Yaa Na Ang Simbag PDF

Chapter 4—Cost-Volume-Profit Analysis: A Managerial Planning Tool
TRUE/FALSE
1. The break-even point is where total sales revenue equals total cost.
ANS: T PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 4-1 NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point
KEY: Bloom's: Knowledge NOT: 1 min.
2. The contribution margin ratio can be calculated by subtracting the variable cost ratio from one.

STA: AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin
3. Variable expense per unit consists only of direct materials, direct labor, and variable overhead.
ANS: F PTS: 1 DIF: Difficulty: Easy

STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-28-Variable and Fixed
Costs KEY: Bloom's: Knowledge NOT: 1 min.
4. The break-even point in sales dollars is equal to the break-even units multiplied by cost.
ANS: F
The break-even point in sales dollars is equal to the break-even units multiplied by price.
PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1 | LO: 4-4

NAT: BUSPROG: Analytic
5. If variable expenses decrease and the price increases, the break-even point decreases.

OBJ: LO: 4-1 | LO: 4-5 NAT: BUSPROG: Analytic
6. Most firms would like to earn operating income equal to the break-even point.

7. In the equation to determine the number of units that must be sold to earn a target income, targeted
income is subtracted from fixed expense in the numerator.
ANS: F
In the equation to determine the number of units that must be sold to earn a target income, targeted
income is added to fixed expense in the numerator.
PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-2

STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin of
safety/sales target KEY: Bloom's: Knowledge NOT: 1 min.
8. If one increases variable costs per unit, the break-even point will decrease.
ANS: F
If one increases variable costs per unit, the break-even point will increase.

9. The impact on a firm's income resulting from a change in the number of units sold can be assessed by
multiplying the unit contribution margin by the change in units sold assuming that fixed costs remain
the same.

STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis
10. To find the number of units to sell to earn a targeted income, it is acceptable to simply adjust the
break-even units equation by adding target income to the variable cost.

11. To determine the number of units that must be sold to earn a target operating income, one can use the
equation for operating income and replace the operating income term with the target operating income.

12. The contribution margin income statement provides a good check to determine if the sale of a certain
number of units really results in operating income of the given amount.

13. If fixed costs increase, the break-even point decreases.

ANS: F
If fixed costs increase, the break-even point also increases.

14. The profit-volume graph shows the relationship between profits and units sold.

STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis
15. The profit-volume graph shows the relationship between operating income and the number of units
sold.

16. The linear equation for revenue is price multiplied by fixed cost.

STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Knowledge NOT: 1 min.
17. The linear equation for total cost is (Unit variable cost  Units) + Fixed cost.

18. The cost-volume profit graph depicts the relationships among cost, volume, and profits, by plotting the
total revenue line and the total cost line on the graph.

19. It is possible to calculate the break-even point for individual products in a multiple product firm by
separating the common and direct fixed expenses.

20. If a multi-product company simply wants to know the overall break-even point, it is easiest to use the
break-even in sales revenue approach.

21. In a multi-product firm, if the sales mix changes, the break-even points for each product will not
change.
ANS: F
In a multi-product firm, if the sales mix changes, the break-even points for each product will change.

22. Direct fixed expenses are the fixed costs that are not traceable to the segments and would remain even
if one of the segments was eliminated.

23. Common fixed expenses are the fixed costs that are traceable to the segments and would be avoided if
the segment did not exist.
ANS: F
Common fixed expenses are the fixed costs that are not traceable to the segments and would remain
even if one of the segments was eliminated.

STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-28-Variable and
Fixed Costs KEY: Bloom's: Knowledge NOT: 1 min.
24. If the break-even point increases, the margin of safety increases.

25. Operating leverage is the use of fixed cost to extract higher percentage changes in profits as sales
activity changes.

26. The margin of safety measures the units sold or the revenue earned above the break-even volume.

27. Managers can use CVP analysis to handle risk and uncertainty.

STA: AICPA: FN-Risk Analysis | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis
MATCHING
Given the following numbers from Webster Company, match the correct value with its appropriate
term.
Webster Company sells a product for $20. Unit cost information is as follows:
Direct materials $7
Direct labor $3
Variable overhead $4
Fixed overhead $1
Webster normally produces 50,000 units and the fixed overhead rate is based on this amount. Fixed
selling and administrative expense is $37,000.
a. $6
b. 30%
c. $14
d. 70%
e. $290,000
f. 14,500
1. Variable cost per unit
2. Contribution margin per unit
3. break-even point (in units)
4. Variable cost ratio
5. Contribution margin ratio
6. break-even point (in dollars)
1. ANS: C PTS: 1 DIF: Difficulty: Moderate

Costs KEY: Bloom's: Analysis NOT: 1 min.
2. ANS: A PTS: 1 DIF: Difficulty: Moderate
KEY: Bloom's: Analysis NOT: 1 min.
3. ANS: F PTS: 1 DIF: Difficulty: Moderate
4. ANS: D PTS: 1 DIF: Difficulty: Moderate
Costs KEY: Bloom's: Analysis NOT: 1 min.
5. ANS: B PTS: 1 DIF: Difficulty: Moderate
6. ANS: E PTS: 1 DIF: Difficulty: Moderate
Match each item with the correct statement below.

a. horizontal-axis of CVP graph
b. vertical-axis of CVP graph
c. slope of revenue line
d. slope of cost line
e. point where the total revenue line and the total cost line intersect
7. variable cost per unit
8. the selling price per unit
9. measured in dollars
10. measured in units sold
11. break-even point
7. ANS: D PTS: 1 DIF: Difficulty: Easy

8. ANS: C PTS: 1 DIF: Difficulty: Easy
9. ANS: B PTS: 1 DIF: Difficulty: Easy
10. ANS: A PTS: 1 DIF: Difficulty: Easy
11. ANS: E PTS: 1 DIF: Difficulty: Easy
Match each item with the correct statement below.

a. break-even point
b. Common fixed expenses
c. Contribution margin
d. Direct fixed expenses
e. Margin of safety
f. Operating leverage
g. Degree of operating leverage
h. Sales mix
12. Fixed costs that are directly traceable to a given segment and, consequently, disappear if the segment is
eliminated.
13. The relative combination of products (or services) being sold by an organization.
14. Sales revenue minus total variable cost or price minus unit variable cost.
15. The use of fixed costs to extract higher percentage changes in profits as sales activity changes.
16. The point where total sales revenue equals total cost.
17. A measure of the sensitivity of profit changes to changes in sales volume.
18. Fixed expenses that cannot be directly traced to individual segments and that are unaffected by the
elimination of any one segment.
19. The units sold or expected to be sold or sales revenue earned or expected to be earned above the break-
even volume.
12. ANS: D PTS: 1 DIF: Difficulty: Easy

STA: AICPA: FN-Decision Modeling |AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP:
APC-28-Variable and Fixed Costs KEY: Bloom's: Knowledge
NOT: 1 min.
13. ANS: H PTS: 1 DIF: Difficulty: Easy
APC-29-CVP Analysis KEY: Bloom's: Knowledge
NOT: 1 min.
14. ANS: C PTS: 1 DIF: Difficulty: Easy
STA: AICPA: FN-Reporting |AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-
Contribution Margin KEY: Bloom's: Knowledge
NOT: 1 min.
15. ANS: F PTS: 1 DIF: Difficulty: Easy
NOT: 1 min.
16. ANS: A PTS: 1 DIF: Difficulty: Easy
17. ANS: G PTS: 1 DIF: Difficulty: Easy
NOT: 1 min.
18. ANS: B PTS: 1 DIF: Difficulty: Easy
APC-28-Variable and Fixed Costs KEY: Bloom's: Knowledge
NOT: 1 min.
19. ANS: E PTS: 1 DIF: Difficulty: Easy
APC-32-Margin of safety/sales target KEY: Bloom's: Knowledge
NOT: 1 min.
COMPLETION
1. The difference between sales and variable expenses is called the ______________________.
ANS: contribution margin.

