Chapter 4-Cost-Volume-Profit Analysis: A Managerial Planning Tool

Chapter 4—Cost-Volume-Profit Analysis: A Managerial Planning Tool
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.
ANS: B 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. 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
STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin
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
OBJ: LO: 4-1 | LO: 4-5 NAT: BUSPROG: Analytic
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
6. Assume the following information:
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
PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-1

NAT: BUSPROG: Analytic
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
Average CM rate = (0.6)(0.5) + (0.4)(0.25) = 0.40
$120,000/0.4 = $300,000
PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-1 | LO: 4-4

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
$8,000/0.4 = $20,000
PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

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
$45/$150 = .300

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.
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
$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
($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.
ANS: B PTS: 1 DIF: Difficulty: Moderate
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
$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.
e. All of these statements are true.
ANS: E PTS: 1 DIF: Difficulty: Moderate
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis
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

$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%
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%

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
b. 1,393
c. 3,714
d. 5,571
e. 12,000
ANS: D
$78,000/$14 = 5,571

a. $130,000
b. $195,000
c. $252,000
d. $420,000
e. $342,000
ANS: B
$78,000/0.40 = $195,000


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

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
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

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

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

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

a. $120,000
b. $80,000
c. $58,330
d. $21,670
e. $28,000
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.

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.
Figure 4-7.
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
a. $498,000
b. $400,000
c. $171,429
d. $112,500
e. $150,000
ANS: B
Contribution margin ratio = ($540,000  $378,000)/$540,000 = 30%
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
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%.

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

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

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
Figure 4-5.
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
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

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

57. Refer to Figure 4-5. What is the number of superior models sold at break-even?
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

$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.
safety/sales target KEY: Bloom's: Knowledge NOT: 1 min.
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).
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
($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
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.
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.
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
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.
73. Fixed expenses that cannot be directly traced to individual segments are called
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
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
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.
OBJ: LO: 4-1 | LO: 4-4 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales
target KEY: Bloom's: Knowledge NOT: 1 min.
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
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.
80. The following data pertain to the three products produced by Alberts Corporation:
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
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.
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
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Knowledge NOT: 1 min.
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
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.
PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 4-5

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
STA: AICPA: FN-Risk Analysis | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis
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.
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
b. Total sales/Common fixed costs
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.
analysis KEY: Bloom's: Knowledge NOT: 1 min.
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

NOT: 5 min.

Chapter 4-Cost-Volume-Profit Analysis: A Managerial Planning Tool

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Chapter 4-Cost-Volume-Profit Analysis: A Managerial Planning Tool

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Chapter 4—Cost-Volume-Profit Analysis: A Managerial Planning Tool

1. The break-even point is when

2. Total contribution margin divided by total sales is the

3. At the break-even point,

Variable cost ratio 80%

What volume of sales dollars is needed to break even?

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

7. Which of the following equations is true?

ANS: D PTS: 1 DIF: Difficulty: Easy

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

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

Selling price per unit $150.00

What is the contribution margin ratio?

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

Sales (10,000 units) $120,000

What is the contribution margin per unit?

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

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

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

19. Total variable cost divided by price is

20. Which statement is true about cost-volume profit (CVP) analysis?

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

23. If the contribution margin ratio increases

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

25. The contribution margin is

26. Refer to Figure 4-1. What is the budgeted operating income?

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

29. Refer to Figure 4-1. What is the contribution margin?

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

30. Refer to Figure 4-1. What is the contribution margin ratio?

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

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

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

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

36. Refer to Figure 4-2. What is the budgeted operating income?

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

Direct materials $1.50

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

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

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

40. Refer to Figure 4-3. What is the break-even point in units?

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

42. Refer to Figure 4-3. What is the variable expense ratio?

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

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

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

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-2

Selling price per unit $60

45. Refer to Figure 4-7. What is the break-even point in units?

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-2

break-even point = $120,000/30% = $400,000

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

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-2

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

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

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