Cornerstones of Managerial Accounting Canadian 2nd Edition Mowen Test Bank 1

Solution Manual for Cornerstones of Managerial Accounting
Canadian 2nd Edition by Mowen Hanson Heitger Conomy Pittman

ISBN 0176530886 9780176530884
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Chapter 4 - Cost–Volume–Profit Analysis: A Managerial Planning Tool
1. What is the break-even point?

a. the point at which total sales are greater than total cost
b. the point at which total sales equal total cost
c. the point at which fixed costs equal variable costs
d. the point at which total sales are less than total cost
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 126
LEARNING OBJECTIVES: MACC.MOWE.15.4.1 - 4.1
NATIONAL STANDARDS: United States - AACSB Analytic
United States - IMA-Decision Analysis
KEYWORDS: Bloom's Higher order; classifying
2. What is the purpose of doing a cost–volume–profit (CVP) analysis?

a. CVP analysis provides managers with information used for control only.
b. CVP analysis allows managers to do sensitivity analysis by examining the impact of various prices or costs on
volume.
c. CVP analysis shows how revenues, expenses, and profits behave as volume changes.
d. CVP analysis is effectively used by single-product firms only.
ANSWER: c
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 126
KEYWORDS: Bloom's Higher order; exemplifying
3. What is the formula to calculate operating income?

a. (price × units sold) − (unit variable cost × units sold) − fixed cost
b. (price × units sold) + (unit variable cost × units sold) + fixed cost
c. (price + units sold) − (unit variable cost + units sold) − fixed cost
Copyright © 2015 Nelson Education Limited. 4-1
d. (price − units sold) + (unit variable cost − units sold) + fixed cost
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 126
4. What is the break-even point?

a. Total revenue minus total cost.
b. Profit is greater than zero.
c. Total contribution margin equals total fixed cost.
d. Margin of safety is positive.
ANSWER: c
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 126
MACC.MOWE.15.4.5 - 4.5
Desjardin’s makes power tools. The budgeted sales are $550,000, budgeted variable costs are $230,000, and budgeted
fixed costs are $227,500.
5. Refer to the Figure. What is the contribution margin?
a. $92,500
b. $320,000
c. $322,500
d. $457,500
ANSWER: b
RATIONALE: $550,000 − $230,000 = $320,000
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 127
KEYWORDS: Bloom's Higher order; executing
6. Refer to the Figure. What is the contribution ratio?

a. 35%
b. 50%
c. 58%
d. 65%
ANSWER: c
RATIONALE: $320,000/$550,000 = 58%
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 127
7. Refer to the Figure. What is the budgeted operating income?

a. $92,500
b. $320,000
c. $322,500
d. $457,500
ANSWER: a
RATIONALE: $550,000 − $230,000 − $227,500 = $92,500
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 126
8. Refer to the Figure. What is the variable cost ratio?

a. 19%
b. 42%
c. 50%
d. 54%
ANSWER: b
RATIONALE: $230,000/$550,000 = 42%
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 132

9. Refer to the Figure. What is the break-even point in sales dollars?

a. $392,241
b. $420,000
c. $761,905
d. $948,275
ANSWER: a
RATIONALE: $227,500/0.58 = $392,241 (or $391,016 if you did not round)
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 132
10. What is total variable cost divided by sales revenue?

a. the variable cost ratio
b. the revenue ratio
c. the contribution ratio
d. the sales ratio
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 132
Date Company makes calendars. Information on cost per unit is as follows:

Direct materials $1.50
Direct labour 1.20
Variable overhead 0.90
Variable marketing expense 0.40
Fixed marketing expense totalled $13,000, and fixed administrative expense totalled $35,000. The price per calendar is
$10.
11. Refer to the Figure. What is the contribution margin per unit?
a. $5.00
b. $5.40
c. $6.00
d. $6.30
ANSWER: c
RATIONALE: $10 − $4 = $6, where $4 is ($1.50 + $1.20 + $0.90 + $0.40)
POINTS: 1
DIFFICULTY: Easy
REFERENCES: 127
12. Refer to the Figure. What is the contribution margin ratio?

a. 36%
b. 40%
c. 44%
d. 60%
ANSWER: d
RATIONALE: $6/$10 = 60%
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 127
13. Refer to the Figure. What is the variable product expense per unit?
a. $1.30
b. $3.60
c. $4.00
d. $4.60
ANSWER: b
RATIONALE: $1.50 + $1.20 + $0.90 = $3.60
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 128
14. Refer to the Figure. What is the variable expense per unit?
a. $1.30
b. $3.70
c. $4.00
d. $4.60
ANSWER: c
RATIONALE: $1.50 + $1.20 + $0.90 + $0.40 = $4.00
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 132
15. Refer to the Figure. What is the variable expense ratio?

a. 36%
b. 40%
c. 46%
d. 50%
ANSWER: b
RATIONALE: $4/$10 = 40%
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 132
16. Refer to the Figure. What is the break-even point in units?

a. 2,167
b. 2,800
c. 5,833
d. 8,000
ANSWER: d
RATIONALE: ($13,000 + $35,000)/$6 = 8,000
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 130

17. Refer to the Figure. How many units must be sold to yield a targeted income of $36,000?
a. 5,833
b. 6,000
c. 12,000
d. 14,000
ANSWER: d
RATIONALE: ($13,000 + $35,000 + $36,000)/$6 = 14,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 138
a. $21,670
b. $28,000
c. $58,330
d. $80,000
ANSWER: d
RATIONALE: Break-even sales = 8,000 × $10 = $80,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p.132
Green Acres Company provides home health care. Green Acres charges $35 per hour for professional care. Variable costs
are $21 per hour and fixed costs are $78,000. Next year, Green Acres expects to charge out 12,000 hours of home health
care.
19. Refer to the Figure. What is the contribution margin ratio?
a. 33%
b. 40%
c. 50%
d. 60%
ANSWER: b
RATIONALE: 100% − 60% = 40% or $14/$35 = 40%
POINTS: 1
DIFFICULTY: Easy

REFERENCES: p. 128
20. Refer to the Figure. What is the budgeted operating income for next year?
a. $90,000
b. $168,000
c. $174,000
d. $342,000
ANSWER: a
RATIONALE: ($35 × 12,000) − ($21 × 12,000) − $78,000 = $90,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 134
21. Refer to the Figure. What is the break-even point in hours (rounded to the nearest whole hour)?
a. 1,393
b. 2,229
c. 3,714
d. 5,571
ANSWER: d
RATIONALE: $78,000/$14 = 5,571
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 130
22. Refer to the Figure. What is the contribution margin per hour?
a. $6.50
b. $14.00
c. $21.00
d. $35.00
ANSWER: b
RATIONALE: $35 − $21 = $14
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 128
a. $130,000
b. $195,000
c. $252,000
d. $342,000
ANSWER: b
RATIONALE: $78,000/0.40 = $195,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 132
24. Refer to the Figure. What is the variable cost ratio?

