Chapter 9 - Cost-volume-profit analysis

MULTIPLE CHOICE

1. Which of the following equations is CORRECT?

a. Sales revenues = Variable expenses - (Fixed expenses + Operating income)
b. Sales revenues - Variable expenses - Fixed expenses = Operating income
c. Sales revenues + Variable expenses + Fixed expenses = Operating income
d. Sales revenues - Fixed expenses = Variable expenses - Operating income
ANS: B PTS: 1

2. Baker Company sells its product for £60. In addition, it has a variable cost ratio of 40 percent and total
fixed costs of £9,000. What is the break-even point in units for Baker Company?
a. 375 units
b. 3,600 units
c. 250 units
d. 2,400 units
ANS: C
SUPPORTING CALCULATIONS:
£9,000/(£60  0.6) = 250 units

PTS: 1

3. Total contribution margin is calculated by subtracting

a. cost of goods sold from total revenues.
b. fixed costs from total revenues.
c. total manufacturing costs from total revenues.
d. total variable costs from total revenues.
ANS: D PTS: 1

4. Which of the following items would NOT be considered in cost-volume-profit analysis?

a. units of production
b. fixed costs
c. product mix
d. gross profit margin
ANS: D PTS: 1

5. The contribution margin at the break-even point

a. equals total fixed costs.
b. is zero.
c. plus total fixed costs equals total revenues.
d. is greater than variable costs.
ANS: A PTS: 1

6. The break-even point is

a. the volume of activity where all fixed costs are recovered.
b. where fixed costs equal total variable costs.
c. where total revenues equal total costs.
d. where total costs equal total contribution margin.
 ANS: C PTS: 1

Figure 1

The Kringel Company provides the following information:

Sales (200,000 units) £500,000

Manufacturing costs:
Variable 170,000
Fixed 30,000
Selling and administrative costs:
Variable 80,000
Fixed 20,000

7. Refer to Figure 1. What is the break-even point in units for Kringel?

a. 33,334 units
b. 100,000 units
c. 40,000 units
d. 200,000 units
ANS: C
SUPPORTING CALCULATIONS:
(£30,000 + £20,000)/[(£500,000 - £170,000 - £80,000)/200,000] = 40,000 units

PTS: 1

8. Refer to Figure 1. What is the break-even point in monetary sales for Kringel?
a. £25,000
b. £83,333
c. £100,000
d. £250,000
ANS: C
SUPPORTING CALCULATIONS:
CM rate = (£500,000 - £170,000 - £80,000)/£500,000 = 0.5

(£30,000 + £20,000)/0.5 = £100,000

PTS: 1

9. Baker Company sells its product for £60. In addition, it has a variable cost ratio of 40 percent and total
fixed costs of £9,000. How many units must be sold in order to obtain a before-tax profit of £12,000?
a. 350 units
b. 584 units
c. 875 units
d. 333 units
ANS: B
SUPPORTING CALCULATIONS:
(£9,000 + £12,000)/£36 = 583.333 units

PTS: 1

Figure 2
 Lewis Production Company had the following projected information for 2012:

Selling price per unit £150

Variable cost per unit £90
Total fixed costs £300,000

10. Refer to Figure 2. What is the break-even point in units?

a. 2,000 units
b. 5,000 units
c. 3,333 units
d. 60,000 units
ANS: B
SUPPORTING CALCULATIONS:
£300,000/(£150 - £90) = 5,000 units

PTS: 1

11. Refer to Figure 2. What is the profit when one unit more than the break-even point is sold?
a. £150
b. £60
c. £1,500,150
d. £600,060
ANS: B
SUPPORTING CALCULATIONS:
£150 - £90 = £60

PTS: 1

12. Refer to Figure 2. What is the contribution margin ratio?

a. 0.400
b. 1.667
c. 2.500
d. 0.600
ANS: A
SUPPORTING CALCULATIONS:
(£150 - £90)/£150 = 40%

PTS: 1

13. Refer to Figure 2. What level of monetary sales is needed to obtain a target before-tax profit of
£75,000?
a. £375,000
b. £625,000
c. £750,000
d. £937,500
ANS: D
SUPPORTING CALCULATIONS:
CM rate = (£150 - £90)/£150 = 40%

(£300,000 + £75,000)/0.4 = £937,500

 PTS: 1

Figure 3

The Allen Company had the following income statement for the month of July 2012:

Allen Company
Income Statement
For the Month of July 2012

Sales (£60  10,000) £600,000

Cost of goods sold:
Direct materials (£12  10,000) £120,000
Direct labour (£9  10,000) 90,000
Variable factory overhead (£7.50  10,000) 75,000
Fixed factory overhead _120,000 _405,000
Gross profit £195,000
Selling and administrative expenses:
Variable (£1.50  10,000) £ 15,000
Fixed __90,000 _105,000
Operating income £ 90,000

14. Refer to Figure 3. Allen Company's break-even sales volume is

a. 20,000 units.
b. 7,000 units.
c. 11,211 units.
d. 10,000 units.
ANS: B
SUPPORTING CALCULATIONS:
(£120,000 + £90,000)/(£60 - £12 - £9 - £7.50 - £1.50) = 7,000 units

PTS: 1

15. Refer to Figure 3. What is the sales volume required to earn a profit of £9,000?
a. 3,300 units
b. 10,000 units
c. 7,300 units
d. 4,300 units
ANS: C
SUPPORTING CALCULATIONS:
[£120,000 + £90,000 + £9,000]/£30 = 7,300 units

PTS: 1

16. Refer to Figure 3. If the monthly sales volume increases by 450 units, Allen Company's monthly
profits will increase by
a. £9,450.00.
b. £1,282.50.
c. £13,500.00.
d. £14,175.00.
 ANS: C
SUPPORTING CALCULATIONS:
450  (£60.00 - £12.00 - £9.00 - £7.50 - £1.50) = £13,500

PTS: 1

17. Assume the following information:

Selling price per unit £150

Contribution margin ratio 40%
Total fixed costs £225,000

How many units must be sold to generate a before-tax profit of £45,000?

a. 3,000 units
b. 2,500 units
c. 4,500 units
d. 3,750 units
ANS: C
SUPPORTING CALCULATIONS:
(£225,000 + £45,000)/(£150  0.4) = 4,500 units

PTS: 1

Figure 4

Malone Printing Company projected the following information for next year:

Selling price per unit £75.00

Contribution margin per unit £30.00
Total fixed costs £120,000
Tax rate 40%

18. Refer to Figure 4. How many units must be sold to obtain an after-tax profit of £67,500?
a. 3,750 units
b. 7,750 units
c. 5,625 units
d. 5,167 units
ANS: B
SUPPORTING CALCULATIONS:
(£120,000 + £67,500/0.6)/£30 = 7,750 units

PTS: 1

19. Refer to Figure 4. What is the break-even point in monetary terms?

a. £200,000
b. £300,000
c. £120,000
d. £500,000
ANS: B
SUPPORTING CALCULATIONS:
CM ratio = £30/£75 = 40%
 £120,000/0.40 = £300,000

PTS: 1

Figure 5

In 2012, Angel's Bath and Body Shop had variable costs of £27,000, fixed costs of £18,000, and a net
loss of £4,500.

