Chap 4 CVP analysis - For practice PDF

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MULTIPLE CHOICEBasic concepts Cost-volume-profit analysis assumes that over the relevant range A. Variable costs are nonlinear. C. Selling prices are unchanged. B. Fixed costs are nonlinear. D. Total costs are unchanged. (aicpa) C ? A basic assumption within the relevant range.  Relevant range is a...

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MULTIPLE CHOICE Basic concepts 1. Cost-volume-profit analysis assumes that over the relevant range A. Variable costs are nonlinear. C. Selling prices are unchanged. B. Fixed costs are nonlinear. D. Total costs are unchanged.

(aicpa)

1. C ? A basic assumption within the relevant range.  Relevant range is a band (or stretch) of activity where the behavior of sales and costs is predictable. The basic assumptions used in management accounting within the relevant range are: a. Costs behavior - costs are segregated as to fixed or variable in behavior. b. Linearity - the behavior of total fixed cost, total variable cost, total costs, and total sales is linear (i.e., straight line). c. Fixed costs - total fixed cost does not change, while unit fixed cost changes; that is, UFC increases as production decreases and it decreases as production increases. d. Variable costs - total variable cost changes in direct relation to change in the volume of production and sales, while unit variable cost is constant. Also, total variable costs are not affected by the change in unit sales price. e. Unit sales price - unit sales price is constant. f. Sales mix - the company produces only one product, or in multi-product operations, the sales mix is constant. g. WIP - there is no work-in-process inventory. h. Production equals sales - there is no change in the number of units in finished goods inventory; meaning, production equals sales. Choice-letter “c” is correct, sales price is assumed to be constant within the relevant range. Choice-letters “a” and “b” are incorrect because variable costs and fixed costs are assumed to be linear. Choice-letter “d” is incorrect because total costs change on account of the total variable costs. 2. Cost-volume-profit analysis assumes that over the relevant range total. A. Revenues are linear. C. Variable costs are nonlinear. B. Costs are unchanged. D. Fixed costs are nonlinear.

(aicpa)

2. A ? Basic assumptions within the relevant range.  Choice-letter “a” is correct because the linearity of revenues and costs is one of the basic assumptions in the CVP analysis. Choice-letter “b” is incorrect because total costs would change because of the change in variable costs. Choice-letters “c” and “d” are incorrect because variable costs and fixed costs are assumed to be linear. 3. Breakeven analysis assumes linearity over the relevant range with respect to Total costs Total revenue Total costs Total revenue A. Yes No C. No Yes B. Yes Yes D. No No (aicpa)

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3. B ? Breakeven linearity assumptions over the relevant range.  Relevant range is a band or width of activity (e.g., in terms of levels of output or the unit of measurement used) where the sales and costs could be predicted with reasonable certainty. Within this range, sales and total costs are assumed to behave linearly. Unit sales price is constant and total sales increase in direct relation with changes in production levels. Total cost is composed of fixed cost and variable cost where total fixed cost is constant regardless of changes in the levels of production and sales and unit variable cost is constant. Total variable costs change in direct relation with the changes in the unit of production levels. Choice-letter “b” is correct because total costs and total revenue are assumed to be linear within the relevant range. 4. Break-even analysis assumes that over the relevant range. A. Selling prices are unchanged. C. Total costs are unchanged. B. Variable costs are nonlinear. D. Fixed costs are nonlinear.

(rpcpa)

4. A ? An assumption about breakeven analysis over the relevant range.  Within the relevant range, the following are the assumptions on cost-volume-profit analysis and breakeven analysis: the behavior of sales and costs is linear, total fixed costs is constant but unit fixed costs changes, total variable costs change but unit variable cost is constant; units sales price is constant; there is no change in the finished goods inventory (i.e., production equals sales); there is no work-in-process inventory; and the sales mix is constant. Within the relevant range, variable cost and fixed costs are linear and total costs change due to the change in variable costs. (Choice-letter “a” is correct). 5. The amount of variable cost per unit and total fixed cost within a relevant range behave this way in relation to production level: A. Production increases, unit variable cost increases, total fixed cost increases. B. Production decreases, unit variable cost decreases, total fixed cost decreases. C. Production increases, unit variable cost remains constant, total fixed cost remains the same. D. Production increases, unit variable cost decreases, total fixed cost remains the same. (rpcpa) 5. C ? The behavior of variable cost per unit and total fixed costs within the relevant range.  Total fixed costs remain constant within the relevant range. However, unit fixed cost decreases as production increases, and it increases as production decreases. Total variable cost changes in direct relation to the change in the level of production and sales within the relevant range. However, unit variable cost is constant within the relevant range. Therefore, regardless of the change in the level of production, the total fixed costs and unit variable will be constant within the relevant range. Choice-letter “c” is the correct answer.