2. The ________________________ is the point where total revenue equals total cost.
ANS: break-even point

3. The ______________________ is the proportion of each sales dollar that must be used to cover
variable costs.
ANS: variable cost ratio

STA: AICPA: FN-Measurement | IMA: Cost Management | ACBSP: APC-33-Incremental analysis
4. The _________________________ is the proportion of each sales dollar available to cover fixed costs
and provide for profit.
ANS: contribution margin ratio
PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-1

5. ___________________________________ is the income statement format that is based on the

separation of costs into fixed and variable components.
ANS: Contribution margin income statement

STA: AICPA: FN-Reporting | IMA: Reporting | ACBSP: APC-30-Contribution Margin
6. ______________ gives us a way to determine how many units must be sold, or how much sales
revenue must be generated to earn a particular target income.
ANS: CVP analysis

7. Assuming that fixed costs remain unchanged, the _____________________ can be used to find the
profit impact of a change in sales revenue.
ANS: contribution margin ratio

STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin
8. The amount of income an organization is trying to achieve during a particular period is known as the
_____________.
ANS: target income

STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales
target KEY: Bloom's: Knowledge NOT: 1 min.
9. A ________________________ visually portrays the relationship between profits and units sold.
ANS: profit-volume graph

10. The _________________________ depicts the relationships among cost, volume, and profits by
plotting the total revenue line and the total cost line on a graph.
ANS: cost-volume-profit graph

11. ______________________ are those fixed costs that can be traced to each segment and would be
avoided if the segment did not exist.
ANS: Direct fixed expenses

STA: AICPA: FN-Reporting | IMA: Cost Management | ACBSP: APC-28-Variable and Fixed Costs
12. Fixed costs that are not traceable to the segments and would remain even if one of the segments was
eliminated are known as _____________________________.
ANS: common fixed expenses

STA: AICPA: FN-Reporting | IMA: Cost Management | ACBSP: APC-28-Variable and Fixed Costs
13. __________ is the relative combination of products being sold by a firm.
ANS: Sales mix

STA: AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-31-Break-even point
14. The _________________ is the units sold or the revenue earned above the break-even volume.
ANS: margin of safety

STA: AICPA: FN-Decision Modeling |AICPA: FN-Risk Analysis | IMA: Decision Analysis | ACBSP:
NOT: 1 min.
15. If the break-even volume for a company is 600 units and the company is currently selling 1,000 units
than the 400 units would represent the company’s ____________________.
ANS: margin of safety

NOT: 1 min.
16. _____________________ is the use of fixed costs to extract higher percentage changes in profits as
sales activity changes.
ANS: Operating leverage

17. The _________________________________ can be measured for a given level of sales by taking the
ratio of contribution margin to operating income.
ANS:
degree of operating leverage
(DOL)
DOL

18. The quantity at which two systems produce the same operating income is referred to as the
___________________.
ANS: indifference point

19. The “what-if” process of altering certain key variables to assess the effect on the original outcome is
also called a __________________.
ANS: sensitivity analysis

STA: AICPA: FN-Risk Analysis | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis
20. A company’s mix of fixed costs relative to variable costs is referred to as its _______________.
ANS: cost structure

STA: AICPA: FN-Measurement | IMA: Cost Management | ACBSP: APC-28-Variable and Fixed
MULTIPLE CHOICE
1. The break-even point is when

a. the company is operating at a loss.
b. total revenue equals total cost.
c. the company is earning a small profit.
d. total sales equal variable costs.
e. total sales equals operating income.
ANS: B PTS: 1 DIF: Difficulty: Easy
2. Total contribution margin divided by total sales is the

a. indifference point.
b. margin of safety.
c. sales ratio.
d. target income.
e. contribution margin ratio.
ANS: E PTS: 1 DIF: Difficulty: Easy
3. At the break-even point,

a. total revenue equals variable cost.
b. total fixed cost equals variable cost.
c. total contribution margin equals total fixed cost.
d. total sales equals total fixed cost.
e. total margin of safety equals variable cost.
ANS: C PTS: 1 DIF: Difficulty: Moderate
STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-31-Break-even point
4. If variable costs per unit decrease, sales volume at the break-even point will
a. decrease.
b. stay constant.
c. double.
d. increase.
ANS: A PTS: 1 DIF: Difficulty: Easy
5. Contribution margin ratio can be calculated in all of the following ways except
a. fixed costs/Contribution margin per unit.
b. 1  Variable cost ratio.
c. contribution margin per unit/price.
d. total contribution margin/Total sales.
e. All of these are correct.
ANS: A PTS: 1 DIF: Difficulty: Moderate
6. Assume the following information:

Variable cost ratio 80%
Total fixed costs $60,000
What volume of sales dollars is needed to break even?

a. $75,000
b. $300,000
c. $48,000
d. $12,000
ANS: B
SUPPORTING CALCULATIONS:
($60,000/0.2) = $300,000

KEY: Bloom's: Application NOT: 1 min.
7. Which of the following equations is true?

a. Contribution margin = Sales revenue  Variable cost ratio
b. Contribution margin ratio = Contribution margin/Variable costs
c. Contribution margin = Fixed costs
d. Contribution margin ratio = 1  Variable cost ratio
ANS: D PTS: 1 DIF: Difficulty: Easy

8. If the selling price per unit increases, the break-even point in units will
a. decrease.
b. increase.
c. remain the same.
d. remain the same; however, contribution per unit will decrease.
9. Patricia Company produces two products, X and Y, which account for 60% and 40%, respectively, of
total sales dollars. Contribution margin ratios are 50% for X and 25% for Y. Total fixed costs are
$120,000. What is Patricia's break-even point in sales dollars?
a. $300,000
b. $328,767
c. $342,856
d. $375,000
ANS: A
Average CM rate = (0.6)(0.5) + (0.4)(0.25) = 0.40
$120,000/0.4 = $300,000
PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-1 | LO: 4-4

10. Clean Company sells its product for $80. In addition, it has a variable cost ratio of 60% and total fixed
costs of $8,000. What is the break-even point in sales dollars for Baker Company?
a. $4,800
b. $32,000
c. $20,000
d. $8,000
ANS: C
$8,000/0.4 = $20,000

11. Sarah Smith, a sole proprietor, has the following projected figures for next year:
Selling price per unit $150.00

Contribution margin per unit $ 45.00
What is the contribution margin ratio?

a. 0.300
b. 1.429
c. 0.429
d. 3.333
ANS: A
$45/$150 = .300

12. The ratio of fixed expenses to the contribution margin ratio is the
a. indifference point.
b. break-even point in units.
c. fixed cost ratio.
d. break-even point in sales.
e. sensitivity analysis.
13. If the contribution margin per unit decreases, the break-even point in units
a. will increase.
b. will decrease.
c. will remain the same.
d. cannot be determined from the information given.
14. The income statement for Thomas Manufacturing Company for 2011 is as follows:
Sales (10,000 units) $120,000

Variable expenses 72,000
Contribution margin $ 48,000
Fixed expenses 36,000
Operating income $ 12,000
What is the contribution margin per unit?

a. $7.20
b. $1.20
c. $4.80
d. $120,000
ANS: C
$48,000/10,000 = $4.80

15. Dirth Company sells only one product at a regular price of $7.50 per unit. Variable expenses are 60%
of sales and fixed expenses are $30,000. Management has decided to decrease the selling price to
$6.00 in hopes of increasing its volume of sales. What is the contribution margin ratio when the selling
price is reduced to $6 per unit?
a. 25%
b. 40%
c. 75%
d. 60%
ANS: A
($6.00  $4.50)/$6.00 = 25%

