unavoidable
9. Which of the following statements is true regarding the traditional income statement?
a.
Sales revenue is based on the units produced rather than the units sold.
b.
It will include a subtotal called contribution margin.
c.
It will group costs into categories based on their behavior (fixed or variable).
d.
It is required for external reporting purposes.
10. Which of the following statements is false regarding the contribution margin income statement?
a.
It will group costs into categories based on their behavior (fixed or variable).
b.
It will include a subtotal called gross profit.
c.
It is not allowed for external reporting purposes.
d.
It is used by management to perform cost-volume-profit analysis.
11. Which of the following accounting system outputs is not needed for cost-volume-profit analysis?
a.
Sales price per unit
b.
Variable costs per unit
c.
Total fixed costs
d.
Fixed cost per unit
12. Which of the following is usually not one of the factors that cost-volume-profit analysis focuses on?
a.
Sales prices of products
b.
Mix of products or services produced
c.
Variable costs per unit
d.
Fixed costs per unit
13. All else being equal, which of the following would cause the total contribution margin to increase?
a.
A decrease in variable costs per unit.
b.
An increase in sales volume.
c.
A decrease in fixed costs per unit.
d.
An increase in the sales price per unit.
14. All else being equal, which of the following would not cause the contribution margin to decrease?
a.
An increase in total variable costs.
b.
A decrease in sales volume.
c.
A decrease in variable costs per unit.
d.
A decrease in the sales price per unit.
15. All else being equal, which of the following would cause the contribution margin to increase?
a.
An increase in variable costs per unit.
b.
An increase in total variable costs.
c.
A decrease in total fixed costs.
d.
An increase in sales volume.
16. All else being equal, which of the following would cause net operating income to increase?
a.
An increase in total variable costs.
b.
A decrease in total fixed costs.
c.
A decrease in sales price per unit.
d.
A decrease in contribution margin.
17. Assuming a company’s income statement shows a net operating income, which of the following
statements is true regarding the contribution margin per unit?
a.
It will decrease as the number of units sold increases.
b.
It will decrease as the number of units purchased decreases.
c.
It indicates the amount that net operating income will increase with the sale of each
additional unit.
d.
It indicates the amount that variable costs will decrease with the sale of each additional
unit.
18. Assuming that the fixed cost do not change, with the sale of each additional unit (above the break-even
point), net operating income will increase by the ____.
a.
contribution margin ratio
b.
contribution margin per unit
c.
sales price per unit
d.
fixed cost per unit
19. For each unit sold , the contribution margin per unit:
a.
will increase.
b.
will decrease.
c.
will stay the same.
d.
can not be predicted.
20. The ____ represents the amount of each additional sales dollar that contributes towards the payment of
fixed costs and, ultimately, increasing net operating profit.
a.
contribution margin ratio
b.
contribution margin per unit
c.
break-even point
d.
variable cost per unit
21. If a company has a positive contribution margin but net operating income is low or negative, what are
some ways of increasing net operating income?
a.
Increase sales price
b.
Increase sales volume
c.
Decrease variable costs
d.
All of these are ways to increase net operating income
22. Assuming a company has a positive contribution margin, which of the following changes will cause
net operating income to increase?
a.
A decrease in variable costs.
b.
A decrease in the sale price
c.
An increase in total fixed costs.
d.
A decrease in the sales volume.
23. All else being equal, which of the following changes would increase a company’s net operating
income?
a.
A decrease in sales price.
b.
A decrease in contribution margin.
c.
An increase in variable costs
d.
A decrease in fixed costs.
Hunter Inc.
Hunter Inc. sells a unique product with the following information available:
Sales price
$100 per unit
Variable costs
$40 per unit
Fixed costs
$19,500
Units produced and sold
1,300 units
24. Refer to Hunter Inc. information above. If one more unit is sold, net operating income will:
a.
decrease by $55.
b.
increase by $45.
c.
increase by $60.
d.
decrease by $15.
25. Refer to Hunter Inc. information above. What is the contribution margin ratio?
a.
55%
b.
25%
c.
60%
d.