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6. Assuming that a flexible budget is in use, production levels are expected to increase within a relevant ranged, the expected effect on fixed cost per unit (FCU) and variable costs per unit (VCU) would be A. FCU to decrease and VCU to decrease. B. FCU to decrease and VCU no change. C. FCU no change and VCU no change. D. FCU no change and VCU to decrease. (rpcpa) 6. B ? Using the flexible budget and assuming production increases within a relevant range, determine the expected effect on fixed costs per unit (FCU) and variable cost per unit (VCU) by an increase in production levels.  Within the relevant range, total fixed cost remains constant but FCU changes (that is, FCU decreases as production increases and FCU increases as production decreases). Also within the relevant range, total variable costs changes but VCU is constant. Choice-letter “b” is correct, FCU decreases, VCU does not change. Choice-letter “b” is correct. 7. One of the major assumptions limiting to reliability of break-even analysis is that A. The cost of productivity will continually increase. B. The cost of production factors varies with changes in technology. C. Total variable cost will remain unchanged over the relevant range. D. Total fixed cost will remain unchanged over the relevant range. (rpcpa) 7. D ? A major assumption limiting the reliability of breakeven analysis.  The breakeven analysis is based on the following assumptions within the relevant range: a. The behavior of sales and costs is linear within the relevant range. b. Total fixed costs are constant but unit fixed cost changes. c. Total variable costs change but unit variable cost is constant. d. Unit sales price is constant. e. Sales equal production; there is no change in the finished goods inventory. f. There is no work-in-process inventory. g. The sales mix ratio is constant. Choice-letter “d” is correct (refer to assumption letter ”b”), Choice-letter “a” is incorrect because efficiency and productivity have no direct relations with the BEP analysis; choice-letter “b” is incorrect because it is not an assumption in the BEP analysis, although the statement is true; choice-letter “c” is incorrect because total variable costs change (not unchanged) within the relevant range 8. At the breakeven point, the contribution margin equals total A. Variable costs. C. Selling and administrative costs. B. Sales revenues. D. Fixed costs. 8. D

(aicpa)

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The amount of contribution margin at breakeven point. At breakeven point, there is no profit or loss, meaning, total sales equal total costs. Alternatively, profit is contribution margin less fixed costs and expenses. Therefore, at breakeven point contribution margin equals total fixed costs. Choice-letter “d” is correct.

9. At breakeven point, fixed cost is always A. Less than contribution margin. C. More than variable cost. B. Equal to contribution margin. D. More than the contribution margin.

(rpcpa)

9. B ? Fixed cost at breakeven point.  At breakeven point, total fixed cost equals contribution margin. This is so because, if fixed cost and contribution are of the same amount, there is no profit or loss. 10. An assembly plant accumulates its variable and fixed manufacturing overhead costs in a single cost pool, which is then applied to work-in-process using a single application base. The assembly plant management wants to estimate the magnitude of the total manufacturing overhead costs for different volume levels of the application activity base using a flexible budget formula. If there is an increase in the application activity base that is within the relevant range of activity for the assembly plant, which one of the following relationship regarding variable and fixed costs is correct? A. The variable cost per unit is constant, and the total fixed costs decrease. B. The variable cost per unit is constant, and the total fixed costs increase. C. The variable cost per unit and the total fixed costs remain constant. D. The variable cost per unit increases, and the total fixed costs remain constant. (cia) 10. C ? Relationship regarding variable and fixed costs within the relevant range.  Within the relevant range, unit variable cost and total fixed costs are constant. Choice-letter “c” is correct. 11. Contribution margin is the excess of revenues over A. Direct cost. C. Cost of good sold. B. Manufacturing cost. D. All variable costs.

