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Chapter 06
Cost-Volume-Profit Analysis
True / False Questions
1. Cost-volume-profit analysis assumes that all costs can be accurately described as either
fixed or variable.
True False
6-1
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
2. Cost-volume-profit analysis assumes that total costs behave in a curvilinear fashion.
True False
3. On a CVP graph, the break-even point is the point at which the contribution margin line
crosses the total cost line.
True False
4. Contribution margin is equal to fixed costs at the break-even point.
True False
5. Break-even units can be found by dividing fixed costs by unit contribution margin.
True False
6. The break-even point is the point at which profit equals zero.
True False
7. Target units equals fixed costs plus target profit divided by the unit contribution margin.
True False
8. The target sales level equals fixed costs plus variable costs divided by the contribution
margin ratio.
True False
6-2
9. To determine the number of units needed to earn a target profit, divide the target
contribution margin by the contribution margin per unit.
True False
10. The margin of safety is the difference between actual sales and budgeted sales.
True False
11. The margin of safety is the point where zero profit is earned.
True False
12. The margin of safety is a positive number at the break-even point.
True False
13. Managers can use cost-volume-profit analysis to evaluate changes in price.
True False
14. Managers can use cost-volume-profit analysis to evaluate changes in cost structure.
True False
15. Degree of operating leverage is calculated by dividing sales by profit.
True False
16. The degree of operating leverage can be multiplied by a change in sales to determine change
in profit.
True False
6-3
17. A firm with a higher degree of operating leverage would be considered less risky than a
comparable firm with a lower degree of operating leverage.
True False
18. Cost-volume-profit analysis can only be performed for companies that sell only one product.
True False
19. In multiproduct cost-volume-profit analysis, a break-even point must be calculated