a. 33%
b. 40%
c. 50%
d. 60%
ANSWER: d
RATIONALE: $21/$35 = 60%
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 132
25. What is total contribution margin divided by sales revenue?

a. the variable cost ratio
b. the fixed cost ratio
c. the sales ratio
d. the contribution margin ratio
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 127
KEYWORDS: Bloom's Higher order: classifying
26. What is the ratio of fixed expenses to the contribution margin ratio?
a. the break-even point in sales
b. the break-even point in units
c. the variable cost ratio
d. the margin of safety
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 127
27. Miss She makes dolls. The price of a doll is $15, and the variable expense is $7 per doll. What is the contribution
margin ratio?
a. 37.5%
b. 40.0%
c. 53.3%
d. 60.0%
ANSWER: c
RATIONALE: ($15 − $7)/$15 = 53.3%
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 127
28. What is the contribution margin?

a. the difference between sales and fixed costs
b. the difference between fixed and variable costs
c. the difference between sales and variable costs
d. the difference between sales and total costs

ANSWER: c
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 127
29. What is the result when the contribution margin ratio increases?
a. The variable cost ratio decreases.
b. The break-even point increases.
c. The fixed costs decrease.
d. The price decreases.
ANSWER: a
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 127
30. The income statement for Thompson Manufacturing Company is as follows:

Sales (10,000 units) $150,000
Variable expenses 102,000
Contribution margin $ 48,000
Fixed expenses 36,000
Operating income $ 12,000
What is the contribution margin per unit?
a. $1.20
b. $4.80
c. $7.20
d. $120,000.00
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: $48,000/10,000 = $4.80
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 127
31. Which of the following is correct?

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
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 127
KEYWORDS: Bloom's Higher order; organizing
32. Wendall Company sells only one product at a regular price of $7.50 per unit. Variable expenses are 60% of sales, and
fixed expenses are $30,000. Management has decided to decrease the selling price to $6 in hopes of increasing its volume
of sales. What is the contribution margin ratio when the selling price is reduced to $6 per unit?
a. 25%
b. 40%
c. 60%
d. 75%
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: ($6.00 − $4.50)/$6.00 = 25%
POINTS: 1
DIFFICULTY: Challenging
REFERENCES: p. 127
33. Orbee Company sells a product for $24. Variable costs are $14 per unit, and total fixed costs are $6,000. What is the
per unit contribution margin?
a. $4
b. $10
c. $14
d. $24
ANSWER: b
RATIONALE: $24 − $14 = $10
POINTS: 1

DIFFICULTY: Easy
REFERENCES: p. 127
34. What formula is used to calculate contribution margin ratio?

a. contribution margin per unit/sales per unit
b. 1 + variable cost ratio
c. contribution margin per unit/variable costs per unit
d. unit contribution margin/total revenues
ANSWER: a
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 127
Woods Company originally expected to earn operating income of $150,000 next year. Woods’s degree of operating
leverage is 2.4. Recently, Woods revised its plans and now expects to increase sales by 20% next year.
35. Refer to the Figure. What is Woods’s revised expected operating income for the coming year?
a. $62,400
b. $130,000
c. $156,000
d. $222,000
ANSWER: d
RATIONALE: $150,000 + (0.48 × $150,000) = $222,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 154
36. Refer to the Figure. What is the percent change in operating income expected by Woods in the coming year?
a. 8.3%
b. 20.0%
c. 30.0%

d. 48.0%
ANSWER: d
RATIONALE: Percent change in operating income = 2.4 × 20% = 48%
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 154
37. Roundstreet Company sells a product for $14. Variable costs are $7 per unit, and total fixed costs are $7,000. What is
the break-even point in units?
a. 210
b. 360
c. 504
d. 1,000
ANSWER: d
RATIONALE: $7000/($14 − $7) = 1,000
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 130
38. Suppose variable costs per unit decrease. What will be the effect on sales volume at the break-even point?
a. Sales volume will increase.
b. Sales volume will decrease.
c. Sales volume will remain the same.
d. Sales volume will remain the same; however, contribution margin per unit will decrease.
ANSWER: b
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 130
KEYWORDS: Bloom's Higher order; inferring
39. Suppose fixed costs increase. What will be the effect on the break-even point in units?
a. The break-even point will increase.
b. The break-even point will decrease.

c. The break-even point will remain the same.
d. The break-even point will remain the same; however, contribution per unit will decrease.
ANSWER: a
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 130
40. Suppose the selling price per unit increases. What will be the effect on the break-even point in units?
a. The units will decrease.
b. The units will increase.
c. The units will remain the same.
d. The units will remain the same; however, contribution per unit will decrease.
ANSWER: a
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 130
41. Suppose the contribution margin per unit decreases. What will be the effect on the break-even point in units?
a. The units will increase.
b. The units will decrease.
c. The units will remain the same.
d. The units cannot be determined from the information given.
ANSWER: a
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 127
42. Suppose the contribution margin ratio increases. What will be the effect on the break-even point in sales dollars?
a. The dollar value will increase.
b. The dollar value will decrease.
c. The dollar value will remain the same.

d. The dollar value will double.
ANSWER: b
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 127
43. Firm X and Firm Y compete within the same industry and have the same sales volumes and costs other than the
following items: Firm X manufactures its product using large amounts of direct labour. Firm Y has replaced direct labour
with investment in machinery. Projected sales for both firms are 15% less than in the previous year. What will be the
projected profits for Firm X compared to Firm Y?
a. Firm X will lose more profit than Firm Y.
b. Firm Y will lose more profit than Firm X.
c. Firm X and Firm Y will lose the same amount of profit.
d. Neither Firm X nor Firm Y will lose profit.
ANSWER: b
POINTS: 1
REFERENCES: p. 134
KEYWORDS: Bloom's Higher order; comparing
44. The following data pertain to the three products produced by Rona Corporation:
A B C
Selling price per unit $5.00 $7.00 $6.00
Variable costs per unit 4.00 5.00 3.00
Contribution margin per unit $1.00 $2.00 $3.00
Fixed costs are $90,000 per month.
Of all units sold, 60% are Product A, 30% are Product B, and 10% are Product C.
What is the monthly break-even point for total units?
a. 36,000 units
b. 45,000 units
c. 60,000 units
d. 180,000 units
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS: Average CM per unit = (0.6 × $1) + (0.3 × $2) + (0.1 × $3)
= $1.50 $90,000/$1.50 = 60,000 units
POINTS: 1
REFERENCES: p. 143
45. Hammer Company expects the following results for the next accounting period:
Sales $240,000
Variable costs $135,000
Fixed costs $ 40,000
Expected production and sales in units 3,000
The sales manager believes sales could be increased by 400 units if advertising expenditures are increased by $10,000.
Suppose advertising expenditures are increased and sales increase by 400 units. What will be the effect on operating
income?
a. a decrease of $4,000
b. an increase of $22,000
c. an increase of $4,000
d. an increase of $30,000
ANSWER: c
POINTS: 1
REFERENCES: p. 134
KEYWORDS: Bloom's Higher order; implementing
46. TriTech Company sells a product for $12. Variable costs are $6 per unit, and total fixed costs are $6,000. How many
units must Melody sell to earn an operating profit of $240?
a. 62
b. 1,040
c. 1,260
d. 1,480
ANSWER: b
RATIONALE: ($6,000 + $240)/($12 − $6) = 1,040
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 136