20. Refer to Figure 5 Angel's 2012 break-even sales volume was

a. £36,000.
b. £37,500.
c. £49,500.
d. £54,000.
ANS: D
SUPPORTING CALCULATIONS:
X - £27,000 - £18,000 = (£4,500)

X = £40,500

CM rate = (£40,500 - £27,000)/£40,500 = 33.33%

£18,000/0.33333 = £54,000

PTS: 1

21. Refer to Figure 5. The annual sales volume required for Angel's to have a before-tax income of
£18,000 is
a. £126,000.
b. £84,000.
c. £73,500.
d. £42,000.
ANS: A
SUPPORTING CALCULATIONS:
(£18,000 + £24,000)/0.3333 = £126,000

PTS: 1

22. Assume the following information:

Variable cost ratio 80%

Total fixed costs £60,000

What volume of monetary sales 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

23. Baker Company sells its product for £60. In addition, it has a variable cost ratio of 40 percent and total
fixed costs of £9,000. What is the break-even point in monetary sales for Baker Company?
a. £3,600
b. £5,400
c. £15,000
d. £9,000
ANS: C
SUPPORTING CALCULATIONS:
£9,000/0.6 = £15,000

PTS: 1

Figure 6

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
Total fixed costs £630,000

24. Refer to Figure 6. What is the contribution margin ratio?

a. 0.300
b. 1.429
c. 0.429
d. 3.333
ANS: A
SUPPORTING CALCULATIONS:
£45/£150 = 30%

PTS: 1

25. Refer to Figure 6. What is the break-even point in monetary terms?

a. £426,000
b. £2,100,000
c. £189,000
d. £900,000
ANS: B
SUPPORTING CALCULATIONS:
CM rate = £45/£150 = 30%

£630,000/0.3 = £2,100,000

PTS: 1

26. Refer to Figure 6. How many units must be sold to obtain a target before-tax profit of £270,000?
a. 6,000 units
b. 20,000 units
c. 8,572 units
d. 14,000 units
 ANS: B
SUPPORTING CALCULATIONS:
(£630,000 + £270,000)/£45 = 20,000 units

PTS: 1

27. Refer to Figure 6. What selling price per unit is needed to obtain a before-tax profit of £270,000 at a
volume of 4,000 units?
a. £150.00
b. £330.00
c. £225.00
d. £105.00
ANS: B
SUPPORTING CALCULATIONS:
Total contribution margin = £630,000 + £270,000 = £900,000

Contribution margin per unit = £900,000/4,000 = £225

Price = £225 + (£150 - £45) = £330

PTS: 1

28. 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

Figure 7

Dirth Company sells only one product at a regular price of £7.50 per unit. Variable expenses are 60
percent 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.

29. Refer to Figure 7. What is the contribution margin ratio when the selling price is reduced to £6 per
unit?
a. 25%
b. 40%
c. 75%
d. 60%
ANS: A
SUPPORTING CALCULATIONS:
(£6.00 - £4.50)/£6.00 = 25%

PTS: 1

30. Refer to Figure 7. What is the monetary sales level required to break even at the old price of £7.50?
a. £75,000
b. £12,000
c. £18,000
 d. £50,000
ANS: A
SUPPORTING CALCULATIONS:
£30,000/0.4 = £75,000

PTS: 1

31. Refer to Figure 7. What sales pound level is needed to obtain a before-tax profit of £60,000 when the
selling price is £6.00 per unit?
a. £360,000
b. £120,000
c. £72,000
d. £90,000
ANS: A
SUPPORTING CALCULATIONS:
CM rate = (£6.00 - £4.50)/£6.00 = 25%

(£30,000 + £60,000)/0.25 = £360,000

PTS: 1

32. Refer to Figure 7. What is the new break-even point in units for Dirth Company when the selling price
is £6.00?
a. 10,000 units
b. 6,667 units
c. 4,000 units
d. 20,000 units
ANS: D
SUPPORTING CALCULATIONS:
Variable cost per unit = £7.50  0.6 = £4.50

New contribution margin per unit = £6.00 - £4.50 = £1.50

£30,000/£1.50 = 20,000 units

PTS: 1

Figure 8

Assume the following cost behaviour data for Portrait Company:

Sales price £18.00per unit

Variable costs £13.50per unit
Fixed costs £22,500
Tax rate 40%

33. Refer to Figure 8. What volume of monetary sales is required to earn a before-tax income of £27,000?
a. £198,000
b. £180,000
c. £90,000
d. £270,000
 ANS: A
SUPPORTING CALCULATIONS:
CM rate = (£18.00 - £13.50)/£18.00 = 25%

(£22,500 + £27,000)/0.25 = £198,000

PTS: 1

34. Refer to Figure 8. What volume of monetary sales is required to earn an after-tax income of £40,500?
a. £360,000
b. £90,000
c. £252,000
d. £495,000
ANS: A
SUPPORTING CALCULATIONS:
[£22,500 + (£40,500/0.6)]/0.25 = £360,000

PTS: 1

35. Sales mix refers to

a. the different volume of sales achieved during the year.
b. the contribution margins achieved on the different products during the year.
c. the relative proportions of different products that constitute total sales.
d. the mix of variable and fixed costs.
ANS: C PTS: 1

36. Which of the following is a TRUE statement about sales mix?

a. Profits may decline with an increase in total monetary sales if the sales mix shifts to sell
more of the high contribution margin product.
b. Profits may decline with an increase in total monetary sales if the sales mix shifts to sell
more of the lower contribution margin product.
c. Profits will remain constant with an increase in total monetary sales if the total sales in
units remains constant.
d. Profits will remain constant with a decrease in total monetary sales if the sales mix also
remains constant.
ANS: B PTS: 1

37. Patricia Company produces two products, X and Y, which account for 60 percent and 40 percent,
respectively, of total monetary sales. Contribution margin ratios are 50 percent for X and 25 percent
for Y. Total fixed costs are £120,000. What is Patricia's break-even point in monetary sales?
a. £300,000
b. £328,767
c. £342,856
d. £375,000
ANS: A
SUPPORTING CALCULATIONS:
Average CM rate = (0.6)(0.5) + (0.4)(0.25) = 0.40