separately for each product.
True False
20. An important assumption in multiproduct cost-volume-profit analysis is that the sales mix
remains constant.
True False
Multiple Choice Questions
21. Which of the following is not a key assumption of cost-volume-profit?
A. Costs may be fixed, variable, mixed, or step.
B. Production and sales are equal.
C. Changes in total cost are strictly due to changes in activity.
D. Total costs and revenues can be depicted with a straight line.
6-4
22. If production does not equal sales,
A. it must adjust the CVP formulas for that fact if it wishes to use CVP.
B. it cannot use CVP, as an assumption is violated.
C. a CVP analysis will always indicate a breakeven point that cannot be reached.
D. the conclusions it draws from a CVP analysis will not be as sound as they would be if
production equaled sales.
23. Profit is indicated on a cost-volume-profit graph by
A. the profit line.
B. the horizontal difference between the revenue line and the cost line.
C. the vertical difference between the revenue line and the cost line.
D. the horizontal distance from the breakeven point.
24. What component of the profit equation should be set equal to zero to find the breakeven
point?
A. Total sales revenue
B. Total variable costs
C. Total fixed costs
D. Profit
25. The break-even point is
A. the point where zero contribution margin is earned.
B. the point where zero profit is earned.
C. the point where selling price just equals variable cost.
D. equal to sales revenue less fixed costs.
6-5
26. The profit equation is
A. (Unit price × Q) - (Unit variable costs × Q) - Total fixed costs = Profit
B. (Unit price × Q) - (Unit variable costs × Q) + Total fixed costs = Profit
C. (Unit price - Unit variable costs - Total fixed costs) × Q = Profit
D. (Unit price × Q) + (Unit variable costs × Q) + Total fixed costs = Profit
27. The formula for break-even point in terms of units is
A. Total variable costs/Unit contribution margin
B. Total fixed costs/Contribution margin ratio
C. Total fixed costs/Unit contribution margin
D. Total variable costs/Total fixed costs
28. The formula for break-even point in terms of revenue is
A. Total variable costs/Contribution margin ratio
29. Mustang Corp has a selling price of $15, variable costs of $10 per unit, and fixed costs of
$35,000. How many units must be sold to break-even?
A. 7,000
B. 14,000
C. 3,500
D. 2,334
6-6
30. Thunder Corp has a selling price of $25 per unit, variable costs of $20 per unit, and fixed
costs of $35,000. How many units must be sold to break even?
A. 7,000
B. 14,000
C. 3,500
D. 2,334
31. Maggie Corp has a selling price of $20 per unit, variable costs of $10 per unit, and fixed costs
of $140,000. How many units must be sold to break even?
A. 7,000
B. 14,000
C. 3,500
D. 2,334
32. Quail, Inc, has a contribution margin of 40% and fixed costs of $130,000. What is the break-
even point?
A. $52,000
B. $325,000
C. $225,000
D. $78,000
6-7
33. Allen, Inc, has a contribution margin of 40% and fixed costs of $250,000. What is the break-
even point?
A. $100,000
B. $250,000
C. $375,000
D. $625,000
34. Mira Corp has a selling price of $50 per unit, variable costs of $40 per unit, and fixed costs of
A. 1,800
B. 2,250
C. 9,000
D. 2,000
35. Jasper Corp has a selling price of $30, and variable costs of $20 per unit. When 12,000 units
are sold, profits equaled $70,000. How many units must be sold to break-even?
A. 19,000
B. 12,000
C. 14,333
D. 5,000
6-8
36. At a level of 20,000 units sold, Gail Corp has sales of $400,000, a contribution margin ratio of
40%, and a profit of $40,000. What is the break-even point in units?
A. 12,000
B. 8,000
C. 20,000
D. 15,000
37. Last month Peggy Company had a $30,000 profit on sales of $250,000. Fixed costs are
$60,000 a month. What sales revenue is needed for Peggy to break even?
A. $166,667
B. $90,000
C. $30,000
D. $280,000
38. Last month Carlos Company had a $60,000 profit on sales of $300,000. Fixed costs are
$120,000 a month. What sales revenue is needed for Carlos to break even?
A. $360,000
B. $420,000
C. $200,000
D. $240,000
6-9
39. Skyline Corp has a selling price of $25 per unit, variable costs of $20 per unit, and fixed costs
of $25,000. What sales revenue is needed to break-even?
A. $100,000
B. $5,000
C. $125,000
D. $50,000
40. Dancer Corp has a selling price of $20 per unit, and variable costs of $10 per unit. When
12,000 units are sold, profits equaled $35,000. How many units must be sold to break-even?
A. 32,300
B. 20,400
C. 24,366
D. 8,500
41. Belle Corp has a selling price of $50 per unit, variable costs of $40 per unit, and fixed costs of
$100,000. What sales revenue is needed to break-even?
A. $500,000
B. $125,000
C. $5,000,000
D. $1,000,000
6-10
42. Virgil Corp has a selling price of $30 per unit, and variable costs of $20 per unit. When 12,000
units are sold, profits equaled $55,000. How many units must be sold to break-even?
A. 4,000
B. 12,000
C. 6,500
D. 5,500
43. Last month Dexter Company had a $15,000 loss on sales of $150,000. Fixed costs are
$60,000 a month. How much do sales have to increase for Dexter to break even?
A. $60,000
B. $75,000
C. $45,000
D. $50,000
44. Last month Empire Company had a $30,000 profit on sales of $250,000. Fixed costs are
$60,000 a month. How much would sales have to decrease for Empire to break even?
A. $90,000
B. $83,333
C. $166,667
D. $280,000
6-11
45. Last month Angus Company had a $30,000 loss on sales of $250,000. Fixed costs are $60,000
a month. What sales revenue is needed for Angus to break even?
A. $166,667
B. $500,000
C. $280,000
D. $220,000
46. At a sales level of 20,000 units, Pony Corp has sales of $400,000, a variable cost ratio of 60%,
and a profit of $40,000. What is the break-even point in units?
A. 8,000
B. 12,000
C. 15,000
D. 20,000
47. Last month Stagecoach Company had a $60,000 loss on sales of $300,000. Fixed costs are
$120,000 a month. What sales revenue is needed for Stagecoach to break even?
A. $360,000
B. $480,000
C. $600,000
D. $420,000
6-12
48. The formula for target units is
A. (Total fixed costs + Target profit)/Contribution margin ratio
B. (Total variable costs + Total fixed costs)/Contribution margin ratio
C. (Total fixed costs + Target profit)/Unit contribution margin
D. (Total variable costs + Total fixed costs)/Unit contribution margin
49. The formula for target sales is
50. Merlot, Inc. has fixed costs of $200,000, sales price of $50, and variable cost of $30 per unit.
How many units must be sold to earn profit of $80,000?
A. 2,800
B. 11,200
C. 14,000
D. 202,400
51. Martol, Inc. has fixed costs of $200,000 and a contribution margin ratio of 40%. How much
sales revenue must be earned for a profit of $80,000?
A. $140,000
B. $560,000
C. $700,000
D. $1,120,000
6-13
52. Megan, Inc. has fixed costs of $400,000, sales price of $40, and variable cost of $30 per unit.
How many units must be sold to earn profit of $80,000?
A. 2,000
B. 10,000
C. 40,000
D. 48,000
53. Fern, Inc. has fixed costs of $400,000 and a contribution margin ratio of 30%. How much sales
revenue must be earned for a profit of $80,000?
A. $144,000
B. $336,000
C. $1,600,000
D. $1,920,000
54. Pecan, Inc, has a contribution margin of 50% and fixed costs of $220,000. What sales revenue
is needed to attain a $60,000 profit?
A. $70,400
B. $440,000
C. $560,000
D. $240,000
6-14
55. Munoz Inc. has a contribution margin ratio of 30% and fixed costs of $90,000. What sales
revenue is needed to generate a $60,000 profit?
A. $45,000
B. $200,000
C. $500,000
D. $214,286
56. Louise Corp has a contribution margin ratio of 35%, fixed costs of $60,000, and a profit of
$45,000. What are total sales?
A. $300,000
B. $105,000
C. $36,750
D. $171,429
57. Ironwood Inc. has a variable cost ratio of 60% and fixed costs of $90,000. What sales revenue
is needed to generate a $120,000 profit?
A. $128,572
B. $225,000
C. $375,000
D. $525,000
6-15
58. Payton Corp has sales of $200,000, a contribution margin ratio of 35%, and a target profit of
$40,000. If 10,000 units were sold, what are total variable costs?
A. $200,000
B. $130,000
C. $240,000
D. $160,000
59. Chelsea Company has sales of $400,000, variable costs of $10 per unit, fixed costs of
$100,000, and a target profit of $60,000. How many units were sold?
A. 12,000
B. 18,000
C. 24,000
D. 30,000
60. Elk Corp has sales of $300,000, a contribution margin ratio of 40%, and a target profit of
$30,000. If 20,000 units were sold, what is the variable cost per unit?
A. $22.50
B. $9.00
C. $6.00
D. $2.00
6-16
61. Bugle Corp has sales of $400,000, a variable cost ratio of 40%, and a profit of $40,000. If
10,000 units were sold, what is the contribution margin per unit?
A. $60.00
B. $36.00
C. $24.00
D. $18.00
62. Nancy Company has sales of $100,000, variable costs of $5 per unit, fixed costs of $25,000,
and a profit of $15,000. How many units were sold?
A. 20,000
B. 16,000
C. 12,000
D. 8,000
63. Keith Corp has sales of $200,000, a contribution margin ratio of 35%, and a profit of $40,000.
If 10,000 units were sold, what is the variable cost per unit?
A. $13.00
B. $20.00
C. $7.00
D. $3.00
6-17
64. Vesper Company has sales of $200,000, variable costs of $8 per unit, fixed costs of $50,000,
and a profit of $30,000. How many units were sold?
A. 10,000
B. 15,000
C. 20,000
D. 25,000
65. Paint Corp has sales of $600,000, a contribution margin ratio of 30%, and a profit of $40,000.
If 20,000 units were sold, what is the variable cost per unit?
A. $9.00
B. $30.00
C. $21.00
D. $3.00
66. Harvest Corp has a contribution margin ratio of 30%, fixed costs of $45,000, and a profit of
A. $31,500
B. $105,000
C. $150,000
D. $350,000
6-18
67. Leather Company sold 20,000 units, had variable costs of $12 per unit, fixed costs of
$100,000, and profits of $60,000. What is the selling price per unit?
A. $8
B. $17
C. $20
D. $32
68. Last month Lyle Company had a $60,000 profit on sales of $300,000. Fixed costs are
$120,000 a month. How much do sales have to increase for Lyle to earn a $100,000 profit?
A. $66,667
B. $83,333
C. $220,000
D. $400,000
69. The margin of safety is the difference between
A. actual sales and budgeted sales.
B. actual sales and break-even sales.
C. target sales and actual sales.
D. target sales and budgeted sales.
6-19
70. Dragon, Inc. has actual sales of $400,000 and a margin of safety of $150,000. What is
Dragon's break-even point in sales?
A. $100,000
B. $250,000
C. $350,000
D. $450,000
71. Jerome Corp has fixed costs of $500,000 and a contribution margin ratio of 40%. Currently,
sales are $3,000,000. What is Jerome's margin of safety?
A. $1,750,000
B. $3,500,000
C. $5,250,000
D. $7,000,000
72. Idaho Corp has fixed costs of $20,000 and a contribution margin ratio of 50%. Currently, sales
are $75,000. What is Idaho's margin of safety?
A. $28,000
B. $35,000
C. $42,000
D. $70,000
6-20
73. The margin of safety tells managers
A. how much sales would have to increase to hit the target profit.
B. how much profit would drop if sales decreased.
C. how much sales could drop before the firm no longer earns profits.
D. how much profit would have to increase to hit target sales.
74. Dexter Corp has fixed costs of $500,000 and a contribution margin ratio of 25%. Currently,
margin of safety is $1,000,000. What are Dexter's current sales?
A. $1,000,000
B. $2,000,000
C. $3,000,000
D. $4,000,000
75. Irwin Corp has fixed costs of $20,000 and a contribution margin ratio of 40%. Currently,
margin of safety is $35,000. What are Irwin's current sales?
A. $35,000
B. $37,500
C. $50,000
D. $85,000
6-21
76. Fountain Corp has a selling price of $15 per unit and variable costs of $10 per unit. When
14,000 units are sold, profits equaled $45,000. What is the margin of safety?
A. $210,000
B. $105,000
C. $135,000
D. $75,000
77. Fontaine Corp has a selling price of $15 and variable costs of $10 per unit. When 10,000 units
are sold, profits equaled $25,000. What is the margin of safety?
A. $75,000
B. $25,000
C. $105,000
D. $50,000
78. Rollag Corp has a selling price of $30 and variable costs of $20 per unit. When 14,000 units
A. $420,000
B. $135,000
C. $142,500
D. $75,000
6-22
79. Indigo Corp has a selling price of $45 and variable costs of $30 per unit. When 10,000 units
A. $75,000
B. $25,000
C. $80,000
D. $150,000
80. Knoll, Inc. currently sells 15,000 units a month for $50 each, has variable costs of $20 per
unit, and fixed costs of $300,000. Knoll is considering increasing the price of its units to $60
per unit. This will not affect costs, but demand is expected to drop 20%. Should Knoll
increase the cost of its product?
A. Yes; profit will increase $30,000.
B. Yes, profit will increase $150,000.
C. No, profit will decrease $150,000.
D. No, profit will decrease $30,000.
unit, and fixed costs of $300,000. Knoll is considering increasing the price of its units to $60
per unit. If the price is changed, how many units will Knoll need to sell for profit to remain the
same as before the price change?
A. 10,000
B. 11,250
C. 12,000
D. 12,500
6-23
82. Cost structure refers to
A. a company's break-even point.
B. whether fixed costs are covered by contribution margin.
C. how a company uses variable versus fixed costs.
D. where funds are stored.
83. Plymouth Corp sells units for $100 each. Variable costs are $75 per unit, and fixed costs are
$200,000. If Plymouth leases a new machine, fixed costs will increase by $60,000 a year, but
production will be more efficient, saving $5 per unit. At what level of production will Plymouth
be indifferent between leasing and not leasing the new machine?
A. 5,000
B. 10,000
C. 10,400
D. 12,000
84. A company is debating whether to change its cost structure so that fixed costs increase from
$300,000 to $400,000, but variable costs decrease from $5 per unit to $4 per unit. If it were to
implement the change at its current production level of 100,000, profit would not change.
What would happen to the company's profit if the change were implemented and production
increased to 125,000?
A. It will stay the same.
B. It will increase.
C. It will decrease.
D. It could increase or decrease.
6-24
85. A company is debating whether to change its cost structure so that variable costs increase
from $4 per unit to $5 per unit but fixed costs decrease from $400,000 to $300,000. If it were
to implement the change at its current production level of 100,000, profit would not change.
What would happen to the company's profit if the change were implemented and production
increased?
86. Plymouth Corp sells units for $100 each. Variable costs are $75 per unit, and fixed costs are
$200,000. If Plymouth leases a new machine, production will be more efficient, saving $5 per
unit. If Plymouth plans to sell 12,000 units, at what lease cost will Plymouth be indifferent
between leasing and not leasing the new machine?
A. $10,000
B. $40,000
C. $60,000
D. $80,000
87. Degree of operating leverage is calculated as
A. profit divided by contribution margin.
B. break-even sales divided by profit.
C. profit divided by break-even sales.
D. contribution margin divided by profit.
6-25
88. Degree of operating leverage is used to
A. calculate sales change given profit change.
B. calculate profit change given sales change.
C. calculate break-even sales given sales change.
D. calculate break-even sales given profit change.
89. Frontier Corp has a contribution margin of $450,000 and profit of $150,000. What is its degree
of operating leverage?
A. .33
B. 1.67
C. 2.5
D. 3
90. Frontier Corp has a contribution margin of $450,000 and profit of $150,000. If sales increase
20%, by how much will profits increase?
A. 20%
B. 30%
C. 60%
D. 90%
6-26
91. Frontier Corp has fixed costs of $300,000 and profit of $150,000. What is its degree of
operating leverage?
A. .33
B. 1.67
C. 2.5
D. 3
92. Frontier Corp has fixed costs of $300,000 and profit of $150,000. If sales increase 20%, by
how much will profits increase?
A. 20%
B. 30%
C. 60%
D. 90%
93. Frontier Corp sells units for $50, has unit variable costs of $20, and fixed costs of $300,000. If
Frontier sells 15,000 units, what is its degree of operating leverage?
A. .33
B. 1.67
C. 2.5
D. 3
6-27
94. Frontier Corp sells units for $50, has unit variable costs of $20, and fixed costs of $300,000.
Frontier sells 15,000 units. If sales increase 20%, by how much will profits increase?
A. 20%
B. 30%
C. 60%
D. 90%
95. In multiproduct cost-volume-profit analysis, an assumption made in addition to those used in

single-product CVP analysis is that
A. the sales mix remains constant.
B. all costs can be classified as fixed or variable.
C. costs are linear in the relevant range.
D. production and sales are equal.
96. If a firm sells more than one product, the break-even point in units represents
A. the number of units of the largest-selling product required to break even.
B. the number of units of the most profitable product required to break even.
C. the number of units of the highest-revenue product required to break even.
D. the sum of the units of all products required to break even.
6-28
97. Friar Corp sells two products. Product A sells for $100 per unit, and has unit variable costs of
$60. Product B sells for $70 per unit, and has unit variable costs of $50. Currently, Friar sells
three units of product B for every one unit of product A sold. Friar has fixed costs of
$750,000. What is Friar's break-even point in units?
A. 30,000 units of A and 30,000 units of B
B. 7,500 units of A and 22,500 units of B
C. 22,500 units of A and 7,500 units of B
D. 15,000 units of A and 15,000 units of B
98. Friar Corp sells two products. Product A sells for $100 per unit, and has unit variable costs of
$60. Product B sells for $70 per unit, and has unit variable costs of $50. Currently, Friar sells
three units of product B for every one unit of product A sold. Friar has fixed costs of
$750,000. How many units would Friar have to sell to earn a profit of $250,000?
99. Graham Corp sells two products. Product A sells for $200 per unit, and has unit variable costs
of $150. Product B sells for $50 per unit, and has unit variable costs of $20. Currently,
Graham sells three units of product B for every two units of product A sold. Graham has fixed
costs of $760,000. What is Graham's break-even point in units?
6-29
100.Graham Corp sells two products. Product A sells for $200 per unit, and has unit variable
costs of $150. Product B sells for $50 per unit, and has unit variable costs of $20. Currently,
Graham sells three units of product B for every two units of product A sold. Graham has fixed
costs of $760,000. How many units would Graham have to sell to earn a profit of $57,000?
Essay Questions
101.Roland had revenues of $600,000 in March. Fixed costs in March were $200,000 and profit
was $40,000. Answer the following questions:
a. What was the contribution margin percentage?

