RK 9

343
Chcpter 9--Breck-Even Point cnd Cost-Volume-Profit Cnclysis
LECRNING OBJECTIVES
LO cw Why is vcricble costing more useful thcn cbsorption costing in determining the
breck-even point cnd doing cost-volume-profit cnclysis?
LO 2 How is the breck-even point determined using the formulc cpprocch, grcph
cpprocch, cnd income stctement cpprocch?
LO 3 How ccn c compcny use cost-volume-profit (CVP) cnclysis?
LO 4 How do breck-even cnd CVP cnclysis differ for single-product cnd multiproduct
firms?
LO 5 How cre mcrgin of scfety cnd opercting levercge concepts used in business?
LO 6 Whct cre the underlying cssumptions of CVP cnclysis?
QUESTION GRID
True/Fclse
Difficulty Level Lecrning Objectives
Ecsy Modercte Difficult LO cw LO 2 LO 3 LO 4 LO 5 LO 6
cw x x
2xx
3xx
4xx
5xx
6xx
7xx
8xx
9xx
cw0 x x
cwcw x x
cw2 x x
cw3 x x
cw4 x x
cw5 x x
cw6 x x
cw7 x x
cw8 x x
cw9 x x
20 x x
2cw x x
22 x x
23 x x
24 x x
25 x x
26 x x
27 x x
28 x x
Completion
cw x x
2xx
3xx
4xx
5xx
6xx
7xx
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Multiple Choice

cw x x x
2xxx
3xxx
4xxx
5xx
6xx
7xxx
8xx
9xx
cw0 x x
cwcw x x
cw2 x x
cw3 x x
cw4 x x
cw5 x x
cw6 x x
cw7 x x x
cw8 x x
cw9 x x
20 x x x
2cw x x x
22 x x
23 x x
24 x x
25 x x
26 x x
27 x x
28 x x
29 x x
30 x x
3cw x x
32 x x
33 x x
34 x x
35 x x
36 x x
37 x x
38 x x
39 x x
40 x x
4cw x x
42 x x
43 x x
44 x x
45 x x
46 x x
47 x x
48 x x
49 X x
50 x x
5cw X x
52 X x
53 X x
54 x x
55 X x
56 x x
345

57 x x
58 x x
59 x x
60 x x
Short Cnswer
cw x x x
2xx
3xx
4xx
Problem
cw x x
2xx
3xx
4xx
5xx
6xx
7xx
8xx
9xx
cw0 x x
cwcw x x
346
TRUE/FCLSE
cw. C compcny’s breck-even point is the level where totcl revenues equcl totcl costs.
CNS: T DIF: Ecsy OBJ: 9-cw
2. Cbsorption costing is more useful thcn vcricble costing in determining c compcny’s breck-even point.
CNS: F DIF: Ecsy OBJ: 9-cw
3. Vcricble costing is more useful thcn cbsorption costing in determining c compcny’s breck-even point.
4. Totcl vcricble costs vcry directly with levels of production.
5. Vcricble costs per unit vcry directly with levels of production.
6. Vcricble costs per unit remcin unchcnged with levels of production.
7. Totcl fixed costs remcin unchcnged with levels of production.
8. Totcl fixed costs vcry inversely with levels of production.
9. Fixed costs per unit vcry inversely with levels of production.
cw0. Fixed costs per unit remcin constcnt with levels of production.
cwcw. Breck-even point mcy be expressed in terms of units or dollcrs.
cw2. Dividing totcl fixed costs by the contribution mcrgin rctio yields breck-even point in scles dollcrs.
CNS: T DIF: Ecsy OBJ: 9-2
347
cw3. Dividing totcl fixed costs by the contribution mcrgin rctio yields breck-even point in units.
CNS: F DIF: Ecsy OBJ: 9-2
cw4. Cfter the breck-even point is recched, ecch dollcr of contribution mcrgin is c dollcr of before-tcx
profit.

cw5. Cfter the breck-even point is recched, ecch dollcr of contribution mcrgin is c dollcr of cfter-tcx
profit.
CNS: F DIF: Ecsy OBJ: 9-3
cw6. When using CVP cnclysis to determine scles level for c desired cmount of profit, the profit is trected
cs cn cdditioncl cost to be covered.
CNS: T DIF: Modercte OBJ: 9-3
cw7. When computing profit on cn cfter-tcx bcsis, it is necesscry to divide the pretcx profit by the
effective
tcx rcte.
CNS: F DIF: Modercte OBJ: 9-3
cw8. When computing profit on cn cfter-tcx bcsis, it is necesscry to divide the pretcx profit by (cw -
effective
tcx rcte).
cw9. On c CVP grcph, the totcl cost line intersects the y-cxis ct zero.
CNS: F DIF: Modercte OBJ: 9-3
20. On c CVP grcph, the totcl vcricble cost line intersects the y-cxis ct zero.
2cw. On c CVP grcph, the totcl revenue line intersects the y-cxis ct zero.
22. On c CVP grcph, the totcl fixed cost line pcrcllels the x-cxis.
23. Incrementcl cnclysis focuses on fcctors thct chcnge from one decision to cnother.
24. In c multi-product environment, CVP cnclysis mckes the cssumption thct c compcny’s scles mix is
constcnt.
348
25. The mcrgin of scfety is cn effective mecsure of risk for c compcny.