40%
Carolina Products
Carolina Products sells a unique item with the following information available:
Sales price
$45 per unit
Variable costs
$15 per unit
Fixed costs
$5 per unit
Units produced and sold
2,000
26. Refer to the Carolina Products information above. If one more unit is sold, net operating income will:
a.
increase by $30.
b.
increase by $25.
c.
increase by $45.
d.
increase by $40.
27. Refer to the Carolina Products information above. What is the contribution margin per unit?
a.
$25
b.
$40
c.
$45
d.
$30
28. Refer to the Carolina Products information above. What is the contribution margin ratio?
a.
33.33%
b.
66.67%
c.
55.56%
d.
44.44%
Joe’s Coffee House
Joe’s Coffee House has the following information available for the month of July:
Sales (2,500 cups)
$7,500
Variable costs
3,250
Fixed costs
4,000
Net operating income
$ 250
29. Refer to the Joe’s Coffee House information above. If Joe’s sells 500 more cups of coffee per month,
net operating income will:
a.
increase by $850.
b.
increase by $100.
c.
increase by $150.
d.
increase by $1,500.
30. Refer to the Joe’s Coffee House information above. Each additional cup of coffee sold will increase net
operating income by:
a.
$1.70.
b.
$3.00.
c.
$1.00.
d.
$0.57.
31. Refer to the Joe’s Coffee House information above. All else being equal, if Joe’s increases the sales
price per unit by 10%, net operating income will:
a.
increase by $425.
b.
increase by $750.
c.
increase by $75.
d.
not change.
32. Jazz Products has the following information available for the month of March:
Sales (5,000 units)
$100,000
Variable costs
45,000
Fixed costs
15,000
Net operating income
$40,000
The company’s manager is considering several options to increase net operating income. By what
amount do sales dollars need to increase in order for net operating income to increase to $62,000?
a.
$40,000
b.
$62,000
c.
$162,000
d.
$38,000
33. If sales revenue stays the same but the contribution margin ratio decreases, then:
a.
net operating income will increase.
b.
fixed costs will decrease.
c.
net operating income will decrease.
d.
fixed costs will increase.
34. Which of the following statements is true when making decisions using cost-volume-profit (CVP)
analysis?
a.
As long as the contribution margin is a positive number, net operating income will be
positive.
b.
As long as variable costs are more than fixed costs, net operating income will be negative.
c.
As long as the contribution margin is greater than fixed costs, net operating income will be
positive.
d.
As long as the sales price per unit is greater than fixed costs per unit, net operating income
will be positive.
35. Haywood Inc. has the following information available for one of its products:
Sales price per unit
$35
Contribution margin ratio
65%
Total fixed costs
$10,000
Units produced and sold
5,000
In Haywood sells one more unit, net operating income will:
a.
increase by $20.75.
b.
increase by $12.25.
c.
increase by $22.75.
d.
increase by $35.
36. Laverne’s Soda Shop wishes to decrease variable costs. Which of the following options should she
consider?
a.
Decrease in advertising costs
b.
Decrease in rent
c.
Decrease in direct labor costs
d.
Increase in equipment rentals
37. Last year, Brown Manufacturing had a contribution margin ratio of 40%. This year, fixed expenses are
expected to remain at $50,000 and sales are expected to increase by $90,000. What should the
contribution margin ratio be this year if the company wishes to increase net operating income by
$31,500?
a.
78.75%
b.
40.00%
c.
35.00%
d.
55.56%
Stealth Software Inc.
Stealth Software Inc. has the following information available from last year for one of its software
products:
Sales revenue
$50,000
Variable costs
15,000
Fixed costs
10,000
38. Refer to the Stealth Software Inc. information above. If the software had a sales price of $20 per unit,
what is the variable cost per unit?
a.
$ 20
b.
$ 14
c.
$ 10
d.
$ 6
39. Refer to the Stealth Software Inc. information above. If the software had a sales price of $20 per unit,
what is the contribution margin per unit?
a.
$10
b.
$6
c.
$14
d.