b. What monthly sales volume (in dollars) would be needed to break-even?
c. What sales volume (in dollars) would be needed to earn $150,000?
6-30
102.Portia Company is a retailer of hammers. Portia pays $4.75 for each hammer and sells them
for $8.00. Monthly fixed costs are $26,000. The hammer cost is the only variable cost.
a. What is the contribution margin per unit?

b. What is the break-even point in units?
c. How many units will Portia need to sell to earn target profit of $13,000?
103.Nora Inc. sells a single product for $15. Variable costs include $6 for each unit plus a 10%
sales commission. Fixed costs are $150,000 per month.
a. What is the contribution margin percentage?

b. What is the break-even sales revenue?
c. What sales revenue is needed to achieve a $100,000 per month profit?
6-31
104.Raven Inc. sells a single product for $45. Variable costs include $26 for each unit plus a $10
selling expense per unit. Fixed costs are $200,000 per month.

b. What is the breakeven sales revenue?
105.Holly Inc. sells a single product for $40. Variable costs include $22 for each unit plus a 10%

6-32
106.Jasmine sells a product for $50 per unit. Variable costs per unit are $30, and monthly fixed
costs are $150,000. Answer the following questions:
a. What is the break-even point in units?

b. What unit sales would be required to earn a target profit of $100,000?
c. Assume they achieve the level of sales required in part b, what is the margin of safety in
sales dollars?
107.Halifax Products sells a product for $75. Variable costs per unit are $50, and monthly fixed

sales dollars?
6-33
108.Juniper had revenues of $450,000 in March. Fixed costs in March were $240,000 and profit

c. What was the margin of safety for March?
109.Dallas Inc. sells a product for $60. Variable costs are 60% of sales, and monthly fixed costs
are $54,000. Answer the following questions:

sales dollars?
6-34
110.Duncan had revenues of $900,000 in March. Fixed costs in March were $480,000 and profit

111.Boise Corp had a margin of safety of $375,000 last month, with sales revenue of $1,000,000
and fixed costs of $250,000.
a. What are break-even sales?

b. What is the contribution margin ratio?
c. How much profit did Boise earn last month?
d. How much would sales have to increase for Boise to earn profit of 600,000?
6-35
112.Akron Corp had a margin of safety of $500,000 last month, with sales revenue of $1,250,000
and fixed costs of $150,000.

c. How much profit did Akron earn last month?
d. How much would sales have to be for Akron to earn profit of 500,000?
6-36
113.The manager of Calypso, Inc. is considering raising its current price of $30 per unit by 10%. If
she does so, she estimates that demand will decrease by 20,000 units per month. Calypso
currently sells 50,000 units per month, each of which costs $25 in variable costs. Fixed costs
are $180,000.
a. What is the current profit?

b. What is the current break-even point in units?
c. If the manager raises the price, what will profit be?
d. If the manager raises the price, what will be the new break-even point in units?
e. Assume the manager does not know how much demand will drop if the price increases. By
how much would demand have to drop before the manager would not want to implement the
price increase?
6-37
114.The manager of Arbor, Inc. is considering raising its current price of $50 per unit by 10%. If
she does so, she estimates that demand will decrease by 30,000 units per month. Arbor
currently sells 100,000 units per month, each of which costs $35 in variable costs. Fixed
costs are $1,200,000.

e. Assume the manager does not know how much demand will drop if the price increases. By
how much would demand have to drop before the manager would not want to implement the
price increase?
6-38
115.Glade, Inc. is trying to decide whether to increase the commission-based pay of its
salespeople. Currently, each of its five salespeople earns a 15% commission on the units they
sell for $100 each, plus a fixed salary of $40,000. Glade hopes that by increasing
commissions to 20% and decreasing each salesperson's salary to $25,000, sales will increase
because salespeople will be more motivated. Currently, sales are 13,000 units. Glade's other
fixed costs, NOT including the salespeople's salaries, total $580,000. Glade's other variable
costs, NOT including commissions, total $20 per unit.
a. What is current profit?

c. What would the break-even point in units be if commissions are increased and salaries
decreased?
d. If sales increase by 4,000 units, what will profit be under the new plan?
e. At what sales level would Glade be indifferent between the lower-commission plan and the
higher-commission plan?
6-39
116.Forge, Inc. is trying to decide whether to increase the commission-based pay of its
salespeople. Currently, each of its ten salespeople earns a 10% commission on the units they
sell for $90 each, plus a fixed salary of $30,000. Forge hopes that by increasing commissions
to 20% and decreasing each salesperson's salary to $21,000, sales will increase because
salespeople will be more motivated. Currently, sales are 12,000 units. Forge's other fixed
costs, NOT including the salespeople's salaries, total $188,580. Forge's other variable costs,
NOT including commissions, total $30 per unit.

decreased?
e. At what sales level would Forge be indifferent between the lower-commission plan and the
higher-commission plan?
6-40
117.Cantor Products sells a product for $75. Variable costs per unit are $50, and monthly fixed

c. Assume they achieve the level of sales required in part b, what is the degree of operating
leverage?
d. If sales decrease by 30% from that level, by what percentage will profits decrease?
118.Harmony sells a product for $50 per unit. Variable costs per unit are $30, and monthly fixed

c. Assume they achieve the level of sales required in part b, what is the degree of operating
leverage?
d. If sales increase by 40% from that level, by what percentage will profits increase?
6-41
119.Malibu, Inc., which has fixed costs of $2,150,000, sells three products whose sales price,
variable cost per unit, and percentage of sales units are presented in the table below.
a. What is the weighted average unit contribution margin?

b. At the break-even point, how many units of Product A must be sold?
c. To make a profit of $1,075,000, how many units of Product B must be sold?
6-42
120.Drake, Inc., which has fixed costs of $1,400,000, sells three products whose sales price,

c. To make a profit of $910,000, how many units of Product B must be sold?
6-43
Chapter 06 Cost-Volume-Profit Analysis Answer Key
True / False Questions
1. Cost-volume-profit analysis assumes that all costs can be accurately described as either
fixed or variable.
TRUE
Cost-volume-profit analysis assumes that costs can be classified or broken down as fixed
or variable.
AACSB: Reflective Thinking

AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.
Topic: Assumptions of cost-volume-profit analysis
2. Cost-volume-profit analysis assumes that total costs behave in a curvilinear fashion.
FALSE
Cost-volume-profit analysis assumes that total costs behave in a linear fashion.

Blooms: Remember
Difficulty: 2 Medium
6-44
3. On a CVP graph, the break-even point is the point at which the contribution margin line
crosses the total cost line.
FALSE
The break-even point is the point at which the total revenue line crosses the total cost
line.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.
Topic: CVP graph
4. Contribution margin is equal to fixed costs at the break-even point.
TRUE
At break-even point, profit, or contribution margin minus fixed costs, is zero, so

contribution margin must equal fixed costs.

Blooms: Remember
Difficulty: 1 Easy
Topic: Unit contribution margin method
6-45
5. Break-even units can be found by dividing fixed costs by unit contribution margin.
TRUE
At break-even point, contribution margin just covers fixed costs, so dividing fixed costs by
unit contribution margin yields the number of units needed.

Blooms: Remember
Difficulty: 1 Easy
6. The break-even point is the point at which profit equals zero.
TRUE
The break-even point is where the company breaks even, or has zero profit.

Blooms: Remember
Difficulty: 1 Easy
6-46
7. Target units equals fixed costs plus target profit divided by the unit contribution margin.
TRUE
This is the formula for target units.

Blooms: Remember
Difficulty: 1 Easy
8. The target sales level equals fixed costs plus variable costs divided by the contribution
margin ratio.
FALSE
Target sales level equals fixed costs plus target profit divided by the contribution margin
ratio.

Blooms: Remember
Difficulty: 1 Easy
Topic: Contribution margin ratio method
6-47
9. To determine the number of units needed to earn a target profit, divide the target
contribution margin by the contribution margin per unit.
FALSE
Divide total fixed costs plus profit by the contribution margin per unit.

Blooms: Remember
10. The margin of safety is the difference between actual sales and budgeted sales.
FALSE
The margin of safety is the difference between actual or budgeted sales and break-even
sales.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Compute the margin of safety.
Topic: Margin of safety
6-48
11. The margin of safety is the point where zero profit is earned.
FALSE
The margin of safety is how much sales can drop before zero profit is earned.

Blooms: Remember
Difficulty: 1 Easy
12. The margin of safety is a positive number at the break-even point.
FALSE
The margin of safety will be zero at the break-even point.