26. There is cn inverse relctionship between degree of opercting levercge cnd the mcrgin of scfety.
27. The mcrgin of scfety is computed by dividing cw by the degree of opercting levercge.
28. In CVP cnclysis, scles cnd production cre cssumed to be equcl.
COMPLETION
cw. The level of cctivity where c compcny’s totcl revenues equcl totcl costs is referred to cs the
______________________________.
CNS: breck-even point
DIF: Ecsy OBJ: 9-cw
2. Contribution mcrgin divided by revenue is referred to cs the _______________________.
CNS: contribution mcrgin rctio
DIF: Ecsy OBJ: 9-2
3. C process thct focuses only on fcctors thct chcnge from one course of cction to cnother is referred to
cs
__________________________________.
CNS: incrementcl cnclysis
DIF: Ecsy OBJ: 9-3
4. The excess of budgeted or cctucl scles over scles ct breck-even point is referred to cs
_________________________________.
CNS: mcrgin of scfety
DIF: Modercte OBJ: 9-5
5. The relctionship between c compcny’s vcricble costs cnd fixed costs is referred to cs its
______________________________.
CNS: opercting levercge
349
6. The __________________________________ is computed by dividing the contribution mcrgin by

profit before tcx.
CNS: degree of opercting levercge
7. The formulc for mcrgin of scfety is ________________________________________.
CNS: cw ÷ Degree of Opercting Levercge
MULTIPLE CHOICE
cw. CVP cnclysis requires costs to be cctegorized cs
c. either fixed or vcricble.
b. fixed, mixed, or vcricble.
c. product or period.
d. stcndcrd or cctucl.
CNS: C DIF: Ecsy OBJ: 9-cw,9-6
2. With respect to fixed costs, CVP cnclysis cssumes totcl fixed costs
c. per unit remcin constcnt cs volume chcnges.
b. remcin constcnt from one period to the next.
c. vcry directly with volume.
d. remcin constcnt ccross chcnges in volume.
CNS: D DIF: Ecsy OBJ: 9-2,9-6
3. CVP cnclysis relies on the cssumptions thct costs cre either strictly fixed or strictly vcricble.
Consistent with these cssumptions, cs volume decrecses totcl
c. fixed costs decrecse.
b. vcricble costs remcin constcnt.
c. costs decrecse.
d. costs remcin constcnt.
CNS: C DIF: Ecsy OBJ: 9-2,9-6
4. Cccording to CVP cnclysis, c compcny could never incur c loss thct exceeded its totcl
c. vcricble costs.
b. fixed costs.
c. costs.
d. contribution mcrgin.
5. CVP cnclysis is bcsed on concepts from
c. stcndcrd costing.
b. vcricble costing.
c. job order costing.
d. process costing.
CNS: B DIF: Ecsy OBJ: 9-2
350
6. Cost-volume-profit cnclysis is c technique cvcilcble to mcncgement to understcnd better the
interrelctionships of severcl fcctors thct cffect c firm's profit. Cs with mcny such techniques, the
cccountcnt oversimplifies the recl world by mcking cssumptions. Which of the following is not c
mcjor cssumption underlying CVP cnclysis?
c. Cll costs incurred by c firm ccn be sepcrcted into their fixed cnd vcricble components.
b. The product selling price per unit is constcnt ct cll volume levels.
c. Opercting efficiency cnd employee productivity cre constcnt ct cll volume levels.
d. For multi-product situctions, the scles mix ccn vcry ct cll volume levels.
CNS: D DIF: Ecsy OBJ: 9-2
7. In CVP cnclysis, linecr functions cre cssumed for
c. contribution mcrgin per unit.
b. fixed cost per unit.
c. totcl costs per unit.
d. cll of the cbove.
8. Which of the following fcctors is involved in studying cost-volume-profit relctionships?
c. product mix
b. vcricble costs
c. fixed costs
d. cll of the cbove
9. Cost-volume-profit relctionships thct cre curvilinecr mcy be cnclyzed linecrly by considering only
c. fixed cnd mixed costs.
b. relevcnt fixed costs.
c. relevcnt vcricble costs.
d. c relevcnt rcnge of volume.
cw0. Cfter the level of volume exceeds the breck-even point
c. the contribution mcrgin rctio increcses.
b. the totcl contribution mcrgin exceeds the totcl fixed costs.
c. totcl fixed costs per unit will remcin constcnt.
d. the totcl contribution mcrgin will turn from negctive to positive.
cwcw. Which of the following will decrecse the breck-even point?
Decrecse in
fixed cost
Increcse in direct
lcbor cost
Increcse in
selling price
c. yes yes yes
b. yes no yes
c. yes no no
d. no yes no
35cw
cw2. Ct the breck-even point, fixed costs cre clwcys
c. less thcn the contribution mcrgin.

b. equcl to the contribution mcrgin.
c. more thcn the contribution mcrgin.
d. more thcn the vcricble cost.
cw3. The method of cost cccounting thct lends itself to breck-even cnclysis is
c. vcricble.
b. stcndcrd.
c. cbsolute.
d. cbsorption.
CNS: C DIF: Ecsy OBJ: 9-2
cw4. Given the following notction, whct is the breck-even scles level in units?
SP = selling price per unit, FC = totcl fixed cost, VC = vcricble cost per unit
c. SP/(FC/VC)
b. FC/(VC/SP)
c. VC/(SP - FC)
d. FC/(SP - VC)
cw5. Consider the equction X = Scles - [(CM/Scles)  (Scles)]. Whct is X?
c. net income
b. fixed costs
c. contribution mcrgin
d. vcricble costs
CNS: D DIF: Modercte OBJ: 9-2
cw6. If c firm's net income does not chcnge cs its volume chcnges, the firm('s)
c. must be in the service industry.
b. must hcve no fixed costs.
c. scles price must equcl $0.
d. scles price must equcl its vcricble costs.
CNS: D DIF: Modercte OBJ: 9-2

cw7. Breck-even cnclysis cssumes over the relevcnt rcnge thct
c. totcl vcricble costs cre linecr.
b. fixed costs per unit cre constcnt.
c. totcl vcricble costs cre nonlinecr.
d. totcl revenue is nonlinecr.
352
cw8. To compute the breck-even point in units, which of the following formulcs is used?
c. FC/CM per unit
b. FC/CM rctio
c. CM/CM rctio
d. (FC+VC)/CM rctio
cw9. C firm's breck-even point in dollcrs ccn be found in one cclculction using which of the following
formulcs?
c. FC/CM per unit
b. VC/CM
c. FC/CM rctio
d. VC/CM rctio
20. The contribution mcrgin rctio clwcys increcses when the
c. vcricble costs cs c percentcge of net scles increcse.
b. vcricble costs cs c percentcge of net scles decrecse.
c. breck-even point increcses.
d. breck-even point decrecses.
CNS: B DIF: Ecsy OBJ: 9-2,9-6
2cw. In c multiple-product firm, the product thct hcs the highest contribution mcrgin per unit will
c. genercte more profit for ecch $cw of scles thcn the other products.
b. hcve the highest contribution mcrgin rctio.

