Chapter 9—Break-Even Point and Cost-Volume-Profit Analysis

MULTIPLE CHOICE 1. CVP analysis requires costs to be categorized as a. either fixed or variable. b. direct or indirect. c. product or period. d. standard or actual. ANS: A PTS: 1 DIF: Easy NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Decision Modeling OBJ: 9-1

2. With respect to fixed costs, CVP analysis assumes total fixed costs a. per unit remain constant as volume changes. b. remain constant from one period to the next. c. vary directly with volume. d. remain constant across changes in volume. ANS: D PTS: 1 DIF: Easy OBJ: 9-2 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement, Reporting 3. CVP analysis relies on the assumptions that costs are either strictly fixed or strictly variable. Consistent with these assumptions, as volume decreases total a. fixed costs decrease. b. variable costs remain constant. c. costs decrease. d. costs remain constant. ANS: C PTS: 1 DIF: Easy OBJ: 9-2 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement, Reporting 4. CVP analysis is based on concepts from a. standard costing. b. variable costing. c. job order costing. d. process costing. ANS: B PTS: 1 DIF: Easy OBJ: 9-2 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement, Reporting

Chapter 9

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5. Cost-volume-profit analysis is a technique available to management to understand better the interrelationships of several factors that affect a firm's profit. As with many such techniques, the accountant oversimplifies the real world by making assumptions. Which of the following is not a major assumption underlying CVP analysis? a. All costs incurred by a firm can be separated into their fixed and variable components. b. The product selling price per unit is constant at all volume levels. c. Operating efficiency and employee productivity are constant at all volume levels. d. For multi-product situations, the sales mix can vary at all volume levels. ANS: D PTS: 1 DIF: Easy OBJ: 9-2 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement, Reporting 6. In CVP analysis, linear functions are assumed for a. contribution margin per unit. b. fixed cost per unit. c. total costs per unit. d. all of the above. ANS: A PTS: 1 DIF: Easy OBJ: 9-2 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement, Reporting 7. Which of the following factors is involved in studying cost-volume-profit relationships? a. product mix b. variable costs c. fixed costs d. all of the above ANS: D PTS: 1 DIF: Easy OBJ: 9-2 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement, Reporting 8. Cost-volume-profit relationships that are curvilinear may be analyzed linearly by considering only a. fixed and mixed costs. b. relevant fixed costs. c. relevant variable costs. d. a relevant range of volume. ANS: D PTS: 1 DIF: Easy OBJ: 9-2 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement, Reporting 9. After the level of volume exceeds the break-even point a. the contribution margin ratio increases. b. the total contribution margin exceeds the total fixed costs. c. total fixed costs per unit will remain constant. d. the total contribution margin will turn from negative to positive. ANS: B PTS: 1 DIF: Easy OBJ: 9-2 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement, Reporting

d. b. c. FC/(VC/SP) c. Consider the equation X = Sales . yes yes yes no Increase in direct labor cost yes no no yes Increase in selling price yes yes no no ANS: B PTS: 1 DIF: Easy OBJ: 9-2 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. Reporting 13. what is the break-even sales level in units? SP = selling price per unit. b. more than the contribution margin. absolute. Reporting 14. d. d. net income b. variable. VC/(SP . ANS: A PTS: 1 DIF: Easy OBJ: 9-2 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. At the break-even point. Reporting . more than the variable cost. SP/(FC/VC) b. fixed costs c. FC/(SP . equal to the contribution margin. Given the following notation. c. VC = variable cost per unit a. c. contribution margin d. standard. Reporting 11.[(CM/Sales)  (Sales)]. less than the contribution margin.VC) ANS: D PTS: 1 DIF: Easy OBJ: 9-2 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement.FC) d. b. The method of cost accounting that lends itself to break-even analysis is a. FC = total fixed cost. ANS: B PTS: 1 DIF: Easy OBJ: 9-2 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. variable costs ANS: D PTS: 1 DIF: Moderate OBJ: 9-2 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. fixed costs are always a. absorption.Chapter 9 3 10. What is X? a. Which of the following will decrease the break-even point? Decrease in fixed cost a. Reporting 12.