£120,000/0.4 = £300,000

PTS: 1
 Figure 9

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

38. Refer to Figure 9. What is the total monthly sales volume in units required to break even when the
sales mix in units is 70 percent Product X and 30 percent Product Y?
a. 8,333 units
b. 50,000 units
c. 16,667 units
d. 56,667 units
ANS: B
SUPPORTING CALCULATIONS:
Average CM per unit = [0.7  (£9.00 - £6.00)] + [0.3  (£9.00 - £7.50)] = £2.55

£127,500/£2.55 = 50,000 units

PTS: 1

39. Refer to Figure 9. If the sales mix in units is 50 percent Product X and 50 percent Product Y, the
monthly break-even total monetary sales is
a. £150,000.
b. £450,000.
c. £510,000.
d. £630,000.
ANS: C
SUPPORTING CALCULATIONS:
Average CM per unit = [0.5  (£9.00 - £6.00)] + [0.5  (£9.00 - £7.50)] = £2.25

£127,500/£2.25 = 56,666.667 units

56,666.667  £9 = £510,000

PTS: 1

40. 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. The contribution margin per unit of direct materials is lower for 1 than for 2.
d. The ratio of contribution to total sales always will be larger for 1 than for 2.
ANS: A PTS: 1

41. The following data pertain to the three products produced by Alberts Ltd.:

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.

Sixty percent of all units sold are Product A, 30 percent are Product B, and 10 percent are Product C.

What is the monthly break-even point for total units?

a. 45,000 units
b. 36,000 units
c. 60,000 units
d. 180,000 units
ANS: C
SUPPORTING CALCULATIONS:
Average CM per unit = (0.6  £1) + (0.3  £2) + (0.1  £3) = £1.50

£90,000/£1.50 = 60,000 units

PTS: 1

42. In a cost-volume-profit graph,

a. the total revenue line crosses the horizontal axis at the break-even point.
b. beyond the break-even sales volume, profits are maximized at the sales volume where total
revenues equal total costs.
c. an increase in unit variable costs would decrease the slope of the total cost line.
d. an increase in the unit selling price would shift the break-even point in units to the left.
ANS: D PTS: 1

43. On a profit-volume graph, the profit line intersects the horizontal axis at
a. the origin.
b. the break-even point.
c. a volume of 1,000 units.
d. a point where profit is greater than zero.
ANS: B PTS: 1

44. Which of the following statements is TRUE?

a. The slope of the total cost line is dependent on the variable cost per unit.
b. The total cost line normally begins at zero.
c. The total revenue line typically begins above zero.
d. The slope of the total revenue line is the contribution margin per unit.
 ANS: A PTS: 1

45. Cost-volume-profit models assume that

a. the sales mix may vary among multiple products.
b. unit selling prices are constant.
c. inventories are dynamic and subject to change.
d. the total cost function is quadratic.
ANS: B PTS: 1

46. Which of the following assumptions does NOT pertain to cost-profit-volume analysis?
a. Sales price per unit remains constant.
b. The sales mix is constant.
c. Inventories in a manufacturing entity may go up or down.
d. Fixed expenses are constant at all volumes of activities within the relevant range.
ANS: C PTS: 1

Figure 10

The following diagram is a cost-volume-profit graph for a manufacturing company:

47. Refer to Figure 10. The difference between line AB and line AC (area BAC) is the
a. contribution ratio.
b. total variable cost.
c. contribution margin per unit.
d. total fixed cost.
ANS: B PTS: 1

48. Refer to Figure 10. Select the answer that best describes the labeled item on the diagram.
a. Area CDE represents the area of net loss.
b. Line AC graphs total fixed costs.
c. Point D represents the point at which the contribution margin per unit increases.
d. Line AC graphs total costs.
ANS: D PTS: 1

49. Refer to Figure 10. The formula to determine the Y-axis value (£) at point D on the graph is as follows:
a. Fixed costs + (Variable costs per unit  Number of units).
b. XY - bX.
c. Fixed costs/Unit contribution margin.
d. Fixed costs/Contribution margin ratio.
 ANS: D PTS: 1

50. When a company sells more units than the break-even point,
a. it moves above the relevant range.
b. profits are positive.
c. there are no new variable costs incurred.
d. profits are negative.
ANS: B PTS: 1

51. In a cost-volume-profit graph, the slope of the total revenue line represents
a. the selling price per unit.
b. the contribution margin per unit.
c. the variable cost per unit.
d. total contribution margin.
ANS: A PTS: 1

52. In a cost-volume-profit graph, the slope of the total cost line represents
a. the selling price per unit.
b. the contribution margin per unit.
c. the variable cost per unit.
d. total contribution margin.
ANS: C PTS: 1

53. On a profit-volume graph, the intersection of the profit line with the vertical axis provides a
a. profit of £1,000.
b. profit equal to zero.
c. profit equal to fixed costs.
d. loss equal to fixed costs.
ANS: D PTS: 1

54. A profit-volume graph

a. measures profit or loss on the horizontal axis.
b. illustrates total revenues, total cost, and profits at various sales volumes.
c. is not subject to the same limiting assumptions as cost-volume-profit graphs.
d. illustrates the relationship between volume and profits.
ANS: D PTS: 1

55. In a profit-volume graph, the slope of the profit line represents

a. the selling price per unit.
b. the contribution margin per unit.
c. the variable cost per unit.
d. total contribution margin.
ANS: B PTS: 1

56. Which of the following assumptions is NOT necessary for cost-volume-profit analysis?
a. Total variable costs are linear.
b. Total revenues increase when total costs increase.
c. Inventories are constant.
d. The product sales mix is constant.
 ANS: B PTS: 1

57. Which of the following assumptions does NOT pertain to cost-volume-profit analysis?
a. The units produced will equal the units sold.
b. Inventories are constant.
c. All costs are classified as fixed or variable.
d. Sales mix may vary during the related period.
ANS: D PTS: 1

Figure 11

The income statement for Thomas Manufacturing Company for 2012 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

58. Refer to Figure 11. If sales increase by 1,000 units, what will happen to profit?
a. increase by £4,800
b. increase by £1,200
c. increase by £7,200
d. increase by £12,000
ANS: A
SUPPORTING CALCULATIONS:
Contribution margin per unit = £48,000/10,000 = £4.80

1,000  £4.80 = £4,800

PTS: 1

59. Refer to Figure 11. If sales increase by £60,000, what will happen to profit?
a. increase by £60,000
b. increase by £24,000
c. increase by £6,000
d. increase by £36,000
ANS: B
SUPPORTING CALCULATIONS:
£60,000  0.4 = £24,000

PTS: 1

60. Refer to Figure 11. What is the contribution margin per unit?
a. £7.20
b. £1.20
c. £4.80
d. £120,000
ANS: C
SUPPORTING CALCULATIONS:
£48,000/10,000 = £4.80
 PTS: 1