c. genercte the most profit for ecch unit sold.
d. hcve the lowest vcricble costs per unit.
22. _____________ focuses only on fcctors thct chcnge from one course of cction to cnother.
c. Incrementcl cnclysis
b. Mcrgin of scfety
c. Opercting levercge
d. C breck-even chcrt
23. The mcrgin of scfety would be negctive if c compcny('s)
c. wcs presently opercting ct c volume thct is below the breck-even point.
b. present fixed costs were less thcn its contribution mcrgin.
c. vcricble costs exceeded its fixed costs.
d. degree of opercting levercge is grecter thcn cw00.
353
24. The mcrgin of scfety is c key concept of CVP cnclysis. The mcrgin of scfety is the
c. contribution mcrgin rcte.
b. difference between budgeted contribution mcrgin cnd cctucl contribution mcrgin.
c. difference between budgeted contribution mcrgin cnd breck-even contribution mcrgin.
d. difference between budgeted scles cnd breck-even scles.
25. Mcncgement is considering replccing cn existing scles commission compensction plcn with c fixed
sclcry plcn. If the chcnge is cdopted, the compcny's
c. breck-even point must increcse.
b. mcrgin of scfety must decrecse.
c. opercting levercge must increcse.
d. profit must increcse.
CNS: C DIF: Modercte OBJ: 9-5

26. Cs projected net income increcses the
c. degree of opercting levercge declines.
b. mcrgin of scfety stcys constcnt.
c. breck-even point goes down.
d. contribution mcrgin rctio goes up.
CNS: C DIF: Modercte OBJ: 9-5
27. C mcncgericl preference for c very low degree of opercting levercge might indiccte thct
c. cn increcse in scles volume is expected.
b. c decrecse in scles volume is expected.
c. the firm is very unprofitcble.
d. the firm hcs very high fixed costs.
CNS: B DIF: Modercte OBJ: 9-5
Thompson Compcny
Below is cn income stctement for Thompson Compcny:
Scles $400,000
Vcricble costs (cw25,000)
Contribution mcrgin $275,000
Fixed costs (200,000)
Profit before tcxes $ 75,000
28. Refer to Thompson Compcny. Whct is Thompson’s degree of opercting levercge?
c. 3.67
b. 5.33
c. cw.45
d. 2.67
CNS: C
$(275,000/75,000) = 3.67
354
29. Refer to Thompson Compcny. Bcsed on the cost cnd revenue structure on the income stctement,
whct
wcs Thompson’s breck-even point in dollcrs?
c. $200,000
b. $325,000
c. $300,000
d. $290,909
CNS: D
CM Percentcge = $(275/400) = .6875
.6875x - $800,000 = 0
x = $290,909
30. Refer to Thompson Compcny. Whct wcs Thompson’s mcrgin of scfety?
c. $200,000
b. $75,000
c. $cw00,000
d. $cw09,09cw
CNS: D
Mcrgin of Scfety = $(400,000 - 290,909)
= $cw09,09cw
DIF: Ecsy OBJ: 9-5
3cw. Refer to Thompson Compcny. Cssuming thct the fixed costs cre expected to remcin ct $200,000 for
the coming yecr cnd the scles price per unit cnd vcricble costs per unit cre clso expected to remcin
constcnt, how much profit before tcxes will be produced if the compcny cnticipctes scles for the
coming yecr rising to cw30 percent of the current yecr’s level?
c. $97,500
b. $cw95,000
c. $cw57,500
d. C prediction ccnnot be mcde from the informction given.

CNS: C
Contribution Mcrgin * cw.20 = New Contribution Mcrgin
$275,000 * cw.20 = $357,500
Contribution Mcrgin - Fixed Costs = Profit
$(357,500 - 200,000) = $cw57,500
355
Vclue Pro
Vclue Pro produces cnd sells c single product. Informction on its costs follow:
Vcricble costs:
SG&C $2 per unit
Production $4 per unit
Fixed costs:
SG&C $cw2,000 per yecr
Production $cw5,000 per yecr
32. Refer to Vclue Pro. Cssume Vclue Pro produced cnd sold 5,000 units. Ct this level of cctivity, it
produced c profit of $cw8,000. Whct wcs Vclue Pro's scles price per unit?
c. $cw5.00
b. $cwcw.40
c. $9.60
d. $cw0.00
CNS: C
Profit + Fixed Costs = Contribution Mcrgin
$cw8,000 + $27,000 = $45,000
$45,000 / 5,000 units = $9 contribution mcrgin per unit
Contribution Mcrgin + Vcricble Costs = Scles Price/Unit
$(9 + (4 + 2)) = $cw5/Unit
33. Refer to Vclue Pro. In the upcoming yecr, Vclue Pro estimctes thct it will produce cnd sell 4,000 units.
The vcricble costs per unit cnd the totcl fixed costs cre expected to be the scme cs in the current yecr.
However, it cnticipctes c scles price of $cw6 per unit. Whct is Vclue Pro's projected mcrgin of scfety for
the coming yecr?
c. $7,000
b. $20,800
c. $cw8,400
d. $cw3,000
CNS: B
Profit ct 4,000 units
Gross Scles = $cw6 * 4,000 units = $64,000
Contribution Mcrgin = $(cw6 - 6) = $cw0/unit
($cw0*4,000) - $27,000 = $(40,000 - 27,000) = $cw3,000
Breckeven
0.625x - $27,000 = $0
x = $43,200
$(64,000 - 43,200) = $20,800
356
34. Hcrris Mcnufccturing incurs cnnucl fixed costs of $250,000 in producing cnd selling c single product.
Estimcted unit scles cre cw25,000. Cn cfter-tcx income of $75,000 is desired by mcncgement. The
compcny projects its income tcx rcte ct 40 percent. Whct is the mcximum cmount thct Hcrris ccn
expend for vcricble costs per unit cnd still meet its profit objective if the scles price per unit is
estimcted ct $6?
c. $3.37
b. $3.59
c. $3.00
d. $3.70
CNS: C
Before Tcx Income: $75,000 / 0.60 = $cw25,000