the firm('s) a. ANS: B PTS: 1 DIF: Easy OBJ: 9-6 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. A firm's break-even point in dollars can be found in one calculation using which of the following formulas? a. VC/CM c. Break-even analysis assumes over the relevant range that a. ANS: A PTS: 1 DIF: Easy OBJ: 9-2 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. FC/CM per unit b. total variable costs are nonlinear.Chapter 9 4 15. b. FC/CM per unit b. FC/CM ratio d. d. Reporting 18. variable costs as a percentage of net sales decrease. c. sales price must equal $0. To compute the break-even point in units. must be in the service industry. Reporting . FC/CM ratio c. Reporting 16. c. b. must have no fixed costs. fixed costs per unit are constant. The contribution margin ratio always increases when the a. d. break-even point increases. total variable costs are linear. total revenue is nonlinear. Reporting 19. d. (FC+VC)/CM ratio ANS: A PTS: 1 DIF: Easy OBJ: 9-2 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. If a firm's net income does not change as its volume changes. ANS: D PTS: 1 DIF: Moderate OBJ: 9-2 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. variable costs as a percentage of net sales increase. b. break-even point decreases. VC/CM ratio ANS: C PTS: 1 DIF: Easy OBJ: 9-2 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. c. which of the following formulas is used? a. sales price must equal its variable costs. Reporting 17. CM/CM ratio d.

c. rate at which profit changes as volume changes. Reporting 22. On a break-even chart. ____ focuses only on factors that change from one course of action to another. revenue line crosses the total fixed cost line. b. have the highest contribution margin ratio. b. d.Chapter 9 5 20. profit. Reporting 23. b. total costs per unit. variable costs. d. generate the most profit for each unit sold. ratio of increase of total fixed costs. fixed cost line intersects the total variable cost line. A break-even chart ANS: A PTS: 1 DIF: Easy OBJ: 9-3 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. a. fixed costs. b. Reporting 24. ANS: D PTS: 1 DIF: Easy OBJ: 9-3 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. revenue line crosses the total cost line. d. revenue line crosses the total contribution margin line. ANS: B PTS: 1 DIF: Moderate OBJ: 9-3 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. ANS: C PTS: 1 DIF: Easy OBJ: 9-6 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. c. have the lowest variable costs per unit. ANS: D PTS: 1 DIF: Easy OBJ: 9-3 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. Margin of safety c. d. Reporting 21. the product that has the highest contribution margin per unit will a. In a CVP graph. In a CVP graph. the break-even point is located at the point where the total a. the slope of the total revenue line indicates the a. In a multiple-product firm. rate at which the contribution margin changes as volume changes. Operating leverage d. Reporting . c. c. the area between the total cost line and the total revenue line represents total a. generate more profit for each $1 of sales than the other products. contribution margin. Incremental analysis b.