61. Refer to Figure 11. What is the contribution margin ratio?

a. 40%
b. 60%
c. 100%
d. 30%
ANS: A
SUPPORTING CALCULATIONS:
£48,000/£120,000 = 40%

PTS: 1

62. Assuming all other things are the same, contribution margin per unit must have ____ if there was an
increase in the break-even point.
a. remained the same
b. increased first, then decreased
c. increased
d. decreased
ANS: D PTS: 1

63. Assuming all other things are the same, selling price per unit must have ____ if there was a decrease in
the break-even point.
a. remained the same
b. increased first, then decreased
c. increased
d. decreased
ANS: C PTS: 1

64. Using cost-volume-profit analysis, we can conclude that a 20 percent reduction in variable costs will
a. reduce the break-even sales volume by 20 percent.
b. reduce total costs by 20 percent.
c. reduce the slope of the total cost line by 20 percent.
d. not affect the break-even sales volume if there is an offsetting 20 percent increase in fixed
costs.
ANS: C PTS: 1

65. Assuming all other things are the same, variable cost per unit must have ____ if there was an increase
in the break-even point.
a. remained the same
b. increased first, then decreased
c. increased
d. depends on the circumstances
ANS: C PTS: 1

66. Assuming all other things are equal, fixed costs must have ____ if there was a decrease in the break-
even point.
a. remained the same
b. increased first, then decreased
 c. increased
d. decreased
ANS: D PTS: 1

67. A decrease in the sales price in the basic cost-volume-profit model would
a. require a recomputation of the gross profit per unit.
b. be offset by an increase in unit costs.
c. decrease the break-even volume.
d. increase the break-even volume.
ANS: D PTS: 1

68. Camp Gordon has annual fixed operating costs of £150,000 and variable cost of £550 per camper.
Total fees charged to campers amount to £500 each. The camp expects 350 campers next summer.
Projected government grants are £95,000. How much must Camp Gordon raise from other sources to
break even?
a. £45,000
b. £37,500
c. £97,500
d. £72,500
ANS: D
SUPPORTING CALCULATIONS:
Total costs = £150,000 + (£550  350) = £342,500

£342,500 - £95,000 - (£500  350) = £72,500

PTS: 1

Figure 12

Thomas Company had the following information:

Activity Driver Unit Variable Cost Level of Activity Driver

Units sold £ 20 --
Setups 1,000 80
Engineering hours 60 2,000

Other data:
Total fixed costs (traditional) £800,000
Total fixed costs (ABC) £400,000
Unit selling price £40

69. Refer to Figure 12. What is the break-even point in units using ABC?
a. 30,000 units
b. 45,000 units
c. 15,000 units
d. 75,000 units
ANS: A
SUPPORTING CALCULATIONS:
[£400,000 + (£1,000  80) + (£60  2,000)]/(£40 - £20) = 30,000 units

PTS: 1
70. Refer to Figure 12. How many units need to be sold to produce a before-tax profit of £120,000 using
ABC?
a. 51,000 units
b. 36,000 units
c. 21,000 units
d. 81,000 units
ANS: B
SUPPORTING CALCULATIONS:
(£400,000 + £80,000 + £120,000 + £120,000)/£20 = 36,000 units

PTS: 1

71. Refer to Figure 12. Suppose Thomas could reduce setup costs by £500 per setup and could reduce the
number of engineering hours needed to 1,216 2/3 hours. How many units must be sold to break even in
this case?
a. 30,000 units
b. 25,050 units
c. 25,650 units
d. 11,250 units
ANS: C
SUPPORTING CALCULATIONS:
[£400,000 + (£500  80) + (£60  1,216 2/3)]/£20 = 25,650 units

PTS: 1

Figure 13

Urban Company had the following information:

Activity Driver Unit Variable Cost Level of Activity Driver

Units sold £ 20 --
Setups 1,200 60
Engineering hours 52 1,500

Other data:
Total fixed costs (traditional) £600,000
Total fixed costs (ABC) £300,000
Unit selling price £60

72. Refer to Figure 13. What is the break-even point in units using ABC?
a. 5,625 units
b. 16,875 units
c. 7,500 units
d. 11,250 units
ANS: D
SUPPORTING CALCULATIONS:
[£300,000 + (£1,200  60) + (£52  1,500)]/(£60 - £20) = 11,250 units

PTS: 1
73. Refer to Figure 13. Suppose Urban could reduce setup costs by £300 per setup and could reduce the
number of engineering hours needed to 1,400 hours. How many units must be sold to break even in
this case?
a. 10,670 units
b. 21,340 units
c. 6,350 units
d. 7,500 units
ANS: A
SUPPORTING CALCULATIONS:
[£300,000 + (£900  60) + (£52  1,400)]/£40 = 10,670 units

PTS: 1

74. Refer to Figure 13. How many units need to be sold to produce a before-tax profit of £80,000 using
ABC?
a. 13,250 units
b. 11,500 units
c. 14,000 units
d. 7,500 units
ANS: A
SUPPORTING CALCULATIONS:
(£300,000 + £72,000 + £78,000 + £80,000)/£40 = 13,250 units

PTS: 1

75. When the volume of activity increases within the relevant range, the fixed cost per unit
a. decreases.
b. decreases at first, then increases.
c. remains the same.
d. increases.
ANS: A PTS: 1

76. As the volume of activity increases within the relevant range, the variable cost per unit
a. decreases.
b. decreases at first, then increases.
c. remains the same.
d. increases.
ANS: C PTS: 1

77. Which of the following statements is TRUE about relevant range?

a. When costs reach a level above the relevant range, they are considered appropriate for
analysis.
b. Linear estimates of an economist's curvilinear cost function is only valid within the
relevant range.
c. When costs reach a level below the relevant range, they are considered appropriate for
analysis.
d. The nonlinear relevant range is ignored, and only those costs outside of this range may be
considered.
ANS: B PTS: 1
78. Which of the following statements is TRUE about relevant range?
a. When costs reach a level above the relevant range, they are considered appropriate for
analysis.
b. Linear estimates of an economist's curvilinear cost function is only valid within the
relevant range.
c. When costs reach a level below the relevant range, they are considered appropriate for
analysis.
d. The nonlinear relevant range is ignored, and only those costs outside of this range may be
considered.
ANS: B PTS: 1

79. The relevant range is

a. a relatively wide range of sales where total variable costs remain the same.
b. a relatively wide range of sales where all costs remain the same.
c. a relatively narrow range of production where total variable costs remain the same.
d. a relatively wide span of production where total fixed costs are expected to remain the
same.
ANS: D PTS: 1