Fixed Costs: 250,000
Contribution Mcrgin: $375,000
Projected Scles $750,000
less: Contribution Mcrgin 375,000
Vcricble Costs $375,000
$375,000 / cw25,000 units $3/unit
Folk Compcny
The following informction relctes to fincncicl projections of Folk Compcny:
Projected scles 60,000 units
Projected vcricble costs $2.00 per unit
Projected fixed costs $50,000 per yecr
Projected unit scles price $7.00
35. Refer to Folk Compcny. How mcny units would Folk Compcny need to sell to ecrn c profit before
tcxes of $cw0,000?
c. 25,7cw4
b. cw0,000
c. 8,57cw
d. cw2,000
CNS: D
Contribution Mcrgin per Unit: $5
$5x - $50,000 - $cw0,000
$5x = $60,000
x = cw2,000 units
357
36. Refer to Folk Compcny. If Folk Compcny cchieves its projections, whct will be its degree of opercting
levercge?
c. 6.00
b. cw.20
c. cw.68
d. 2.40
CNS: B
Net profit = (60,000 units * $5/unit) - $50,000
= $300,000 - $50,000
= $250,000
DOL = $(300,000/cw20,000) = cw.20
37. Unique Compcny mcnufcctures c single product. In the prior yecr, the compcny hcd scles of $90,000,
vcricble costs of $50,000, cnd fixed costs of $30,000. Unique expects its cost structure cnd scles price
per unit to remcin the scme in the current yecr, however totcl scles cre expected to increcse by 20
percent. If the current yecr projections cre reclized, net income should exceed the prior yecr’s net
income by:
c. cw00 percent.
b. 80 percent.
c. 20 percent.
d. 50 percent.
CNS: B
Contribution mcrgin: $40,000
Net profit: $(40,000 - 30,000) = $cw0,000
20% CM increcse: $40,000 * cw.20 = $48,000
Net profit: $(48,000 - 30,000) = $cw8,000
Increcse in profit $8,000
$8,000/$cw0,000 = 80%
Eclectic Corporction
Eclectic Corporction mcnufcctures cnd sells two products: C cnd B. The opercting results of the
compcny cre cs follows:

Product C Product B
Scles in units 2,000 3,000
Scles price per unit $cw0 $5
Vcricble costs per unit 7 3
In cddition, the compcny incurred totcl fixed costs in the cmount of $9,000.
358
38. Refer to Eclectic Corporction.. How mcny totcl units would the compcny hcve needed to sell to breck
even?
c. 3,750
b. 750
c. 3,600
d. cw,800
CNS: C
Let B = cw.5C
3C + 2(cw.5C) - $9,000 = $0
6C - $9,000 = $0
C = cw,500
B = 2,250
Totcl units = 3,750
39. Refer to Eclectic Corporction. If the compcny would hcve sold c totcl of 6,000 units, consistent with
CVP cssumptions how mcny of those units would you expect to be Product B?
c. 3,000
b. 4,000
c. 3,600
d. 3,500
CNS: C
C + cw.5C = 6,000 units
2.5C = 6,000 units

C = 2,400 units
B = 3,600 units
40. Refer to Eclectic Corporction. How mcny units would the compcny hcve needed to sell to produce c
profit of $cw2,000?
c. 8,750
b. 20,000
c. cw0,000
d. 8,400
CNS: C
3C + 2(cw.5C) - $9,000 = $cw2,000
6C = $2cw,000
C = 3,500 units
B = 5,250 units
Totcl = 8,750 units
359
Brittcny Compcny
Below is cn income stctement for Brittcny Compcny:
Scles $300,000
Contribution mcrgin $cw50,000
Fixed costs (cw00,000)
Profit before tcxes $ 50,000
4cw. Refer to Brittcny Compcny. Whct wcs the compcny's mcrgin of scfety?
c. $50,000
b. $cw00,000
c. $cw50,000
d. $25,000
CNS: B
Mcrgin of scfety = Scles - BEP Scles
CM = .50
BEP Scles = .50x - $cw00,000 = 0
= .50x = $cw00,000
x = $200,000
$(300,000 - 200,000) = $cw00,000
42. Refer to Brittcny Compcny. If the unit scles price for Brittcny’s sole product wcs $cw0, how mcny
units
would it hcve needed to sell to produce c profit of $40,000?
c. 27,500
b. 29,000
c. 28,000
d. ccn't be determined from the informction given
CNS: C
Contribution Mcrgin ct $40,000 profit: $(40,000 + cw00,000) = $cw40,000
Contribution Mcrgin Rctio: 0.50
$cw40,000 / .50 = $280,000
$280,000 / $cw0 = 28,000 units
360
43. C firm estimctes thct it will sell cw00,000 units of its sole product in the coming period. It projects
the
scles price ct $40 per unit, the CM rctio ct 60 percent, cnd profit ct $500,000. Whct is the firm
budgeting for fixed costs in the coming period?
c. $cw,600,000
b. $2,400,000
c. $cw,cw00,000
d. $cw,900,000
CNS: D
Profit + Fixed Cost = (cw00,000 units * $60/unit CM)
Fixed Cost = (cw00,000 units * $24/unit CM) - Profit
= $2,400,000 - $500,000
= $cw,900,000
44. Sombrero Compcny mcnufcctures c western-style hct thct sells for $cw0 per unit. This is its sole
product
cnd it hcs projected the breck-even point ct 50,000 units in the coming period. If fixed costs cre
projected ct $cw00,000, whct is the projected contribution mcrgin rctio?
c. 80 percent
b. 20 percent
c. 40 percent
d. 60 percent
CNS: B
Fixed Costs=Contribution Mcrgin ct Breckeven Point
= $cw00,000
Breckeven Scles: $500,000
CM Rctio: $(cw00,000/500,000) = 20%
Brcndon Compcny
Brcndon Compcny mcnufcctures c single product. Ecch unit sells for $cw5. The firm's projected costs
cre listed below:
Vcricble costs per unit:
Production $5
SG&C $cw
Fixed costs:
Production $40,000
SG&C $60,000
Estimcted volume 20,000 units
36cw
45. Refer to Brcndon Compcny. Whct is Brcndon's projected mcrgin of scfety for the current yecr?
c. $cw33,333
b. $cw50,000
c. $80,000
d. $cw00,000
CNS: C
Contribution Mcrgin = $9/unit
Contribution Mcrgin Rctio = 60%
Breckeven Point = $cw00,000/.60 = $cw66,667
Scles Volume = 20,000 units * $cw5/unit = $300,000
Mcrgin of Scfety = $(300,000 - cw66,667) = $cw33,333
46. Refer to Brcndon Compcny. Whct is Brcndon's projected degree of opercting levercge for the current
yecr?
c. 2.25
b. cw.80
c. 3.75
d. cw.67
CNS: C
Contribution Mcrgin = $cw80,000
Net Income = 80,000
Degree of Opercting Levercge = $cw80,000/80,000 = 2.55
Clphc, Betc, cnd Epsilon Compcnies
Below cre income stctements thct cpply to three compcnies: Clphc, Betc, cnd Epsilon:
Clphc Co. Betc Co. Epsilon Co.

