334296235-Chapter-04-5e

(1)

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.

(2)

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.

(3)

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.

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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.

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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

STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-28-Variable and Fixed 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

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4. ANS: D PTS: 1 DIF: Difficulty: Moderate

STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-28-Variable and Fixed 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

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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

STA: AICPA: FN-Decision Modeling |AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: 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

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.

19. ANS: E PTS: 1 DIF: Difficulty: Easy

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STA: AICPA: FN-Decision Modeling |AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: 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

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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.

(10)

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: APC-32-Margin of safety/sales target KEY: Bloom's: Knowledge

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

STA: AICPA: FN-Decision Modeling |AICPA: FN-Risk Analysis | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Knowledge

NOT: 1 min.

16. _____________________ is the use of fixed costs to extract higher percentage changes in profits as sales activity changes.

ANS: Operating leverage

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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.

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ANS: B PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1 NAT: BUSPROG: Analytic

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

STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-31-Break-even point

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

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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

STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point 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 SUPPORTING CALCULATIONS: Average CM rate = (0.6)(0.5) + (0.4)(0.25) = 0.40 $120,000/0.4 = $300,000

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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 SUPPORTING CALCULATIONS: $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 SUPPORTING CALCULATIONS: $45/$150 = .300

STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 1 min.

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.

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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 SUPPORTING CALCULATIONS: $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 SUPPORTING CALCULATIONS: ($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.

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ANS: B PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-1 NAT: BUSPROG: Analytic

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 SUPPORTING CALCULATIONS: $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.

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ANS: E PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-1 NAT: BUSPROG: Analytic

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

22. Melody Company sells a product for $14, variable costs are $10 per unit, and total fixed costs are $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%

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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%

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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

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c. 3,714 d. 5,571 e. 12,000

ANS: D

$78,000/$14 = 5,571

32. Refer to Figure 4-2. What is the break-even point in sales dollars? a. $130,000 b. $195,000 c. $252,000 d. $420,000 e. $342,000 ANS: B $78,000/0.40 = $195,000

33. Refer to Figure 4-2. What is the contribution margin ratio? 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

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KEY: Bloom's: Knowledge NOT: 1 min. 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

STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Application NOT: 1 min.

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

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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

41. Refer to Figure 4-3. What is the break-even point in sales dollars? a. $120,000

b. $80,000 c. $58,330 d. $21,670 e. $28,000

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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.

43. Refer to Figure 4-3. What is the contribution margin ratio? 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

STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Application NOT: 1 min.

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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

47. Refer to Figure 4-8. What is the break-even point in sales dollars? a. $498,000 b. $400,000 c. $171,429 d. $112,500 e. $150,000 ANS: B

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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

ANS: B PTS: 1 DIF: Difficulty: Easy

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%.

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

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51. 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 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

52. 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 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

53. 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 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

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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

STA: AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 2 min.

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 NAT: BUSPROG: Analytic

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

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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

59. Melody Company sells a product for $14, variable costs are $10 per unit, and total fixed costs are $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.

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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). e. All of these are correct.

ANS: B PTS: 1 DIF: Difficulty: Moderate

62. Assume the following information:

Selling price per unit $150

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 SUPPORTING CALCULATIONS: ($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

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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. e. All of these are correct.

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. e. All of these are correct.

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

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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.

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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 Characteristics/Terminology KEY: Bloom's: Knowledge

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 Characteristics/Terminology KEY: Bloom's: Knowledge

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.

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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 SUPPORTING CALCULATIONS:

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.

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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 SUPPORTING CALCULATIONS:

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.

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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

ANS: E PTS: 1 DIF: Difficulty: Moderate

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.

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PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 4-5 NAT: BUSPROG: Analytic

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.

ANS: E PTS: 1 DIF: Difficulty: Moderate

90. Biggers Company expects the following results for the next accounting period:

Sales $240,000

Variable costs $135,000

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

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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

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