b. c. d. b. If a company's variable costs per unit were to increase but its unit selling price stays constant. degree of operating leverage is greater than 100. c. slope of the contribution margin line would be more pronounced (steeper). contribution margin line would shift upward parallel to the present line. d. d. slope of the contribution margin line would be less pronounced (flatter). amount of sales revenue needed to cover enterprise variable costs. volume or output level at which the enterprise breaks even. fixed costs per unit. d. and fixed costs at various levels of activity. profit. c. slope of the contribution margin line would be pronounced (steeper). slope of the contribution margin line would be less pronounced (flatter). b. contribution margin. the effect on a profit-volume graph would be that the a. ANS: D PTS: 1 DIF: Easy OBJ: 9-3 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. was presently operating at a volume that is below the break-even point. variable costs exceeded its fixed costs. amount of sales revenue needed to cover enterprise fixed costs. In a CVP graph. contribution margin line would shift upward parallel to the present line. contribution margin line would shift downward parallel to the present line. Reporting 28. The most useful information derived from a cost-volume-profit chart is the a. present fixed costs were less than its contribution margin. variable costs. Reporting 26. ANS: C PTS: 1 DIF: Easy OBJ: 9-3 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. contribution margin line would shift downward parallel to the present line. ANS: B PTS: 1 DIF: Moderate OBJ: 9-3 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. Reporting 27. the area between the total cost line and the total fixed cost line yields the a. c. the effect on a profit-volume graph would be that the a. total variable costs. b. relationship among revenues. ANS: A PTS: 1 DIF: Easy OBJ: 9-5 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. c. Reporting . b. The margin of safety would be negative if a company('s) a.Chapter 9 6 25. If a company's fixed costs were to increase. Reporting 29. ANS: B PTS: 1 DIF: Easy OBJ: 9-3 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. d.

ANS: B PTS: 1 DIF: Moderate OBJ: 9-5 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. the firm is very unprofitable. d. Reporting 31. Reporting Palmer Company Below is an income statement for Palmer Company: Sales Variable costs Contribution margin Fixed costs Profit before taxes $400.000) $ 75. As projected net income increases the a. b. profit must increase. difference between budgeted contribution margin and actual contribution margin. b. margin of safety stays constant. a decrease in sales volume is expected.000 (125. the firm has very high fixed costs. Reporting 32. d. c. c. contribution margin ratio goes up.000) $275. If the change is adopted. margin of safety must decrease.000 (200. Management is considering replacing an existing sales commission compensation plan with a fixed salary plan. an increase in sales volume is expected. b. c. contribution margin rate. operating leverage must increase. break-even point goes down. ANS: C PTS: 1 DIF: Moderate OBJ: 9-5 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. A managerial preference for a very low degree of operating leverage might indicate that a. d. The margin of safety is a key concept of CVP analysis. c. break-even point must increase. the company's a. b.000 . difference between budgeted sales and break-even sales. ANS: A PTS: 1 DIF: Moderate OBJ: 9-5 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. ANS: D PTS: 1 DIF: Easy OBJ: 9-5 NAT: AACSB: Reflective Thinking LOC: AICPA Functional Competencies: Measurement. d. The margin of safety is the a. Reporting 33.Chapter 9 7 30. degree of operating leverage declines. difference between budgeted contribution margin and break-even contribution margin.

$200.6875x . What was Palmer’s margin of safety? a.$200. Reporting 35.000 b.000 c. $325. Reporting 36. Reporting .909) = $109. $75. what was Palmer’s break-even point in dollars? a. What is Palmer’s degree of operating leverage? a. $300.091 PTS: 1 DIF: Easy OBJ: 9-5 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement. 1.000 = 0 x = $290. $290.67 b.000/75.000 d.000 c.290.45 d. 2.6875 .909 ANS: D CM Percentage = $(275/400) = .000 . Refer to Palmer Company.33 c.Chapter 9 8 34. $100. Based on the cost and revenue structure on the income statement. $109.000) = 3.000 b. Refer to Palmer Company.909 PTS: 1 DIF: Moderate OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.000 d. Refer to Palmer Company.67 ANS: A $(275.091 ANS: D Margin of Safety = $(400.67 PTS: 1 DIF: Moderate OBJ: 9-5 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement. $200. 3. 5.