$20
40. Refer to the Stealth Software Inc. information above. If the sales price per unit is $20 and the company
expects a 25% increase in sales volume this year along with a 10% decrease in fixed costs. What will
be expected net operating income this year?
a.
$22,250
b.
$53,500
c.
$32,750
d.
$34,750
41. A company’s manager estimates that in the upcoming year, total variable costs will increase by $7,500
and total fixed costs will increase by $3,500. Assume that the unit sales price did not change. What
will be the anticipated effect on net operating income?
a.
Net operating income will increase by $11000.
b.
Net operating income will decrease by $11,000.
c.
Net operating income will increase by $4,000.
d.
Net operating income will decrease by $4,000.
42. A company’s manager estimates that in the upcoming year, total variable costs will increase by
$20,000 and total fixed costs will decrease by $14,000. Assume that the unit sales price did not
change. What will be the anticipated effect on net operating income?
a.
Net operating income will increase by $34,000.
b.
Net operating income will decrease by $34,000.
c.
Net operating income will increase by $6,000.
d.
Net operating income will decrease by $6,000.
43. A company’s manager estimates that in the upcoming year, increasing advertising costs by $25,000
will cause sales revenue to increase by $60,000. If the company’s contribution margin ratio is 35%,
what will be overall effect on net operating income?
a.
Net operating income will increase by $12,250.
b.
Net operating income will increase by $29,750.
c.
Net operating income will increase by $35,000.
d.
Net operating income will decrease by $4,000.
44. A company’s manager estimates that in the upcoming year, decreasing advertising costs by $50,000
will cause sales revenue to decrease by $120,000. If the company’s contribution margin ratio is 35%,
what will be overall effect on net operating income?
a.
Net operating income will increase by $8,000.
b.
Net operating income will decrease by $8,000.
c.
Net operating income will increase by $24,500.
d.
Net operating income will decrease by $24,500.
45. LMN Manufacturing produces two products − Product S and Product W. The following information is
available related to each product:
Product S
Product W
Sales price per unit
$25
$40
Variable costs per unit
17
22
Product S accounts for 40% of total product sales and Product W accounts for the rest. LMN’s total
fixed costs are $24,990. How many total number of products need to be sold in order for the company
to break even?
a.
1,922 units
b.
2,403 units
c.
962 units
d.
1,785 units
RET Manufacturing
RET Manufacturing produces two types of children’s products − Rubles and Twizzles. The following
information is available related to each product:
Rubles
Twizzles
Sales price per unit
$15
$24
Variable costs per unit
5
12
Rubles account for 60% of total product sales and Twizzles accounts for the rest. RET’s total fixed
costs are $30,024.
46. Refer to the RET Manufacturing information above. How many total number of products need to be
sold in order for the company to break even?
a.
2,780 units
b.
2,730 units
c.
5,560 units
d.
2,176 units
47. Refer to the RET Manufacturing information above. How many Rubles need to be sold in order for the
company to break even?
a.
1,638 units
b.
1,668 units
c.
819 units
d.
2,780 units
48. Crabtree Inc. produces two types of products − Gizmos and Gadgets. The following information is
available related to each product:
Gizmos
Gadgets
Sales price per unit
$32
$50
Variable costs per unit
17
22
Percentage of total sales
66.67%
33.33%
If total fixed costs are $29,000, how many total units need to be sold in order for the company to break
even? (round computations to nearest number)
a.
1,933 units
b.
1,036 units
c.
1,500 units
d.
1,349 units
49. Crabtree Inc. produces two types of products − Gizmos and Gadgets. The following information is
available related to each product:
Gizmos
Gadgets
Sales price per unit
$80
$50
Variable costs per unit
36
22
Three-fourths of the products sold are Gizmos and one-fourth are Gadgets. If total fixed costs are
$50,000, how many total units need to be sold in order for the company to break even?
a.
1,250 units
b.
1,389 units
c.
2,500 units
d.
690 units
Village Manufacturing
Village Manufacturing produces two types of products − Card Games and Puzzles. The following
information is available related to each product:
Card Games
Puzzles
Sales price per unit
$6.00
$15.00
Variable costs per unit
2.00
3.50
60% of the products sold are Card Games and 40% are Puzzles.