16. If the contribution margin ratio increases, the break-even point in sales dollars will
a. increase.
b. decrease.
c. remain the same.
d. double.
ANS: B PTS: 1 DIF: Difficulty: Moderate
17. Dirth Company sells only one product at a regular price of $7.50 per unit. Variable expenses are 60%
of sales and fixed expenses are $30,000. Management has decided to decrease the selling price to
$6.00 in hopes of increasing its volume of sales. What is the sales dollars level required to break even
at the old price of $7.50?
a. $75,000
b. $12,000
c. $18,000
d. $50,000
ANS: A
$30,000/0.4 = $75,000

18. If fixed costs increase, the break-even point in units will

a. increase.
b. decrease.
c. remain the same.
d. remain the same; however, contribution per unit will decrease.
19. Total variable cost divided by price is

a. variable cost ratio.
b. revenue ratio.
c. contribution ratio.
d. sales ratio.
e. degree of operating leverage.
STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-23-Financial Statement
Analysis KEY: Bloom's: Knowledge NOT: 1 min.
20. Which statement is true about cost-volume profit (CVP) analysis?

a. CVP analysis is a powerful tool for planning and decision making.
b. CVP analysis allows managers to do sensitivity analysis by examining the impact of
various prices or cost levels on profit.
c. CVP analysis shows how revenues, expenses, and profits behave as volume changes.
d. CVP analysis can be used in both single-product and multi-product firms.
e. All of these statements are true.
ANS: E PTS: 1 DIF: Difficulty: Moderate
21. Melody Company sells a product for $14, variable costs are $10 per unit, and total fixed costs are
$5,040. What is the break-even point in units?
a. 640
b. 1,260
c. 210
d. 360
e. 504
ANS: B
$5,040/($14  $10) = 1,260

$5,040. What is the per unit contribution margin?
a. $14
b. $10
c. $24
d. $10
e. $4
ANS: E
$14  $10 = $4

23. If the contribution margin ratio increases

a. the variable cost ratio decreases.
b. the break-even point increases.
c. fixed costs must have decreased.
d. price must have decreased.
e. more units must be sold to break even.
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-30-Contribution
Margin KEY: Bloom's: Knowledge NOT: 1 min.
24. Stepford Company makes dolls. The price is $10 and the variable expense per unit is $6. What is the
contribution margin ratio?
a. 62.5%
b. 37.5%
c. 55%
d. 40%
e. 60%
ANS: D
($10  $6)/$10 = 40%

25. The contribution margin is

a. the difference between sales and variable costs.
b. the difference between target income and operating income.
c. the difference between operating income and margin of safety.
d. equal to sales.
e. when total sales equals total costs.
Figure 4-1.
Foster Company makes power tools. The budgeted sales are $420,000, budgeted variable costs are
$147,000, and budgeted fixed costs are $227,500.
26. Refer to Figure 4-1. What is the budgeted operating income?

a. $273,000
b. $227,500
c. $45,500
d. $374,500
e. $567,000
ANS: C
$420,000  $147,000  $227,500 = $45,500

STA: AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis
27. Refer to Figure 4-1. What is the variable cost ratio?

a. 54%
b. 35%
c. 89%
d. 19%
e. 50%
ANS: B
$147,000/$420,000 = 35%

Analysis KEY: Bloom's: Knowledge NOT: 1 min.
28. Refer to Figure 4-1. What is the break-even point in sales dollars?
a. $350,000
b. $420,000
c. $650,000
d. $780,000
e. $567,000
ANS: A
$227,500/0.65 = $350,000

29. Refer to Figure 4-1. What is the contribution margin?

a. $90,000
b. $183,000
c. $36,000
d. $273,000
e. $374,500
ANS: D
$420,000  $147,000 = $273,000

30. Refer to Figure 4-1. What is the contribution margin ratio?

a. 35%
b. 65%
c. 54%
d. 89%
e. 50%
ANS: B
$273,000/$420,000 = 65%

Figure 4-2.
Pauley Company provides home health care. Pauley charges $35/hour for professional care. Variable
costs are $21/hour and fixed costs are $78,000. Next year, Pauley expects to charge out 12,000 hours
of home health care.
31. Refer to Figure 4-2. What is the break-even point in hours? (round to the nearest whole hour)
a. 2,229
b. 1,393
c. 3,714
d. 5,571
e. 12,000
ANS: D
$78,000/$14 = 5,571

a. $130,000
b. $195,000
c. $252,000
d. $420,000
e. $342,000
ANS: B
$78,000/0.40 = $195,000


a. 67%
b. 60%
c. 40%
d. 33%
e. 50%
ANS: C
100%  60% = 40% or $14/$35 = 40%

34. Refer to Figure 4-2. What is the contribution margin per hour?
a. $21
b. $35
c. $14
d. $56
e. $6.50
ANS: C
$35  $21 = $14

35. Refer to Figure 4-2. What is the variable cost ratio?

a. 50%
b. 40%
c. 33%
d. 67%
e. 60%
ANS: E
$21/$35 = 60%

Analysis KEY: Bloom's: Application NOT: 1 min.
36. Refer to Figure 4-2. What is the budgeted operating income?

a. $342,000
b. $174,000
c. $168,000
d. $90,000
e. $420,000
ANS: D
($35  12,000)  ($21  12,000)  $78,000 = $90,000

Figure 4-3.
Paney Company makes calendars. Information on cost per unit is as follows:
Direct materials $1.50

Direct labor 1.20
Variable overhead 0.90
Variable marketing expense 0.40
Fixed marketing expense totaled $13,000 and fixed administrative expense totaled $35,000. The price
per calendar is $10.
37. Refer to Figure 4-3. What is the contribution margin per unit?
a. $6.30
b. $5.00
c. $6.40
d. $6.00
e. $5.40
ANS: D
$10  $4 = $6

38. Refer to Figure 4-3. What is the variable product expense per unit?
a. $5.00
b. $4.00
c. $3.60
d. $1.30
e. $4.60
ANS: C
$1.50 + $1.20 + $0.90 = $3.60

Costs KEY: Bloom's: Application NOT: 1 min.
39. Refer to Figure 4-3. What is the variable cost per unit?
a. $5.00
b. $4.00
c. $3.70
d. $1.30
e. $4.60
ANS: B
$1.50 + $1.20 + $0.90 + $0.40 = $4.00

Costs KEY: Bloom's: Application NOT: 1 min.
40. Refer to Figure 4-3. What is the break-even point in units?

a. 2,167
b. 5,833
c. 8,000
d. 12,000
e. 2,800
ANS: C
($13,000 + $35,000)/$6 = 8,000

a. $120,000
b. $80,000
c. $58,330
d. $21,670
e. $28,000
ANS: B
break-even sales = 8,000  $10 = $80,000

42. Refer to Figure 4-3. What is the variable expense ratio?

a. 40%
b. 36%
c. 50%
d. 60%
e. 46%
ANS: A
$4/$10 = 40%

Analysis KEY: Bloom's: Application NOT: 1 min.

a. 36%
b. 40%
c. 50%
d. 60%
e. 44%
ANS: D
$6/$10 = 60%

44. Refer to Figure 4-3. How many units must be sold to yield targeted income of $36,000?
a. 6,000
b. 5,833
c. 8,167
d. 14,000
e. 12,000
ANS: D
($13,000 + $35,000 + $36,000)/$6 = 14,000

safety/sales target KEY: Bloom's: Application NOT: 1 min.
Figure 4-7.
A company provided the following data:
Selling price per unit $60

Variable cost per unit $40
45. Refer to Figure 4-7. What is the break-even point in units?

