06 CVP Relationships PDF

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Chapter 6 Cost-Volume-Profit Relationships True/False Questions 1. To estimate what the profit will be at various levels of activity, a manager can simply take the number of units to be sold over the break-even point and multiply that number by the unit contribution margin. Answer: True Level: Medium LO: 1 2. Incremental analysis is generally the simplest and most direct approach to decision making. Answer: True Level: Easy LO: 1 3. To facilitate decision-making, fixed expenses should be expressed on a per-unit basis. Answer: False Level: Medium LO: 1 4. One assumption in CVP analysis is that inventories do not change. Answer: True Level: Easy LO: 1 5. On a CVP graph for a profitable company, the total expense line will be steeper than the total revenue line. Answer: False Level: Medium LO: 2 6. If sales volume increases, and all other factors remain unchanged, the contribution margin ratio will decrease. Answer: False Level: Medium LO: 3 7. The break-even point for a capital intensive, automated company will tend to be higher than for a less capital intensive company while the margin of safety will tend to be lower. Answer: True Level: Medium LO: 5,7 8. An increase in the number of units sold will decrease a company's break-even point. Answer: False Level: Medium LO: 5

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Chapter 6 Cost-Volume-Profit Relationships 9. Assuming that the unit contribution margin is positive, a 10% decrease in selling price will increase the break-even point in terms of unit sales more than will a 10% increase in the variable expense. Answer: True Level: Hard LO: 5 10. The break-even point is the point where total contribution margin equals total variable expenses. Answer: False Level: Medium LO: 5 11. The break-even point can usually be determined by simply adding together all of the expenses from the income statement. Answer: False Level: Medium LO: 5 12. Two companies with the same margin of safety in dollars will also have the same total contribution margin. Answer: False Level: Medium LO: 7 13. If a company has high operating leverage, then profits will be very sensitive to changes in sales. Answer: True Level: Easy LO: 8 14. Operating leverage will decrease as the company's margin of safety increases. Answer: True Level: Hard LO: 7,8 15. The overall contribution margin ratio for a company producing three products may be obtained by adding the contribution margin ratios for the three products and dividing the total by three. Answer: False Level: Hard LO: 9

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Chapter 6 Cost-Volume-Profit Relationships Multiple Choice Questions 16. Which of the following is correct? The break-even point occurs on the CVP graph where: A) total profit equals total expenses. B) total profit equals total fixed expenses. C) total contribution margin equals total fixed expenses. D) total variable expenses equal total contribution margin. Answer: C Level: Medium LO: 1,2 17. If a company decreases its total fixed expenses while increasing the variable expense per unit, the total expense line relative to its previous position on a cost-volume-profit graph will: A) shift upward and have a steeper slope. B) shift upward and have a flatter slope. C) shift downward and have a steeper slope. D) shift downward and have a flatter slope. Answer: C Level: Medium LO: 2 18. East Company manufactures and sells a single product with a positive contribution margin. If the selling price and the variable expense per unit both increase 5% and fixed expenses do not change, what is the effect on the contribution margin per unit and the contribution margin ratio?

A) B) C) D)

Contribution Contribution margin per unit margin ratio No change No change Increase Increase Increase No change Increase Decrease

Answer: C Level: Medium LO: 3,4 Source: CMA, adapted

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Chapter 6 Cost-Volume-Profit Relationships 19. Mossfeet Shoe Company is a single product firm. Mossfeet is predicting that a price increase next year will not cause unit sales to decrease. What effect would this price increase have on the following items for next year?

A) B) C) D)

Contribution Break-even Margin Ratio Point Increase Decrease Decrease Decrease Increase No effect Decrease No effect

Answer: A Level: Medium LO: 3,5 20. The contribution margin ratio is equal to: A) Total manufacturing expenses/Sales. B) (Sales - Variable expenses)/Sales. C) 1 - (Gross Margin/Sales). D) 1 - (Contribution Margin/Sales). Answer: B Level: Medium LO: 3 21. The contribution margin ratio always increases when the: A) break-even point increases. B) break-even point decreases. C) variable expenses as a percentage of net sales decrease. D) variable expenses as a percentage of net sales increase. Answer: C Level: Hard LO: 3 Source: CPA, adapted 22. In the middle of the year, the price of Lake Corporation's major raw material increased by 8%. How would this increase affect the company's break-even point and margin of safety?