Information on its costs follow: Variable costs: SG&A Production Fixed costs: SG&A Production $2 per unit $4 per unit $12. $15.30 = $357.500 Contribution Margin . A prediction cannot be made from the information given. What was Ideal Company's sales price per unit? a.000 units = $9 contribution margin per unit Contribution Margin + Variable Costs = Sales Price/Unit $(9 + (4 + 2)) = $15/Unit PTS: 1 DIF: Moderate OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement. $10. At this level of activity.40 c. Assume Ideal Company produced and sold 5.000) = $157. Refer to Palmer Company.000 per year 38.Fixed Costs = Profit $(357. $11. $157.500 . $195.Chapter 9 9 37. ANS: C Contribution Margin * 1.500 d.000 $45. it produced a profit of $18.500 PTS: 1 DIF: Moderate OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.500 b.000.000 + $27. Refer to Ideal Company. $9. Assuming that the fixed costs are expected to remain at $200.30 = New Contribution Margin $275.000 per year $15.00 b.000 = $45.60 d.00 ANS: A Profit + Fixed Costs = Contribution Margin $18.000 for the coming year and the sales price per unit and variable costs per unit are also expected to remain constant.000 c. Reporting .000 / 5.000 units.200.000 * 1. how much profit before taxes will be produced if the company anticipates sales for the coming year rising to 130 percent of the current year’s level? a. Reporting Ideal Company Ideal Company produces and sells a single product. $97.

$18.800 c.000 $750.000 / 0. $7.$27. In the upcoming year.000 units $125.400 d. Ideal Company estimates that it will produce and sell 4.000 units = $64. $3.00 d.6) = $10/unit ($10*4. $3.000) .000 b. The variable costs per unit and the total fixed costs are expected to be the same as in the current year.Chapter 9 10 39.27. $3.000 .000 units. it anticipates a sales price of $16 per unit. Reporting .625x .000) = $13. What is Ideal Company's projected margin of safety for the coming year? a.000 = $0 x = $43.000 = $(40. Refer to Ideal Company.37 b. $20.000 is desired by management. $3.70 ANS: C Before Tax Income: $75.000 Breakeven 0.60 = Fixed Costs: Contribution Margin: Projected Sales less: Contribution Margin Variable Costs $375.000 Contribution Margin = $(16 .000 375.43.000 $375.000 $3/unit PTS: 1 DIF: Moderate OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.200) = $20. $13. Reporting 40.000 . The company projects its income tax rate at 40 percent. An after-tax income of $75. What is the maximum amount that Campbell can expend for variable costs per unit and still meet its profit objective if the sales price per unit is estimated at $6? a.200 $(64.000.000 $375.$27.000 in producing and selling a single product.000 / 125. Estimated unit sales are 125.800 PTS: 1 DIF: Moderate OBJ: 9-5 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.000 ANS: B Profit at 4. Campbell Manufacturing incurs annual fixed costs of $250.59 c.000 units Gross Sales = $16 * 4.000 250. However.

How many units would Teal Company need to sell to earn a profit before taxes of $10.000 $5x = $60. what will be its degree of operating leverage? a.000 .20 PTS: 1 DIF: Moderate OBJ: 9-5 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.571 d.000 per year $7.000) $450.00 b. 10. Reporting Shelton Company Below is an income statement for Shelton Company: Sales Variable costs Contribution margin Fixed costs Profit before taxes $600. 25.20 c.000 = $300. 8.000 units PTS: 1 DIF: Moderate OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement. 1.000 units $2. 12. 6.000 . Refer to Teal Company.000 units * $5/unit) .00 41.714 b.000? a.Chapter 9 11 Teal Company The following information relates to financial projections of Teal Company: Projected sales Projected variable costs Projected fixed costs Projected unit sales price 60.68 d. If Teal Company achieves its projections.000 + $10.000 x = 12.000 (150.000 = $250.000 c.000 (300.$50.40 ANS: B Net profit = (60. Refer to Teal Company.$50. 1.000 ANS: D Contribution Margin per Unit: $5 $5x = $50. Reporting 42.000/250.000) $150.00 per unit $50.000) = 1.000 DOL = $(300. 2.