a. 20,000
b. 10,000
c. 6,667
d. 13,333
e. 12,000
ANS: A
$400,000/($60 per unit  $40 per unit) = 20,000 units

46. Refer to Figure 4-7. How many units must be sold to earn a profit of $40,000?
a. 8,500
b. 23,333
c. 22,000
d. 2,000
e. 20,000
ANS: C
($400,000 + $40,000)/($60 per unit  $40 per unit) = 22,000 units

Figure 4-8.
A company provided the following data:
Sales $540,000
Variable costs $378,000
Fixed costs $120,000
Expected production and sales in units 40,000
a. $498,000
b. $400,000
c. $171,429
d. $112,500
e. $150,000
ANS: B
Contribution margin ratio = ($540,000  $378,000)/$540,000 = 30%
break-even point = $120,000/30% = $400,000

48. Refer to Figure 4-8. How much sales in dollars is necessary to generate a profit of $30,000?
a. $528,000
b. $500,000
c. $214,286
d. $100,000
e. $150,000
ANS: B
($540,000  $378,000)/($540,000) = 30%
($120,000 + $30,000)/30% = $500,000

Figure 4-4.
Yerke Company makes jungle gyms and tree houses for children. For jungle gyms, the price is $120
and variable expenses are $90 per unit. For tree houses, the price is $200 and variable expenses are
$100. Total fixed expenses are $253,750. Last year, Yerke sold 12,000 gyms and 4,000 tree houses.
49. Refer to Figure 4-4. Using the lowest whole numbers, what is the sales mix of gyms and tree houses?
a. 4:1
b. 3:1
c. 3:2
d. 2:3
e. 1:4
50. Refer to Figure 4-4. Now suppose that Yerke expects tree house demand to increase from 4,000 to
8,000 units. What is the new contribution margin ratio (rounded to two decimal places)?
a. 38%
b. 62%
c. 40%
d. 60%
e. 50%
ANS: A
The new sales mix is 3:2. A package with 3 gyms and 2 tree houses has contribution margin of $290
[($30  3) + ($100  2)]. Thus, the contribution margin ratio is $290/$760 or 38%.

8,000 units. What is the number of jungle gyms sold at break-even?
a. 1,750
b. 668
c. 2,625
d. 1,002
e. 875
ANS: C
$253,750/$290 = 875 packages
875 packages  3 = 2,625

8,000 units. What is the number of tree houses sold at break-even?
a. 1,750
b. 668
c. 2,625
d. 1,002
e. 875
ANS: A
$273,750/$290 = 875 packages
875  2 = 1,750

8,000 units. What is the sales revenue at break-even?
a. $411,250
b. $253,700
c. $1,076,250
d. $665,000
e. $140,000
ANS: D
($120  2,625) + ($200  1,750) = $665,000

Figure 4-5.
Standlar Company makes wireless speakers. The standard model price is $360 and variable expenses
are $210. The deluxe model price is $500 and variable expenses are $300. The superior model price is
$1,600 and variable expense per unit is $600. Total fixed expenses are $300,000. Generally, Standlar
sells 8 standard models and 4 deluxe models for every superior model sold.
54. Using the sales mix stated in the facts from Figure 4-5 to form a package, what is the total package
contribution margin?
a. $2,000
b. $1,110
c. $3,000
d. $900
e. $1,200
ANS: C
($150  8) + ($200  4) + ($1,000  1) = $3,000

55. Refer to Figure 4-5. What is the number of standard models sold at break-even?
a. 100
b. 800
c. 180
d. 1,000
e. 250
ANS: B
$300,000/$3,000 = 100 packages
100  8 = 800
PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 4-1 | LO: 4-4

56. Refer to Figure 4-5. What is the number of deluxe models sold at break-even?
a. 250
b. 500
c. 400
d. 100
e. 1,000
ANS: C
$300,000/$3,000 = 100 packages
100  4 = 400

57. Refer to Figure 4-5. What is the number of superior models sold at break-even?
a. 200
b. 800
c. 400
d. 1,600
e. 100
ANS: E
$300,000/$3,000 = 100 packages
100  1 = 100

58. Refer to Figure 4-5. What is the overall sales revenue at break-even?
a. $778,800
b. $387,200
c. $648,000
d. $550,000
e. $480,000
ANS: C
($360  800) + ($500  400) + ($1,600  100) = $648,000

$5,040. If Melody wants to earn an operating profit of $880, how many units must it sell?
a. 1,480
b. 1,260
c. 1,040
d. 62
e. 247
ANS: A
($5,040 + $880)/($14  $10) = 1,480

60. The formula used to calculate the number of units needed in order to earn a target income is
a. (Fixed costs + Variable costs)/Sales.
b. (Fixed costs + Target income)/Sales.
c. (Fixed costs + Target income)/Contribution margin per unit.
d. (Fixed costs + Variable costs)/Contribution margin per unit.
e. (Fixed costs + Target income)/Contribution margin ratio.
61. The formula that can be used to calculate sales dollars necessary in order to earn a target income is
a. (Fixed costs + Contribution margin)/(Contribution margin ratio).
b. (Fixed costs + Target income)/(Contribution margin ratio).
c. (Fixed costs + Variable costs)/(1  Variable cost ratio).
d. (Fixed costs + Target income )/(1  Sales ratio).
62. Assume the following information:

Contribution margin ratio 40%
How many units must be sold to generate a profit of $45,000?

a. 3,000 units
b. 2,500 units
c. 4,500 units
d. 3,750 units
ANS: C
($225,000 + $45,000)/($150  0.4) = 4,500 units

63. Which is the equation for operating income?

a. (Price  Units sold)  (Unit variable cost  Units sold)  Fixed cost
b. (Price  Units sold) + (Unit variable cost  Units sold) + Fixed cost
c. (Price + Units sold)  (Unit variable cost + Units sold)  Fixed cost
d. (Price  Units sold) + (Unit variable cost  Units sold) + Fixed cost
e. (Price  Units sold) + (Unit variable cost  Units sold)  Fixed cost

STA: AICPA: FN-Measurement |AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-33-
Incremental analysis KEY: Bloom's: Knowledge
NOT: 1 min.
64. Rachel Company sells office chairs at $350 each, incurs variable cost per unit of $100, and has a total
fixed expense of $30,000. How many units must be sold to achieve a target operating income of
$55,000?
a. 200
b. 340
c. 180
d. 450
e. 275
ANS: B
Units = ($30,000 + $55,000)/($350  100) = 340 units

65. A graph that depicts the relationships among cost, volume and profits (operating income) is the
a. Cost graph.
b. Volume graph.
c. Cost-volume-profit graph.
d. Profit-volume graph.
e. break-even graph.
ANS: C PTS: 1 DIF: Difficulty: Easy
66. A profit-volume graph differs from a cost-volume-profits graph in that a profit-volume graph displays
only
a. costs associated with units produced.
b. operating income associated with expected sales.
c. revenues and costs associated with sales volume.
d. revenues expected at targeted sales levels.
67. On a cost-volume-profit graph, the break-even point is where

a. the revenue line intersects the profit line.
b. the revenue line intersects the total cost line.
c. the fixed cost line intersects the variable cost line.
d. the contribution margin line intersects the fixed cost line.
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis |
ACBSP: APC-31-Break-even point KEY: Bloom's: Knowledge
NOT: 1 min.
68. Which of the following is not an assumption used to prepare a cost-volume-profit graph?
a. linear costs within the relevant range
b. units produced equals units sold
c. constant sales mix
d. constant cost fluctuation
e. All of these are assumptions used in preparing cost-volume-profit graphs.
ANS: D PTS: 1 DIF: Difficulty: Moderate
69. Which of the following is not an assumption of a cost-volume-profit analysis?