Blooms: Understand
6-49
13. Managers can use cost-volume-profit analysis to evaluate changes in price.
TRUE
CVP analysis is useful in evaluating changes in price and cost structure.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04 Analyze how changes in prices and cost structure affect cost-volume-profit relationships.
Topic: CVP for decision making
14. Managers can use cost-volume-profit analysis to evaluate changes in cost structure.
TRUE
CVP analysis is useful in evaluating changes in price and cost structure.

Blooms: Remember
Difficulty: 1 Easy
Topic: Changes in cost structure
6-50
15. Degree of operating leverage is calculated by dividing sales by profit.
FALSE
Degree of operating leverage is calculated by dividing contribution margin by profit.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-05 Calculate the degree of operating leverage and use it to predict the effect a change in sales will
have on profit.
Topic: Degree of operating leverage
16. The degree of operating leverage can be multiplied by a change in sales to determine
change in profit.
TRUE
This is the primary use of degree of operating leverage.

Blooms: Remember
Difficulty: 1 Easy
have on profit.
6-51
17. A firm with a higher degree of operating leverage would be considered less risky than a
comparable firm with a lower degree of operating leverage.
FALSE
A company with a higher degree of operating leverage will experience larger swings in
profit as a result of changes in sales revenue, and so will be considered more risky.

Blooms: Understand
have on profit.
18. Cost-volume-profit analysis can only be performed for companies that sell only one
product.
FALSE
Firms that sell more than one product can use multiproduct cost-volume-profit analysis.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-06 Perform multiproduct cost-volume-profit analysis and explain how the product or sales mix
affects the analysis.
Topic: Weighted-average contribution margin
6-52
19. In multiproduct cost-volume-profit analysis, a break-even point must be calculated
separately for each product.
FALSE
A combined break-even point can be calculated using a weighted average contribution

margin.

Blooms: Understand
Difficulty: 1 Easy
20. An important assumption in multiproduct cost-volume-profit analysis is that the sales mix
remains constant.
TRUE
The weighted average contribution margin approach assumes a constant sales mix.

Blooms: Understand
Difficulty: 1 Easy
Multiple Choice Questions
6-53
21. Which of the following is not a key assumption of cost-volume-profit?
A. Costs may be fixed, variable, mixed, or step.
B. Production and sales are equal.
C. Changes in total cost are strictly due to changes in activity.
D. Total costs and revenues can be depicted with a straight line.
CVP assumes that all costs be either fixed or variable.

Blooms: Remember
6-54
22. If production does not equal sales,
A. it must adjust the CVP formulas for that fact if it wishes to use CVP.
B. it cannot use CVP, as an assumption is violated.
C. a CVP analysis will always indicate a breakeven point that cannot be reached.
D. the conclusions it draws from a CVP analysis will not be as sound as they would be if
production equaled sales.
CVP analysis can be used, but its conclusions will only be as sound as the assumptions on
which they are based.

Blooms: Understand
Difficulty: 3 Hard
6-55
23. Profit is indicated on a cost-volume-profit graph by
A. the profit line.
B. the horizontal difference between the revenue line and the cost line.
C. the vertical difference between the revenue line and the cost line.
D. the horizontal distance from the breakeven point.
The vertical difference between the revenue line and the cost line is revenue minus cost,
which equals profit.

Blooms: Remember
Topic: CVP graph
6-56
24. What component of the profit equation should be set equal to zero to find the breakeven
point?
A. Total sales revenue
B. Total variable costs
C. Total fixed costs
D. Profit
The break-even point is the point where profit is zero.

Blooms: Remember
Difficulty: 1 Easy
Topic: Profit equation method
25. The break-even point is
A. the point where zero contribution margin is earned.
B. the point where zero profit is earned.
C. the point where selling price just equals variable cost.
D. equal to sales revenue less fixed costs.
This is the definition of the break-even point.

Blooms: Remember
Difficulty: 1 Easy
6-57
26. The profit equation is
A. (Unit price × Q) - (Unit variable costs × Q) - Total fixed costs = Profit
B. (Unit price × Q) - (Unit variable costs × Q) + Total fixed costs = Profit
C. (Unit price - Unit variable costs - Total fixed costs) × Q = Profit
D. (Unit price × Q) + (Unit variable costs × Q) + Total fixed costs = Profit
This is the formula for profit.

Blooms: Remember
Difficulty: 1 Easy
27. The formula for break-even point in terms of units is
A. Total variable costs/Unit contribution margin
This is the formula for break-even units.

Blooms: Remember
Difficulty: 1 Easy
6-58
28. The formula for break-even point in terms of revenue is
A. Total variable costs/Contribution margin ratio
This is the formula for break-even sales.

Blooms: Remember
Difficulty: 1 Easy
29. Mustang Corp has a selling price of $15, variable costs of $10 per unit, and fixed costs of
A. 7,000
B. 14,000
C. 3,500
D. 2,334
$35,000/($15 - $10) = 7,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
6-59
30. Thunder Corp has a selling price of $25 per unit, variable costs of $20 per unit, and fixed
A. 7,000
B. 14,000
C. 3,500
D. 2,334
$35,000/($25 - $20) = 7,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
6-60
31. Maggie Corp has a selling price of $20 per unit, variable costs of $10 per unit, and fixed
A. 7,000
B. 14,000
C. 3,500
D. 2,334
$140,000/($20 - $10) = 14,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
6-61
32. Quail, Inc, has a contribution margin of 40% and fixed costs of $130,000. What is the
break-even point?
A. $52,000
B. $325,000
C. $225,000
D. $78,000
$130,000/0.40 = $325,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
6-62
33. Allen, Inc, has a contribution margin of 40% and fixed costs of $250,000. What is the
break-even point?
A. $100,000
B. $250,000
C. $375,000
D. $625,000
$250,000/0.40 = $625,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
6-63
34. Mira Corp has a selling price of $50 per unit, variable costs of $40 per unit, and fixed costs
of $90,000. How many units must be sold to break-even?
A. 1,800
B. 2,250
C. 9,000
D. 2,000
$90,000/($50 - $40) = 9,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
6-64
35. Jasper Corp has a selling price of $30, and variable costs of $20 per unit. When 12,000
units are sold, profits equaled $70,000. How many units must be sold to break-even?
A. 19,000
B. 12,000
C. 14,333
D. 5,000
Fixed costs are [($30 - $20) × 12,000] - $70,000 = $50,000. Break-even point is
$50,000/($30 - $20) = 5,000.
AACSB: Analytic
Blooms: Apply
6-65
36. At a level of 20,000 units sold, Gail Corp has sales of $400,000, a contribution margin ratio
of 40%, and a profit of $40,000. What is the break-even point in units?
A. 12,000
B. 8,000
C. 20,000
D. 15,000
Fixed costs are ($400,000 × 40%) - $40,000 = $120,000. Break-even point is

$120,000/0.40 = $300,000 in sales, and $300,000/$20 = 15,000 in units.
AACSB: Analytic
Blooms: Apply
6-66
37. Last month Peggy Company had a $30,000 profit on sales of $250,000. Fixed costs are
$60,000 a month. What sales revenue is needed for Peggy to break even?
A. $166,667
B. $90,000
C. $30,000
D. $280,000
Contribution margin ratio is ($30,000 + $60,000)/$250,000 = 36%. Break-even point is

$60,000/.36 = $166,667.
AACSB: Analytic
Blooms: Apply
6-67
38. Last month Carlos Company had a $60,000 profit on sales of $300,000. Fixed costs are
$120,000 a month. What sales revenue is needed for Carlos to break even?
A. $360,000
B. $420,000
C. $200,000
D. $240,000
Contribution margin ratio is ($60,000 + $120,000)/$300,000 = 60%. Break-even point is

$120,000/0.60 = $200,000.
AACSB: Analytic
Blooms: Apply
6-68
39. Skyline Corp has a selling price of $25 per unit, variable costs of $20 per unit, and fixed
costs of $25,000. What sales revenue is needed to break-even?
A. $100,000
B. $5,000
C. $125,000
D. $50,000
Break-even point in units is $25,000/($25 - $20) = 5,000. Revenue = 5,000 × $25 =

$125,000.
AACSB: Analytic
Blooms: Apply
6-69
40. Dancer Corp has a selling price of $20 per unit, and variable costs of $10 per unit. When
12,000 units are sold, profits equaled $35,000. How many units must be sold to break-
even?
A. 32,300
B. 20,400
C. 24,366
D. 8,500
$85,000/($20 - $10) = 8,500.
AACSB: Analytic
Blooms: Apply
6-70
41. Belle Corp has a selling price of $50 per unit, variable costs of $40 per unit, and fixed costs
of $100,000. What sales revenue is needed to break-even?
A. $500,000
B. $125,000
C. $5,000,000
D. $1,000,000
Break-even point in units is $10,000/($50 - $40) = 10,000. Revenue = 10,000 × $50 =

$500,000.
AACSB: Analytic
Blooms: Apply
6-71
42. Virgil Corp has a selling price of $30 per unit, and variable costs of $20 per unit. When
12,000 units are sold, profits equaled $55,000. How many units must be sold to break-
even?
A. 4,000
B. 12,000
C. 6,500
D. 5,500
$65,000/($30 - $20) = 6,500.
AACSB: Analytic
Blooms: Apply
6-72
43. Last month Dexter Company had a $15,000 loss on sales of $150,000. Fixed costs are
$60,000 a month. How much do sales have to increase for Dexter to break even?
A. $60,000
B. $75,000
C. $45,000
D. $50,000
Contribution margin ratio is ($60,000 - $15,000)/$150,000 = 30%. Break-even sales is

$60,000/0.30 = $200,000. Sales must increase $200,000 - $150,000 = $50,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
6-73
44. Last month Empire Company had a $30,000 profit on sales of $250,000. Fixed costs are
$60,000 a month. How much would sales have to decrease for Empire to break even?
A. $90,000
B. $83,333
C. $166,667
D. $280,000
Contribution margin ratio is ($30,000 + $60,000)/$250,000 = 36%. Break-even sales is

$60,000/0.36 = $166,667. Sales must decrease $250,000 - $166,667 = $83,333.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
6-74
45. Last month Angus Company had a $30,000 loss on sales of $250,000. Fixed costs are
$60,000 a month. What sales revenue is needed for Angus to break even?
A. $166,667
B. $500,000
C. $280,000
D. $220,000

$60,000/0.12 = $500,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
6-75
46. At a sales level of 20,000 units, Pony Corp has sales of $400,000, a variable cost ratio of
60%, and a profit of $40,000. What is the break-even point in units?
A. 8,000
B. 12,000
C. 15,000
D. 20,000
Contribution margin ratio is 100% - 60% = 40%. Fixed costs are ($400,000 × 40%) -
$40,000 = $120,000. Break-even sales are $120,000/0.40 = $300,000. In units, this is
$300,000/$20 = 15,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
6-76
47. Last month Stagecoach Company had a $60,000 loss on sales of $300,000. Fixed costs are
$120,000 a month. What sales revenue is needed for Stagecoach to break even?
A. $360,000
B. $480,000
C. $600,000
D. $420,000

$120,000/0.20 = $600,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
6-77
48. The formula for target units is
This is the formula for target units.