$200.000 c. Reporting . $300. $175. what was Shelton’s break-even point in dollars? a.000 .00 c. $400.00 PTS: 1 DIF: Moderate OBJ: 9-5 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement. What was Shelton’s margin of safety? a.00 ANS: C $(450. 3. Reporting 45.$300.000 d. $150.Chapter 9 12 43. Refer to Shelton Company.000 ANS: B CM Percentage = $(450/600) = .75x . What is Shelton’s degree of operating leverage? a.75 . 4. $425.000 b.400.33 b.000 = 0 x = $400. 2.000 b.000) = 3. Refer to Shelton Company. $300. Reporting 44. 1.000 c.000) = $200.000 ANS: C Margin of Safety = $(600. $450.000 d.000 PTS: 1 DIF: Moderate OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement. Refer to Shelton Company.000 PTS: 1 DIF: Easy OBJ: 9-5 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement. Based on the cost and revenue structure on the income statement.000/150.00 d.

$112.500 d. $262. however total sales are expected to increase by 20 percent. 50 percent. and fixed costs of $30.000 $40.000 $12 6 $40.25 = New Contribution Margin $450.000 = 80% PTS: 1 DIF: Moderate OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.Chapter 9 13 46. 80 percent. Assuming that the fixed costs are expected to remain at $300.Fixed Costs = Profit $(562. Sunshine Company manufactures a single product. the company had sales of $90.300.000 * 1.000.500 b.000) = $262.000 for the coming year and the sales price per unit and variable costs per unit are also expected to remain constant.000 . c. $187.000. the company incurred total fixed costs in the amount of $10. net income should exceed the prior year’s net income by: a.000/$10.000) = $18.000 .30.000 * 1. $300.30. d.000 Product B 4. 20 percent. ANS: B Contribution margin: Net profit: 20% CM increase: Net profit: Increase in profit $8. Reporting Sunglo Corporation Sunglo Corporation manufactures and sells two products: A and B. In the prior year.500 c. The operating results of the company are as follows: Product A Sales in units Sales price per unit Variable costs per unit 3. . variable costs of $50. Sunshine expects its cost structure and sales price per unit to remain the same in the current year. 100 percent.000.000 $8.000) = $10.000 $(40. Refer to Shelton Company.000 $(48.000 ANS: C Contribution Margin * 1.500 Contribution Margin . Reporting 47. If the current year projections are realized.000. how much profit before taxes will be produced if the company anticipates sales for the coming year rising to 125 percent of the current year’s level? a.000 $7 4 In addition.25 = $562.500 .20 = $48. b.500 PTS: 1 DIF: Moderate OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.

how many of those units would be Product B? a.333 units Total units = 2.000 units B = 4. consistent with CVP assumptions. Refer to Sunglo Corporation.500 units B = 6.$10.000? a. 7. Refer to Sunglo Corporation.500 units 2. Reporting .33A) .000 10A = $30.33A = 10. 6. If the company had sold a total of 10. Refer to Sunglo Corporation.111 c.333 PTS: 1 DIF: Moderate OBJ: 9-4 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.33A = 10.000 = $0 10A .000 A = 3.33A) .923 d.875 ANS: B A + 1. 6.33A 6A + 3(1. 1. Reporting 49.000 units PTS: 1 DIF: Moderate OBJ: 9-4 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement. 5. 2.000 c. 333 b.000 units PTS: 1 DIF: Moderate OBJ: 9-4 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.332 ANS: C Let B = 1.000 units Total = 7. 6.000 units B = 1. Reporting 50.333 d.500 units A = 4. 3.000 d. 7. How many units would the company need to sell to produce a before-tax profit of $20.000 b. 7.250 c.250 b.$10.Chapter 9 14 48.000 = $0 A = 1.000 ANS: D 6A + 3(1. How many total units would the company have needed to sell to break even? a. 6.500 units.000 = $20.$10.