a. Selling price and costs can be accurately identified.
b. Selling price and costs remain constant within the relevant range.
c. Inventory levels can increase or decrease.
d. Selling price and costs behave in a linear manner.
70. A profit-volume graph visually portrays the relationship between

a. total sales and fixed cost.
b. profits and units sold.
c. total sales and margin of safety.
d. total sales and variable costs.
e. profits and degree of operating leverage.
71. The profit-volume graph

a. is difficult to interpret.
b. fails to reveal how costs change as sales volume changes.
c. can be only plotted using the break-even point.
d. can be only plotted using fixed costs.
e. shows the relationship between operating income and variable costs.
72. The cost-volume-profit graph

a. plots three separate lines.
b. plots the total revenue line and the total cost line.
c. the vertical axis is measured in units sold and the horizontal axis in dollars.
d. All of these are correct.
73. Fixed expenses that cannot be directly traced to individual segments are called
a. cost structure.
b. direct fixed expenses.
c. operating leverage.
d. common fixed expenses.
e. indifference point.
STA: AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-28-Variable and Fixed Costs
74. Sales mix is the relative combination of

a. inputs required to produce a product.
b. outputs produced by a firm.
c. products sold by a firm.
d. distribution channels used by a firm.
e. resources used to produce a product.
ANS: C PTS: 1 DIF: Difficulty: Easy
STA: AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-25-Managerial
Characteristics/Terminology KEY: Bloom's: Knowledge
NOT: 1 min.
75. Sales mix can be expressed in terms of

a. units but not revenues.
b. either revenues or units.
c. revenues but not units.
d. neither units nor revenue.
STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-25-Managerial
NOT: 1 min.
76. In order for the break-even computation to be meaningful to management, sales mix should be
computed using the
a. expected mix.
b. most desirable mix.
c. least desirable mix.
d. traditional mix.
e. average mix over the past 5 years.
STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-25-Managerial
NOT: 1 min.
77. If sales remain the same and the margin of safety increases, which of the following is true?
a. The break-even point has decreased.
b. The common fixed costs have increased.
c. The break-even point has remained constant.
d. Variable costs have increased.
STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales
78. Information about the Harmon Company's two products includes:
Product X Product Y
Unit selling price $9.00 $9.00
Unit variable costs:
Manufacturing $5.25 $6.75
Selling .75 .75
Total $6.00 $7.50
Monthly fixed costs are as follows:

Manufacturing $ 82,500
Selling and administrative 45,000
Total $127,500
What is the total monthly sales volume in units required to break even when the sales mix in units is
70% Product X and 30% Product Y?
a. 8,333 units
b. 50,000 units
c. 16,667 units
d. 56,667 units
ANS: B
Average CM per unit = [0.7  ($9.00  $6.00)] + [0.3  ($9.00  $7.50)] = $2.55
$127,500/$2.55 = 50,000 units

79. Product 1 has a contribution margin of $6.00 per unit, and Product 2 has a contribution margin of
$7.50 per unit. Total fixed costs are $300,000. Sales mix and total volume varies from one period to
another. Which of the following is true?
a. At a sales volume in excess of 25,000 units of 1 and 25,000 units of 2, operations will be
profitable.
b. The ratio of net profit to total sales for 2 will be larger than the ratio of net profit to total
sales for 1.
c. Variable costs are $1.50 more for 2 than for 1.
d. The ratio of contribution margin to total sales always will be larger for 1 than for 2.
80. The following data pertain to the three products produced by Alberts Corporation:
A B C
Selling price per unit $5.00 $7.00 $6.00
Variable costs per unit 4.00 5.00 3.00
Contribution margin per unit $1.00 $2.00 $3.00
Fixed costs are $90,000 per month.
60% of all units sold are Product A, 30% are Product B, and 10% are Product C.
What is the monthly break-even point for total units?

a. 45,000 units
b. 36,000 units
c. 60,000 units
d. 180,000 units
ANS: C
Average CM per unit = (0.6  $1) + (0.3  $2) + (0.1  $3) = $1.50
$90,000/$1.50 = 60,000 units

81. If actual sales equal break-even sales

a. the margin of safety is negative.
b. the margin of safety is positive.
c. it is impossible to say anything about the margin of safety.
d. the margin of safety equals zero.
e. the margin of safety is negative or positive.
82. The units sold or expected to be sold or sales revenue earned or expected to be earned above the break-
even volume is called
a. variable cost ratio.
b. degree of operating leverage.
c. break-even point.
d. margin of safety.
e. contribution margin ratio.
83. The margin of safety in dollars is

a. expected sales minus expected profit.
b. expected sales minus sales at break-even.
c. costs at break-even minus expected profit.
d. expected costs minus costs at break-even.
e. expected profit minus actual profit.
84. ____ can be measured for a given level of sales by taking the ratio of contribution margin to operating
income.
a. Contribution margin ratio
b. Degree of operating leverage
c. Break-even point
d. Sensitivity analysis
e. Contribution margin
85. Which of the following can be considered a measure of risk in cost-volume-profit analysis?
a. margin of safety
b. contribution margin
c. break-even point
d. sales mix
STA: AICPA: FN-Risk Analysis | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales
86. Sales can decline by how much before losses are incurred?
a. contribution margin ratio
b. variable cost ratio
c. sales ratio
d. common fixed costs
e. margin of safety
STA: AICPA: FN-Risk Analysis | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales
87. Firm X and Firm Y are competitors within the same industry. Firm X produces its product using large
amounts of direct labor. Firm Y has replaced direct labor with investment in machinery. Projected sales
for both firms are 15% less than in the prior year. Which statement regarding projected profits is true?
a. Firm X will lose more profit than Firm Y.
b. Firm Y will lose more profit than Firm X.
c. Firm X and Firm Y will lose the same amount of profit.
d. Neither Firm X nor Firm Y will lose profit.
ANS: B
This would be true because the company would not have to pay the direct labor employees for hours
they do not work. The return on the investment of the machine would be significantly less.
PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 4-5
analysis KEY: Bloom's: Analysis NOT: 4 min.
88. Operating leverage is

a. the difference between sales and variable expense.
b. the use of fixed costs to extract higher percentage changes in profits as sales activity
changes.
c. the portion of each sales dollar available to cover fixed costs and provide for profit.
d. visually portrays the relationship between profits and units sold.
e. none of these
89. A "what-if" technique that examines the impact of changes in underlying assumptions on an answer is
a. margin of safety.
b. sales mix.
c. indifference point.
d. cost structure.
e. sensitivity analysis.
90. Biggers Company expects the following results for the next accounting period:
Sales $240,000
Fixed costs $ 40,000
Expected production and sales in units 3,000
The sales manager believes sales could be increased by 400 units if advertising expenditures were
increased by $10,000. If advertising expenditures are increased and sales increase by 400 units, the
effect on operating income will be a(n)
a. decrease of $4,000.
b. increase of $22,000.
c. increase of $4,000.
d. increase of $30,000.
e. cannot be determined from data given.
91. Degree of operating leverage is calculated as

a. Variable costs/Sales
b. Total sales/Common fixed costs
c. Fixed costs/Variable costs
d. Contribution margin/Operating income
e. Operating income/Contribution margin
92. Operating leverage is the relative mix of

a. revenues earned and manufacturing costs.
b. fixed and variable costs.
c. high-volume and low-volume products.
d. manufacturing costs and period costs.
e. revenues earned and variable costs.
Figure 4-6.
Shorter Company had originally expected to earn operating income of $130,000 in the coming year.
Shorter's degree of operating leverage is 2.4. Recently, Shorter revised its plans and now expects to
increase sales by 20% next year.
93. Refer to Figure 4-6. What is the percent change in operating income expected by Shorter in the coming
year?
a. 8.33%
b. 48.0%
c. 20.0%
d. 54.17%
e. 30.0%
ANS: B
Percent change in operating income = 2.4  20% = 48%