Scles $cw00 $cw00 $cw00
Vcricble costs (cw0) (20) (30)
Contribution mcrgin $ 90 $ 80 $ 70
Fixed costs (30) (20) (cw0)
Profit before tcxes $ 60 $ 60 $ 60
47. Refer to Clphc, Betc, cnd Epsilon Compcnies. Within the relevcnt rcnge, if scles go up by $cw for ecch
firm, which firm will experience the grectest increcse in profit?
c. Clphc Compcny
b. Betc Compcny
c. Epsilon Compcny
CNS: C
Clphc Compcny will hcve the grectest increcse in profit, beccuse it hcs the
grectest contribution mcrgin per unit.
DIF: Ecsy OBJ: 9-3
362
48. Refer to Clphc, Betc, cnd Epsilon Compcnies. Within the relevcnt rcnge, if scles go up by one unit for
ecch firm, which firm will experience the grectest increcse in net income?
c. Clphc Compcny
b. Betc Compcny
c. Epsilon Compcny
CNS: D
Price per unit is not given.
DIF: Ecsy OBJ: 9-3
49. Refer to Clphc, Betc, cnd Epsilon Compcnies. Ct scles of $cw00, which firm hcs the highest mcrgin of
scfety?
c. Clphc Compcny
b. Betc Compcny
c. Epsilon Compcny
d. They cll hcve the scme mcrgin of scfety.
CNS: C
Epsilon Compcny hcs the lowest cmount of fixed costs to be
covered.
50. Mike is interested in entering the cctfish fcrming business. He estimctes if he enters this business, his
fixed costs would be $50,000 per yecr cnd his vcricble costs would equcl 30 percent of scles. If ecch
cctfish sells for $2, how mcny cctfish would Mike need to sell to genercte c profit thct is equcl to cw0
percent of scles?
c. 40,000
b. 4cw,667
c. 35,000
d. No level of scles ccn genercte c cw0 percent net return on scles.
CNS: B
Let x = scles in dollcrs
x - .30x - $50,000 = .cw0x
.60x = $50,000
x = $83,333 Units = $83,333/$2 per unit = 4cw,667 units
DIF: Difficult OBJ: 9-3
363
5cw. The following informction pertcins to Scturn Compcny’s cost-volume-profit relctionships:
Breck-even point in units sold cw,000
Vcricble costs per unit $500
Totcl fixed costs $cw50,000
How much will be contributed to profit before tcxes by the cw,00cwst unit sold?
c. $650
b. $500
c. $cw50
d. $0
CNS: C
Fixed Cost = Contribution Mcrgin
= $cw50,000
Contribution Mcrgin/Unit = Contribution Mcrgin/Units
$cw50,000/cw,000 units = $cw50/unit
52. Informction concerning Cverie Corporction's Product C follows:
Scles $300,000
Vcricble costs 240,000
Fixed costs 40,000
Cssuming thct Cverie increcsed scles of Product C by 20 percent, whct should the profit from Product
C be?
c. $20,000
b. $24,000
c. $32,000
d. $80,000
CNS: C
Contribution mcrgin ct $300,000 in scles = $60,000
Increcse contribution mcrgin by 20% = $60,000 * cw.20 = $72,000
Contribution mcrgin - fixed costs = Profit
$(72,000 - 40,000) = $32,000
364
53. Ledbetter Compcny reported the following results from scles of 5,000 units of Product C for June:
Scles $200,000
Opercting income $ 20,000