000 = $0 A = 1.000 $5 3 In addition.5A = 6.400 units B = 3.5A) . The operating results of the company are as follows: Product A Sales in units Sales price per unit Variable costs per unit 2. 750 c.800 ANS: A Let B = 1.500 ANS: C A + 1.000. 51. 3.000 $10 7 Product B 3.250 Total units = 3. Reporting 52.600 d.000 b.600 units PTS: 1 DIF: Moderate OBJ: 9-4 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement. Reporting .000 units. Refer to Moonbeam Corporation.5A = 6. How many total units would the company have needed to sell to break even? a.5A 3A + 2(1.$9.$9.000 units A = 2. 3.000 units 2.Chapter 9 15 Moonbeam Corporation Moonbeam Corporation manufactures and sells two products: A and B.000 c.750 PTS: 1 DIF: Moderate OBJ: 9-4 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement. 1. the company incurred total fixed costs in the amount of $9. consistent with CVP assumptions how many of those units would you expect to be Product B? a. 4. 3.000 = $0 6A . 3.600 d.750 b. If the company would have sold a total of 6. 3.500 B = 2. Refer to Moonbeam Corporation.

Refer to Moonbeam Corporation. Reporting John Anderson Company Below is an income statement for John Anderson Company: Sales Variable costs Contribution margin Fixed costs Profit before taxes $300.250 units Total = 8. Reporting .000 c. $150. What was the company's margin of safety? a.000 A = 3.000? a. Refer to John Anderson Company.200.000 b. $100.5A) .750 b. 20.000 6A = $21.000 = 0 = .000 d.000 = $12.000 (100.400 ANS: A 3A + 2(1.50x .500 units B = 5.000 d.Chapter 9 16 53.000 .$100.000 c.000 $(300. $50.000 ANS: B Margin of safety = Sales .000) = $100. How many units would the company have needed to sell to produce a profit of $12.BEP Sales CM = . 8.50 BEP Sales = .000) $150. 8.50x = $100.000 PTS: 1 DIF: Moderate OBJ: 9-5 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.000 54.000 x = $200.750 units PTS: 1 DIF: Moderate OBJ: 9-4 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.000) $ 50.000 (150. 10.$9. $25.

000 units in the coming period.900. $1.50 $140.000/500.000 = $1.500 b. A firm estimates that it will sell 100.400. the CM ratio at 60 percent.000) = $140. 27.$500. 80 percent b.000 units PTS: 1 DIF: Moderate OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.100.400.000 . what is the projected contribution margin ratio? a.000 / .000 profit: $(40. If fixed costs are projected at $100.000 b.000 units of its sole product in the coming period. 20 percent c. 60 percent ANS: B Fixed Costs=Contribution Margin at Breakeven Point = $100.000. $1. $1. If the unit sales price for John Anderson’s sole product was $10.000 c. What is the firm budgeting for fixed costs in the coming period? a.000 Breakeven Sales: $500.000 d.000) = 20% PTS: 1 DIF: Moderate OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.000 $280.Profit = $2.000. 29.600.Chapter 9 17 55. 28.900.000 + 100.000 d.000 ANS: D Profit + Fixed Cost = (100. $2. 40 percent d.000 / $10 = 28. Refer to John Anderson Company. can't be determined from the information given ANS: C Contribution Margin at $40.000 CM Ratio: $(100. Reporting 57.000 units * $24/unit CM) Fixed Cost = (100.000 units * $24/unit CM) . Reporting . Reporting 56. and profit at $500.000 Contribution Margin Ratio: 0. This is its sole product and it has projected the break-even point at 50.50 = $280.000 c.000 PTS: 1 DIF: Moderate OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.000? a. Cowboy Duds Corporation manufactures a western-style hat that sells for $10 per unit. It projects the sales price at $40 per unit. how many units would it have needed to sell to produce a profit of $40.