94. Refer to Figure 4-6. What is Shorter's revised expected operating income for the coming year?
a. $192,400
b. $156,000
c. $312,000
d. $130,000
e. $62,400
ANS: A
$130,000 + (0.48  $130,000) = $192,400

PROBLEM
1. Dance Unlimited plans to sell 10,000 ballet shoes at $50 each in the coming year. Unit variable cost is
$30 and total fixed cost equals $65,000.
Required:
A.) Calculate the break-even in ballet shoes.
B.) Calculate the break-even in sales dollars.
ANS:
A.) $65,000/($50-$30) = 3,250 ballet shoes
B.) 3,250 x $50 = $162,500

2. Shamrock Inc. plans to sell 3,000 Irish sweaters for $200 each in the coming year. Product costs
include:
Direct materials per sweater $40
Direct labor per sweater 10
Variable overhead per sweater 15
Total fixed factory overhead 20,000
Variable selling expenses are $5 per sweater and fixed selling and administrative expenses total
$12,000.
Required:
A.) Calculate the total variable cost per unit.
B.) Calculate the total fixed expenses for the year.
C.) Prepare a contribution margin income statement for Shamrock Inc. for the coming year.
ANS:
A.) Total variable cost per unit = $40 + $10 + $15 + 5 = $70
B.) Total fixed expense = $20,000 + $12,000 = $32,000
C.)
Shamrock Inc.
Contribution Margin Income Statement
For the Coming Year
Sales 600,000
Total variable expenses 210,000
Total contribution margin 390,000
Total fixed expense 32,000
Operating income 358,000
STA: AICPA: FN-Measurement |AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-28-
Variable and Fixed Costs | ACBSP: APC-30-Contribution Margin
3. Newman Company expects to produce and sell 2,000 units next month. Data on costs follows:
Per unit costs:

Selling price $40
Variable manufacturing costs $10
Variable selling costs $ 6
Total costs:
Fixed manufacturing costs $16,000
Fixed selling costs $ 8,000
Required:
A. What is the variable cost per unit?
B. What is contribution margin per unit?
C. What is the variable cost ratio?
D. What is the contribution margin ratio?
ANS:
A. Variable cost per unit = $10 + $6 = $16

B. Contribution margin per unit = $40  $16 = $24
C. Variable cost ratio = $16/$40 = 0.4 or 40%
D. Contribution margin ratio = $24/$40 = 0.6 or 60%

Costs | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application
NOT: 2 min.
4. McCallen Company expects to produce and sell 500 units next month. Data on costs follows:
Per unit costs:

Selling price $8
Variable manufacturing costs $2.75
Variable selling costs $0.25
Total costs:
Fixed selling costs $ 125
Required:
A. What is the variable cost per unit?
B. What is contribution margin per unit?
C. What is the variable cost ratio?
D. What is the contribution margin ratio?
ANS:
A. Variable cost per unit = $2.75 + $0.25 = $3

B. Contribution margin per unit = $8  $3 = $5
C. Variable cost ratio = $3/$8 = 0.375 or 37.5%
D. Contribution margin ratio = $5/$8 = 0.625 or 62.5%

Costs | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application
NOT: 2 min.
5.
Fry Company
Projected Income Statement
For the Current Year Ending December 31
Sales (12,000 units) $240,000
Less variable costs:
Variable manufacturing costs $60,000
Variable selling costs 36,000
Total variable costs 96,000
Contribution margin $144,000
Less fixed costs:
Fixed selling and administrative costs 35,000
Total fixed costs 120,000
Required:
A. Determine the break-even point in sales dollars.
B. The sales manager believed the company could increase sales by 1,000 units if
advertising expenditures were increased by $15,000. By how much will operating
income increase or decrease if the advertising is increased as suggested?
C. What is the maximum amount the company could pay for advertising if the advertising
would increase sales by 1,000 units?
ANS:
A. $120,000/($20  $8) = 10,000 units x $20 = $200,000
B. (1,000  $12)  $15,000 = $3,000 decrease
C. 1,000  $12 = $12,000

STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point |
ACBSP: APC-33-Incremental analysis KEY: Bloom's: Evaluation
NOT: 3 min.
6. Music Now plans to sell 6,000 MP3 players at $60 each in the coming year. Variable cost per unit is
$12 and total fixed cost is $24,000.
Required:
A.) Calculate the variable cost ratio.
B.) Calculate the contribution margin ratio.
C.) Calculate the break-even point in sales dollars.
D.) If Music Now has a target profit of $90,000, how many MP3 players will they have to sell?
ANS:
A.) $12/$60 = 20%
B.) ($60-$12)/$60 = 80%
C.) $24,000/80% = $30,000
D.) ($24,000 + $90,000)/($60 - $12) = 2,375 MP3 players

Margin | ACBSP: APC-31-Break-even point | ACBSP: APC-32-Margin of safety/sales target
7. A company provided the following information:
Sales $500,000
Required:
A. What is the contribution margin ratio?
B. What is the level of sales in dollars necessary to generate a profit of $40,000?
C. What is the contribution margin ratio if the sales price is increased by 10%?
D. Using the information in part C, what level of sales in dollars is necessary to generate a
profit of $40,000?
ANS:
A. ($500,000  $100,000)/$500,000 = 80%
B. ($200,000 + $40,000)/80% = $300,000
C. ($500,000  1.1) = $550,000

($550,000  $100,000)/$550,000 = 81.82%
D. ($200,000 + $40,000)/81.82% = $293,327 rounded

Margin | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Application
NOT: 4 min.
8. Aaron Company provided the following data for next month:

Variable manufacturing costs per unit $100
Fixed manufacturing costs per unit $ 80
Variable selling costs per unit $ 60
Fixed selling costs per unit $ 40
Expected production and sales 1,800 units
Required:
A. What is contribution margin per unit?
B. What is the contribution margin ratio?
C. What is the break-even point in units?
D. What are the sales in dollars needed to obtain an operating income of $20,000?
ANS:
A. $400  ($100 + $60) = $240
B. $400  ($100 + $60) = $240

$240/$400 = 0.60 or 60%
C. $400  ($100 + $60) = $240

Fixed costs = ($80 + $40)  1,800 = $216,000
$216,000/$240 per unit = 900 units
D. ($216,000 + $20,000)/60% = $393,333 rounded

APC-30-Contribution Margin | ACBSP: APC-31-Break-even point | ACBSP: APC-32-Margin of
safety/sales target KEY: Bloom's: Application
NOT: 5 min.
9. Thomas Corporation developed the following income statement using a contribution margin approach:
Thomas Corporation
Projected Income Statement
For the Current Year Ending December 31
Sales $750,000
Less variable costs:
Variable manufacturing costs $280,000
Variable selling costs 120,000
Total variable costs $400,000
Less fixed costs:
Fixed selling and administrative costs 80,000
Operating income $140,000
The projected income statement was based on sales of 100,000 units. Thomas has the capacity to
produce 120,000 units during the year.
Required:
A. Determine the break-even point in units.
B. The sales manager believes the company could increase sales by 8,000 units if
advertising expenditures were increased by $22,000. By how much will income increase
or decrease if this plan is put into effect?
C. What is the maximum amount the company could pay for advertising if the sales would
really increase by 8,000 units?
ANS:
A. $210,000/($7.50  $4.00) = 60,000 units
B. (8,000  $3.50)  $22,000 = $6,000 increase
C. 8,000  $3.50 = $28,000

ACBSP: APC-33-Incremental analysis KEY: Bloom's: Evaluation
NOT: 4 min.
10. The following information was extracted from the accounting records of MVP Corporation:

Variable cost per unit $20
Required:
A. What is MVP's break-even point in units?
B. How many units must be sold to earn operating income of $80,000?
C. What is MVP's break-even point in units if the selling price increases by 20% and the
variable costs decrease by 20%?
D. Using the information in part C, what sales level in dollars is needed to earn an
operating income of $80,000?
ANS:
A. $480,000/($60 per unit  $20 per unit) = 12,000 units
B. ($480,000 + $80,000)/($60  $20) = 14,000 units
C. ($60  1.2) = $72 new sales price

($20  .8) = $16 new variable cost
($72  $16) = $56 new contribution margin
$480,000/$56 = 8,572 units (rounded)
D. ($480,000 + $80,000)/$56 = 10,000 units

(10,000  $72) = $720,000

ACBSP: APC-33-Incremental analysis KEY: Bloom's: Application
NOT: 5 min.
11. Information for Crisby Company is as follows:
Sales $500,000
Required:
A. What is the break-even point in sales dollars?
B. What sales (in dollars) are needed to generate operating income of $40,000?
ANS:
A. ($500,000  $100,000)/$500,000 = 80%

$200,000/80% = $250,000
B. ($500,000  $100,000)/$500,000 = 80%

($200,000 + $40,000)/0.80 = $300,000

ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Application
NOT: 3 min.
12. The Noble Company manufactures two products. Information about the two products are as follows:
Product A Product B
Selling price per unit $80 $30
Variable costs per unit $45 $15
Contribution margin per unit $35 $15
The company expects fixed costs to be $189,000. The firm expects 60% of its sales (in units) to be
Product A (a sales mix of 3:2).
Required:
A. Calculate the contribution margin per package.
B. Determine the break-even point in units for Products A and B.
C. Determine the level of sales (in dollars) necessary to generate operating income of
$135,000.
ANS:
A. Product A = $35  3 = $105

Product B = $15  2 = 30
Contribution margin per package = $105 + $30 = $135
B. $189,000/$135 per package = 1,400 packages

Product A units = 1,400  3 = 4,200 units
Product B units = 1,400  2 = 2,800 units
C. ($189,000 + $135,000)/$135 = 2,400 packages

Product A sales = 2,400  3  $80 = $576,000
Product B sales = 2,400  2  $30 = $144,000
Total sales = $576,000 + $144,000 = $720,000
PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 4-1 | LO: 4-2 | LO: 4-4
13. Travel On Inc. sells luggage. They sell a duffle bag, a carry-on suitcase and a deluxe suitcase. The
price and variable cost for each type of luggage is listed below.
Price Variable Cost

Duffle bag $100 $25
Carry-on $180 $40
Deluxe $300 $120
The total fixed costs for Travel On Inc. equals $60,000. For every 8 duffle bags Travel On Inc sells it
sells 3 carry-on suitcases and 1 deluxe suitcase.
Required:
A.) Calculate the package contribution margin.
B.) Calculate the break-even point in units for duffle bags, carry-on suitcases and deluxe suitcases.
C.) If Travel On Inc. has a target income for the coming year of $300,000, how many packages will
company have to sell?
D.) Based on your answer in Part C, prepare a contribution margin income statement for the coming
year.
E.) What is the company’s margin of safety in packages?
ANS:
A.)
Price Variable Cost Unit contribution Sales mix Package contribution
margin margin
Duffle bag $100 $25 $75 8 $600

Carry-on $180 $40 $140 3 $420
Deluxe $300 $120 $180 1 $180
$1,200
B.) $60,000/1,200 = 50 packages
50 packages x 8 = 400 duffle bags
50 packages x 3 = 150 carry-on suitcases
50 packages x 1 = 50 deluxe suitcases
C.) ($60,000 + $300,000)/1,200 = 300 packages
D.)
Travel On Inc.
Contribution Margin Income Statement
For the Coming Year
Sales $ 492,000
Total variable expenses 132,000
Total contribution margin $ 360,000
Total fixed expense 60,000
E.) 300 packages - 50 packages = 250 packages is the company’s margin of safety
PTS: 1 DIF: Difficulty: Challenging

OBJ: LO: 4-1 | LO: 4-2 | LO: 4-4 | LO: 4-5 NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling |AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP:
APC-30-Contribution Margin | ACBSP: APC-31-Break-even point | ACBSP: APC-32-Margin of
14. The Lauren Company manufactures two products. Information about the two product lines for the year
is as follows:
Product X Product Y
Selling price per unit $70 $100
Variable costs per unit $30 $40
Contribution margin per unit $40 $ 60
The company expects fixed costs to be $144,000. The firm expects 60% of its sales (in units) to be
Product X.
Required: Determine the break-even point in units for both Product X and Product Y.
ANS:
Form a package with 3 units of Product X and 2 units of Product Y.
Contribution margin from Product X: $40  3 = $120
Contribution margin from Product Y: $60  2 = $120
Total Package contribution margin = $120 + $120 = $240 per package

break-even packages = $144,000/$240 per package = 600 packages
Product X: 600 packages  3 = 1,800 units

Product Y: 600 packages  2 = 1,200 units

15. The Young Manufacturing Company produces the following three products:
Hammers Screwdrivers Saws

Selling price per unit $40 $16 $50
Variable costs per unit $28 $12 $30
Contribution per unit $12 $ 4 $20
Fixed costs are $76,000 per year.
50% of all sales in units are hammers, 30% are screwdrivers, and 20% are saws.
Required: Calculate the following values:

A. break-even point in total units.
B. Number of hammers that will be sold at break-even.
C. Total sales in units to obtain a target income of $19,000.
ANS:
A. Ave. CM/unit = ($12  0.5) + ($4  0.3) + ($20  0.2) = $11.20

$76,000/$11.20 = 6,786 packages of hammers, screwdrivers, and saws
B. 6,786  0.5 = 3,393 hammers
C. ($76,000 + $19,000)/$11.20 = 8,482 packages

ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Application
NOT: 5 min.
16. Income statements for two different companies in the same industry are as follows:
Company A Company B
Sales $400,000 $400,000
Less: Variable costs 300,000 200,000
Contribution margin $100,000 $200,000
Less: Fixed costs 50,000 150,000
Operating income $ 50,000 $ 50,000
Required:
A. Calculate the degree of operating leverage for each firm.
B. Calculate the margin of safety in dollars for each firm.
C. Determine the operating income for each firm if sales increase by 20%.
ANS:
A. Company A: $100,000/$50,000 = 2
Company B: $200,000/$50,000 = 4
B. Company A:
break-even sales = $50,000/($100,000/$400,000) = $200,000
Margin of safety = $400,000  $200,000 = $200,000
Company B:
break-even sales = $150,000/($200,000/$400,000) = $300,000
Margin of safety = $400,000  $300,000 = $100,000
C. Company A:
Increase in net income = (.20  2)  $50,000 = $20,000
Net income = $50,000 + $20,000 = $70,000
Company B:
Increase in net income = (.20  4)  $50,000 = $40,000
Net income = $50,000 + $40,000 = $90,000

safety/sales target | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Application
NOT: 5 min.
17. Newman Company expects to produce and sell 2,000 units next month. Data on costs follows:
Per unit costs:

Selling price $40
Variable manufacturing costs $10
Variable selling costs $ 6
Total costs:
Fixed selling costs $ 8,000
Required:
A. What is the break-even point in units?
B. What is the break-even point in sales dollars?
C. What is the expected operating income for next month?
D. What is the margin of safety in dollars?
ANS:
A. break-even units = ($16,000 + $8,000)/$24 = 1,000 units
B. break-even sales dollars = 1,000  $40 = $40,000

OR
break-even sales dollars = $24,000/0.6 = $40,000
C. Expected operating income = $80,000  $32,000  $24,000 = $24,000
D. Margin of safety = $80,000  $40,000 = $40,000

