True/False Quiz

25-1. Cost-volume-profit analysis is often referred to as break-even

analysis.

True
False

25-2. A cost that remains unchanged in total within a relevant range

of operations, yet decreases per unit of product as production
accelerates, is known as a variable cost.

True
False

25-3. Variable costs change in proportion to changes in volume and,

as a result, are shown on a graph as curvilinear line.

True
False

25-4. A mixed cost is a combination (or acts as if it contains a

combination) of fixed and variable costs.

True
False

25-5. In cost-volume-profit analysis, some costs which do not have

the characteristics of fixed or variable costs are treated as either fixed
or variable for the purposes of the analysis.

True
False

25-6. When a factory hires a new supervisor every time it adds a shift
to its production line, the salaries of the supervisors would be
classified as a stair-step cost.

True
 False

25-7. Variable costs and nonlinear costs are plotted on graphs as

straight lines with a positive slope.

True
False

25-8. Curvilinear costs are linear in nature.

True
False

25-9. One of the simplest methods of analyzing fixed and variable

costs is to use a scatter diagram, which requires a hand drawn 'best
fit' line which begins on the vertical axis at the level of total fixed
costs, then slopes upward along the horizontal axis to illustrate the
slope of the variable cost line.

True
False

25-10. Using the high-low method to draw an estimated line of cost

behaviour on a scatter diagram will result in a very precise line of
estimated cost behaviour.

True
False

25-11. A method of estimating cost behaviour in which a line is drawn

between the highest and lowest total costs plotted on a scatter
diagram is known as the least-squares regression method.

True
False

25-12. The least-squares regression method is a statistical method

for deriving an estimated line of cost behaviour that is more precise
than the high-low method.
 True
False

25-13. When a company's total contribution margin is $200,000 at

the break-even point, its fixed costs are greater than $200,000.

True
False

25-14. If one unit of product produces $2.00 of contribution margin

when sold, and fixed costs amount to $190, the pre-tax profit on the
sale of 100 units will be $10 (assuming taxes are not included in the
determination of contribution margin or fixed costs).

True
False

25-15. When the variable costs are 60% of sales dollars, the
contribution ratio is 40%.

True
False

25-16. If the contribution margin is $45,000 at the break-even point,

the fixed costs must be $45,000.

True
False

25-17. If the contribution ratio for a product is 65%, then the variable
costs of the product are 35% of the sales price of the product.

True
False

25-18. When the selling price of a unit is $10 and the variable costs
to make and sell the unit are $6, the contribution ratio is 40.0%.

True
 False

25-19. One of the assumptions for cost-volume-profit analysis is that

the selling price per unit remains unchanged for all units sold during
the planning period.

True
False

25-20. While curvilinear costs are not illustrated as straight lines on a

CVP graph, they tend to be nearly straight within the relevant range
of operations.

True
False

25-21. If fixed costs are $10,000 and the variable cost per unit is $2,
then expected sales of 20,000 units at $4 each should generate
income (before taxes) of $30,000.

True
False

25-22. It is not possible to estimate the dollar of sales required to

achieve a target income, after taxes, using CVP analysis.

True
False

25-23. If the current level of sales if $450,000 and the break-even

point is $300,000, the margin of safety is 50%.

True
False

25-24. The profit of a company is equal to its margin of safety.

True
False
25-25. A company with current sales of $450,000 and a break-even
point of $460,000 has a $10,000 margin of safety.

True
False

25-26. It is not possible to apply break-even analysis to firms that sell

more than one product, when each product has a different variable
cost.

True
False

25-27. If the degree of operating leverage is 1.5, then a 10% increase

in sales (within the relevant range of operations) will result in a 150%
increase in income.

True
False

Multiple Choice Quiz

25-1. A firm sells widgets for $14 each. The variable costs for each
unit is $8. The contribution margin per unit is:

a. $ 6
b. $12
c. $14
d. $ 8

25-2. Company A's fixed costs were $42,000, its variable costs were
$24,000, and its sales were $80,000 for the sale of 8,000 units. The
company's break-even point in units is:

a. 8,000
b. 5,000
c. 6,000
 d. 7,000

25-3. Janet sells a product for $6.25. The variable costs are $3.75.
Janet's break-even units are 35,000. What is the amount of fixed
costs?

a. $ 87,500
b. $ 35,000
c. $131,250
d. $104,750

25-4. The current sales price is $25 per unit and the current variable
cost is $17 per unit. Fixed costs are $40,000. If the sales price is
increased by $2, and all other costs remain unchanged, the break-
even point in units will:

a. increase by 1,000 units

b. decrease by 1,000 units
c. decrease by 2,000 units
d. decrease by 119 units (rounded to nearest unit)