67 ANS: A Contribution Margin = $180.000/. The firm's projected costs are listed below: Variable costs per unit: Production SG&A Fixed costs: Production SG&A Estimated volume $5 $1 $40. Each unit sells for $15. Refer to Jordan Company. 2. Reporting 59. 1.55 PTS: 1 DIF: Moderate OBJ: 9-5 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.000/80. Brooks.000 $60. and Fitch: Alford Co.000 = 2.333 PTS: 1 DIF: Moderate OBJ: 9-5 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement. $100 (20) $ 80 (20) $ 60 Fitch Co.000 d.000 Margin of Safety = $(300.000 units 58.75 d. What is Jordan's projected degree of operating leverage for the current year? a.Chapter 9 18 Jordan Company Jordan Company manufactures a single product. $100. $150.80 c.25 b.000 .60 = $166.000 ANS: A Contribution Margin = $9/unit Contribution Margin Ratio = 60% Breakeven Point = $100. $133.000 c. Reporting Alford. Refer to Jordan Company. $100 (30) $ 70 (10) $ 60 .667 Sales Volume = 20. Sales Variable costs Contribution margin Fixed costs Profit before taxes $100 (10) $ 90 (30) $ 60 Brooks Co.000 20. and Fitch Companies Below are income statements that apply to three companies: Alford.333 b. 3. $80.000 Net Income = 80.000 Degree of Operating Leverage = $180.166. 1. Brooks.000 units * $15/unit = $300. What is Jordan's projected margin of safety for the current year? a.667) = $133.

Reporting 61. Fitch Company d. Beta Company c. ANS: C Fitch Company has the lowest amount of fixed costs to be covered. if sales go up by $1 for each firm. Beta Company c. which firm will experience the greatest increase in profit? a. Within the relevant range.Chapter 9 19 60.00 . can't be determined from the information given ANS: A Alpha Company will have the greatest increase in profit. because it has the greatest contribution margin per unit. can't be determined from the information given ANS: D Price per unit is not given. Fitch Company d.00 per unit $60. Fitch Company d. which firm will experience the greatest increase in net income? a. and Fitch Companies. Reporting Ford Company The following information relates to financial projections of Ford Company: Projected sales Projected variable costs Projected fixed costs Projected unit sales price 75. and Fitch Companies. Refer to Alford. Alpha Company b. Alpha Company b. Brooks. Refer to Alford. Beta Company c. Brooks. They all have the same margin of safety.000 per year $8.000 units $3. which firm has the highest margin of safety? a. Reporting 62. Alpha Company b. Refer to Alford. Brooks. if sales go up by one unit for each firm. and Fitch Companies. At sales of $100. Within the relevant range. PTS: 1 DIF: Moderate OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement. PTS: 1 DIF: Easy OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement. PTS: 1 DIF: Easy OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.

375 b. Reporting 64.000 x = 15. 40. 12. 3. 9. Reporting 65.000 b.Chapter 9 20 63.000 .000 = .000 + $15.10x .000 = $315.000 d.000 per year and his variable costs would equal 30 percent of sales. Andrew is interested in entering the catfish farming business.000 units * $5/unit) . Reporting . 1.000/315. 41. what will be its degree of operating leverage? a. No level of sales can generate a 10 percent net return on sales.500 ANS: C Contribution Margin per Unit: $5 $5x = $60. He estimates if he enters this business.000 d. 6.667 c. 35.$50. how many catfish would Andrew need to sell to generate a profit that is equal to 10 percent of sales? a.000 units PTS: 1 DIF: Moderate OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.$60.000 c. Refer to Ford Company.000 $5x = $75.. If each catfish sells for $2.19 PTS: 1 DIF: Moderate OBJ: 9-5 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement. How many units would Ford Company need to sell to earn a profit before taxes of $15.25 b.667 units PTS: 1 DIF: Difficult OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement. his fixed costs would be $50. ANS: B Let x = sales in dollars x .333 Units = $83.68 d.30x .$60. 37.00 ANS: B Net profit = (75.333/$2 per unit = 41. 1.60x = $50. If Ford Company achieves its projections.000? a. Refer to Ford Company.000 = $375.000 x = $83.000) = 1.19 c.000 DOL = $(375. 15.