ACBSP: APC-32-Margin of safety/sales target | ACBSP: APC-33-Incremental analysis
18. McCallen Company expects to produce and sell 500 units next month. Data on costs follows:
Per unit costs:

Selling price $8
Variable manufacturing costs $2.75
Variable selling costs $0.25
Total costs:
Fixed selling costs $ 125
Required:
A. What is the break-even point in units?
B. What is the break-even point in sales dollars?
C. What is the expected operating income for next month?
D. What is the margin of safety in dollars?
E. What is the break-even point in units if fixed manufacturing costs increase by $500?
F. What is the break-even point in units if variable manufacturing costs decrease by $0.75?
ANS:
A. break-even units = $1,125/$5 = 225 units
B. break-even sales dollars = $8  225 = $1,800

OR
break-even sales dollars = $1,125/0.625 = $1,800
C. Expected operating income = $4,000  $1,500  $1,125 = $1,375
D. Margin of safety in dollars = $4,000  $1,800 = $2,200
E. ($1,000 + $500 + $125)/$5 = 325 units
F. ($1,000 + $125)/($8  $2  $.25) = $1,125/$5.75 = 196 units (rounded)

ACBSP: APC-32-Margin of safety/sales target | ACBSP: APC-33-Incremental analysis
19. At a monthly sales volume of $25,000, a company incurs variable costs of $19,000 and fixed costs of
$6,000.
Required: Determine each of the following values:

A. Variable cost ratio
B. Contribution margin ratio
C. Monthly break-even dollar sales volume
D. Monthly margin of safety in dollars
ANS:
A. Variable cost ratio = $19,000/$25,000 = 0.76
B. Contribution margin ratio = 1.00  0.76 = 0.24
C. Monthly break-even dollar sales volume = $6,000/0.24 = $25,000
D. Monthly sales volume $25,000

Monthly break-even sales volume 25,000
Monthly margin of safety $ -0-

20. Arnold Corporation has the following information for the current year:

Variable costs per unit $ 6
Fixed costs $1,000
Required: Prepare a cost-volume-profit graph identifying the following items:

A. Total costs line
B. Total fixed costs line
C. Total variable costs line
D. Total revenues line
E. break-even point in sales dollars, indicate the amount
F. break-even point in units, indicate the amount
G. Profit area
H. Loss area
ANS:
NOT: 5 min.
21. The following information has been provided for Walsh Corporation:
Sales price per unit $20

Variable costs per unit $10
Fixed costs $500
Required: Prepare a cost-volume-profit graph identifying the following items:

A.) Total cost line
B.) Total fixed cost line
C.) Total variable cost line
D.) Total revenue line
E.) Loss area
F.) Profit area
G.) Compute the break-even point in units
H.) Compute the break-even point in sales dollars
ANS:
Units Sold Revenue Fixed Costs Total Variable Cost Total Cost
10 200 500 100 600
20 400 500 200 700
30 600 500 300 800
40 800 500 400 900
50 1000 500 500 1000
60 1200 500 600 1100
70 1400 500 700 1200
80 1600 500 800 1300
90 1800 500 900 1400
100 2000 500 1000 1500
Break-even point = 50 units
Break-even point = $1,000

NOT: 5 min.
22. Place Corporation had the following income statement for the current year:
Sales $25,000
Variable expenses 15,000
Fixed expenses 4,000
Required:
A. Calculate the operating leverage ratio.
B. If sales increase by 20%, what will be the percentage change in income?
C. If sales increase by $15,000, how much will income increase?
ANS:
A. $10,000/$6,000 = 1.6667
B. 1.6667  0.2 = 0.33333, or 33.33% increase
C. $15,000  .4 = $6,000

ESSAY
1. Explain why cost-volume-profit analysis can be useful to managers.
ANS:
Cost-volume-profit (CVP) analysis is a powerful tool for planning and decision making. Because CVP
analysis emphasizes the interrelationships of costs, quantity sold, and price, it brings together all of the
financial information of the firm. CVP analysis can be a valuable tool to identify the extent and
magnitude of the economic trouble a division is facing and to help pinpoint the necessary solution.
CVP analysis can address many other issues as well, such as the number of units that must be sold to
break even, the impact of an increase in price on profit. Additionally, CVP analysis allows managers to
do sensitivity analysis by examining the impact of various prices or cost levels on profit.

NAT: BUSPROG: Communication
APC-29-CVP Analysis KEY: Bloom's: Comprehension
NOT: 5 min.
2. What are the assumptions underlying cost-volume-profit analysis?
ANS:
Some of the assumptions are as follows:
1. The analysis assumes a linear revenue function and a linear cost function.
2. The analysis assumes that price, total fixed costs, and unit variable costs can be accurately
identified and remain constant over the relevant range.
3. The analysis assumes that what is produced is actually sold.
4. For multiple-product analysis, the sales mix is assumed to be known.
5. The selling prices and costs are assumed to be known with certainty.

3. How can a multi-product firm determine its break-even point?
ANS:
The firm can determine its break-even point by finding the break-even point in sales dollars, or it can
form packages and determine the break-even point for each package, realizing that the sales mix must
be determined as well.

KEY: Bloom's: Comprehension NOT: 3 min.
You Decide
4. As a cost accountant at A&E Company you have been given a set of data and have been asked to
perform a break-even analysis as well as a sensitivity analysis. Why are these analyses important?
ANS:
A break-even analysis is important to a company for several reasons. First it tells a company at what
level they will have zero profit. Determining either how many units they have to sell to cover total
costs or how much in sales dollars need to be generated to cover total costs. Companies want to turn a
profit and this information will guide them to the levels of output necessary. This also tells
management if their desired targeted income is achievable in a given time period.
A sensitivity analysis, also known as the “what-if” technique, shows the impact of changes in various
components of the break-even analysis. This gives management a wealth of useful information in
order to make decisions regarding such things as whether or not an increase in either fixed or variable
costs will make the break-even point unattainable. It will also display the affect of a change in the
sales price or the sales mix.
One poor decision can dramatically affect a business and these analyses are crucial in assisting
management in making sound and logical decisions.

KEY: Bloom's: Comprehension NOT: 5 min.

Yaa Na Ang Simbag PDF

Încărcat de

Informații document

Descriere originală:

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Yaa Na Ang Simbag PDF

Încărcat de

Drepturi de autor:

Formate disponibile

Chapter 4—Cost-Volume-Profit Analysis: A Managerial Planning Tool

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: F PTS: 1 DIF: Difficulty: Easy

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1 | LO: 4-4

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: F PTS: 1 DIF: Difficulty: Easy

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-2

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-2

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: F PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

13. If fixed costs increase, the break-even point decreases.

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-3

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: F PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-4

ANS: F PTS: 1 DIF: Difficulty: Easy

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-4

24. If the break-even point increases, the margin of safety increases.

ANS: F PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

1. ANS: C PTS: 1 DIF: Difficulty: Moderate

Match each item with the correct statement below.

7. ANS: D PTS: 1 DIF: Difficulty: Easy

Match each item with the correct statement below.

12. ANS: D PTS: 1 DIF: Difficulty: Easy

ANS: contribution margin.

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

ANS: break-even point

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

ANS: variable cost ratio

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

ANS: contribution margin ratio

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-1

5. ___________________________________ is the income statement format that is based on the

ANS: Contribution margin income statement

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

ANS: CVP analysis

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-2

ANS: contribution margin ratio

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-2

ANS: target income

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-2

ANS: profit-volume graph

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-3

ANS: cost-volume-profit graph

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-3

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-4

ANS: common fixed expenses

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-4

13. __________ is the relative combination of products being sold by a firm.

ANS: Sales mix

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-4