PERDIZO, MILJANE P.

BSA 301

COST VOLUME PROFIT ANALYSIS

MULTIPLE CHOICE

Use the following data for questions 1-6.

The Applewood Ice Cream Parlor, Inc. is leasing space at the airport in order to open a
new parlor. The following data is given to management to assist them in their decision:

Revenue:
Selling price of ice cream (cone or cup) $0.50/scoop
Costs:
Cones .06/cone
Cups .06/cup
Ice cream (200 scoops/tab) 8.00/tub
Leasing cost (includes utilities) 2,000/month
Salaries 1,000/month
1. What is the monthly breakeven in scoops of ice cream? (Round to the nearest
scoop).
a. 6,000 SCOOPS
b. 7,500 SCOOPS
c. 8,824 SCOOPS
d. None of the above

Breakeven in units = 3,000/0.40 = 7,500

2. What is the monthly breakeven in sales dollars of ice cream? (Round to the
nearest dollar).
a. $3,750
b. $4,412
c. $9,375
d. $15,000
Breakeven in sales dollars = 3,000/0.80 = 3,750
 3. Suppose Applewood decided that the airport parlor needs to make a minimum
profit of $4,000 per month. What is the monthly required number of scoops of
ice cream? (Round to the nearest scoop).
a. 10,000 scoops
b. 11,765 scoops
c. 17,500 scoops
d. 20,588 scoops
Units to attain the target profit = (4,000 + 3,000)/.40 = 17,500

4. Assume the same facts as in the previous question. What is the required monthly
sales dollars of ice cream? (Round to the nearest dollar).
a. $10,294
b. $8,750
c. $5,883
d. $5,000
Unit sales to attain the sales dollars = (4,000 + 3,000)/0.80 = 8,750

5. If Applewood sold 20,000 scoops of ice cream during its first month of
operations, the profit would be:
a. $1,000
b. $4,000
c. $5,000
d. $8,000
Profit = 0.80 x 10,000 – 3,000 = 5,000

6. If Applewood’s cost for cones and cups increases 100%, the contribution margin
per unit would be:
a. $0.22
b. $0.34
c. $0.40
d. $0.50
CM = 0.50 – 0.16 = 0.34
Use the following data for question 7-10.
Unit sales price $20
Unit variable cost 15
Fixed cost 100,000
7. The breakeven point in units is:
a. 10,000 units
b. 6,667 units
c. 4,000 units
d. None of the above
Breakeven in units = 100,000/5 = 20,000

8. The number of units required to earn $50,000, before taxes is:

a. 10,000 units
b. 6,000 units
c. 15,000 units
d. None of the above
(Target profit + Fixed cost)/CM

(50,000 + 100,000)/5=30,000

9. The number of units required to earn $60,000, after taxes of 40% is:
a. 25,000 units
b. 20,000 units
c. 16,000 units
d. 8,000 units
100,000 + (60,000/1-.40)/5 = 40,000

NONE OF THE CHOICES

10.If the variable cost per unit changes from $15 to $12, the profit will:
a. Increase $3 per unit sold
b. Decrease $3 per unit sold
c. Increase $3,000
d. Decrease $3,000

TRUE OR FALSE

TRUE 1. The contribution margin ratio indicates the percentage of sales that is
available first for paying fixed costs and then for profits.

FALSE 2. The breakeven point occurs when sales revenue plus variable costs equals
fixed costs.
TRUE 3. A breakeven graph is more accurate than the breakeven equations.

FALSE 4. A labor-intensive firm has a cost structure that is more variable than fixed.

FALSE 5. The choice of a cost structure by management has no effect on the firm’s
contribution margin.

TRUE 6. Operating leverage indicates the relationship between sales volumes and
profits.

TRUE 7. If a company has an $8 contribution margin per unit and its sales volume for
the quarter is 2,500 units more than breakeven, the company’s profit is $20,000.

TRUE 8. If a company’s variable rate increases 10 percent, the net income will
decrease 10%.

FALSE 9. When a company has more than one product, simple contribution margin
equation cannot be used; rather a weighted contribution approach is necessary.

FALSE 10. Variable cost is proportional to sales volume is an assumption of breakeven

analysis.

EXERCISES
1. List 5 of the 12 limiting assumptions for breakeven analysis.
(1) All costs can be categorized as fixed or variable costs.
(2) Total fixed costs remain unchanged for all output levels.
(3) Total variable costs fluctuate proportionately with output level resulting in no
change in per unit variable cost.
(4) Sale price per unit remains the same for each output level.
(5) Costs and revenue behave in a linear fashion within a relevant range.

Use the following data for question 2-4.

The Tidecast Company has the following information for the third quarter of operations
is 1992:
Sales $250,000
Prime cost 108, 000
Variable factory overhead 31,000
Fixed factory overhead 21,000
Fixed administrative cost 17,500

2. Compute the contribution margin for the third quarter.

Sales 250,000
Less: Variable Cost (139,000)
CM 111,000
 3. Compute the degree of operating leverage for the third quarter.
Degree of operating leverage = 111,000/72,500 = 1.53

4. If Tidecast expects sales to increase 15% in the fourth quarter of 1992 and all
other facts remain the same, the net income for the fourth quarter will be:
Percent increase in income = 15% x 1.53 = 22.95%
= (.2295 x 72,500) + 72,500
= 89,138.75

Use the following data for questions 5-7.

Rache, Inc. produces three products: D, E, and F in a 5:5:1 proportion. Their fixed costs
are $04, 130. Other data includes:
D E F
Unit sales price $14 $36 $10
Unit variable cost 5 31 2
5. The breakeven point in units is:
Breakeven in units = 104,130/22 = 4,733.18

6. The breakeven point in sales dollars are:

Breakeven in sales dollars = 104,130/0.37 = 281,432.43

7. If Roche, Inc. wants to earn $26,130, how many units of each product must be
sold?
D = 539.88
E = 539.88
F = 107.97

Use the following data for questions 8-9.

Andrade Manufacturing Co. produced a single product during 1992 with the following
results: unit sales price $10; units sold 120, 000; variable cost $504,000; and fixed
costs $400,000. The marketing department thinks Andrade can increase its sales
volume by 30% if it decreases the unit sales price by 10% and hires an additional
salesperson at $40,000 per year.
8. Using the differential approach, should the changes be made?
No. Any changes that will be made will not ensure profit.
9. Using the contribution margin approach, should the changes be made if the
increase in sales volume is only 25%?
No. Any changes will impede profitability.
 MATCHING

C Contribution Margin Ratio A. S-VC

E Breakeven in Dollars B. FC/CMPU
F Contribution margin per unit C. 1-Variable cost ratio
A Contribution margin D. FC-VC
B Breakeven in units E. FC/CMR
F. USP-UVC
G. S-VC-FC