5% DOL=1/. $ 75.67 ANS: A DOL=1/MS% MS%=($150. 10.67 PTS: 1 DIF: Moderate OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.000 d.000 .000) = $150.50 BEP Sales = .50x .000) $ 75. 5.50x = $125.2 c.000 = 0 = . Reporting 67.000 66.$125.500 b.000 $(400.000)=37. What is the company’s degree of operating leverage (DOL)? a. 2.000) $200.000 (200.67 b. $150. $125.000 PTS: 1 DIF: Moderate OBJ: 9-5 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.BEP Sales CM = .000 x = $250.000/$400.250. Reporting .000 (125. Refer to Mark Smith Company. 3.Chapter 9 21 Mark Smith Company Below is an income statement for Mark Smith Company: Sales Variable costs Contribution margin Fixed costs Profit before taxes $400.000 ANS: D Margin of safety = Sales .375 DOL=2. $ 37.000 c.33 d. Refer to Mark Smith Company. What was the company's margin of safety? a.

Reporting .500 units = $150/unit PTS: 1 DIF: Moderate OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement. $0 ANS: C Fixed Cost = Contribution Margin = $225.500 $700 $225. $150 d. The following information pertains to Apollo Company’s cost-volume-profit relationships: Break-even point in units sold Variable costs per unit Total fixed costs 1.501st unit sold? a.Chapter 9 22 68. $0 ANS: C Fixed Cost = Contribution Margin = $150.000 How much will be contributed to profit before taxes by the 1. Reporting 69.001st unit sold? a. $850 b.000 $500 $150.000 Contribution Margin/Unit = Contribution Margin/Units $225.000 units = $150/unit PTS: 1 DIF: Moderate OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement. $650 b.000/1. The following information pertains to Mercury Company’s cost-volume-profit relationships: Break-even point in units sold Variable costs per unit Total fixed costs 1.000 How much will be contributed to profit before taxes by the 1.000 Contribution Margin/Unit = Contribution Margin/Units $150.000/1. $150 d. $500 c. $700 c.

000 b. $ 50.000 Assuming that Simmons increased sales of Product A by 25 percent.500 c.000 Contribution margin . what should the profit from Product A be? a.000) = $32.000 Increase contribution margin by 20% = $60.40. $ 62. $24.000 40.000 d.Chapter 9 23 70.20 = $72.000 d. $80.000 50. $20.000 PTS: 1 DIF: Moderate OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.000 * 1. Information concerning Simmons Corporation's Product A follows: Sales Variable costs Fixed costs $400. Information concerning Clarkson Corporation's Product A follows: Sales Variable costs Fixed costs $300.000 Assuming that Clarkson increased sales of Product A by 20 percent.000 in sales = $60.000 .000) = $75.000 * 1. Reporting 71. $170.000 ANS: C Contribution margin at $400.000 b.50.000 300.000 Increase contribution margin by 25% = $100. $ 75. what should the profit from Product A be? a.000 in sales = $100. $32.fixed costs = Profit $(72. Reporting .000 c.000 ANS: C Contribution margin at $300.fixed costs = Profit $(125.000 PTS: 1 DIF: Moderate OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.000 240.25 = $125.000 Contribution margin .000 .

300 c.000? a.10 = $44/unit $(200. less units will have to be sold to generate gross revenues of $200.000 ANS: C If sales price per unit is increased by 10 percent. Reporting .000 units = $40/unit $40/unit * 1.000 Assume that Smith increases the selling price of Product A by 10 percent in July. 4.000. Sales price per unit = $200.000 units of Product A for June: Sales Variable costs Fixed costs Operating income $200.000 b. 4. How many units of Product A would have to be sold in July to generate an operating income of $20. 4.000) (60. 5.000) $ 20. Smith Company reported the following results from sales of 5.Chapter 9 24 72.545 d.000 (120.000/5.545 units PTS: 1 DIF: Moderate OBJ: 9-3 NAT: AACSB: Analytical Skills LOC: AICPA Functional Competencies: Measurement.000 / 44/unit) = 4.

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