A) B) C) D)

Break-even point Margin of safety Increase Increase Increase Decrease Decrease Decrease Decrease Increase

Answer: B Level: Easy LO: 5,7

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Chapter 6 Cost-Volume-Profit Relationships 23. A $2.00 increase in a product's variable expense per unit accompanied by a $2.00 increase in its selling price per unit will: A) decrease the degree of operating leverage. B) decrease the contribution margin. C) have no effect on the break-even volume. D) have no effect on the contribution margin ratio. Answer: C Level: Hard LO: 5,8 24. The break-even point in unit sales is found by dividing total fixed expenses by: A) the contribution margin ratio. B) the variable expenses per unit. C) the sales price per unit. D) the contribution margin per unit. Answer: D Level: Easy LO: 5 25. Which of the following would not affect the break-even point? A) number of units sold B) variable expense per unit C) total fixed expenses D) selling price per unit Answer: A Level: Medium LO: 5 Source: CMA, adapted 26. If a company increases its selling price by $2 per unit due to an increase in its variable labor cost of $2 per unit, the break-even point in units will: A) decrease. B) increase. C) not change. D) change but direction cannot be determined. Answer: C Level: Medium LO: 5 27. To obtain the dollar sales volume necessary to attain a given target profit, which of the following formulas should be used? A) (Fixed expenses + Target net profit)/Total contribution margin B) (Fixed expenses + Target net profit)/Contribution margin ratio C) Fixed expenses/Contribution margin per unit D) Target net profit/Contribution margin ratio Answer: B Level: Easy LO: 6

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Chapter 6 Cost-Volume-Profit Relationships 28. Salinas Corporation has a degree of operating leverage of 8. This means that a 1% change in sales dollars at Salinas will generate an 8% change in: A) variable expenses. B) fixed expenses. C) contribution margin. D) net operating income. Answer: D Level: Medium LO: 8 29. In calculating the break-even point for a multi-product company, which of the following assumptions are commonly made? I. Selling prices are constant. II. Variable expenses are constant per unit. III. The sales mix is constant. A) B) C) D)

I and II I and III II and III I, II, and III

Answer: D Level: Easy LO: 9 30. The following information relates to the break-even point at Pezzo Corporation: Sales dollars ...................... $120,000 Total fixed expenses ......... $30,000 If Pezzo wants to generate net operating income of $12,000, what will its sales dollars have to be? A) $132,000 B) $136,000 C) $168,000 D) $176,000 Answer: C Level: Hard LO: 1,3,5,6

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Chapter 6 Cost-Volume-Profit Relationships 31. The following information relates to Snowbird Corporation: Sales at the break-even point ......... $312,500 Total fixed expenses ...................... $250,000 Net operating income .................... $150,000 What is Snowbird's margin of safety? A) $62,500 B) $187,500 C) $100,000 D) $212,500 Answer: B Level: Hard LO: 1,3,5,7 32. The “Dog Hut” hot dog stand expects the following operating results for next year: Sales............................................... $280,000 Net operating income .................... $21,000 Contribution margin ratio .............. 70% What is Dog Hut's break-even point next year in sales dollars? A) $120,000 B) $181,300 C) $196,000 D) $250,000 Answer: D Level: Hard LO: 1,3,5 33. The following information relates to Zinc Corporation for last year: Sales........................................................... $500,000 Net operating income ................................ $25,000 Degree of operating leverage .................... 5 Sales at Zinc are expected to be $600,000 next year. Assuming no change in cost structure, this means that net operating income for next year should be: A) $30,000 B) $45,000 C) $50,000 D) $125,000 Answer: C Level: Hard LO: 1,3,8

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Chapter 6 Cost-Volume-Profit Relationships 34. The following information pertains to Nova Co.'s cost-volume-profit relationships: Breakeven point in units sold ...................... 1,000 Variable expenses per unit .......................... $500 Total fixed expenses .................................... $150,000 How much will be contributed to net operating income by the 1,001st unit sold? A) $650 B) $500 C) $150 D) $0 Answer: C Level: Medium LO: 1,5 35. Barnes Corporation expected to sell 150,000 games during the month of November. The following budgeted data are based on that level of sales: Revenue (150,000 games) ..................................... $2,400,000 Variable expenses .................................................. 1,425,000 Fixed manufacturing overhead expenses .............. 250,000 Fixed selling & administrative expenses ............... 500,000 Net operating income ............................................ 225,000 Barnes' actual sales during November were 180,000 games. What should the actual net operating income during November have been? A) $450,000 B) $270,000 C) $420,000 D) $510,000 Answer: C Level: Medium LO: 1 Source: CMA, adapted 36. Carver Company produces a product which sells for $40. Variable manufacturing costs are $18 per unit. Fixed manufacturing costs are $5 per unit based on the current level of activity, and fixed selling and administrative costs are $4 per unit. A selling commission of 15% of the selling price is paid on each unit sold. The contribution margin per unit is: A) $7 B) $17 C) $22 D) $16 Answer: D Level: Easy LO: 1