Blooms: Remember
Difficulty: 1 Easy
49. The formula for target sales is
This is the formula for target sales.

Blooms: Remember
Difficulty: 1 Easy
6-78
50. Merlot, Inc. has fixed costs of $200,000, sales price of $50, and variable cost of $30 per
unit. How many units must be sold to earn profit of $80,000?
A. 2,800
B. 11,200
C. 14,000
D. 202,400
($200,000 + $80,000)/($50 - $30) = 14,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
6-79
51. Martol, Inc. has fixed costs of $200,000 and a contribution margin ratio of 40%. How much
A. $140,000
B. $560,000
C. $700,000
D. $1,120,000
($200,000 + $80,000)/40% = $700,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
6-80
52. Megan, Inc. has fixed costs of $400,000, sales price of $40, and variable cost of $30 per
unit. How many units must be sold to earn profit of $80,000?
A. 2,000
B. 10,000
C. 40,000
D. 48,000
($400,000 + $80,000)/($40 - $30) = 48,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
6-81
53. Fern, Inc. has fixed costs of $400,000 and a contribution margin ratio of 30%. How much
A. $144,000
B. $336,000
C. $1,600,000
D. $1,920,000
($400,000 + $80,000)/30% = $1,600,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
6-82
54. Pecan, Inc, has a contribution margin of 50% and fixed costs of $220,000. What sales
revenue is needed to attain a $60,000 profit?
A. $70,400
B. $440,000
C. $560,000
D. $240,000
($220,000 + $60,000)/0.50 = $560,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
6-83
55. Munoz Inc. has a contribution margin ratio of 30% and fixed costs of $90,000. What sales
A. $45,000
B. $200,000
C. $500,000
D. $214,286
($90,000 + $60,000)/0.30 = $500,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
6-84
56. Louise Corp has a contribution margin ratio of 35%, fixed costs of $60,000, and a profit of
A. $300,000
B. $105,000
C. $36,750
D. $171,429
($60,000 + $45,000)/0.35 = $300,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
6-85
57. Ironwood Inc. has a variable cost ratio of 60% and fixed costs of $90,000. What sales
A. $128,572
B. $225,000
C. $375,000
D. $525,000
Contribution margin ratio is 100% - 60% = 40%. Target sales is ($90,000 + $120,000)/0.40
= $525,000.
AACSB: Analytic
Blooms: Apply
6-86
58. Payton Corp has sales of $200,000, a contribution margin ratio of 35%, and a target profit
of $40,000. If 10,000 units were sold, what are total variable costs?
A. $200,000
B. $130,000
C. $240,000
D. $160,000
Contribution margin is $200,000 × 35% = $70,000. Total variable costs are $200,000 -
$70,000 = $130,000.
AACSB: Analytic
Blooms: Apply
6-87
59. Chelsea Company has sales of $400,000, variable costs of $10 per unit, fixed costs of
$100,000, and a target profit of $60,000. How many units were sold?
A. 12,000
B. 18,000
C. 24,000
D. 30,000
$400,000 - ($10 × Q) - $100,000 = $60,000, so Q = 24,000.
AACSB: Analytic
Blooms: Apply
6-88
60. Elk Corp has sales of $300,000, a contribution margin ratio of 40%, and a target profit of
A. $22.50
B. $9.00
C. $6.00
D. $2.00
Contribution margin is $300,000 × 40% = $120,000. Total variable costs are $300,000 -
$120,000 = $180,000. Variable cost per unit is $180,000/20,000 = $9.00.
AACSB: Analytic
Blooms: Apply
6-89
61. Bugle Corp has sales of $400,000, a variable cost ratio of 40%, and a profit of $40,000. If
10,000 units were sold, what is the contribution margin per unit?
A. $60.00
B. $36.00
C. $24.00
D. $18.00
Contribution margin is $400,000 - (40% × $400,000) = $240,000. Per unit, this is

$240,000/10,000 = $24.00.
AACSB: Analytic
Blooms: Apply
6-90
62. Nancy Company has sales of $100,000, variable costs of $5 per unit, fixed costs of
$25,000, and a profit of $15,000. How many units were sold?
A. 20,000
B. 16,000
C. 12,000
D. 8,000
$100,000 - ($5 × Q) - $25,000 = $15,000, so Q = 12,000.
AACSB: Analytic
Blooms: Apply
6-91
63. Keith Corp has sales of $200,000, a contribution margin ratio of 35%, and a profit of
A. $13.00
B. $20.00
C. $7.00
D. $3.00
Contribution margin is $200,000 × 35% = $70,000. Variable costs are $200,000 - $70,000
= $130,000. Per unit, this is $130,000/10,000 = $13.00.
AACSB: Analytic
Blooms: Apply
6-92
64. Vesper Company has sales of $200,000, variable costs of $8 per unit, fixed costs of
$50,000, and a profit of $30,000. How many units were sold?
A. 10,000
B. 15,000
C. 20,000
D. 25,000
$200,000 - ($8 × Q) - $50,000 = $30,000, so Q = 15,000.
AACSB: Analytic
Blooms: Apply
6-93
65. Paint Corp has sales of $600,000, a contribution margin ratio of 30%, and a profit of
A. $9.00
B. $30.00
C. $21.00
D. $3.00
Contribution margin ratio = $600,000 × 30% = $180,000. Variable costs are $600,000 -
$180,000 = $420,000. Per unit, this is $420,000/20,000 = $21.00.
AACSB: Analytic
Blooms: Apply
6-94
66. Harvest Corp has a contribution margin ratio of 30%, fixed costs of $45,000, and a profit of
A. $31,500
B. $105,000
C. $150,000
D. $350,000
Contribution margin is $60,000 + $45,000 = $105,000 = Sales × 30%. Sales = $350,000.
AACSB: Analytic
Blooms: Apply
6-95
67. Leather Company sold 20,000 units, had variable costs of $12 per unit, fixed costs of
$100,000, and profits of $60,000. What is the selling price per unit?
A. $8
B. $17
C. $20
D. $32
(20,000 × SP) - (20,000 × $12) - $100,000 = $60,000. SP = $20.00.
AACSB: Analytic
Blooms: Apply
6-96
68. Last month Lyle Company had a $60,000 profit on sales of $300,000. Fixed costs are
$120,000 a month. How much do sales have to increase for Lyle to earn a $100,000 profit?
A. $66,667
B. $83,333
C. $220,000
D. $400,000
Contribution margin ratio is ($120,000 + $60,000)/$300,000 = 60%. Target sales is

($120,000 + $100,000)/0.60 = $366,667. Sales must increase $366,667 - $300,000 =
$66,667.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
6-97
69. The margin of safety is the difference between
A. actual sales and budgeted sales.
B. actual sales and break-even sales.
C. target sales and actual sales.
D. target sales and budgeted sales.
Margin of safety = Actual sales or budgeted sales - break-even sales.

Blooms: Remember
Difficulty: 1 Easy
70. Dragon, Inc. has actual sales of $400,000 and a margin of safety of $150,000. What is
Dragon's break-even point in sales?
A. $100,000
B. $250,000
C. $350,000
D. $450,000
$400,000 - $150,000 = $250,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
6-98
71. Jerome Corp has fixed costs of $500,000 and a contribution margin ratio of 40%. Currently,
sales are $3,000,000. What is Jerome's margin of safety?
A. $1,750,000
B. $3,500,000
C. $5,250,000
D. $7,000,000
$3,000,000 - ($500,000/0.40) = $1,750,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
6-99
72. Idaho Corp has fixed costs of $20,000 and a contribution margin ratio of 50%. Currently,
sales are $75,000. What is Idaho's margin of safety?
A. $28,000
B. $35,000
C. $42,000
D. $70,000
$75,000 - ($20,000/0.50) = $35,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
6-100
73. The margin of safety tells managers
A. how much sales would have to increase to hit the target profit.
B. how much profit would drop if sales decreased.
C. how much sales could drop before the firm no longer earns profits.
D. how much profit would have to increase to hit target sales.
Margin of safety is a buffer zone that identifies how much sales can drop before the
business will suffer a loss.