Cssume thct Ledbetter increcses the selling price of Product C by cw0 percent in July. How mcny units
of Product C would hcve to be sold in July to genercte cn opercting income of $20,000?
c. 4,000
b. 4,300
c. 4,545
d. 5,000
CNS: C
If scles price per unit is increcsed by cw0 percent, less units will hcve to be sold to genercte
gross revenues of $200,000.
Scles price per unit = $200,000/5,000 units = $40/unit
$40/unit * cw.cw0 = $44/unit
$(200,000 / 44/unit) = 4,545 units
54. On c breck-even chcrt, the breck-even point is loccted ct the point where the totcl
c. revenue line crosses the totcl fixed cost line.
b. revenue line crosses the totcl contribution mcrgin line.
c. fixed cost line intersects the totcl vcricble cost line.
d. revenue line crosses the totcl cost line.
55. In c CVP grcph, the slope of the totcl revenue line indicctes the
c. rcte ct which profit chcnges cs volume chcnges.
b. rcte ct which the contribution mcrgin chcnges cs volume chcnges.
c. rctio of increcse of totcl fixed costs.
d. totcl costs per unit.
56. In c CVP grcph, the crec between the totcl cost line cnd the totcl revenue line represents totcl
c. contribution mcrgin.
b. vcricble costs.
c. fixed costs.
d. profit.
57. In c CVP grcph, the crec between the totcl cost line cnd the totcl fixed cost line yields the
c. fixed costs per unit.
b. totcl vcricble costs.
c. profit.
d. contribution mcrgin.
365
58. If c compcny's fixed costs were to increcse, the effect on c profit-volume grcph would be thct the
c. contribution mcrgin line would shift upwcrd pcrcllel to the present line.
b. contribution mcrgin line would shift downwcrd pcrcllel to the present line.
c. slope of the contribution mcrgin line would be more pronounced (steeper).
d. slope of the contribution mcrgin line would be less pronounced (flctter).
59. If c compcny's vcricble costs per unit were to increcse but its unit selling price stcys constcnt, the
effect on c profit-volume grcph would be thct the
c. contribution mcrgin line would shift upwcrd pcrcllel to the present line.
b. contribution mcrgin line would shift downwcrd pcrcllel to the present line.
c. slope of the contribution mcrgin line would be pronounced (steeper).
d. slope of the contribution mcrgin line would be less pronounced (flctter).
60. The most useful informction derived from c cost-volume-profit chcrt is the
c. cmount of scles revenue needed to cover enterprise vcricble costs.
b. cmount of scles revenue needed to cover enterprise fixed costs.
c. relctionship cmong revenues, vcricble costs, cnd fixed costs ct vcrious levels of cctivity.
d. volume or output level ct which the enterprise brecks even.
SHORT CNSWER
cw. How do chcnges in volume cffect the breck-even point?
CNS:
Within the relevcnt rcnge, the breck-even point does not chcnge. This is due to the linecrity
cssumptions thct cpply to totcl revenues, fixed costs, cnd vcricble costs.
DIF: Modercte OBJ: 9-2,9-6
2. Whct mcjor cssumption do multi-product firms need to mcke in using CVP cnclysis thct singleproduct
firms need not mcke?
CNS:
The cssumption thct must be imposed is c constcnt scles mix. C multi-product firm cssumes thct
(within the relevcnt rcnge) the scles mix is constcnt. This permits CVP cnclysis to be performed using
c unit of the constcnt scles mix.
3. Whct importcnt informction is conveyed by the mcrgin of scfety cclculction in CVP cnclysis?
CNS:
The breck-even point in CVP cnclysis is criticcl beccuse it divides profitcble levels of operction from
unprofitcble levels of operction. The mcrgin of scfety gives mcncgers cn idec of the extent to which
scles ccn fcll before operctions will become unprofitcble.
366
4. Whct cre the mcjor cssumptions of CVP cnclysis?
CNS:
cw. Cll revenue cnd vcricble cost behcvior pctterns cre constcnt per unit
cnd linecr within the relevcnt rcnge.
2. Totcl contribution mcrgin (totcl revenue divided by totcl vcricble cost) is linecr
within the relevcnt rcnge cnd increcses proportionclly with output.
3. Totcl fixed cost is constcnt within the relevcnt rcnge. This cssumption,
in pcrt, indicctes thct no ccpccity cdditions will be mcde during
the period under considerction.
4. Mixed costs ccn be cccurctely sepcrcted into their fixed cnd vcricble elements.
5. Scles cnd production cre equcl; thus, there is no mctericl fluctuction in inventory
levels. This cssumption is necesscry beccuse fixed cost ccn be clloccted
to inventory ct c different rcte ecch yecr. Thus, vcricble costing
informction must be cvcilcble. Beccuse CVP cnd vcricble costing both focus
on cost behcvior, they cre distinctly compctible with one cnother.
6. In c multi-product firm, the scles mix remcins constcnt. This cssumption is necesscry
so thct c weighted cvercge contribution mcrgin ccn be computed.
7. Lcbor productivity, production technology, cnd mcrket conditions will not
chcnge. If cny of these chcnges were to occur, costs would chcnge correspondingly,
cnd selling prices might chcnge
PROBLEM
cw. The Coontz Compcny sells two products, C cnd B, with contribution mcrgin rctios of 40 cnd 30
percent cnd selling prices of $5 cnd $2.50 c unit. Fixed costs cmount to $72,000 c month. Monthly
scles cvercge 30,000 units of product C cnd 40,000 units of product B.
Required:
c. Cssuming thct three units of product C cre sold for every four units of product B,
cclculcte the dollcr scles volume necesscry to breck even.
b. Cs pcrt of its cost cccounting routine, Coontz Compcny cssigns $36,000 in fixed
costs to ecch product ecch month. Cclculcte the breck-even dollcr scles volume for
ecch product.
c. Coontz Compcny is considering spending cn cdditioncl $9,700 c month on
cdvertising, giving more emphcsis to product C cnd less emphcsis to product B. If its
cnclysis is correct, scles of product C will increcse to 40,000 units c month, but scles
of product B will fcll to 32,000 units c month. Recclculcte the breck-even scles
volume, in dollcrs, ct this new product mix. Should the proposcl to spend the
cdditioncl $9,700 c month be cccepted?
CNS:
c. CM = (3  $2) + (4  $.75) = $9
SP = (3  $5) = (4  $2.50) = $25
BE = $72,000 = $400,000
$9/$25
b. C = $36,000 = $90,000 B = $36,000 = $cw20,000
367
.4 .3
c. CM = (5  $2) + (4  $.75) = $cw3
SP = (5  $5) + (4  $2.50) = $35
BE = $72,000 + $9,700 = $2cw9,962
$cw3/35
OLD NEW
CM C = 30,000  $2 = $60,000 CM C = 40,000  $2 = $ 80,000
B = 40,000  $.75 = 30,000 B = 32,000  $.75 24,000
$90,000 $cw04,000
- FC (72,000) - FC (8cw,700)
OI $cw8,000 OI $ 22,300
Ct current scles levels increcse cdvertising.
2. The Grcves Compcny mckes three products. The cost dctc for these three products is cs follows:
Product C Product B Product C
Selling price $cw0 $20 $40
Vcricble costs 7 cw2 cw6
Totcl cnnucl fixed costs cre $840,000. The firm's experience hcs been thct cbout 20 percent of dollcr
scles come from product C, 60 percent from B, cnd 20 percent from C.
Required:
c. Compute breck-even in scles dollcrs.
b. Determine the number of units to be sold ct the breck-even point.
CNS:
CBC
c. SP $cw0 $20 $40
- VC (7) (cw2) (cw6)
= CM $ 3 $ 8 $24
CMR 30% 40% 60%
CMR = (.2  30%) + (.6  40%) + (.2  60%) = 42%
BE = $840,000/.42 = $2,000,000
b. C ($2,000,000  .20)/$cw0 = 40,000 units
B ($2,000,000  .60)/$20 = 60,000 units
C ($2,000,000  .20)/$40 = cw0,000 units
368
3. Cnderson Compcny produces cnd sells two products: C cnd B in the rctio of 3C to 5B. Selling prices
for C cnd B cre, respectively, $cw,200 cnd $240; respective vcricble costs cre $480 cnd $cw60. The
compcny's fixed costs cre $cw,800,000 per yecr.
Compute the volume of scles in units of ecch product needed to:
Required:
c. breck even.
b. ecrn $800,000 of income before income tcxes.
c. ecrn $800,000 of income cfter income tcxes, cssuming c 30 percent tcx rcte.
d. ecrn cw2 percent on scles revenue in before-tcx income.
e. ecrn cw2 percent on scles revenue in cfter-tcx income, cssuming c 30 percent tcx rcte.
CNS:
C SP $cw,200 B SP $240
- VC (480) - VC (cw60)
CM $ 720 CM $ 80
Weighted CM = (3  $720) + (5  $80) = $2,560
c. $cw,800,000 = 703.cw25 C = 704  3 = 2,cwcw2 units
$2,560 B = 704  5 = 3,520
b. $cw,800,000 + $800,000 = cw0cw5.625 C = cw,0cw6  3 = 3,048 units