80. Boss Company currently leases a delivery van from Check Enterprises for a fee of £250 per month
plus £0.40 per mile. Management is evaluating the desirability of switching to a modern, fuel-efficient
van, which can be leased from David, SA., for a fee of £600 per month plus £0.05 per mile. All
operating costs and fuel are included in the rental fees. In general,
a. a lease from David, SA., is economically preferable to a lease from Check Enterprises
regardless of the monthly use.
b. a lease from Check Enterprises is economically preferable below 1,000 miles per month.
c. a lease from Check Enterprises is economically preferable to a lease from David, SA.,
regardless of the monthly use.
d. a lease from Check Enterprises is economically preferable above 1,000 miles per month.
ANS: B PTS: 1

81. If at a given volume total costs and fixed costs are known, the variable costs per unit may be computed
as follows:
a. (Total costs - Fixed costs)/Unit volume.
b. (Total costs/Unit volume) - Fixed costs.
c. (Total costs  Unit volume) - (Fixed costs/Unit volume).
d. Total costs - (Fixed costs/Unit volume).
ANS: A PTS: 1

82. Total costs may be computed as follows:

a. Fixed costs + (Variable costs per unit  Unit volume).
b. (Fixed costs per unit  Unit volume) + Variable costs.
c. Fixed costs per unit + (Variable costs per unit  Unit volume).
d. (Fixed costs per unit  Unit volume) + Variable costs per unit.

ANS: A PTS: 1

83. Cost behaviour analysis focuses on

a. how costs respond to changes in profit.
b. how costs change over time.
c. how costs change as output changes.
 d. none of the above.
ANS: C PTS: 1

84. Cost behaviour is necessary in providing cost information for

a. Budgeting.
b. cost control.
c. decision making.
d. all of the above.
ANS: D PTS: 1

85. Fixed costs,

a. in total, remain constant within a relevant range.
b. in total, increase as activity increases.
c. in total, decrease as activity decreases.
d. on a per unit basis, are constant as activity increases or decreases.
ANS: A PTS: 1

86. The relevant range is a relatively

a. wide span of production where total fixed costs are expected to remain the same.
b. wide range of sales where total variable costs remain the same.
c. wide range of sales where all costs remain the same.
d. narrow range of production where total variable costs remain the same.
ANS: A PTS: 1

87. Management is interested in utilizing the full capacity of production facilities because it
a. spreads variable costs over a greater number of units, thereby reducing the variable cost
per unit.
b. spreads fixed costs over a greater number of units, thereby reducing the fixed cost per unit.
c. reduces total variable costs.
d. reduces total fixed costs.
ANS: B PTS: 1

88. In January, 5,000 units were manufactured at a unit cost of £5. At this level of activity, variable costs
are 40 percent of total unit costs. The following month, the company planned to manufacture 4,500
units. If cost behaviour patterns remain unchanged in February,
a. total fixed costs will decrease.
b. total variable cost will remain unchanged.
c. total cost per unit will increase.
d. variable cost per unit will decrease.
ANS: C PTS: 1

89. What is the first step in classifying costs according to behaviour?

a. identify the resources needed and the output of the activity
b. measure the outputs and inputs
c. determine the time horizon
d. determine the impact of output changes on the activity cost
ANS: C PTS: 1

90. Cost function is represented by the following formula:

 a. Total cost = Fixed costs + (Variable rate  Output).
b. Total cost = Fixed costs - (Variable rate  Output).
c. Total cost + Fixed costs = (Variable rate  Output).
d. Total cost = (Fixed rate  Output) + (Variable rate  Output).
ANS: A PTS: 1

91. In the formula, Total cost = Fixed cost + (Variable rate  Output), fixed cost refers to the
a. slope parameter or b.
b. intercept parameter or a.
c. dependent variable.
d. independent variable.
ANS: B PTS: 1

92. In the formula, Total cost = Fixed cost + (Variable rate  Output), total cost refers to the
a. slope parameter or b.
b. intercept parameter or a.
c. dependent variable.
d. independent variable.
ANS: C PTS: 1

93. In the formula, Total cost = Fixed cost + (Variable rate  Output), output refers to the
a. slope parameter or b.
b. intercept parameter or a.
c. dependent variable.
d. independent variable.
ANS: D PTS: 1

94. In the formula, Total cost = Fixed cost + (Variable rate  Output), variable cost refers to the
a. slope parameter or b.
b. intercept parameter or a.
c. dependent variable.
d. independent variable.
ANS: A PTS: 1

95. The range of operations within which a linear cost function is valid is called:
a. the linear average.
b. the relevant range.
c. the marginal range.
d. the functional range.
ANS: B PTS: 1

96. Which of the following statements is true concerning the use of linear analysis at low activity levels
(below the range for which the company's facility was designed)?
a. Linear analysis is well suited for estimating total costs at low activity levels.
b. Linear analysis likely understates total costs at low activity levels.
c. Linear analysis likely overstates total costs at low activity levels.
d. Linear analysis of low activity levels fails to capture the fact that total fixed costs decrease
as more units are produced.
 ANS: B PTS: 1

97. Which of the following statements is true concerning the use of linear analysis at high activity levels
(above the range for which the company's facility was designed)?
a. Linear analysis is well suited for estimating total costs at high activity levels.
b. Linear analysis likely understates total costs at high activity levels.
c. Linear analysis likely overstates total costs at high activity levels.
d. Linear analysis of high activity levels fails to capture the fact that total fixed costs decrease
as more units are produced.
ANS: B PTS: 1

98. A "what if" technique that examines the impact of changes in underlying assumptions on an answer is
a. degree of sensitivity.
b. sensitivity analysis.
c. sensitivity training.
d. none of the above.
ANS: B PTS: 1

99. Information about two products is as follows:

Product C Product D
Selling price per unit £20 £25
Variable costs per unit _11 _18
Contribution margin per unit £9 £7

The firm expects 60 percent of its sales (in units) to be Product C (a sales mix of 6:4). Fixed costs are
expected to be £82,000. Break-even in units would be

Product C Product D
a. 1,200 units 800 units
b. 2,460 units 1,312 units
c. 18,000 units 14,000 units
d. 6,000 units 4,000 units
ANS: D
SUPPORTING CALCULATIONS:

CM Mix
Product C: £9  6= £54
Product D: £7  4= _28
£82

Break-even = £82,000/£82 per package = 1,000 packages

Product C: 1,000 packages  6 units per package = 6,000 units

Product D: 1,000 packages  4 units per package = _4,000 units
Total 10,000 units

PTS: 1

100. The following information is provided:

 Sales price per unit £70
Variable cost per unit £45
Fixed costs £50,000
Expected sales 5,000 units

The margin of safety is

a. 2,000 units.
b. 3,000 units.
c. 5,000 units.
d. 7,000 units.
ANS: B
SUPPORTING CALCULATIONS:
Break-even = £50,000/(£70 per unit - £45 per unit) = 2,000 units

Margin of safety = 5,000 - 2,000 = 3,000 units

PTS: 1

PROBLEM

1. The Valdez Mug Company manufactures plastic mugs that sell to wholesalers for £4.00 each. Variable
and fixed costs are as follows:

Variable Costs per Unit Fixed Costs per Month

Manufacturing:
Direct materials £0.60 Factory overhead £ 8,000
Direct labour 0.70 Selling and adm. __6,000
Factory overhead _0.50 £1.80 Total £14,000
Selling and adm. _0.40
Total £2.20

Valdez Mug produced and sold 10,000 cups during April 2012. There were no beginning or ending
inventories.