(rpcpa)

11. D ? A procedure in computing contribution margin.  The traditional way to compute contribution margin is by getting the difference between net sales and variable costs and expenses. Other procedures to determine contribution margin (CM) are as follows: CM = Quantity sold x Unit contribution margin CM = Net sales x Contribution margin ratio CM = Fixed costs + Income before income tax Choice-letter “a” is incorrect because the difference between net sales and direct cost is direct margin or segment margin. Choice-letter “b” is also incorrect because

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the difference between revenues and manufacturing cost is manufacturing margin or manufacturing income. Choice-letter “c” is also incorrect because the difference between net sales and cost of goods sold is gross profit. 12. Cost-volume-profit analysis is a key factor in many decisions, including choice of product lines, pricing of products, marketing strategy, and use of productive facilities. A calculation used in a CVP analysis is the breakeven point. Once the breakeven point has been reached, operating income will increase by the A. Gross margin per unit for each additional unit sold. B. Contribution margin per unit for each additional unit sold. C. Variable cost per unit for each additional unit sold. D. Sales price unit for each additional unit sold. (cma) 12. B ? Effect to operating income, once the breakeven point has been reached.  Beyond the breakeven point, total sales are greater than total costs. Also, contribution margin is greater than fixed cost. The excess of contribution over fixed costs is profit. After breakeven point, income increases by every peso increase in contribution margin, which is the unit contribution margin. Choice-letter “b” is the right choice. 13. Cost-volume-profit relationships that are curvilinear may be analyzed linearly by considering only A. Fixed and semi-variable costs. C. Relevant variable costs. B. Relevant fixed costs. D. A relevant range of volume. (aicpa) 13. D ? The factor to be considered in analyzing curvilinear relationships.  Choice-letter “d” is correct. Curvilinear relationships exist over the long run. In the short-term, however, the relationship between two variables in a graph is linear. This short-term range is otherwise known as relevant range and the linearity assumption is valid within the relevant range. It is a range of production activity where the behavior of costs and sales is linear; meaning, unit sales, unit variable cost, and total fixed cost are constant. Choice-letter “a” is incorrect because semi-variable costs are normally curvilinear in its representation. Choice-letters “b” and “c” are incorrect because other relevant costs are also included in the CVP analysis. 14. When an organization is operating above the breakeven point, the degree or amount that revenues may decline before losses are incurred is the A. Residual income rate. C. Margin of safety. B. Marginal rate of return. D. Target (hurdle) rate of return. (cma) 14. C ? The amount of decline in sales before losses occur.  If operations are in excess of breakeven point, there is profit. The amount of decline in sales before losses occur is margin of safety. Mathematically, margin of safety equals actual (or budgeted) sales less breakeven sales.

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15.The rate or amount that sales may decline before losses are incurred is called: A. Sensitive level of income. C. Margin safety . B. Variable sales ratio. D. Residual income rates. (rpcpa) 15. C ? The rate or amount in sales before losses are incurred.  Margin of safety is the excess of sales over the breakeven point. Therefore, it is the maximum amount of reduction in sales before losses are incurred. Choice-letter “c” is correct. 16. Total unit costs are A. Relevant for cost-volume-profit analysis. B. Independent of the cost system used to generate them. C. Irrelevant in marginal analysis. D. Needed for determining product contribution.

(rpcpa)

16. C ? A choice that describes total unit costs.  Choice-letter “c” is correct, total unit costs are irrelevant in marginal analysis. To be relevant in marginal costing analysis, total costs should be separated as to either fixed or variable. Total unit cost per se is not relevant in marginal costing analysis. Choice-letter “a” is incorrect. Total unit costs are dependent of the cost system used to generate them. Choice-letter “b” is incorrect. And total unit cost is not needed in determining the contribution margin, what is important is the variable cost. Choiceletter “d” is incorrect. Breakeven point 17. Given the following notations, what is the breakeven sales level in units? SP = selling price per unit FC = total fixed costs VC = variable cost per unit A. SP  (FC VC). B. FC  1 – (VC  SP).

D.

C. VC (SP – FC). FC  (SP – VC).

(aicpa)

17. B ? Computation of breakeven point in units.  Choice-letter “b” is correct. Unit contribution margin equals unit sales price (USP) less unit variable costs (UVC). Therefore, breakeven point (BEP) in units and in pesos are computed as follows: BEP (units) = Fixed costs / Unit contribution margin or FC / (USP – UVC) BEP (pesos) = Fixed costs / Contribution margin ratio or FC ÷ (100% - VCR) In the marginal costing analysis, sales ratio is always equal to 100%. Variable cost ratio (VCR) is basically variable cost over sales.