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Chapter 6 Cost-Volume-Profit Relationships 37. Tice Company is a medium-sized manufacturer of lamps. During the year a new line called “Horolin” was made available to Tice's customers. The break-even point for sales of Horolin is $200,000 with a contribution margin of 40%. Assuming that the profit for the Horolin line during the year amounted to $100,000, total sales during the year would have amounted to: A) $300,000 B) $420,000 C) $450,000 D) $475,000 Answer: C Level: Hard LO: 3,5,6 Source: CPA, adapted 38. Black Company's sales are $600,000, its fixed expenses are $150,000, and its variable expenses are 60% of sales. Based on this information, the margin of safety is: A) $90,000 B) $190,000 C) $225,000 D) $240,000 Answer: C Level: Medium LO: 3,5,7 39. Variable expenses for Alpha Company are 40% of sales. What are sales at the breakeven point, assuming that fixed expenses total $150,000 per year: A) $250,000 B) $375,000 C) $600,000 D) $150,000 Answer: A Level: Easy LO: 3,5 40. Minist Company sells a single product at a selling price of $15.00 per unit. Last year, the company's sales revenue was $225,000 and its net operating income was $18,000. If fixed expenses totaled $72,000 for the year, the break-even point in unit sales was A) 15,000 B) 9,900 C) 14,100 D) 12,000 Answer: D Level: Hard LO: 3,5

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Chapter 6 Cost-Volume-Profit Relationships 41. Winger Corp. sells a product for $5 per unit. The fixed expenses are $210,000 and the unit variable expenses are 60% of the selling price. What sales would be necessary in order for Winger Corp. to realize a profit of 10% of sales? A) $700,000 B) $525,000 C) $472,500 D) $420,000 Answer: A Level: Hard LO: 3,6 Source: CPA, adapted 42. Sales in East Company declined from $100,000 per year to $80,000 per year, while net operating income declined by 300 percent. Given these data, the company must have had an operating leverage of: A) 15 B) 2.7 C) 30 D) 12 Answer: A Level: Hard LO: 3,8 43. Darth Company sells three products. Sales and contribution margin ratios for the three products follow: Product X Y Z Sales in dollars ............................... $20,000 $40,000 $100,000 contribution margin ratio ............... 45% 40% 15% Given these data, the contribution margin ratio for the company as a whole would be: A) 25% B) 75% C) 33.3% D) it is impossible to determine from the given data Answer: A Level: Medium LO: 3,9

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Chapter 6 Cost-Volume-Profit Relationships 44. Sunnripe Company manufactures and sells two types of beach towels, standard and deluxe. Sunnripe expects the following operating results next year for each type of towel: Standard Deluxe Sales............................................... $450,000 $50,000 Variable expenses (total) ............... $360,000 $20,000 Sunnripe expects to have a total of $57,600 in fixed expenses next year. What is Sunnripe's break-even point next year in sales dollars? A) $72,000 B) $144,000 C) $192,000 D) $240,000 Answer: D Level: Hard LO: 3,9 45. Cindy, Inc. sells a product for $10 per unit. The variable expenses are $6 per unit, and the fixed expenses total $35,000 per period. By how much will net operating income change if sales are expected to increase by $40,000? A) $16,000 increase B) $5,000 increase C) $24,000 increase D) $11,000 decrease Answer: A Level: Medium LO: 3 46. Birney Company has prepared the following budget data: Sales.............................................................. 150,000 units Selling price.................................................. $25 per unit Variable expenses ......................................... $15 per unit Fixed manufacturing expenses ..................... $800,000 Fixed selling and admin. expenses ............... $700,000 An advertising agency claims that an aggressive advertising campaign would enable the company to increase its unit sales by 20%. What is the maximum amount that the company can pay for advertising and obtain a net operating income of $200,000? A) $100,000 B) $200,000 C) $300,000 D) $550,000 Answer: A Level: Hard LO: 4,6 Source: CPA, adapted