47. What formula is used to calculate the number of units needed to earn a desired profit?
a. (fixed costs + variable costs)/sales
b. (fixed costs + desired profit)/sales
c. (fixed costs + desired profit)/contribution margin per unit
d. (fixed costs + variable costs)/contribution margin per unit
ANSWER: c
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 136
48. Go For It Company sells go-carts at $1,000 each, incurs a variable cost per unit of $600, and has a total fixed expense
of $75,000. How many units must be sold to achieve a target operating income of $55,000?
a. 186
b. 215
c. 250
d. 325
ANSWER: d
RATIONALE: 55,000 = ($1000 × units) − ($600 × units) − $75,000 Units = ($55,000 + $75,000)/($1000 −
600) = 325
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 136
49. Assume the following information:

Selling price per unit $100
Contribution margin ratio 50%
Total fixed costs $250,000
How many units must be sold to generate a before-tax profit of $45,000?
a. 2,500 units
b. 3,000 units
c. 3,750 units
d. 5,900 units
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: ($250,000 + $45,000)/($100 × 0.5) = 5,900 units
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 144
50. Acme Company sells two products. 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 statement is true?
a. At a sales volume in excess of 25,000 units of Product 1 and 25,000 units of Product 2, operations will be
profitable.
b. The ratio of net profit to total sales for Product 2 will be larger than the ratio of net profit to total sales for
Product 1.
c. Variable costs are $1.50 more for Product 2 than for Product 1.
d. The ratio of contribution to total sales always will be larger for Product 1 than for Product 2.
ANSWER: a
POINTS: 1
REFERENCES: p. 145
KEYWORDS: Bloom's Higher order; organizing
Acme Company provided the following data:

Variable cost per unit $60
51. Refer to the Figure. What is the break-even point in units?
a. 6,667
b. 10,000
c. 13,333
d. 20,000
ANSWER: d
RATIONALE: $400,000/($80 per unit − $60 per unit) = 20,000 units
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 130

52. Refer to the Figure. How many units must Acme sell to earn a profit of $40,000?
a. 2,000
b. 8,500
c. 20,000
d. 22,000
ANSWER: d
RATIONALE: ($400,000 + $40,000)/($80 per unit − $60 per unit) = 22,000 units
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 136
53. What formula is used to calculate the sales dollars needed to earn a desired profit?
a. (fixed costs + contribution margin)/(1 − variable cost ratio)
b. (fixed costs + desired profit)/(1 − variable cost ratio)
c. (fixed costs + variable costs)/(1 − variable cost ratio)
d. (fixed costs + desired profit)/(1 − sales ratio)
ANSWER: b
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 138
54. Assume the following information:

Variable cost ratio 80%
What volume of sales dollars is needed to break even?
a. $12,000
b. $48,000
c. $75,000
d. $300,000
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: ($60,000/0.2) = $300,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p.138


55. Bonda, Inc. sells its product for $90. It has a variable cost ratio of 50% and total fixed costs of $14,000. What is the
break-even point in sales dollars?
a. $3,600
b. $7,000
c. $14,000
d. $28,000
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: $14,000/0.5 = $28,000
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p.138
56. Diamonds in the Ruff sells only one product at a regular price of $7.50 per unit. Variable expenses are 60% of sales,
and fixed expenses are $30,000. How many sales (in dollars) are required to break even?
a. $12,000
b. $18,000
c. $50,000
d. $75,000
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: $30,000/0.4 = $75,000
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p.138
57. East Side Company produces two products, X and Y, which account for 60% and 40%, respectively, of total sales
dollars. Contribution margin ratios are 50% for X and 25% for Y. Total fixed costs are $120,000. What is East Side’s
break-even point in sales dollars?
a. $300,000
b. $328,767
c. $342,856

d. $375,000
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: Average CM rate = (0.6)(0.5) + (0.4)(0.25) = 0.40
$120,000/0.4 = $300,000
POINTS: 1
REFERENCES: p. 138
58. Information about the K-9 Salon’s two products is as follows:

Dog Brush Cat Toy
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
Suppose the sales mix in units is 70% Product X and 30% Product Y. What total monthly sales volume in units is required
to break even?
a. 8,333 units
b. 16,667 units
c. 50,000 units
d. 56,667 units
ANSWER: c
RATIONALE: 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
POINTS: 1
REFERENCES: p. 130
Plastic Gym makes children’s jungle gyms and tree houses. The price of jungle gyms is $120, and its variable expenses
are $90 per unit. The price of tree houses is $200, and its variable expenses are $100. Total fixed expenses are $253,750.
Last year, Plastic Gym sold 12,000 gyms and 4,000 tree houses.

59. Refer to the Figure. Plastic Gym expects tree house demand to increase from 4,000 to 8,000 units. Given that demand
for tree houses has doubled, what is the sales revenue at break-even assuming the new sales mix?
a. $140,000
b. $253,700
c. $411,250
d. $665,000
ANSWER: d
RATIONALE: ($120 × 2,625) + ($200 × 1,750) = $665,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 138
60. Refer to the Figure. Plastic Gym expects tree house demand to increase from 4,000 to 8,000 units per year. What is the
new contribution margin ratio?
a. 38%
b. 40%
c. 50%
d. 60%
ANSWER: a
RATIONALE: The new sales mix is 3:2. A package with 3 jungle gyms and 2 tree houses has contribution
margin of $290 [($30 × 3) + ($100 × 2)]. Thus, the contribution margin ratio is $290/$760 or
38%.
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 127
LEARNING OBJECTIVES:MACC.MOWE.15.4.1 - 4.1
MACC.MOWE.15.4.4 - 4.4
61. Refer to the Figure. Plastic Gym expects tree house demand to increase from 4,000 to 8,000 units per year. How many
jungle gyms are sold at break-even using this new sales mix?
a. 668
b. 875
c. 1,002
d. 2,625
ANSWER: d
RATIONALE: $253,750/$290 = 875 packages 875 packages × 3 = 2,625
POINTS: 1
REFERENCES: p. 130
LEARNING OBJECTIVES: MACC.MOWE.15.4.1.4.4 - 4.1, 4.4
62. Refer to the Figure. Plastic Gym expects tree house demand to increase from 4,000 to 8,000 units per year. How many
tree houses are sold at break-even using this new sales mix?
a. 668
b. 875
c. 1,002
d. 1,750
ANSWER: d
RATIONALE: $273,000/$290 = 875 packages 875 × 2 = 1,750
POINTS: 1
REFERENCES: p. 130
63. Refer to the Figure. What is the unit sales mix of jungle gyms and tree houses (rounded down to whole numbers)?
a. 2:3
b. 3:1
c. 3:2
d. 4:1
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 130
Better Bonds provided the following data:

Sales $540,000
Fixed costs $120,000
Expected production and sales in units 40,000
a. $112,500
b. $150,000
c. $171,429
d. $400,000
ANSWER: d
RATIONALE: Contribution margin ratio = ($540,000 − $378,000)/$540,000 = 30% Break-even point =
$120,000/30% = $400,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 132
65. Refer to the Figure. How many sales in dollars are needed to generate a profit of $30,000?
a. $100,000
b. $150,000
c. $214,286
d. $500,000
ANSWER: d
RATIONALE: ($540,000 − $378,000)/($540,000) = 30% ($120,000 + $30,000)/30% = $500,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p.138
66. Which of the following distinguishes a profit–volume graph from a cost–volume–profits graph?
a. Costs are graphed on the y-axis against sales volume.
b. Operating income is graphed on the y-axis against sales volume.
c. Revenues and costs are graphed on the y-axis against sales volume.
d. Revenues are expected at targeted sales levels.
ANSWER: b
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 141
67. What relationship is visually portrayed by a profit-volume graph?

a. total sales and total cost
b. profits and units sold
c. fixed costs and variable costs
d. total sales and units sold
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 141
68. Which of the following is characteristic of the profit–volume graph?

a. It is difficult to interpret.
b. It fails to reveal how costs change as sales volume changes.
c. It can be plotted only if the break-even point is known.
d. It can be plotted only if fixed costs are known.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 141
69. Where is the break-even point on a cost–volume–profit graph?

a. at the intersection of the revenue line and the profit line
b. at the intersection of the revenue line and the total cost line
c. at the intersection of the fixed cost line and the variable cost line
d. at the intersection of the contribution margin line and the fixed cost line
ANSWER: b
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 141

70. Which of the following is NOT an assumption used to prepare a cost–volume–profit graph?
a. Linear costs are within the relevant range.
b. Units produced equals units sold.
c. The sales mix is constant.
d. The constant cost fluctuates.
ANSWER: d
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 141
71. Which of the following is a characteristic of the cost–volume–profit graph?

a. It is hard to interpret.
b. It reveals how costs change as sales volume remains the same.
c. It cannot be plotted if the break-even point is known.
d. It shows the relationship among cost, volume, and profits.
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 141
72. Which of the following is a characteristic of the cost–volume–profit graph?

a. It plots three separate lines.
b. It plots the total revenue line and the total cost line.
c. The vertical axis is measured in units sold, and the horizontal axis is measured in dollars.
d. It is hard to interpret.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 141
73. What fixed expenses can NOT be directly traced to individual segments?
a. direct fixed expenses

b. common fixed expenses
c. contribution margin
d. overall fixed expenses
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 144
74. Which graph depicts the relationships among total variable costs, total fixed costs, number of units, and operating
income?
a. cost graph
b. volume graph
c. cost–volume–profit graph
d. break-even graph
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 141
75. What items is the sales mix the relative combination of?
a. inputs required to produce a product
b. outputs produced by a firm
c. products sold by a firm
d. distribution channels used by a firm
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 145

ePiano makes electronic keyboards. The practice model price is $220, and its variable expenses are $190. The deluxe
model price is $340, and its variable expenses are $250. The professional model price is $1,200 and its variable expenses
are $800. Total fixed expenses are $187,000. In general, ePiano sells six practice models and three deluxe models for
every professional model sold.
76. Refer to the Figure. What is the total contribution margin of six practice models, three deluxe models, and one
professional model?
a. $450
b. $520
c. $587
d. $850
ANSWER: d
RATIONALE: ($30 × 6) + ($90 × 3) + ($400 × 1) = $850
POINTS: 1
REFERENCES: p. 145
MACC.MOWE.15.4.4 - 4.4
77. Refer to the Figure. How many practice models are sold at break-even?
a. 180
b. 220
c. 440
d. 1,320
ANSWER: d
RATIONALE: $187,000/$850 = 220 packages 220 × 3 = 1,320
POINTS: 1
REFERENCES: p. 145
MACC.MOWE.15.4.4 - 4.4
78. Refer to the Figure. How many deluxe models are sold at break-even?
a. 220
b. 440
c. 660
d. 850
ANSWER: c
RATIONALE: $187,000/$850 = 220 packages 220 × 3 = 660

POINTS: 1
REFERENCES: p. 145
MACC.MOWE.15.4.4 - 4.4
79. Refer to the Figure. How many professional models are sold at break-even?
a. 220
b. 400
c. 440
d. 850
ANSWER: a
RATIONALE: $187,000/$850 = 220 packages 220 × 1 = 220
POINTS: 1
REFERENCES: p. 145
MACC.MOWE.15.4.4 - 4.4
80. Refer to the Figure. What is the overall sales revenue at break-even?
a. $387,200
b. $778,800
c. $968,000
d. $1,288,700
ANSWER: b
RATIONALE: ($220 × 1,320) + ($340 × 660) + ($1,200 × 220) = $778,800
POINTS: 1
REFERENCES: p. 145
MACC.MOWE.15.4.4 - 4.4
81. How is the sales mix expressed?

a. in terms of units but not revenues

b. in terms of either revenues or units
c. in terms of revenues but not units
d. in terms of neither units nor revenue
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 145
82. Which of the following should be used to compute the sales mix so that the break-even computation is meaningful to
management?
a. the expected mix
b. the most desirable mix
c. the least desirable mix
d. the traditional mix
ANSWER: a
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 145
KEYWORDS: Bloom's Higher order; implementing
83. Which of the following is an assumption of a cost-volume-profit analysis?