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18. A company’s breakeven point (BEP) in pesos of revenue may be affected by equal percentage increase in both selling price and variable cost per unit (assume all other factors are constant within the relevant range). The equal percentage changes in selling price and variable cost per unit will cause the breakeven point in pesos to A. Decrease by less than the percentage increase in selling price. B. Decrease by more than the percentage increase in the selling price. C. Increase by the percentage change in variable cost per unit. D. Remain unchanged. (cia) 18. D ? Effect to breakeven point of equal percentage increase in both sales price and unit variable cost.  The equal percentage increase in both sales price and unit variable cost does not change the contribution margin ratio. Therefore, the breakeven point will not change, assuming all other factors are constant. Choice-letter “d” is correct. Questions 19 and 20 are based on the following selected budgeted data of Russel Gil Company for the coming year: Selling price per unit P 12.00 Budgeted sales 600,000 Fixed expenses 150,000 Variable cost per unit 8.00 19. What is the breakeven in sales in units? A. 35,000 C. 40,000 B. 37,500 D. 45,000 19. B ? Breakeven sales in units.  Breakeven sales in units equals total fixed costs over unit contribution margin. The unit contribution margin is P4.00 (i.e., P12 – P8). Therefore, breakeven sales in units is 37,500, computed as follows: BEP (units) = P150,000 / P4 = 37,500 units 20. What is the margin of safety ratio in percent? A. 15% C. 30% B. 20% D, 25%

(rpcpa)

20. D ? Margin of safety ratio.  Margin of safety ratio (MSR) is margin of safety divided by actual (or budgeted) sales. Considering the given data, we have: Budgeted sales P 600,000 Less: Breakeven sales (37,500 units x P12) 450,000 Margin of safety P 150,000 Therefore, MSR is 25% (i.e., P150,000 / P600,000). 21. A company is concerned about its operating performance, as summarized below:

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Revenues (P12.50 per unit) Variable costs Operating loss

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P300,000 180,000 (40,000)

How many additional units should have been sold in order for the company to break even in 2004? A. 32,000 C. 16.000 B. 24,000 D. 8.000 (cia) 21. D ? The number of additional units to sell to breakeven.  The company is operating at a loss. It has to increase its actual units sold to breakeven. The additional units to sell to breakeven is the difference between breakeven point and the present actual units sold. The variable cost ratio is 60% (e.g., P180,000/P300,000). Therefore, the CMR is automatically 40%, and the UCM is P5 (e.g., P12.50 x 40%). Total fixed cost equals CM plus operating loss. CM is P120,000 (e.g., P300,000 – P180,000). Therefore, total fixed cost is P160,000 (e.g., P120,000 + P40,000). The additional units to sell is calculated as follows: Breakeven sales (P160,000 / P5) 32,000 units - Actual units sold (P300,000 / P12.50) 24,000 Needed increase in units sold to breakeven 8,000 units Alternatively, the increase in units needed to breakeven is 8000 units determined by dividing the loss by the unit contribution margin (i.e., P40,000 / P5 = 8,000 units) 22. Kent Co.'s operating percentages were as follows: Revenues 100% Cost of good sold Variable 50% Fixed 10 60 Gross profit 40% Other operating expenses Variable 20 Fixed 15 35 Operating income 5% Kent’s sales totaled P2 million. At what revenue level would Kent break even? A. P1,900.000 C. P1,250.000 B. P1,666.667 D. P 883,333 (aicpa) 22. B ? Breakeven sales.  BEP is fixed costs divided by CMR. Total fixed cost is P500,000 (i.e., P2,000,000 x 25%). The total variable cost ratio is 70% (i.e., 50% + 20%). Therefore, CMR is 30%. The breakeven point in pesos is: BEP (pesos) = P500,000 / 30% = P1,666,667 23. For the period just ended Chanda, Inc., generated the following operating results in percentages

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Sales 100% Cost of sales Variable 50% Fixed 10% 60% Gross profit 40% Operating expense Variable 20% Fixed 15% 35% Operating income 5% Total sales amounted to P3.0 million. at what level is break-even sales? A. P3,750,000 C. P1,875,000 B. P1,850,000 D. P2,500,000

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(rpcpa)

23. B ? The breakeven sales in peso...