Required:

a. Determine Valdez Mug's monthly break-even point in units.

b. If monthly sales increase by 500 cups, what will be the change in monthly profits?
c. If Valdez Mug is now subject to an income tax of 40 percent, what pound sales volume is
required to earn a monthly after-tax net income of £12,000?

ANS:
a. Unit selling price £4.00
Unit variable costs _2.20
Unit contribution margin £1.80

Break-even point = £14,000/£1.80 = 7,777.7 units, or 7,778 units

b. Increase in sales 500units

Unit contribution margin __£1.80
Increase in monthly profits £ 900
 c. Desired before-tax profit = £12,000/(1.00 - 0.40) = £20,000

Contribution margin percentage = £1.80/4.00 = 45%

Required sales volume = (£14,000 + £20,000)/0.45 = £75,556

PTS: 1

2. The Waldo Company had the following functional income statement for the month of July 2012:

Sales (£20  20,000 units) £400,000

Costs of goods sold:
Direct materials £ 60,000
Direct labour 40,000
Variable factory overhead 120,000
Fixed factory overhead __50,000 _270,000
Gross profit £130,000
Selling and administrative expenses:
Variable £ 20,000
Fixed __50,000 __70,000
Operating income £ 60,000

There were no beginning and ending inventories.

Required:

a. Calculate the contribution margin per unit.

b. Calculate the contribution margin ratio.
c. What is the break-even point in units?
d. What is the monetary amount of sales in needed to obtain a before-tax profit of £40,000?

ANS:
a. £160,000/20,000 units = £8 per unit
b. £160,000/£400,000 = 40%
c. (£50,000 + £50,000)/£8 = 12,500 units
d. (£50,000 + £50,000 + £40,000)/0.4 = £350,000

PTS: 1

3. At a price of £32, the estimated monthly sales of a product are 12,000 units. Variable costs include
manufacturing costs of £18 and distribution costs of £6. Fixed costs are £40,000 per month.

Required:

Determine each of the following values:

a. Unit contribution margin

b. Monthly break-even unit sales volume
c. Before-tax monthly profit
d. Monthly margin of safety in units

ANS:
a. Selling price £32
 Variable costs:
Manufacturing £18
Distribution __6 _24
Unit contribution margin £8

b. Monthly break-even point = £40,000/£8 =

5,000 units

c. Monthly contribution = (£8  12,000) £96,000

Monthly fixed costs _40,000
Monthly before-tax monthly profit £56,000

d. Monthly sales volume 12,000 units

Monthly break-even sales volume _5,000 units
Monthly margin of safety 7,000 units

PTS: 1

4. Xi Company is the exclusive Iowa distributor of lawn mowers for a small manufacturing company. It
sells only one model at £600 per unit and for which Xi pays £250. Xi's other variable costs amount to
£50 per unit. Fixed costs are £2,000. In October, Xi sold 15 lawn mowers and it sold 20 in November.

Required:

Calculate the following values:

a. Monthly break-even point in monetary sales

b. Monthly break-even point in units
c. Monthly income for October
d. Monthly income for November
e. Margin of safety for October

ANS:
a. £2,000/[(600 - 250 - 50)/600] = £4,000
b. £2,000/(600 - 250 - 50) = 6.67 or 7 mowers
c. (15  £300) - £2,000 = £2,500
d. (20  £300) - £2,000 = £4,000
e. £9,000 - £4,000 = £5,000, or 9 mowers

PTS: 1

5. At a monthly volume of £25,000, a company incurs variable cost of £19,000 and fixed costs of £6,000.

Required:

Determine each of the following values:

a. Variable cost ratio

b. Contribution margin ratio
c. Monthly break-even pound sales volume
d. Monthly margin of safety in monetary terms

ANS:
 a. Variable cost ratio = £19,000/£25,000 = 0.76
b. Contribution margin ratio = 1.00 - 0.76 = 0.24
c. Monthly break-even pound sales volume = £6,000/0.24 = £25,000
d. Monthly sales volume £25,000
Monthly break-even sales volume _25,000
Monthly margin of safety £ -0-

PTS: 1

6. The Young Manufacturing Company produces the following three products:

Hammers Screwdrivers Saws

Selling price per unit £40 £16 £50
Variable costs per unit _28 _12 _30
Contribution per unit £12 £4 £20

Fixed costs are £76,000 per year.

Fifty percent of all sales in units are hammers, 30 percent are screwdrivers, and 20 percent are saws.

Required:

Calculate the following values:

a. Break-even point in total units

b. Number of hammers that will be sold at break-even
c. Total sales in units to obtain a before-tax profit of £19,000

ANS:
a. Ave. CM/unit = (£12  0.5) + (£4  0.3) + (£20  0.2) = £11.20
£76,000/£11.20 = 6,786 units of hammers, screwdrivers, and saws

b. 6,786  0.5 = 3,393 hammers

c. (£76,000 + £19,000)/£11.20 = 8,482 units

PTS: 1

7. Zachary Plumbing Company has the following information for 2012:

Selling price per unit £10

Variable costs per unit £7
Fixed costs £1,500

Required:

Prepare a profit-volume graph identifying the following items:

a. Profit line
b. Intersection of profit line and vertical axis
c. Break-even point
d. Profit area
e. Loss area
 ANS:

*The break-even point is 500 units.

PTS: 1

8. Arnold Ltd.has the following information for 2012:

Selling price per unit £10

Variable costs per unit £6
Fixed costs £1,000

Required:

Prepare a cost-volume-profit graph identifying the following items:

a. Total costs line

b. Total fixed costs line
c. Total variable costs line
d. Total revenues line
e. Break-even point in monetary sales
f. Break-even point in units
g. Profit area
h. Loss area

ANS:
 PTS: 1

9. Gilbert Company had the following information:

Activity Driver Unit Variable Cost Level of Activity Driver

Units sold £ 20 --
Setups 1,000 40
Engineering hours 60 1,000

Other data:
Total fixed costs (traditional) £100,000
Total fixed costs (ABC) £50,000
Unit selling price £40

Required:

a. Calculate the break-even point in units using the traditional approach to CVP analysis.
b. Calculate the break-even point in units using the activity-based costing approach to CVP
analysis.
c. Calculate the number of units that must be sold to earn a before-tax profit of £40,000.
d. Suppose Gilbert could reduce setup costs by £300 per setup and could reduce the number
of engineering hours needed to 900. How many units must be sold to break even in this
case?