a. Selling price and costs cannot be accurately identified.
b. Selling price and costs vary within the relevant range.
c. Inventory levels can increase or decrease.
d. Selling price and costs behave in a linear manner.
ANSWER: d
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 148
84. What “what-if” technique examines the impact on an answer as a result of changes in underlying assumptions?
a. degree of sensitivity
b. sensitivity training
c. sensitivity analysis
d. degree of operating leverage
ANSWER: c
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 149
85. What is the result when actual sales equal break-even sales?
a. the margin of safety is negative
b. the margin of safety is positive
c. the margin of safety equals zero
d. the margin of safety is negative or positive
ANSWER: c
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p 152
86. What is the formula to calculate the margin of safety in dollars?

a. expected sales – expected profit
b. expected sales – sales at break-even
c. costs at break-even – expected profit
d. expected costs – costs at break-even
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 152
87. Which of the following can be considered a measure of risk in cost–volume–profit analysis?
a. margin of safety
b. contribution margin ratio

c. contribution margin
d. fixed cost
ANSWER: a
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 152
88. By what amount can sales decline before losses are incurred?
a. by the contribution margin
b. by the margin of safety
c. by the degree of operating leverage
d. by the fixed costs
ANSWER: b
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 152
89. What would be the effect on the break-even point if sales remain the same and the margin of safety increases?
a. The break-even point would increase.
b. The break-even point would decrease.
c. The break-even point would decrease by half.
d. The break-even point would remain the same.
ANSWER: b
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 152
MACC.MOWE.15.4.4 - 4.4
90. What is the term for the units sold or expected to be sold, or the sales revenue earned or expected to be earned, above
the break-even volume?
a. margin of safety
b. operating leverage
c. break-even point
d. contribution margin
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p 152
91. Which is characteristic of operating leverage?

a. concerned with the relative mix of contribution margin and margin of safety
b. the use of fixed costs to extract higher percentage changes in profits as sales activity changes
c. likely to be lower in an automated manufacturing system than in a manual system
d. provides the same information as margin of safety
ANSWER: b
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 154
92. Which of the following measures the percentage change in profits resulting from a percentage change in sales?
a. variable cost leverage
b. contribution margin ratio
c. degree of operating leverage
d. sales margin ratio
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 154
93. What formula is used to calculate the degree of operating leverage?

a. contribution margin/profit
b. profit/fixed costs
c. profit/variable costs
d. total sales/profit
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 154
94. What is operating leverage the relative mix of?

a. revenues earned and manufacturing costs
b. fixed and variable costs
c. high-volume and low-volume products
d. manufacturing costs and period costs
ANSWER: b
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 154
95. Which of the following measures the sensitivity of profit changes to changes in sales volume?
a. contribution margin ratio
b. variable cost ratio
c. profitability ratio
d. degree of operating leverage
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 157
96. At the break-even point, revenue is equal to the contribution margin.

a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 126
97. The contribution margin ratio is equal to the 1 minus the variable cost ratio.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 127
98. Managers can use CVP analysis to help handle risk and uncertainty.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 126
99. Variable costs per unit consist of direct materials, direct labour, variable factory overhead and variable selling and
administrative costs.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 126
100. The impact on a firm’s income resulting from a change in the number of units sold can be assessed by multiplying
the unit contribution margin by the change in units sold assuming that fixed costs remain the same.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 127
101. To find the number of units to sell to earn a targeted income, it is quicker to simply adjust the break-even units
equation by adding target income to the variable cost.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 130
102. The absorption income statement provides a good check to determine if the sale of a certain number of units really
results in operating income of the given amount.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 129
103. If fixed costs increase, the break-even point also increases.

a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 130


104. If variable expenses decrease and the price increases, the break-even point decreases.
a. True
b. False
ANSWER: True
POINTS: 1
REFERENCES: p. 130
105. If variable costs per unit increase, the break-even point will increase.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 130
106. Most firms would like to earn operating income equal to the income at the break-even point.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 130
107. The break-even point in sales dollars is equal to the break-even units multiplied by the variable cost per unit.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 132


108. In the equation to determine the number of units that must be sold to earn a target income, targeted income is added
to fixed expense in the numerator.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 135
109. The linear equation for revenue is price multiplied by fixed cost.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 135
110. The linear equation for total cost is (unit variable cost × units) + fixed cost.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 135
111. To determine the number of units that must be sold to earn a target operating income, one can use the equation for
operating income and replace the operating income term with the target operating income.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 136
112. The cost–volume–profit graph shows the relationship between cost, volume, and operating income.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 141
113. The profit-volume graph shows the relationship between operating income and the number of units sold.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 141
114. The cost–volume–profit graph depicts the relationships among cost, volume, and profits by plotting the total revenue
line and the total cost line on the graph.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 141
115. Even when you hold the sales mix constant, it is impossible to calculate the break-even point for individual products
in a multiple product firm because many of the fixed costs are common to a number of products.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 143
116. If a multi-product company simply wants to know the overall break-even point and is willing to assume its product
mix stays constant, it is easiest to use the break-even in sales revenue approach.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 147
117. In a multi-product firm, if the sales mix changes, the break-even points for each product will not change.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 143
118. Direct fixed expenses are the fixed costs that are NOT traceable to the segments and would remain even if one of the
segments was eliminated.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 144

119. Common fixed expenses are the fixed costs that are NOT traceable to the segments and would remain even if one of
the segments was eliminated.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 144
120. If the break-even point increases, the margin of safety increases.

a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 152
121. The operating leverage measures the difference between actual sales and break-even sales.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 154
122. Operating leverage is the use of fixed cost to extract higher percentage changes in profits as sales activity changes.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 154


123. Smart Inc. expects to produce and sell 4,000 units next month. Data on costs follows:
Per unit costs:
Selling price $80
Variable manufacturing costs $20
Variable selling costs $ 12
Total costs:
Fixed manufacturing costs $32,000
Fixed selling costs $ 16,000
A. What is the variable cost per unit?
B. What is contribution margin per unit?
C. What is the variable cost ratio?
D. What is the contribution margin ratio?
ANSWER:
A. Variable cost per unit = $20 + $12 = $32
B. Contribution margin per unit = $80 − $32 = $48
C. Variable cost ratio = $32/$80 = 0.4 or 40%
D. Contribution margin ratio = $48/$80 = 0.6 or 60%
POINTS: 1
DIFFICULTY: Easy
REFERENCES: 127-129
124. Ashley Furniture provided the following data for next month:
Variable manufacturing costs per unit $150
Fixed manufacturing costs per unit $ 75
Variable selling costs per unit $ 50
Fixed selling costs per unit $ 50
Expected production and sales 2,000 units
A. What is contribution margin per unit?
B. What is the contribution margin ratio?
C. What is the break-even point in units?
D. What are the sales in dollars needed to obtain on operating income of $20,000?
ANSWER:
A. $500 − ($150 + $50) = $300
B. $500 − ($150 + $50) = $300