50. Refer to the Village Manufacturing information above. If total fixed costs are $24,500, how many
Puzzles need to be sold in order for the company to break even?
a.
852 units
b.
1,265 units
c.
1,400 units
d.
3,500 units
51. Refer to the Village Manufacturing information above. If total fixed costs are $24,500, how many
Card Games need to be sold in order for the company to break even?
a.
2,100 units
b.
3,675 units
c.
4,200 units
d.
3,500 units
52. Which of the following statements is correct as it relates to a company that sells multiple products?
a.
CVP analysis cannot be used.
b.
Contribution margin is based on sales mix.
c.
CVP analysis is much easier to use.
d.
The break-even point remains the same even if sales mix changes.
53. When calculating the break-even point in a multi-product environment, which of the following
statements is false?
a.
The contribution margin per unit for each product needs to be determined.
b.
Total fixed costs need to be determined.
c.
Each product is assumed to count for an equal percentage of total sales.
d.
The weighted-average contribution margin per unit needs to be determined.
54. When calculating the break-even point in a multi-product environment, which of the following pieces
of information would not be relevant?
a.
Contribution margin per unit for each type of product
b.
Each product’s percentage of total sales
c.
Total fixed costs
d.
Fixed costs per unit
55. In a multi-product environment:
a.
cost-volume-profit analysis is not advisable to use.
b.
only the product with the highest contribution margin should be sold.
c.
the product with the highest sales prices per unit should account for the majority of the
sales.
d.
a weighted-average contribution margin per unit should be computed for all products
produced and sold.
Bergman Inc.
Bergman Inc. has the following product information available:
Sales price
$20 per unit
Variable costs
$8 per unit
Fixed costs
$18,000
Units produced and sold
12,000
56. Refer to the Bergman Inc. information above. What is the break-even point in units?
a.
1,500 units
b.
643 units
c.
600 units
d.
900 units
57. Refer to the Bergman Inc. information above. How many units need to be sold in order to earn a target
profit of $180,000?
a.
24,750 units
b.
16,500 units
c.
20,842 units
d.
22,500 units
Poole Products Inc.
Poole Products Inc. has the following product information available:
Sales price
$25 per unit
Variable costs
$10 per unit
Fixed costs
$36,000
58. Refer to the Poole Products Inc. information above. What is the break-even point in units?
a.
1,029 units
b.
1,440 units
c.
2,400 units
d.
5,400 units
59. Refer to the Poole Products Inc. information above. What is the break-even point in sales dollars?
a.
$21,600
b.
$36,000
c.
$60,000
d.
$90,000
60. Refer to the Poole Products Inc. information above. How many units need to be sold in order to earn a
target profit of $249,000?
a.
8,143 units
b.
14,200 units
c.
16,600 units
d.
19,000 units
Harrison Manufacturing
Harrison Manufacturing has the following product information available:
Sales price
$50 per unit
Variable costs
$26 per unit
Fixed costs
$87,600
61. Refer to the Harrison Manufacturing information above. What is the break-even point in units?
a.
3,369 units
b.
1,752 units
c.
3,650 units
d.
1,153 units
62. Refer to the Harrison Manufacturing information above. What is the break-even point in sales dollars?
a.
$87,600
b.
$42,048
c.
$168,462
d.
$182,500
63. Refer to the Harrison Manufacturing information above. How many units need to be sold in order to
earn a target profit of $175,000?
a.
10,942 units
b.
7,292 units
c.
3,642 units
d.
5,252 units
64. Refer to the Harrison Manufacturing information above. What do total sales dollars need to be in order
to earn a target profit of $200,400?
a.
$235,000
b.
$600,000
c.
$288,000
d.
$417,500
Tucker Corp.
Tucker Corp. has the following product information:
Sales price
$12 per unit
Contribution margin ratio
40%
Fixed costs
$45,000
65. Refer to the Tucker Corp. information above. What is the break-even point in sales dollars?
a.
$45,000
b.
$112,500
c.
$18,000
d.
$3,750
66. Refer to the Tucker Corp. information above. What is the break-even point in units?
a.