Blooms: Understand
6-101
74. Dexter Corp has fixed costs of $500,000 and a contribution margin ratio of 25%. Currently,
margin of safety is $1,000,000. What are Dexter's current sales?
A. $1,000,000
B. $2,000,000
C. $3,000,000
D. $4,000,000
Break-even sales are $500,000/25% = $2,000,000. Actual sales are $2,000,000 +

$1,000,000 = $3,000,000
AACSB: Analytic
Blooms: Apply
6-102
75. Irwin Corp has fixed costs of $20,000 and a contribution margin ratio of 40%. Currently,
margin of safety is $35,000. What are Irwin's current sales?
A. $35,000
B. $37,500
C. $50,000
D. $85,000
Break-even sales are $20,000/40% = $50,000. Actual sales are $50,000 + $35,000 =
$85,000.
AACSB: Analytic
Blooms: Apply
6-103
76. Fountain Corp has a selling price of $15 per unit and variable costs of $10 per unit. When
14,000 units are sold, profits equaled $45,000. What is the margin of safety?
A. $210,000
B. $105,000
C. $135,000
D. $75,000
Fixed costs are [($15 - $10) × 14,000] - $45,000 = $25,000. Contribution margin ratio is
($15 - $10)/$15 = 33%. Break-even sales is $25,000/0.33 = $75,000. Actual sales is $15 ×
14,000 = $210,000. Margin of safety is $210,000 - $75,000 = $135,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
6-104
77. Fontaine Corp has a selling price of $15 and variable costs of $10 per unit. When 10,000
units are sold, profits equaled $25,000. What is the margin of safety?
A. $75,000
B. $25,000
C. $105,000
D. $50,000
Fixed costs are [($15 - $10) × 10,000] - $25,000 = $25,000. Contribution margin ratio is
($15 - $10)/$15 = 33%. Break-even sales is $25,000/0.33 = $75,000. Actual sales is $15 ×
10,000 = $150,000. Margin of safety is $150,000 - $75,000 = $75,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
6-105
78. Rollag Corp has a selling price of $30 and variable costs of $20 per unit. When 14,000
units are sold, profits equaled $45,000. What is the margin of safety?
A. $420,000
B. $135,000
C. $142,500
D. $75,000
Fixed costs are ($30 - $20) × 14,000 - $45,000 = $95,000. Contribution margin ratio is
($30 - $20)/$30 = 33%. Break-even sales is $95,000/0.33 = $285,000. Actual sales is $30
× 14,000 = $420,000. Margin of safety is $420,000 - $285,000 = $135,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
6-106
79. Indigo Corp has a selling price of $45 and variable costs of $30 per unit. When 10,000 units
A. $75,000
B. $25,000
C. $80,000
D. $150,000
Fixed costs are ($45 - $30) × 10,000 - $25,000 = $125,000. Contribution margin ratio is
($45 - $30)/$45 = 33%. Break-even sales is $125,000/0.33 = $375,000. Actual sales is $45
× 10,000 = $450,000. Margin of safety is $450,000 - $375,000 = $75,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
6-107
unit, and fixed costs of $300,000. Knoll is considering increasing the price of its units to
$60 per unit. This will not affect costs, but demand is expected to drop 20%. Should Knoll
increase the cost of its product?
A. Yes; profit will increase $30,000.
B. Yes, profit will increase $150,000.
C. No, profit will decrease $150,000.
D. No, profit will decrease $30,000.
Profit is currently 15,000 × ($50 - $20) - $300,000 = $150,000. If price increases, it will be
12,000 × ($60 - $20) - $300,000 = $180,000.
AACSB: Analytic
Blooms: Apply
6-108
unit, and fixed costs of $300,000. Knoll is considering increasing the price of its units to
$60 per unit. If the price is changed, how many units will Knoll need to sell for profit to
remain the same as before the price change?
A. 10,000
B. 11,250
C. 12,000
D. 12,500
Profit is currently 15,000 × ($50 - $20) - $300,000 = $150,000. Target units = ($300,000 +
$150,000)/($60 - $20) = 11,250.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
6-109
82. Cost structure refers to
A. a company's break-even point.
B. whether fixed costs are covered by contribution margin.
C. how a company uses variable versus fixed costs.
D. where funds are stored.
This is the definition of cost structure.

Blooms: Remember
Difficulty: 1 Easy
6-110
83. Plymouth Corp sells units for $100 each. Variable costs are $75 per unit, and fixed costs
are $200,000. If Plymouth leases a new machine, fixed costs will increase by $60,000 a
year, but production will be more efficient, saving $5 per unit. At what level of production
will Plymouth be indifferent between leasing and not leasing the new machine?
A. 5,000
B. 10,000
C. 10,400
D. 12,000
[($100 - $75) × Q] - $200,000 = [($100 - $70) × Q] - $260,000. Q = 12,000.
AACSB: Analytic
Blooms: Apply
6-111
84. A company is debating whether to change its cost structure so that fixed costs increase
from $300,000 to $400,000, but variable costs decrease from $5 per unit to $4 per unit. If it
were to implement the change at its current production level of 100,000, profit would not
change. What would happen to the company's profit if the change were implemented and
production increased to 125,000?
Since variable costs go down, contribution margin will increase with the change. This will
cause profits to increase above the point of indifference.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
6-112
85. A company is debating whether to change its cost structure so that variable costs increase
from $4 per unit to $5 per unit but fixed costs decrease from $400,000 to $300,000. If it
were to implement the change at its current production level of 100,000, profit would not
change. What would happen to the company's profit if the change were implemented and
production increased?
Since variable costs go up, contribution margin will decrease with the change. This will
cause profits to decrease above the point of indifference.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
6-113
86. Plymouth Corp sells units for $100 each. Variable costs are $75 per unit, and fixed costs
are $200,000. If Plymouth leases a new machine, production will be more efficient, saving
$5 per unit. If Plymouth plans to sell 12,000 units, at what lease cost will Plymouth be
indifferent between leasing and not leasing the new machine?
A. $10,000
B. $40,000
C. $60,000
D. $80,000
[($100 - $75) × 12,000] - $200,000 = [($100 - $70) × 12,000] - ($200,000 + L). L =

$60,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
6-114
87. Degree of operating leverage is calculated as
A. profit divided by contribution margin.
B. break-even sales divided by profit.
C. profit divided by break-even sales.
D. contribution margin divided by profit.
This is the formula for degree of operating leverage.

Blooms: Remember
Difficulty: 1 Easy
have on profit.
6-115
88. Degree of operating leverage is used to
A. calculate sales change given profit change.
B. calculate profit change given sales change.
C. calculate break-even sales given sales change.
D. calculate break-even sales given profit change.
The degree of operating leverage is a multiplier that we can use to predict how a
percentage change in sales revenue will translate into a percentage change in profit.

Blooms: Remember
Difficulty: 1 Easy
have on profit.
6-116
89. Frontier Corp has a contribution margin of $450,000 and profit of $150,000. What is its
degree of operating leverage?
A. .33
B. 1.67
C. 2.5
D. 3
Contribution margin is ($50 - $20) × 15,000 = $450,000. Profit is $450,000 - $300,000 =

$150,000. Degree of operating leverage is $450,000/$150,000 = 3.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
have on profit.
6-117
90. Frontier Corp has a contribution margin of $450,000 and profit of $150,000. If sales
increase 20%, by how much will profits increase?
A. 20%
B. 30%
C. 60%
D. 90%

$150,000. Degree of operating leverage is $450,000/$150,000 = 3. 20% × 3 = 60%.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
have on profit.
6-118
91. Frontier Corp has fixed costs of $300,000 and profit of $150,000. What is its degree of
operating leverage?
A. .33
B. 1.67
C. 2.5
D. 3
Contribution margin is $300,000 + $150,000 = $450,000. Degree of operating leverage is

$450,000/$150,000 = 3.
AACSB: Analytic
Blooms: Apply
have on profit.
6-119
92. Frontier Corp has fixed costs of $300,000 and profit of $150,000. If sales increase 20%, by
how much will profits increase?
A. 20%
B. 30%
C. 60%
D. 90%
Contribution margin is $300,000 + $150,000 = $450,000. Degree of operating leverage is

$450,000/$150,000 = 3. 20% × 3 = 60%.
AACSB: Analytic
Blooms: Apply
have on profit.
6-120
93. Frontier Corp sells units for $50, has unit variable costs of $20, and fixed costs of
$300,000. If Frontier sells 15,000 units, what is its degree of operating leverage?
A. .33
B. 1.67
C. 2.5
D. 3

$150,000. Degree of operating leverage is $450,000/$150,000 = 3.
AACSB: Analytic
Blooms: Apply
have on profit.
6-121
94. Frontier Corp sells units for $50, has unit variable costs of $20, and fixed costs of
$300,000. Frontier sells 15,000 units. If sales increase 20%, by how much will profits
increase?
A. 20%
B. 30%
C. 60%
D. 90%

$150,000. Degree of operating leverage is $450,000/$150,000 = 3. 20% × 3 = 60%.
AACSB: Analytic
Blooms: Apply
have on profit.
6-122
95. In multiproduct cost-volume-profit analysis, an assumption made in addition to those used
in single-product CVP analysis is that
A. the sales mix remains constant.
B. all costs can be classified as fixed or variable.
C. costs are linear in the relevant range.
D. production and sales are equal.
In multiproduct CVP analysis, we must assume that the sales mix remains constant. All
other assumptions are the same as in single-product CVP analysis.

Blooms: Remember
Difficulty: 1 Easy
6-123
96. If a firm sells more than one product, the break-even point in units represents
A. the number of units of the largest-selling product required to break even.
B. the number of units of the most profitable product required to break even.
C. the number of units of the highest-revenue product required to break even.
D. the sum of the units of all products required to break even.
The formula yields total units required to break even.