$300/$500 = 0.60 or 60%
C. $500 − ($150 + $50) = $300

Fixed costs = ($75 + $50) × 2,000 = $250,000
$250,000/$300 per unit = 833 units (rounded)
D. $250,000+$20,000/60% = $450,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 126-138
125. Follett Company expects to produce and sell 1,000 units next month. Data on costs follows:
Per unit costs:
Selling price $10
Variable manufacturing costs $1.50
Variable selling costs $0.50
Total costs:
Fixed selling costs $ 150
A. What is the variable cost per unit?
B. What is contribution margin per unit?
C. What is the variable cost ratio?
D. What is the contribution margin ratio?
ANSWER:
A. Variable cost per unit = $1.50 + $0.50 = $2
B. Contribution margin per unit = $10 − $2 = $8
C. Variable cost ratio = $2/$10 = 0.2 or 20%
D. Contribution margin ratio = $8/$10 = 0.80 or 80%
POINTS: 1
DIFFICULTY: Easy
126. McKenzie Company expects to produce and sell 1000 units next month. Data on costs follows:
Per unit costs:
Selling price $8
Variable manufacturing costs $2.75
Variable selling costs $0.25
Total costs:
Fixed selling costs $ 125
A. What is the break-even point in units?
B. What is the break-even point in sales dollars?

C. What is the expected operating income for next month?
D. What is the margin of safety in dollars?
E. What is the break-even point in units if fixed manufacturing costs increase by $500?
F. What is the break-even point in units if variable manufacturing costs decrease by $0.75?
ANSWER:
A. Break-even units = $1,125/$5 = 225 units
B. Break-even sales dollars = $8 × 225 = $1,800

OR
Break-even sales dollars = $1,125/0.625 = $1,800
C. Expected operating income = $8,000 − $3,000 − $1,125 = $3,875
D. Margin of safety in dollars = $8,000 − $1,800 = $6,200
E. ($1,000 + $500 + $125)/$5 = 325 units
F. ($1,000 + $125)/($8 − $2 − $0.25) = $1,125/$5.75 = 196 units (rounded)

POINTS: 1
DIFFICULTY: Medium
MACC.MOWE.15.4.5 - 4.5
127. In a normal month, the Whitewater Company generates total sales of $25,000. To do so they incur variable costs of
$15,000 and fixed costs of $10,000.
Required: Determine each of the following values:

A. Variable cost ratio
B. Contribution margin ratio
C. Monthly break-even dollar sales volume
D. Monthly margin of safety in dollars
ANSWER:
A. Variable cost ratio = $15,000/$25,000 = 0.6
B. Contribution margin ratio = 1.00 − 0.6 = 0.4
C. Monthly break-even dollar sales volume = $10,000/0.4 = $25,000
D. Monthly sales volume $25,000

Monthly break-even sales volume 25,000
Monthly margin of safety $ -0-
POINTS: 1
DIFFICULTY: Medium
REFERENCES: 126-136


MACC.MOWE.15.4.5 - 4.5
128. The Monterra Company provided the following information:

Sales $500,000
A. What is the contribution margin ratio?
B. What is the level of sales in dollars necessary to generate a profit of $40,000?
C. What is the contribution margin ratio if the sales price is increased by 10%?
Using the information in part C, what level of sales in dollars is necessary to generate a
D.
profit of $40,000?
ANSWER:
A. ($500,000 − $100,000)/$500,000 = 80%
B. ($200,000 + $40,000)/80% = $300,000
C. ($500,000 × 1.1) = $550,000

($550,000 − $100,000)/$550,000 = 81.82%
D. ($200,000 + $40,000)/81.82% = $293,327 rounded

POINTS: 1
MACC.MOWE.15.4.2 - 4.2
129. The HoltTec Company manufactures two products. Information about the two product lines for the year is as
follows:
Basic
Deluxe Model
Model
Selling price per unit $70 $100
Variable costs per unit 30 40
Contribution margin per unit $40 $ 60
The company expects fixed costs to be $192,000. The firm expects 60% of its sales (in units) to be Basic Model.
Required: Determine the break-even point in units for both Basic Model and Deluxe Model.
ANSWER:
Form a package with three units of Basic Model and 2 units of Deluxe Model.
Contribution margin from Basic Model: $40 × 3 = $120
Contribution margin from Deluxe Model: $60 × 2 = $120
Total package contribution margin = $120 + $60 = $240 per package

Break-even packages = $192,000/$240 per package = 800 packages
Basic Model: 800 packages × 3 = 2,400 units

Deluxe Model: 800 packages × 2 = 1,600 units
POINTS: 1
REFERENCES: p. 145
MACC.MOWE.15.4.4 - 4.4
130. Campbell Corporation developed the following income statement using a contribution margin approach:
Campbell Corporation
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 selling and administrative
80,000
costs
Operating income $140,000
The projected income statement was based on sales of 100,000 units. Thomas has the capacity to produce 120,000 units
during the year.
A. Determine the break-even point in units.
The sales manager believes the company could increase sales by 8,000 units if
B. advertising expenditures were increased by $22,000. By how much will income increase
or decrease if this plan is put into effect?
What is the maximum amount the company could pay for advertising if the sales would
C.
really increase by 8,000 units?
ANSWER:
A. $210,000/($7.50 − $4.00) = 60,000 units
B. (8,000 × $3.50) − $22,000 = $6,000 increase
C. 8,000 × $3.50 = $28,000

POINTS: 1


MACC.MOWE.15.4.2 - 4.2
131. The following information was extracted from the accounting records of Gumbo Corporation:
Variable cost per unit $20
A. What is Gumbo’s break-even point in units?
B. How many units must be sold to earn operating income of $80,000?
What is Gumbo’s break-even point in units if the selling price increases by 20% and the
C.
variable costs decrease by 20%?
Using the information in part C, what sales level in dollars is needed to earn an operating
D.
income of $80,000?
ANSWER:
A. $480,000/($60 per unit − $20 per unit) = 12,000 units
B. ($480,000 + $80,000)/($60 − $20) = 14,000 units
C. ($60 × 1.2) = $72 new sales price

($20 × 0.8) = $16 new variable cost
($72 − $16) = $56 new contribution margin
$480,000/$56 = 8,572 units (rounded)
D. ($480,000 + $80,000)/$56 = 10,000 units

(10,000 × $72) = $720,000
POINTS: 1
REFERENCES: 126-136
MACC.MOWE.15.4.2 - 4.2
132. Oldman River Company expects to produce and sell 2,000 units next month. Data on costs follows:
Per unit costs:
Selling price $40
Variable manufacturing costs $10
Variable selling costs $ 6
Total costs:
Fixed selling costs $ 8,000
A. What is the break-even point in units?
B. What is the break-even point in sales dollars?
C. What is the expected operating income for next month?