ANS:
a. £100,000/(£40 - £20) = 5,000 units
b. [£50,000 + (1,000  £40) + (1,000  £60)]/£20 = 7,500 units
c. (£50,000 + £40,000 + £60,000 + £40,000)/£20 = 9,500 units
d. [£50,000 + (700  £40) + (900  £60)]/£20 = 6,600 units

PTS: 1

10. For each of the following situations, draw a graph that best describes the cost behaviour pattern. The
vertical axis represents costs, and the horizontal axis represents volume.
 a. Direct materials per unit
b. Depreciation expense on a building per unit
c. An employee paid £50 per hour with a guaranteed salary of £1,000 per week
d. A consultant paid £100 per hour with a maximum fee of £2,000
e. Salaries of teachers where each teacher can handle a maximum of 15 students

ANS:

PTS: 1

11. The average unit cost at a monthly volume of 9,000 units is £3, and the average unit cost at a monthly
volume of 22,500 units is £2.10.

Required:

Develop an equation for total monthly costs.

ANS:

Volume  Average Unit Cost = Total Costs

9,000 £3.00 = £27,000
22,500 2.10 = 47,250

Variable cost per unit = (£47,250 - £27,000)/(22,500 - 9,000) = £1.50

Fixed costs per month = £27,000 - (£1.50  9,000) = £13,500

Total monthly costs = £13,500 + £1.50(# of units)

PTS: 1

12. Enola, SA., manufactures a product that sells for £400. The variable costs per unit are as follows:

Direct materials £100

Direct labour 80
 Variable manufacturing overhead 50

During the year, the budgeted fixed manufacturing overhead is estimated to be £500,000, and budgeted
fixed selling and administrative costs are expected to be £250,000. Variable selling costs are £20 per
unit.

Required:

a. Determine the break-even point in units.

b. Determine the number of units that must be sold to earn £300,000 in profit before taxes.
c. Determine the number of units that must be sold to generate an after-tax profit of £90,000
if there is a 40 percent tax rate.

ANS:
a. 5,000 units (£500,000 + £250,000)/[£400 - (£100 + £80 + £50 + £20)]
b. 7,000 units (£750,000 + £300,000)/(£400 - £250)
c. 6,000 units [£750,000 + (£90,000/.6)]/(£400 - £250)

PTS: 1

13. Chopra Company developed the following income statement using a contribution margin approach:

CHOPRA COMPANY
PROJECTED INCOME STATEMENT
FOR THE CURRENT YEAR ENDING DECEMBER 31
Sales £240,000

Less variable costs:

Variable manufacturing costs £60,000
Variable selling costs _36,000
Total variable costs __96,000
Contribution margin £144,000

Less fixed costs:

Fixed manufacturing costs £85,000
Fixed selling and administrative costs _35,000
Total fixed costs _120,000
Operating income £ 24,000

The projected income statement was based on sales of 12,000 units. Chopra has the capacity to
produce 15,000 units during the year.

Required:

a. Determine the break-even point in units.

b. The sales manager believes the company could increase sales by 1,000 units if advertising
expenditures were increased by £15,000. Determine the effect on income if the company increases
advertising expenditures.
c. What is the maximum amount the company could pay for advertising if the advertising would
increase sales by 1,000 units?

ANS:
a. 10,000 units £120,000/(£20 - £8)
 b. £3,000 decrease (1,000  £12) - £15,000
c. £12,000 1,000  £12

PTS: 1

14. The Millennium Company produces two types of products: Quality and Superior. The company
expects to sell 1,200 units of Quality and 800 units of Superior.

A projected income statement for the firm as a whole follows:

Sales £400,000
Less: Variable costs _100,000
Contribution margin £300,000
Less: Fixed costs __75,000
Operating income £225,000

Required:

a. Determine the break-even point in terms of sales revenue.

b. Determine the sales revenue necessary to generate a before-tax profit of £300,000.
c. Determine the sales revenue necessary to generate an after-tax profit of £270,000 if the
tax rate is 40 percent.

ANS:
a. £100,000 £75,000/(£300,000/£400,000)
b. £500,000 (£75,000 + £300,000)/75%
c. £700,000 [£75,000 + (£270,000/.6)]/75%

PTS: 1

15. Anthony Industries developed the following income statement using a contribution margin approach:

ANTHONY INDUSTRIES
PROJECTED INCOME STATEMENT
FOR THE CURRENT YEAR ENDING DECEMBER 31
Sales £750,000

Less variable costs:

Variable manufacturing costs £280,000
Variable selling costs _120,000
Total variable costs _400,000
Contribution margin £350,000

Less fixed costs:

Fixed manufacturing costs £130,000
Fixed selling and administrative costs __80,000
Total fixed costs _210,000
Operating income £140,000

The projected income statement was based on sales of 100,000 units. Anthony has the capacity to
produce 120,000 units during the year.

Required:
 a. Determine the break-even point in units.
b. The sales manager believes the company could increase sales by 8,000 units if
advertising expenditures were increased by £22,000. Determine the effect on income if
the company increases advertising expenditures.
c. What is the maximum amount the company could pay for advertising if the advertising
would increase sales by 8,000 units?

ANS:
a. 60,000 units £210,000/(£7.50 - £4.00)
b. £6,000 increase (8,000  £3.50) - £22,000
c. £28,000 8,000  £3.50

PTS: 1

16. The Barnes Company manufactures two products. Information about the two product lines is as
follows:

Product K Product Y
Selling price per unit £80 £30
Variable costs per unit _45 _15
Contribution margin per unit £35 £15

The company expects fixed costs to be £189,000. The firm expects 60 percent of its sales (in units) to
be Product K (a sales mix of 3:2).

Required:

a. Calculate the contribution margin per package.

b. Determine the break-even point in units for Product K and Product Y.
c. Determine the level of sales (in pounds) necessary to generate a before-tax profit of
£135,000.