1,500 units.
b.
112,500 units.
c.
216,000 units.
d.
9,375 units.
67. Refer to the Tucker Corp. information above. How many units need to be sold in order to earn a target
profit of $542,400?
a.
234,960 units.
b.
216,960 units.
c.
113,000 units.
d.
122,375 units.
Cameron Corp.
Cameron Corp. has the following product information:
Sales price
$20 per unit
Contribution margin ratio
35%
Fixed costs
$59,500
68. Refer to the Cameron Corp. information above. What is the break-even point in sales dollars?
a.
$20,825
b.
$59,500
c.
$170,000
d.
$416,500
69. Refer to the Cameron Corp. information above. What is the break-even point in units?
a.
8,500 units
b.
2,975 units
c.
1,041 units
d.
170,000 units
70. Refer to the Cameron Corp. information above. How many units need to be sold in order to earn a
target profit of $299,950?
a.
42,850 units
b.
51,350 units
c.
34,350 units
d.
125,808 units
71. Angelo’s is a locally run and operated pizza parlor. Last month, the restaurant broke-even when 400
pizzas were served. The average variable costs per pizza are $2.50 and fixed costs for the month
totaled $6,000. What is the average selling price of a pizza?
a.
$15.00
b.
$12.50
c.
$17.50
d.
$6.00
72. Floyd’s Barbershop has fixed costs of $3,000 per month. Floyd currently breaks-even when it performs
400 haircuts a month. Floyd charges customers $10 per cut. What is Floyd’s variable cost per cut?
a.
$2.50
b.
$7.50
c.
$17.50
d.
$1.33
73. Floyd’s Barbershop has fixed costs of $3,000 per month. Floyd regularly performs 400 haircuts a
month and he does not anticipate this to change. Each haircut has a variable cost of $4.00. If Floyd
would like to earn a target profit of $2,000, what does he need to charge for each haircut?
a.
$12.50
b.
$16.50
c.
$11.50
d.
$8.50
Charlie’s Hotdog Stand
Charlie’s Hotdog Stand sells hotdogs for $2.50 each. The variable costs per hotdog are $.50. Charlie’s
fixed costs are currently $800 per month. Charlie is considering expanding his business to three hotdog
stands which will increase fixed costs per month by $1,200.
74. Refer to the Charlie’s Hotdog Stand information above. If Charlie does expand his business to three
stands, how many additional hotdogs will need to be sold per month in order to break even?
a.
1,000 hotdogs
b.
600 hotdogs
c.
200 hotdogs
d.
480 hotdogs
75. Refer to the Charlie’s Hotdog Stand information above. If Charlie does expand his business to three
stands, how many hotdogs will need to be sold per month in order to earn a target profit of $5,000?
a.
2,500 hotdogs
b.
3,100 hotdogs
c.
3,500 hotdogs
d.
2,800 hotdogs
76. Grisham Inc. wishes to have an after-tax profit of $400,000. If Grisham’s tax rate is 35%, what is their
before-tax profit?
a.
$615,385
b.
$540,000
c.
$1,142,857
d.
$660,000
77. Mulvaney Inc. ignored the effect of income taxes in its calculation of the sales volume needed to
achieve a target profit of $1,000,000. If the company considers the impact of income taxes in its
calculation, which of the following statements would be true?
a.
Total fixed costs will increase.
b.
Contribution margin per unit will decrease.
c.
Sales volume will increase to reach an after-tax profit.
d.
Sales price per unit will decrease.
78. When a company desires to achieve a after-tax profit, which of the following statements is true?
a.
Fixed costs will increase.
b.
As the tax rate increases, the number of units that need to be sold will decrease.
c.
The before-tax profit will need to be calculated.
d.
The contribution margin per unit will decrease.
79. Harrison Manufacturing has the following product information available:
Sales price
$50 per unit
Variable costs
$26 per unit
Fixed costs
$87,600
If Harrison is in the 35% tax bracket, how many units need to be sold in order to earn an after-tax
target profit of $260,000?
a.
16,667 units
b.
14,483 units
c.
22,282 units