D. What is the margin of safety in dollars?
ANSWER:
A. Break-even units = ($16,000 + $8,000)/$24 = 1,000 units
B. Break-even sales dollars = 1,000 × $40 = $40,000

OR
Break-even sales dollars = $24,000/0.6 = $40,000
C. Expected operating income = $80,000 − $32,000 − $24,000 = $24,000
D. Margin of safety = $80,000 − $40,000 = $40,000

POINTS: 1
DIFFICULTY: Easy
REFERENCES: 126-138
MACC.MOWE.15.4.5 - 4.5
133.
Baker Company
Projected Income Statement
For the Current Year Ending December 31
Sales (12,000 units) $240,000
Less variable costs:
Variable manufacturing costs $60,000
Variable selling costs 36,000
Total variable costs 96,000
Less fixed costs:
Fixed selling and administrative
35,000
costs
Total fixed costs 120,000
A. Determine the break-even point in sales dollars.
The sales manager believed the company could increase sales by 1,000 units if
B. advertising expenditures were increased by $15,000. By how much will operating income
increase or decrease if the advertising is increased as suggested?
What is the maximum amount the company could pay for advertising if the advertising
C.
would increase sales by 1,000 units?
ANSWER:
A. $120,000/($20 − $8) = 10,000 units x $20/unit = $200,000 in sales dollars
B. (1,000 × $12) − $15,000 = $3,000 decrease
C. 1,000 × $12 = $12,000

POINTS: 1
MACC.MOWE.15.4.2 - 4.2
134. Information for Select Team Inc. is as follows:

Sales $700,000
A. What is the break-even point in sales dollars?
B. What sales (in dollars) are needed to generate an operating income of $100,000?
ANSWER:
A. ($700,000 − $100,000)/$700,000 = 85.7% (rounded)
$200,000/85.7% = $233,372 (rounded), or $233,333 if not rounded
B. ($700,000 − $100,000)/$700,000 = 85.7% (rounded)

($200,000 + $100,000)/0.857 = $350,058 (rounded), or $350,000 if not rounded
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 142
MACC.MOWE.15.4.2 - 4.2
135. Zena Inc. has the following information for the current year:
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 sales dollars
F. Break-even point in units
G. Profit area
H. Loss area

ANSWER:
POINTS: 1
REFERENCES: p. 141
136. Catelina Company manufactures two products. Information about the two products is as follows:
Product A Product B
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% of its sales (in units) to be Product A (a sales mix
of 3:2).
A. Calculate the contribution margin per package of 3 Products A’s and 2 Product B’s.
B. Determine the break-even point in units for Products A and B.
Determine the level of sales (in dollars) necessary to generate operating income of
C.
$135,000.
ANSWER:
A. Product A = $35 × 3 = $105
Product B = $15 × 2 = 30
Contribution margin per package = $105 + $30 = $135
B. $189,000/$135 per package = 1,400 packages

Product A units = 1,400 × 3 = 4,200 units
Product B units = 1,400 × 2 = 2,800 units
C. ($189,000 + $135,000)/$135 = 2,400 packages

Product A sales = 2,400 × 3 × $80 = $576,000
Product B sales = 2,400 × 2 × $30 = $144,000
Total sales = $576,000 + $144,000 = $720,000

POINTS: 1
REFERENCES: p.145
MACC.MOWE.15.4.2 - 4.2
MACC.MOWE.15.4.4 - 4.4
137. The HandyTool 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.
Of all units sold, 50% are hammers, 30% are screwdrivers, and 20% 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
ANSWER:
A. Ave. CM/unit = ($12 × 0.5) + ($4 × 0.3) + ($20 × 0.2) = $11.20
$76,000/$11.20 = 6,786 units combined of hammers, screwdrivers, and saws
B. 6,786 × 0.5 = 3,393 hammers
C. ($76,000 + $19,000)/$11.20 = 8,482 units

POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 145
MACC.MOWE.15.4.3 - 4.3
138. Income statements for two different wineries are as follows:

White Wine Red Wine
Company Company
Sales $400,000 $400,000
Less: Variable costs 300,000 200,000
Contribution margin $100,000 $200,000
Less: Fixed costs 50,000 150,000
Operating income $ 50,000 $ 50,000
A. Calculate the degree of operating leverage for each firm.
B. Calculate the margin of safety in dollars for each firm.
C. Determine the operating income for each firm if sales increase by 20%.
ANSWER:
A. White Wine Company: $100,000/$50,000 = 2
Red Wine Company: $200,000/$50,000 = 4
B. White Wine Company:

Break-even sales = $50,000/($100,000/$400,000) = $200,000
Margin of safety = $400,000 − $200,000 = $200,000
Red Wine Company:

Break-even sales = $150,000/($200,000/$400,000) = $300,000
Margin of safety = $400,000 − $300,000 = $100,000
C. White Wine Company:

Increase in net income = (.20 × 2) × $50,000 = $20,000
Net income = $50,000 + $20,000 = $70,000
Red Wine Company:

Increase in net income = (.20 × 4) × $50,000 = $40,000
Net income = $50,000 + $40,000 = $90,000
POINTS: 1
REFERENCES: 153-154
MACC.MOWE.15.4.5 - 4.5
139. Magazine Inc. had the following income statement for the current year:
Sales $50,000
Variable expenses 30,000
Fixed expenses 8,000
Required:
A. Calculate the degree of operating leverage ratio.
B. If sales increase by 40 percent, what will be the percentage change in income?
C. If sales decrease by 10 percent how much will income decrease as a percentage?
ANSWER:
A. $20,000/12,000 = 1.6667
B. 1.6667 × 0.4 = 0.666667, or 66.67% increase
C. 1.6667 × 0.1 = 0.16667, or 16.67% decrease

POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 154


140. Explain why cost–volume–profit analysis can be useful to managers.

ANSWER:
Cost–volume–profit (CVP) analysis is a powerful tool for planning and decision making.
Because CVP analysis emphasizes the interrelationships of costs, quantity sold, and price, it
brings together all of the financial information of the firm. CVP analysis can be a valuable
tool to identify the extent and magnitude of the economic trouble a division is facing and to
help pinpoint the necessary solution. CVP analysis can address many other issues as well,
such as the number of units that must be sold to break even, or the impact of an increase in
price on profit. Additionally, CVP analysis allows managers to do sensitivity analysis by
examining the impact of various prices or cost levels on profit.
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 126
MACC.MOWE.15.4.3 - 4.3
NATIONAL STANDARDS: United States - AACSB Communication
141. What are the assumptions underlying cost–volume–profit analysis?