25-5. Company A's fixed costs were $45,000, its variable costs were
$24,000, and its sales were $80,000. The company's break-even
point in sales-dollars is:

a. $33,000
b. $64,286
c. $79,000
d. $88,000

25-6. Currently, a company has fixed costs of $32,500, a contribution

ratio of 65%, and is selling its product for $12 per unit. If the sales
price per unit is increased by $4, how much less will the break-even
point in sales be when compared to the current condition?

a. $14,411
b. $13,414
 c. $17,500
d. $ 5,932

25-7. On a cost-volume-profit chart (break-even graph), the total fixed

costs are:

a. the point where the sales line intersects the cost line (Y)
b. the point where the sales line crosses the total cost line
c. the point where the total cost line intersects the cost line (Y)
d. the point where the total cost line intersects the volume line (X)

25-8. When using conventional cost-volume-profit analysis, some

assumptions about costs and sales prices are made. Which one of
the following is not one of those assumptions?

a. the costs can be expressed as straight lines in a break-even

graph
b. the actual variable cost per unit must vary over the production
range
c. the sales price will remain unchanged per unit
d. fixed costs will decrease per unit

25-9. A firm's fixed costs are $54,000, and it sold 350 units at $140
each. The total variable costs were $35,000. The net income or loss
of the firm was:

a. $40,000 loss
b. $40,000 income
c. $14,000 income
d. $ 9,000 loss

25-10. With a tax rate of 25%, fixed costs of $34,000, and a

contribution ratio of 45%, how much revenue is required to achieve a
desired after-tax profit of $36,000?

a. $111,111
b. $182,222
c. $149,091
 d. $ 83,636

25-11. The dollar sales necessary to achieve a target income of

$21,000 after taxes of 30% is $450,000. The fixed costs are
$240,000. What is the contribution ratio (to the nearest tenth)?

a. 53.3%
b. 65.0%
c. 58.0%
d. 60.0%

25-12. If a firm's margin of safety is 35% on sales of $200,000, then

its margin of safety on sales of $300,000 will be (assume fixed costs,
the variable cost per unit, and the sales price per unit do not change):

a. $105,000
b. $170,000
c. $100,000
d. $ 35,000

25-13. Let:
BES = break-even sales, R = revenue per unit, F = fixed costs,
V = variable cost per unit, CMR = contribution ratio,
CM = contribution margin per unit, S x R = sales dollars,
S = sales in units
(S x R) - (F / CMR) is the:

a. break-even point in units

b. break-even point in dollars
c. margin of safety
d. sales mix composite

25-14. If the margin of safety is 40% of sales, which are $400,000,

the break-even point:

a. is greater than $400,000

b. is $160,000
 c. is $240,000
d. is less than $160,000

25-15. The sales mix for Emory's Hardware is as follows:Product A: 4

units @ $8 sales price; $6 variable cost per unit.
Product B: 6 units @ $7 sales price; $4 variable cost per unit.
Product C: 8 units @ $5 sales price; $3 variable cost per unit.
Emory's fixed costs are $42,000. The composite break-even units
are:

a. 10,000
b. 100
c. 1,000
d. 2,000

25-16. Data from a company's last period of operations shows sales

of 2,000 units, total contribution margin of $50,000, and income after
subtracting fixed costs of $30,000 is $20,000. Should the company
experience sales of 2,400 units (within the relevant range, no sales
price increase), net income will be:

a. $40,000
b. $30,000
c. $10,000
d. $20,000

Fill-In-The-Blanks
Enter the missing words in the supplied boxes, then click the grading button to compare your
responses with the suggested answers.

25-1. When total sales revenue is equal to total fixed costs, a

company has reached its - point.

25-2. The amount that the sale of one unit contributes toward
recovering fixed costs and profit is called the margin per
unit
25-3. When the contribution margin per unit is expressed as a
percentage of the product's selling price it is called the contribution
margin .

25-4. Predicting the volume of activity, the costs to be incurred,

revenues to be received, and profits to be earned is called CVP
or - - analysis.

25-5. A cost that changes with volume but not at a constant rate like
pure variable costs is called a cost

25-6. A cost remains unchanged in total amount even when

production volume varies from period to period.

25-7. A method of drawing an estimated line of cost behaviour which

connects the highest and lowest costs on a scatter diagram with a
straight line is called the - method.

25-8. A method for deriving an estimated line of cost behaviour that is

more precise than the high-low method is the - regression
statistical method.

25-9. If company sales are $450,000 and break-even sales are

$375,000, the $75,000 excess can be called the of .

25-10. Sales personnel receive an hourly wage plus a commission on

sales in excess of $10,000. The sales salary expense account which
includes the hourly pay and the commissions is an example of
a cost.

25-11. The range of sales volume that a business recognizes as its

normal operating range is called the of operations.

25-12. A company sells 6 tons of concrete mix, 3 tons of decorative

rock, and 1 ton of structural rock for every 10 tons of product it sells.
The sales ratio (6:3:1) of volumes of the various products is called
the company's .