ANS:
a. £135

Selling Variable Contribution

Price - Cost = Margin  Mix
Product K £ 80 - £45 = £35  3 = £105
Product Y £ 30 - £15 = £15  2 = __30
£135

b. Product K: 4,200 units

Product Y: 2,800 units

£189,000/£135 per package = 1,400 packages

Product K: 4,200 units

1,400
packages  3
=
Product Y: 2,800 units
 1,400
packages  2
=
Total 7,000 units

c. £720,000

(£189,000 + £135,000)/£135 per package = 2,400 packages

Product K £576,000
sales: 2,400
packages  3
units  £80
=
Product Y _144,000
sales: 2,400
packages  2
units  £30
=
Total sales £720,000

PTS: 1

17. Determine the following missing amounts:

Sales £100,000
Total variable costs ?
Contribution margin ?
Total fixed costs £20,000
Net income £12,000
Units sold 100
Price ?
Variable cost per unit ?
Contribution margin per unit ?
Contribution margin ratio ?
Break-even point in units ?

ANS:
Sales £100,000
Total variable costs £68,000
Contribution margin £32,000
Total fixed costs £20,000
Net income £12,000
Units sold 100
Price (£100,000/100) £10
Variable cost per unit £6.80
Contribution margin per unit £3.20
Contribution margin ratio 32%
Break-even point in units (£20,000/£3.20) 6,250 units

PTS: 1

18. Supply the missing data in each independent case.

 Case 1 Case 2 Case 3 Case 4 Case 5
Unit sales 700 300 ? ? ?
Sales revenue £42,000 ? ? £58,000 £40,000
Variable cost per unit £ 45 £ 1 £ 15 ? ?
Contribution Margin ? £1,200 ? ? £10,000
Fixed costs £ 7,500 ? £60,000 ? ?
Operating income ? £ 100 ? ? ?
Unit contribution margin ? ? ? £ 1 £ 2
Break-even point (units) ? ? 5,000 30,000 ?
Margin of Safety ? ? 1,000 -1,000 600

ANS:
Case 1 Case 2 Case 3 Case 4 Case 5
Unit sales 700 300 6,000 29,000 5,000
Sales revenue £42,000 £1,500 £162,000 £58,000 £40,000
Variable cost per unit £ 45 £ 1 £ 15 £ 1 £ 6
Contribution Margin £10,500 £1,200 £ 72,000 £29,000 £10,000
Fixed costs £ 7,500 £1,100 £ 60,000 £30,000 £ 8,800
Operating income £ 3,000 £ 100 £ 12,000 -£ 1,000 £ 1,200
Unit contribution margin £ 15 £ 4 £ 12 £ 1 £ 2
Break-even point (units) 500 275 5,000 30,000 4,400
Margin of Safety 200 25 1,000 -1,000 600

Case 1:
Price = £42,000 / 700 = £60;
Unit C. M. = £60 - £45 = £15;
Total C. M. = (£15)(700) = £10,500;
Op. SA. = £10,500 - £7,500 = £3,000;
B. E. point = £7,500 / £15 = 500;
Margin Safety = 700 - 500 = 200;

Case 2:
Revenue = £1,200 + (300)(£1) = £1,500;
Fixed Costs = £1,200 - £100 = £1,100;
Unit C. M. = £1,200 / 300 = £4;
B. E. point = £1,100 / £4 = 275;
Margin Safety = 300 - 275 = 25;

Case 3:
Unit Sales = 5,000 + 1,000 = 6,000;
Price = (£60,000 / 5,000) + (£15) = £27;
Revenue = (£27)(6,000) = £162,000;
C. M. = £162,000 - (6,000)(£15) = £72,000;
Op. SA. = £72,000 - £60,000 = 12,000;
Unit C. M. = £27 - £15 = £12;

Case 4:
Unit Sales = 30,000 - 1,000 = 29,000;
Fixed Costs = (30,000)(£1) = £30,000;
Price = £58,000 / 29,000 = £2;
V. C. per unit = £2 - £1 = £1;
 C. M. = (£1)(29,000) = £29,000;
Op. SA. = £29,000 - £30,000 = -£1,000;

Case 5:
Unit Sales = £10,000 / £2 = 5,000;
Price = £40,000 / 5,000 = £8;
V. C. per unit = £8 - £2 = £6;
B. E. point = 5,000 - 600 = 4,400;
Fixed Costs = (4,400)(£2) = £8,800;
Op. SA. = £10,000 = £8,800 = £1,200;

PTS: 1

SHORT ANSWER

1. Describe the cost-volume-profit analysis. Discuss how this analysis can be useful.

ANS:
Cost-Volume-Profit analysis is a technique used to examine the relationships among the total volume
of some cost driver (usually volume), total costs, total revenues, and consequently, profits during a
defined period of time (typically a month, a quarter or a year).

Cost-Volume-Profit analysis is widely used in service, manufacturing, merchandising, and even non-
profit organizations. Cost-Volume-Profit analysis is most useful in the early stages of planning because
it provides an easily understood framework for discussing planning issues and organizing relevant
data. The analysis is used to address a variety of issues. These include (1) determining a breakeven
point in sales units or monetary sales; (2), determining the amount of sales (units or pounds) necessary
to earn a target profit; (3) determining sensitivity of profit to changes in price or costs.

PTS: 1

2. Cost-Volume-Profit analysis is subject to a number of assumptions. List five assumptions that are
necessary to make cost-volume-profit analysis tractable (feasible).

ANS:
The text discusses five assumptions that facilitate cost-volume-profit. These assumptions are:

1. All costs are classified as either fixed or variable (with respect to the cost driver analyzed).
2. The variable cost function (and consequently, the total cost function) are linear within the range
relevant to analysis.
3. The total revenue function is linear within the range relevant to analysis.
4. The analysis is either for a single product (or service) or multiple products with a known
constant sales mix.
5. The analysis considers only one cost driver (most commonly sales volume).

PTS: 1

3. Briefly explain the terms contribution margin and contribution margin ratio.

ANS:
 Contribution margin is defined as the difference between total revenues and total variable costs. Unit
contribution margin is defined as the difference between the unit selling price and the unit variable
costs. In either case, contribution margin identifies the portion of revenues or selling price that goes
toward covering fixed costs and providing a profit. Contribution margin is widely used in sensitivity
analysis, which is the study of the responsiveness of a model to changes in one or more of its
independent variables. When expressed as a ratio to sales, the contribution margin is identified as the
contribution margin ratio. It is the portion of each pound of sales revenue contributed toward covering
fixed costs and earning a profit. The contribution margin ratio is especially useful in situations
involving several products or when unit sales information is not available.

PTS: 1

4. Explain the limitation of basic cost-volume-profit analysis as it relates to an organization's sales mix.

ANS:
Sales mix refers to the relative portion of unit or pound sales that are derived from each product. One
of the limiting assumptions of the basic cost-volume-profit model is that the analysis is for a single
product or the sales mix is constant. When the sales mix is constant, managers of multiple-product
organizations can use the average unit contribution margin, or the average contribution margin ratio, to
determine the break-even point or sales volume required for a desired profit. Often, however,
management is interested in the effect of a change in the sales mix rather than a change in sales
volume at a constant mix.

PTS: 1