ANSWER:
Some of the assumptions are as follows:
1. The analysis assumes a linear revenue function and a linear cost function.
The analysis assumes that price, total fixed costs, and unit variable costs can be
2.
accurately identified and remain constant over the relevant range.
3. The analysis assumes that what is produced is actually sold.
4. For multiple-product analysis, the sales mix is assumed to be known.
5. The selling prices and costs are assumed to be known with certainty.
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 148
142. How can a multi-product firm determine its break-even point?

ANSWER:
The firm can determine its break-even point by finding the break-even point in sales dollars,
or it can form packages and determine the break-even point for each package, realizing that
the sales mix must be determined as well.

POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 145
143. What are two concepts useful to management when assessing risk?
ANSWER:
The two concepts are Margin of Safety and Degree of Operating Leverage. Margin of Safety
measures budgeted or actual sales over break-even sales. Degree of Operating Leverage is
contribution margin divided by Operating Income.
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p.149
Match each item with the correct statement below.

a. Break-even point
b. Common fixed expenses
c. Contribution margin
d. Direct fixed expenses
e. Margin of safety
f. Operating leverage
g. Degree of operating leverage
h. Sales mix
DIFFICULTY: Medium
MACC.MOWE.15.4.4 - 4.4
MACC.MOWE.15.4.5 - 4.5
144. Fixed costs that are directly traceable to a given segment and, consequently, disappear if the segment is eliminated
ANSWER: d
POINTS: 1
145. The relative combination of products (or services) being sold by an organization
ANSWER: h
POINTS: 1
146. Sales revenue minus total variable cost or price minus unit variable cost
ANSWER: c
POINTS: 1
147. The use of fixed costs to extract higher percentage changes in profits as sales activity changes
ANSWER: f
POINTS: 1
148. The point where total sales revenue equals total cost
ANSWER: a
POINTS: 1
149. A measure of the sensitivity of profit changes to changes in sales volume

ANSWER: g
POINTS: 1
150. Fixed expenses that cannot be directly traced to individual segments and that are unaffected by the elimination of any
one segment
ANSWER: b
POINTS: 1
151. The units sold or expected to be sold or sales revenue earned or expected to be earned above the break-even volume
ANSWER: e
POINTS: 1
Given the following numbers from Books and Things, match the correct value with its appropriate term.
Books and Things sells a product for $40. Unit cost information is as follows:
Direct materials $14
Direct labour $6
Variable overhead $8
Fixed overhead $2
Books and Things normally produces 100,000 units, and the fixed overhead rate is based on this amount. Fixed selling and
administrative expense is $74,000.
a. $12
b. 30%
c. $28
d. 70%
e. $913,333
f. 22,833
DIFFICULTY: Medium

152. Variable cost per unit

ANSWER: c
POINTS: 1
153. Contribution margin per unit

ANSWER: a
POINTS: 1
154. Break-even quantity (in units)

ANSWER: f
POINTS: 1
155. Variable cost ratio

ANSWER: d
POINTS: 1
156. Contribution margin ratio

ANSWER: b
POINTS: 1
157. Break-even point (in dollars)

ANSWER: e
POINTS: 1
Match each item with the correct statement below.

a. horizontal-axis of CVP graph
b. vertical-axis of CVP graph
c. slope of revenue line
d. slope of cost line
e. point where the total revenue line and the total cost line intersect
DIFFICULTY: Easy
REFERENCES: p. 141
158. Variable cost per unit

ANSWER: d
POINTS: 1
159. The selling price per unit

ANSWER: c
POINTS: 1
160. Measured in dollars

ANSWER: b
POINTS: 1
161. Measured in units sold

ANSWER: a
POINTS: 1
162. Break-even point

ANSWER: e
POINTS: 1

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Solution Manual for Cornerstones of Managerial Accounting

Canadian 2nd Edition by Mowen Hanson Heitger Conomy Pittman

1. What is the break-even point?

2. What is the purpose of doing a cost–volume–profit (CVP) analysis?

3. What is the formula to calculate operating income?

4. What is the break-even point?

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

7. Refer to the Figure. What is the budgeted operating income?

8. Refer to the Figure. What is the variable cost ratio?

Copyright © 2015 Nelson Education Limited. 4-3

KEYWORDS: Bloom's Higher order; executing

9. Refer to the Figure. What is the break-even point in sales dollars?

10. What is total variable cost divided by sales revenue?

Date Company makes calendars. Information on cost per unit is as follows:

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

15. Refer to the Figure. What is the variable expense ratio?

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

Copyright © 2015 Nelson Education Limited. 4-6

Copyright © 2015 Nelson Education Limited. 4-7

24. Refer to the Figure. What is the variable cost ratio?

25. What is total contribution margin divided by sales revenue?

28. What is the contribution margin?

d. the difference between sales and total costs

30. The income statement for Thompson Manufacturing Company is as follows:

KEYWORDS: Bloom's Higher order; executing

31. Which of the following is correct?

Copyright © 2015 Nelson Education Limited. 4-12

34. What formula is used to calculate contribution margin ratio?

Copyright © 2015 Nelson Education Limited. 4-13

b. The break-even point will decrease.

c. The dollar value will remain the same.

Copyright © 2015 Nelson Education Limited. 4-17

49. Assume the following information:

Acme Company provided the following data:

Copyright © 2015 Nelson Education Limited. 4-19

54. Assume the following information:

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LEARNING OBJECTIVES: MACC.MOWE.15.4.1 - 4.1

Copyright © 2015 Nelson Education Limited. 4-21

58. Information about the K-9 Salon’s two products is as follows:

Monthly fixed costs are as follows:

Copyright © 2015 Nelson Education Limited. 4-22

Better Bonds provided the following data:

67. What relationship is visually portrayed by a profit-volume graph?

68. Which of the following is characteristic of the profit–volume graph?

69. Where is the break-even point on a cost–volume–profit graph?

Copyright © 2015 Nelson Education Limited. 4-26

71. Which of the following is a characteristic of the cost–volume–profit graph?

72. Which of the following is a characteristic of the cost–volume–profit graph?

a. direct fixed expenses

Copyright © 2015 Nelson Education Limited. 4-28

RATIONALE: $187,000/$850 = 220 packages 220 × 3 = 660

81. How is the sales mix expressed?

Copyright © 2015 Nelson Education Limited. 4-30

a. in terms of units but not revenues

83. Which of the following is an assumption of a cost-volume-profit analysis?

86. What is the formula to calculate the margin of safety in dollars?

b. contribution margin ratio

91. Which is characteristic of operating leverage?

93. What formula is used to calculate the degree of operating leverage?

94. What is operating leverage the relative mix of?

96. At the break-even point, revenue is equal to the contribution margin.

103. If fixed costs increase, the break-even point also increases.

Copyright © 2015 Nelson Education Limited. 4-37