Cost-Volume-Profit Analysis

Chapter 21

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Which would not be a variable cost?
1. Direct labor
2. Direct materials
3. Sales commissions
4. Sales force salaries

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Answer: 4
Variable costs increase as activity level increases.
Salaries are a fixed costs. Fixed costs remain the
same as activity levels change.

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Renting a car for $50 per day plus $5 per 100
miles is an example of a:
1. Fixed cost
2. Variable cost
3. Mixed cost
4. Recurring cost

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Answer: 3
Mixed costs have both a fixed element and a
variable element.

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If fixed cost = $100 and unit purchase price = $2,
what is the total cost of 300 units?

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Answer: $700
Fixed cost $100
Variable cost ($2 X 300) 600
Total cost $700

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Given:
Revenue per unit $10
Fixed cost $320
Variable cost per unit $2

What is the operating income expected from the

sale of 30 units?

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Answer: Loss of $80

Revenue (30@$10) $300

Variable costs (30 @ $2) (60)
Contribution margin $240
Fixed costs (320)
Net loss ($80)

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Given:
Revenue per unit $10
Fixed cost $320
Variable cost per unit $2

How many units must be sold to break even?

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Answer: 40 units

Breakeven =
Revenue – Variable cost – Fixed cost = $0
($10 X number of units)–($2 X number of units)-$320 = 0
$8 X number of units = $320
Number of units = $320 / $8 = 40 units

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Given:
Revenue per unit $10
Fixed cost $320
Variable cost per unit $2

How many units must be sold to for operating

income to be $160?

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Answer:
Revenue – variable cost – fixed cost = Income
(# units@$10) - (# units@$2) - $320 = $160
$8 x #units = $320 + $160
Number of units = $480 / $8 = 60

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Given:
Contribution margin ratio = 0.80
Fixed cost = $320

How much revenue is needed to achieve $240 of

operational income?

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Answer:
Target revenue =
(Fixed cost +Target income)/contribution margin ratio
($320 + $240) / 0.80 = $700

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Given:
Revenue per unit $9
Fixed cost $320
Variable cost per unit $2

How many units must be sold to break even?

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If you reduce variable costs, would you expect the
breakeven number of units to increase or
decrease?
1. Increase
2. Decrease

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Answer: 2 – Decrease If variable costs are
decreasing, the contribution margin increases.
With a higher contribution margin, the company
does not need to sell as many units to cover fixed
costs.

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If you increase fixed costs, would you expect
breakeven revenues to increase?

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Answer: Yes. You would need to increase
revenues to offset the increase in fixed costs

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Given:
Product A represents 75% of sales and has contribution
margin per unit = $8

Product B represents 25% of sales and has contribution

margin per unit = $4

What is the weighted average contribution per unit?

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Answer: $7
Weighted average =
(75% x $8) + (25% x $4) = $6 + $1 = $7

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If you could increase the percent of sales for the
product with the higher contribution margin per unit
at the expense of the other product, would you
increase or decrease overall operational income
from the product lines?

1. Increase
2. Decrease

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Answer: 1 You would increase operational
income.

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Copyright © 2007 Prentice-Hall. All rights reserved