25-13. The cost of direct materials is $4 per unit. As production

increases, the total cost of direct material will increase
proportionately, since direct material is an example of a cost.
Internet Exercises
25-1. The CCH site has a link 'business owners toolkit' that discusses
CVP analysis. Read the article and also click on the live links within
the article that visit the areas of breakeven analysis, contribution
margin analysis and operating leverage. Review the articles,
examples and tips provided to further your knowledge and
understanding of this important area in cost accounting.

25-2. The IMA has a web site that contains case studies on ethical
dilemmas. Click on Case #1 - Ethical and Cultural clashes. Read the
case and answer the questions. After completing your analysis,
review the suggested answers by clicking on the Endnotes and
Session Notes link.

Glossary Match
For each question or statement, choose the term from the pulldown menu that most closely is
a match.

The unique sales level at which a company neither earns a profit nor
incurs a loss.

The amount that the sale of one unit contributes toward recovering
fixed costs and profit.
The contribution margin per unit expressed as a percentage of the
product's selling price.

The first step in the planning phase is predicting the volume of

activity, the costs to be incurred, revenues to be received, and profits
to be earned.

A cost that changes with volume but not at a constant rate like pure
variable costs.

A graphic representation of the cost-volume-profit relationships.

A line on a scatter diagram drawn to identify the past relationship

between cost and sales volume.

A cost that remains unchanged in total amount even when production

volume varies from period to period.

A simple way to draw an estimated line of cost behaviour by

connecting the highest and lowest costs on a scatter diagram with a
straight line.

A statistical method for deriving an estimated line of cost behaviour

that is more precise than the high-low method.

The excess of expected sales over the sales at the break-even point.

A cost that behaves like a combination of a fixed and a variable cost.

A business's normal operating range; excludes extremely high and

low volumes that are not likely to be encountered.

The ratio of the volumes of the various products sold by a company.

A graph used to display data about past cost behaviours and
volumes for each period as points on the diagram.

A cost that remains fixed over limited ranges of volumes but

increases by a lump sum when volume increases beyond maximum
amounts.

A cost that changes in proportion to changes in production volume.

Break-even point: The unique sales level at which a company

neither earns a profit nor incurs a loss. (p. 1302)

Composite unit: A specific number of units of each product in

proportion to the expected sales mix. Multi-product CVP analysis
treats this composite unit like a single product. (p. 1310).

Contribution margin per unit: The amount that the sale of one unit
contributes toward recovering fixed costs and profit. (p. 1302)

Contribution margin ratio: A product's contribution margin divided

by its sale price. (Chapter 21, p. 1096) The contribution margin per
unit expressed as a percentage of the product's selling price.
(Chapter 25, p. 1303)

Cost-volume-profit analysis: The first step in the planning phase is

predicting the volume of activity, the costs to be incurred, revenues to
be received, and profits to be earned. (p. 1292)

Cost-volume-profit chart: A graphic representation of the cost-

volume-profit relationships. (p. 1303)

Curvilinear cost: A cost that changes with volume but not at a

constant rate like pure variable costs. (p. 1295)

Degree of operating leverage (DOL): The ratio of contribution

margin divided by pre-tax income; used in assessing how net income
is affected by a given percentage change in sales. (p. 1313)

Estimated line of cost behaviour: A line on a scatter diagram

drawn to identify the past relationship between cost and sales
volume. (p. 1297)
Fixed cost: The cost does not change with changes in the volume of
an activity. (Chapter 21, p. 1087) A cost that remains unchanged in
total amount even when production volume varies from period to
period. (Chapter 25, p.1293)

High-low method: A simple way to draw an estimated line of cost

behaviour by connecting the highest and lowest costs on a scatter
diagram with a straight line. (p. 1297)

Least-squares regression: A statistical method for deriving an

estimated line of cost behaviour that is more precise than the high-
low method. (p. 1298)

Margin of safety: The excess of expected sales over the sales at the
break-even point. (p. 1309)

Mixed cost: A cost that acts like a combination of a fixed and a

variable cost. (p. 1294)

Operating leverage: The extent, or relative size, of fixed costs in the

total cost structure of a company. (p. 1313)

Relevant range of operation: A business' normal operating range;

excludes extremely high and low volumes that are not likely to be
encountered. (p. 1305)

Sales mix: The ratio of the volumes of the various products sold by a
company. (p. 1310)

Scatter diagram: A graph used to display data about past cost

behaviours and volumes for each period as points on a diagram. (p.
1296)

Step-wise cost: A cost that remains fixed over limited ranges of

volumes but increases by a lump sum when volume increases
beyond maximum amounts. (p. 1294)

Variable cost: A cost that changes in proportion to changes in

production volume. (Chapter 21, p. 1087, Chapter 25, p. 1294)