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Chapter 6 Cost-Volume-Profit Relationships 47. During last year, Thor Lab supplied hospitals with a comprehensive diagnostic kit for $120. At a volume of 80,000 kits, Thor had fixed expenses of $1,000,000 and net operating income of $200,000. Because of an adverse legal decision, Thor's liability insurance expenses this year will be $1,200,000 more than they were last year. Assuming that the volume and other costs are unchanged, what should be the sales price this year if Thor is to make the same $200,000 net operating income? A) $120 B) $135 C) $150 D) $240 Answer: B Level: Medium LO: 4,6 Source: CPA, adapted 48. How much will a company's net operating income change if it undertakes an advertising campaign given the following data: Cost of advertising campaign ...................................... $25,000 Variable expense as a percentage of sales ................... 42% Increase in sales ........................................................... $60,000 A) B) C) D)

$200 increase $25,200 increase $15,000 increase $9,800 increase

Answer: D Level: Hard LO: 4

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Chapter 6 Cost-Volume-Profit Relationships 49. Sun Company's tentative budget for next year is as follows: Sales........................................................... $600,000 Variable expenses ...................................... 360,000 Fixed expenses: Manufacturing ........................................ 90,000 Selling and administrative ...................... 110,000 Net operating income ............................. $40,000 Mr. Johnston, the marketing manager, has proposed an aggressive advertising campaign costing an additional $50,000 that he predicts will result in a 30% unit sales increase. Assuming that Johnston's proposal is incorporated into the budget, what should be the increase in the budgeted net operating income for next year? A) $12,000 B) $22,000 C) $72,000 D) $130,000 Answer: B Level: Hard LO: 4 Source: CPA, adapted 50. Last year, variable expenses were 60% of total sales and fixed expenses were 10% of total sales. If the company increases its selling prices by 10%, but if fixed expenses, variable costs per unit, and unit sales remain unchanged, the effect of the increase in selling price on the company's total contribution margin would be: A) a decrease of 2% B) an increase of 5% C) an increase of 10% D) an increase of 25% Answer: D Level: Hard LO: 4 Source: CIMA, adapted

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Chapter 6 Cost-Volume-Profit Relationships 51. Moruzzi Corporation is a single-product company that expects the following operating results for next year: Sales........................................................... $320,000 Contribution margin per unit ..................... $0.20 Contribution margin ratio .......................... 25% Degree of operating leverage .................... 8 How many units would Moruzzi have to sell next year to break-even? A) 50,000 B) 200,000 C) 280,000 D) 350,000 Answer: D Level: Hard LO: 5 52. Mason Company's selling price was $20.00 per unit. Fixed expenses totaled $54,000, variable expenses were $14.00 per unit, and the company reported a profit of $9,000 for the year. The break-even point for Mason Company is: A) 10,500 units B) 4,500 units C) 8,500 units D) 9,000 units Answer: D Level: Medium LO: 5 53. Given the following data: Selling price per unit ................................. $2.00 Variable production cost per unit .............. $0.30 Fixed production cost ................................ $3,000 Sales commission per unit ......................... $0.20 Fixed selling expenses ............................... $1,500 The break-even point in dollars is: A) $6,000 B) $4,500 C) $2,647 D) $4,000 Answer: A Level: Easy LO: 5

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Chapter 6 Cost-Volume-Profit Relationships 54. Hollis Company sells a single product for $20 per unit. The company's fixed expenses total $240,000 per year, and variable expenses are $12 per unit of product. The company's break-even point is: A) $400,000 B) $600,000 C) 20,000 units D) 12,000 units Answer: B Level: Easy LO: 5 55. Darwin, Inc., sells a particular textbook for $20. Variable expenses are $14 per book. At the current volume of 50,000 books sold per year the company is just breaking even. Given these data, the annual fixed expenses associated with the textbook total: A) $300,000 B) $1,000,000 C) $1,300,000 D) $700,000 Answer: A Level: Medium LO: 5 56. Singapore Candy Cane Company is a single product firm with the following cost structure for next year: Selling price per unit ................................. $1.20 Variable expenses per unit ........................ $0.72 Total fixed expenses for the year ....