Blooms: Understand
Difficulty: 1 Easy
6-124
97. Friar Corp sells two products. Product A sells for $100 per unit, and has unit variable costs
of $60. Product B sells for $70 per unit, and has unit variable costs of $50. Currently, Friar
sells three units of product B for every one unit of product A sold. Friar has fixed costs of
$750,000. What is Friar's break-even point in units?
The weighted average unit CM is [($100 - $60) × ¼] + [($70 - $50) × ¾] = $25. Break-
even point is $750,000/$25 = 30,000 units: 30,000 × ¼ = 7,500 of product A, and 30,000
× ¾ = 22,500 of product B.
AACSB: Analytic
Blooms: Apply
6-125
98. Friar Corp sells two products. Product A sells for $100 per unit, and has unit variable costs
of $60. Product B sells for $70 per unit, and has unit variable costs of $50. Currently, Friar
sells three units of product B for every one unit of product A sold. Friar has fixed costs of
$750,000. How many units would Friar have to sell to earn a profit of $250,000?
The weighted average unit CM is [($100 - $60) × ¼] + [($70 - $50) × ¾] = $25. Target
units are ($750,000 + $250,000)/$25 = 40,000 units: 40,000 × ¼ = 10,000 of product A,
and 40,000 × ¾ = 30,000 of product B.
AACSB: Analytic
Blooms: Apply
6-126
99. Graham Corp sells two products. Product A sells for $200 per unit, and has unit variable
costs of $150. Product B sells for $50 per unit, and has unit variable costs of $20.
Currently, Graham sells three units of product B for every two units of product A sold.
Graham has fixed costs of $760,000. What is Graham's break-even point in units?
The weighted average unit CM is [($200 - $150) × 2/5] + [($50 - $20) × 3/5] = $38.
Break-even point is $760,000/$38 = 20,000 units: 20,000 × 2/5 = 8,000 of product A, and
20,000 × 3/5 = 12,000 of product B.
AACSB: Analytic
Blooms: Apply
6-127
100. Graham Corp sells two products. Product A sells for $200 per unit, and has unit variable
costs of $150. Product B sells for $50 per unit, and has unit variable costs of $20.
Currently, Graham sells three units of product B for every two units of product A sold.
Graham has fixed costs of $760,000. How many units would Graham have to sell to earn a
profit of $57,000?
The weighted average unit CM is [($200 - $150) × 2/5] + [($50 - $20) × 3/5] = $38.
Target units are ($760,000 + $57,000)/$38 = 21,500 units: 21,500 × 2/5 = 8,600 of
product A, and 21,500 × 3/5 = 12,900 of product B.
AACSB: Analytic
Blooms: Apply
Essay Questions
6-128
101. Roland had revenues of $600,000 in March. Fixed costs in March were $200,000 and profit

c. What sales volume (in dollars) would be needed to earn $150,000?
a. 40% = ($200,000 + $40,000)/$600,000

b. $500,000 = $200,000/40%
c. $875,000 = ($200,000 + $150,000)/40%
Feedback: Target sales = (Fixed costs + Target profit)/Contribution margin ratio. Break-
even sales = Fixed costs/Contribution margin ratio.
AACSB: Analytic
Blooms: Apply
6-129
102. Portia Company is a retailer of hammers. Portia pays $4.75 for each hammer and sells
them for $8.00. Monthly fixed costs are $26,000. The hammer cost is the only variable
cost.
a. What is the contribution margin per unit?

b. What is the break-even point in units?
c. How many units will Portia need to sell to earn target profit of $13,000?
a. $3.25 = $8.00 - $4.75

b. 8,000 = $26,000/$3.25
c. 12,000 = ($26,000 + $13,000)/$3.25
Feedback: Unit contribution margin = Sales price - Variable cost per unit. Break-even
units = Fixed costs/Unit contribution margin. Target units = (Fixed costs + Target
profit)/Unit contribution margin.
AACSB: Analytic
Blooms: Apply
6-130
103. Nora Inc. sells a single product for $15. Variable costs include $6 for each unit plus a 10%

b. What is the break-even sales revenue?
a. 50% = [$15 - $6 - (10% × $15)]/$15

b. $300,000 = $150,000/50%
c. $500,000 = ($150,000 + $100,000)/50%
Feedback: Contribution margin percentage = Unit contribution margin/Selling price.

Break-even sales = Fixed costs/Contribution margin percentage. Target sales = (Fixed
costs + Target Profit)/Contribution margin percentage.
AACSB: Analytic
Blooms: Apply
6-131
104. Raven Inc. sells a single product for $45. Variable costs include $26 for each unit plus a
$10 selling expense per unit. Fixed costs are $200,000 per month.

a. 20% = ($45 - $26 - $10)/$45

b. $1,000,000 = $200,000/20%
c. $1,875,000 = ($200,000 + $175,000)/20%

AACSB: Analytic
Blooms: Apply
6-132
105. Holly Inc. sells a single product for $40. Variable costs include $22 for each unit plus a
10% sales commission. Fixed costs are $105,000 per month.

a. 35% = ($40 - $22 - 10% × $40)/$40.00

b. $300,000 = $105,000/35%
c. $700,000 = ($105,000 + $140,000)/35%

AACSB: Analytic
Blooms: Apply
6-133
106. Jasmine sells a product for $50 per unit. Variable costs per unit are $30, and monthly fixed

sales dollars?
a. 7,500 units = $150,000/($50 - $30)

b. 12,500 units = ($150,000 + $100,000)/($50 - $30)
c. $250,000 = (12,500 units - 7,500 units) × $50
Feedback: Break-even units = Fixed costs/Unit contribution margin. Target units = (Fixed
costs + Target profit)/Unit contribution margin. Margin of safety = Actual sales - Break-
even sales.
AACSB: Analytic
Blooms: Apply
6-134
107. Halifax Products sells a product for $75. Variable costs per unit are $50, and monthly fixed

sales dollars?
a. 3,000 units = $75,000/($75 - $50)

b. 11,000 units = ($75,000 + $200,000)/($75 - $50)
c. $600,000 units = (11,000 units - 3,000 units) × $75
even sales.
AACSB: Analytic
Blooms: Apply
6-135
108. Juniper had revenues of $450,000 in March. Fixed costs in March were $240,000 and profit

a. 60% = ($240,000 + $30,000)/$450,000

b. $400,000 = $240,000/60%
c. $50,000 = $450,000 - $400,000
even sales = Fixed costs/Contribution margin ratio. Margin of safety = Actual sales -
Break-even sales
AACSB: Analytic
Blooms: Apply
6-136
109. Dallas Inc. sells a product for $60. Variable costs are 60% of sales, and monthly fixed costs
are $54,000. Answer the following questions:

sales dollars?
a. 2,250 units = $54,000/[$60 - ($60 × .60)]

b. 7,250 units = ($54,000 + $120,000)/[$60 - ($60 × .60)]
c. $300,000 = (7,250 units - 2,250 units) × $60
even sales.
AACSB: Analytic
Blooms: Apply
6-137
110. Duncan had revenues of $900,000 in March. Fixed costs in March were $480,000 and
profit was $60,000. Answer the following questions:

a. 60% = ($480,000 + $60,000)/$900,000

b. $800,000 = $480,000/60%
c. $100,000 = $900,000 - $800,000
even sales = Fixed costs/Contribution margin ratio. Margin of safety = Actual sales -
Break-even sales
AACSB: Analytic
Blooms: Apply
6-138
111. Boise Corp had a margin of safety of $375,000 last month, with sales revenue of
$1,000,000 and fixed costs of $250,000.

c. How much profit did Boise earn last month?
d. How much would sales have to increase for Boise to earn profit of 600,000?
a. $625,000 = $1,000,000 - $375,000

b. 40% = $250,000/$625,000
c. $150,000 = ($1,000,000 × 40%) - $250,000
d. $1,125,000 = [($250,000 + $600,000)/0.40] - $1,000,000
Feedback: Margin of safety = Actual sales - Break-even sales. Break-even sales = Fixed
costs/Contribution margin ratio. Target sales = (Fixed costs + Target profit)/Contribution
margin ratio.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
6-139
112. Akron Corp had a margin of safety of $500,000 last month, with sales revenue of
$1,250,000 and fixed costs of $150,000.

c. How much profit did Akron earn last month?
d. How much would sales have to be for Akron to earn profit of 500,000?
a. $750,000 = $1,250,000 - $500,000

b. 20% = $150,000/$750,000
c. $100,000 = ($1,250,000 × 20%) - $150,000
d. $3,250,000 = [($150,000 + $500,000)/0.20]
Feedback: Margin of safety = Actual sales - Break-even sales. Break-even sales = Fixed
costs/Contribution margin ratio. Target sales = (Fixed costs + Target profit)/Contribution
margin ratio.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
6-140
113. The manager of Calypso, Inc. is considering raising its current price of $30 per unit by 10%.
If she does so, she estimates that demand will decrease by 20,000 units per month.
Calypso currently sells 50,000 units per month, each of which costs $25 in variable costs.
Fixed costs are $180,000.

e. Assume the manager does not know how much demand will drop if the price increases.
By how much would demand have to drop before the manager would not want to
implement the price increase?
a. $70,000 = ($30 × 50,000) - ($25 × 50,000) - $180,000

b. 36,000 = $180,000/($30 - $25)
c. $60,000 = [($30 × 1.10) × 30,000] - ($25 × 30,000) - $180,000
d. 22,500 = $180,000/($33 - $25)
e. 18,750 = 50,000 - [($180,000 + $70,000)/($33 - $25)]
Feedback: Profit = (Unit price × Q) - (Unit variable costs × Q) - Total fixed costs. Break-
even units = Fixed costs/Unit contribution margin. Target units = (Fixed costs + Target
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
6-141
114. The manager of Arbor, Inc. is considering raising its current price of $50 per unit by 10%. If
she does so, she estimates that demand will decrease by 30,000 units per month. Arbor
currently sells 100,000 units per month, each of which costs $35 in variable costs. Fixed
costs are $1,200,000.