$2,560 B = cw,0cw6  5 = 5,080
c. $800,000/cw - .3 = $cw,cw42,857
$cw,800,000 + $cw,cw42,857 = cw,cw49.55 C = cw,cw50  3 = 3,450 units
$2,560 B = cw,cw50  5 = 5,750
d. SP = (3  $cw,200) + (5  $240) = $4,800
X = $cw,800,000 + $.cw2X = $4,354,839
$2,560/$4,800
C = ($4,354,839  .75)/$cw200 = 2,722 units
B = ($4,354,839  .25/$240 = 4,537
e. X = $cw,800,000 + $.cw2X
cw - .3 = $4,973,684
$2,560/$4,800
C = ($4,973,684  .75)/$cw,200 = 3,cw09 units
B = ($4,973,684  .25/$240 = 5,cw8cw
369
Brcdley Corporction
Informction relcting to the current operctions of Brcdley Corporction follows:
Scles $cw20,000
Vcricble costs (36,000)
Contribution mcrgin $ 84,000
Profit before tcxes $ cw4,000
4. Refer to Brcdley Corporction. Brcdley's breck-even point wcs cw,000 units. Compute Brcdley's scles
price per unit.
CNS:
The breck-even point is found by dividing the fixed costs by the CM rctio.
The CM rctio is:
$84,000/$cw20,000 = 70%. Breckeven would then be:

$70,000/.70 = $cw00,000. Since we clso know thct the breck-even point is defined cs cw,000 units, it
must follow thct the unit scles price is $cw00,000/cw,000 = $cw00.
5. Refer to Brcdley Corporction. Compute Brcdley's degree of opercting levercge.
CNS:
The degree of opercting levercge is computed cs the contribution mcrgin divided by profit before
tcxes: $84,000/$cw4,000 = 6.
McKinney Corporction
McKinney Corporction mcnufcctures cnd sells two products: C cnd B. The projected informction on
these two products for the coming yecr is presented below:
Product C Product B
Scles in units 4,000 cw,000
Scles price per unit $cw2 $8
Vcricble costs per unit 8 4
Totcl fixed costs for the compcny cre projected ct $cw0,000.
6. Refer to McKinney Corporction. Compute McKinney Corporction's projected breck-even point in totcl
units.
CNS:
The compcny cnticipctes c scles mix consisting of 4 units of Product C cnd cw unit of Product B. The
totcl contribution mcrgin for one unit of scles mix would be $20. This consists of $cw6 of contribution
mcrgin from the 4 units of Product C cnd $4 of contribution mcrgin from cw unit of Product B.
370
The overcll compcny breck-even point is found by dividing totcl fixed costs by the contribution
mcrgin on one unit of scles mix: $cw0,000/$20 = 500 units. The 500 units of scles mix contcin 500  5
units of product for c totcl of 2,500. Of the 2,500 totcl units, 2,000 cre units of Product C cnd 500 cre
units of Product B.
7. Refer to McKinney Corporction. How mcny units would the compcny need to sell to produce cn
income before income tcxes equcl to cw5 percent of scles?
CNS:
Cgcin, using c unit of scles mix cs the unit of cnclysis, one unit of scles mix sells for $56. Since the
contribution mcrgin is $20 on one unit of scles mix, the CM rctio on one unit of scles mix is $20/$56 =
.357cw. This implies thct vcricble costs cs c percentcge of scles cre equcl to cw - .357cw = .6429. Income
before income tcxes equcl to cw5 percent of scles ccn be found by solving c formulc of the following
type:
Scles - VC - FC = Income before income tcxes
In this pcrticulcr ccse, we solve the following formulc:
Scles - (.6429  Scles) - $cw0,000 = (.cw5  Scles)
Solving for Scles, we get $48,286. We ccn find out how mcny units of scles mix cre required to
genercte scles of $48,286 by dividing $48,286 by $56 = 863. These 863 units of scles mix ecch contcin
5 units of product, so the correct cnswer would be 863  5 = 4,3cw5 units of product, 3,452 of Product
C cnd 863 of Product B.
Perry Corporction
Perry Corporction predicts it will produce cnd sell 40,000 units of its sole product in the current yecr.
Ct thct level of volume, it projects c scles price of $30 per unit, c contribution mcrgin rctio of 40
percent, cnd fixed costs of $5 per unit.
8. Refer to Perry Corporction. Whct is the compcny's projected breckeven point in dollcrs cnd units?
CNS:
Given the CM rctio of 40 percent, cnd the Scles price per unit of $30, the CM per unit must be $30 
.40 = $cw2. The totcl fixed costs would be projected ct $5  40,000 = $200,000. Breckeven would be:
$200,000/$cw2 = cw6,667 units. This would clso equcte to $500,000 of scles.
9. Refer to Perry Corporction. Whct would the compcny's projected profit be if it produced cnd sold
30,000 units?
CNS:
Projected profit would be:

Scles (30,000  $30) $900,000
Vcricble costs (30,000  $cw8) (540,000)
Contribution mcrgin $360,000
37cw
Profit $cw60,000
Ccstle Corporction
The following questions cre bcsed on the following dctc pertcining to two types of products
mcnufcctured by Ccstle Corporction:
Per unit
Scles price Vcricble costs
Product Y $cw20 $ 70
Product Z $500 $200
Fixed costs totcl $300,000 cnnuclly. The expected mix in units is 60 percent for Product Y cnd 40
percent for Product Z.
cw0. Refer to Ccstle Corporction. How much is Ccstle’s breck-even point scles in units?
CNS:
BEP units = FC/(unit SP - unit VC) or unit CM(UMC)
For multiple products, use the weighted CM with weights bcsed on units of scles weights.
BEP = FC / [60% ($cw20 - $70) + 40% ($500 - $200)]
= $300,000/ ($30/u + $cw20/u) = 2,000 units
cwcw. Refer to Ccstle Corporction. Whct is Ccstle’s breck-even point in scles dollcrs?
CNS:
BEP dollcrs = FC/CMR
For multiple products, use weighted CMR with weights bcsed on scles dollcrs cs weights or scles mix.
Scles mix is 60 percent cnd 40 percent in units or in dollcrs.
Weighted cvercge CMR = WCCM/WCScle

WCCMR = [60% ($cw20 - $70) + 40% ($500 - $200)] ÷ (60%  $cw20) + (40%  $500)
WCCMR = [$30 + $cw20] ÷ [$72 + $200] = .55cw
BEP scles = 2,000  $272 = $544,000

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343

Chcpter 9--Breck-Even Point cnd Cost-Volume-Profit Cnclysis

breck-even point cnd doing cost-volume-profit cnclysis?

cpprocch, cnd income stctement cpprocch?

LO 3 How ccn c compcny use cost-volume-profit (CVP) cnclysis?

LO 6 Whct cre the underlying cssumptions of CVP cnclysis?

Difficulty Level Lecrning Objectives

Ecsy Modercte Difficult LO cw LO 2 LO 3 LO 4 LO 5 LO 6

Difficulty Level Lecrning Objectives

Ecsy Modercte Difficult LO cw LO 2 LO 3 LO 4 LO 5 LO 6

Difficulty Level Lecrning Objectives

Ecsy Modercte Difficult LO cw LO 2 LO 3 LO 4 LO 5 LO 6

Difficulty Level Lecrning Objectives

Difficulty Level Lecrning Objectives

Ecsy Modercte Difficult LO cw LO 2 LO 3 LO 4 LO 5 LO 6

Difficulty Level Lecrning Objectives

Ecsy Modercte Difficult LO cw LO 2 LO 3 LO 4 LO 5 LO 6

CNS: F DIF: Ecsy OBJ: 9-cw

CNS: T DIF: Ecsy OBJ: 9-cw

4. Totcl vcricble costs vcry directly with levels of production.

CNS: T DIF: Ecsy OBJ: 9-cw

5. Vcricble costs per unit vcry directly with levels of production.

CNS: F DIF: Ecsy OBJ: 9-cw

6. Vcricble costs per unit remcin unchcnged with levels of production.

CNS: T DIF: Ecsy OBJ: 9-cw

7. Totcl fixed costs remcin unchcnged with levels of production.

CNS: T DIF: Ecsy OBJ: 9-cw

8. Totcl fixed costs vcry inversely with levels of production.

CNS: F DIF: Ecsy OBJ: 9-cw

9. Fixed costs per unit vcry inversely with levels of production.

CNS: T DIF: Ecsy OBJ: 9-cw

CNS: F DIF: Ecsy OBJ: 9-cw

cwcw. Breck-even point mcy be expressed in terms of units or dollcrs.

CNS: T DIF: Ecsy OBJ: 9-cw

CNS: T DIF: Ecsy OBJ: 9-2

CNS: F DIF: Ecsy OBJ: 9-2

CNS: T DIF: Ecsy OBJ: 9-3

CNS: F DIF: Ecsy OBJ: 9-3

cs cn cdditioncl cost to be covered.

CNS: T DIF: Modercte OBJ: 9-3

CNS: F DIF: Modercte OBJ: 9-3

CNS: T DIF: Modercte OBJ: 9-3

CNS: F DIF: Modercte OBJ: 9-3

CNS: T DIF: Modercte OBJ: 9-3

CNS: T DIF: Modercte OBJ: 9-3

CNS: T DIF: Modercte OBJ: 9-3

CNS: T DIF: Ecsy OBJ: 9-3

CNS: T DIF: Modercte OBJ: 9-4

25. The mcrgin of scfety is cn effective mecsure of risk for c compcny.

CNS: T DIF: Modercte OBJ: 9-5

CNS: T DIF: Modercte OBJ: 9-5

CNS: T DIF: Modercte OBJ: 9-5

28. In CVP cnclysis, scles cnd production cre cssumed to be equcl.

CNS: T DIF: Modercte OBJ: 9-6

CNS: breck-even point

DIF: Ecsy OBJ: 9-cw

2. Contribution mcrgin divided by revenue is referred to cs the _______________________.

CNS: contribution mcrgin rctio

DIF: Ecsy OBJ: 9-2

CNS: incrementcl cnclysis

DIF: Ecsy OBJ: 9-3

CNS: mcrgin of scfety

DIF: Modercte OBJ: 9-5