e. Assume the manager does not know how much demand will drop if the price increases.
By how much would demand have to drop before the manager would not want to
implement the price increase?
a. $300,000 = ($50 × 100,000) - ($35 × 100,000) - $1,200,000

b. 80,000 = $1,200,000/($50 - $35)
c. $200,000 = [($50 × 1.10) × 70,000] - ($35 × 70,000) - $1,200,000
d. 60,000 = $1,200,000/($55 - $35)
e. 25,000 = 100,000 - [($1,200,000 + $300,000)/($55 - $35)]
Feedback: Profit = Unit price × Q - Unit variable costs × Q - Total fixed costs. Break-
even units = Fixed costs/Unit contribution margin. Target units = (Fixed costs + Target
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
6-142
115. Glade, Inc. is trying to decide whether to increase the commission-based pay of its
salespeople. Currently, each of its five salespeople earns a 15% commission on the units
they sell for $100 each, plus a fixed salary of $40,000. Glade hopes that by increasing
commissions to 20% and decreasing each salesperson's salary to $25,000, sales will
increase because salespeople will be more motivated. Currently, sales are 13,000 units.
Glade's other fixed costs, NOT including the salespeople's salaries, total $580,000. Glade's
other variable costs, NOT including commissions, total $20 per unit.

decreased?
e. At what sales level would Glade be indifferent between the lower-commission plan and
the higher-commission plan?
a. $65,000 = ($100 × 13,000) - [(($100 × 15%) + $20) × 13,000] - [(5 × $40,000) +

$580,000]
b. 12,000 = [(5 × $40,000) + $580,000]/[$100 - ($100 × 15%) - $20]
c. 11,750 = [(5 × $25,000) + $580,000]/[$100 - ($100 × 20%) - $20]
d. $315,000 = ($100 × 17,000) - [(($100 × 20%) + $20) × 17,000] - [(5 × $25,000) -
$580,000]
e. 15,000: ($65 × Q) - $780,000 = ($60 × Q) - $705,000; Q = 15,000
even units = Fixed costs/Unit contribution margin. To find the point of indifference, set
the profit functions under each plan equal to each other.
6-143
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
6-144
116. Forge, Inc. is trying to decide whether to increase the commission-based pay of its
salespeople. Currently, each of its ten salespeople earns a 10% commission on the units
they sell for $90 each, plus a fixed salary of $30,000. Forge hopes that by increasing
commissions to 20% and decreasing each salesperson's salary to $21,000, sales will
increase because salespeople will be more motivated. Currently, sales are 12,000 units.
Forge's other fixed costs, NOT including the salespeople's salaries, total $188,580. Forge's
other variable costs, NOT including commissions, total $30 per unit.

decreased?
e. At what sales level would Forge be indifferent between the lower-commission plan and
the higher-commission plan?
a. $123,420 = ($90 × 12,000) - [(($90 × 10%) + $30) × 12,000] - [(10 × $30,000) +

$188,580]
b. 9,580 = [(10 × $30,000) + $188,580]/[$90 - ($90 × 10%) - $30]
c. 9,490 = [(10 × $21,000) + $188,580]/[$90 - ($90 × 20%) - $30]
d. $147,420 = ($90 × 13,000) - [($90 × 20%) + $30) × 13,000] - [(10 × $21,000) +
$188,500]
e. 10,000: ($51 × Q) - $488,580 = ($42 × Q) - $398,580; Q = 10,000
even units = Fixed costs/Unit contribution margin. To find the point of indifference, set
the profit functions under each plan equal to each other.
6-145
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
6-146
117. Cantor Products sells a product for $75. Variable costs per unit are $50, and monthly fixed

c. Assume they achieve the level of sales required in part b, what is the degree of
operating leverage?
d. If sales decrease by 30% from that level, by what percentage will profits decrease?
a. 3,000 units = $75,000/($75 - $50)

b. 11,000 units = ($75,000 + $200,000)/($75 - $50)
c. 1.375 = [11,000 × ($75 - $50)]/$200,000
d. 41.25% = 30% × 1.375
costs + Target profit)/Unit contribution margin. Degree of operating leverage =
Contribution margin/Profit. Change in revenue × Degree of operating leverage = Change
in profit.
AACSB: Analytic
Blooms: Apply
have on profit.
6-147
118. Harmony sells a product for $50 per unit. Variable costs per unit are $30, and monthly
fixed costs are $150,000. Answer the following questions:

c. Assume they achieve the level of sales required in part b, what is the degree of
operating leverage?
d. If sales increase by 40% from that level, by what percentage will profits increase?
a. 7,500 units = $150,000/($50 - $30)

b. 12,500 units = ($150,000 + $100,000)/($50 - $30)
c. 2.5 = [12,500 × ($50 - $30)]/$100,000
d. 100% = 40% × 2.5
costs + Target profit)/Unit contribution margin. Degree of operating leverage =
Contribution margin/Profit. Change in revenue × Degree of operating leverage = Change
in profit.
AACSB: Analytic
Blooms: Apply
have on profit.
6-148
119. Malibu, Inc., which has fixed costs of $2,150,000, sells three products whose sales price,

c. To make a profit of $1,075,000, how many units of Product B must be sold?
a. $4.30 = [($7.00 - $3.00) × 60%] + [($12.00 - $10.00) × 30%] + [($25.00 - $12.00) ×

10%]
b. 300,000 = ($2,150,000/$4.30) × 60%
c. 225,000 = [($2,150,000 + $1,075,000)/$4.30] × 30%
Feedback: The weighted average unit contribution margin is the sum of the unit
contribution margins for each product times their sales mix percentages. Total break-even
units = Total fixed costs/Weighted average unit contribution margin. For each product,
multiply total break-even units by the sales mix percentage. Total target units = (Total
fixed costs + target profit)/Weighted average unit contribution margin. For each product,
multiply total target units by the sales mix percentage.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
6-149
120. Drake, Inc., which has fixed costs of $1,400,000, sells three products whose sales price,

c. To make a profit of $910,000, how many units of Product B must be sold?
a. $14.00 = [($16.00 - $8.00) × 40%] + [($48.00 - $30.00) × 50%] + [($103.00 - $85.00)

× 10%]
b. 40,000 = ($1,400,000/$14.00) × 40%
c. 82,500 = [($1,400,000 + $910,000)/$14.00] × 50%
Feedback: The weighted average unit contribution margin is the sum of the unit
contribution margins for each product times their sales mix percentages. Total break-even
units = Total fixed costs/Weighted average unit contribution margin. For each product,
multiply total break-even units by the sales mix percentage. Total target units = (Total
fixed costs + target profit)/Weighted average unit contribution margin. For each product,
multiply total target units by the sales mix percentage.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
6-150

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Managerial Accounting 2nd

Edition Whitecotton Test Bank

Test Bank: https://testbankpack.com/p/test-bank-for-

Solution Manual: https://testbankpack.com/p/solution-

True / False Questions

4. Contribution margin is equal to fixed costs at the break-even point.

6. The break-even point is the point at which profit equals zero.

12. The margin of safety is a positive number at the break-even point.

13. Managers can use cost-volume-profit analysis to evaluate changes in price.

15. Degree of operating leverage is calculated by dividing sales by profit.

19. In multiproduct cost-volume-profit analysis, a break-even point must be calculated

Multiple Choice Questions

21. Which of the following is not a key assumption of cost-volume-profit?

A. Costs may be fixed, variable, mixed, or step.

B. Production and sales are equal.

C. Changes in total cost are strictly due to changes in activity.

D. Total costs and revenues can be depicted with a straight line.

B. it cannot use CVP, as an assumption is violated.

23. Profit is indicated on a cost-volume-profit graph by

A. the profit line.

D. the horizontal distance from the breakeven point.

A. Total sales revenue

B. Total variable costs

C. Total fixed costs

25. The break-even point is

A. the point where zero contribution margin is earned.

B. the point where zero profit is earned.

C. the point where selling price just equals variable cost.

D. equal to sales revenue less fixed costs.

A. (Unit price × Q) - (Unit variable costs × Q) - Total fixed costs = Profit

B. (Unit price × Q) - (Unit variable costs × Q) + Total fixed costs = Profit

C. (Unit price - Unit variable costs - Total fixed costs) × Q = Profit

D. (Unit price × Q) + (Unit variable costs × Q) + Total fixed costs = Profit

27. The formula for break-even point in terms of units is

A. Total variable costs/Unit contribution margin

B. Total fixed costs/Contribution margin ratio

C. Total fixed costs/Unit contribution margin

D. Total variable costs/Total fixed costs

28. The formula for break-even point in terms of revenue is

A. Total variable costs/Contribution margin ratio

B. Total fixed costs/Contribution margin ratio

C. Total fixed costs/Unit contribution margin

D. Total variable costs/Total fixed costs

A. (Total fixed costs + Target profit)/Contribution margin ratio

B. (Total variable costs + Total fixed costs)/Contribution margin ratio

C. (Total fixed costs + Target profit)/Unit contribution margin

D. (Total variable costs + Total fixed costs)/Unit contribution margin

49. The formula for target sales is

A. (Total fixed costs + Target profit)/Contribution margin ratio

B. (Total variable costs + Total fixed costs)/Contribution margin ratio

C. (Total fixed costs + Target profit)/Unit contribution margin

D. (Total variable costs + Total fixed costs)/Unit contribution margin

69. The margin of safety is the difference between

A. actual sales and budgeted sales.

B. actual sales and break-even sales.

C. target sales and actual sales.

D. target sales and budgeted sales.

B. how much profit would drop if sales decreased.

D. how much profit would have to increase to hit target sales.

A. Yes; profit will increase $30,000.

B. Yes, profit will increase $150,000.

C. No, profit will decrease $150,000.

D. No, profit will decrease $30,000.

A. a company's break-even point.