Deck 4: Cost-Volume-Profit Relationships

Question 1

Which of the following is defined as the difference between total sales in dollars and total variable expenses?

A) Margin of safety.
B) Operating income.
C) The gross margin.
D) The contribution margin.

Answer 1

D

Question 2

Which of the following is defined as the amount by which a company's sales can decline before operating losses are incurred?

A) Contribution margin.
B) Degree of operating leverage.
C) Margin of safety.
D) Contribution margin ratio.

Answer 2

C

Question 3

Marston Enterprises sells three chemicals: petrol,septine,and tridol.Petrol's unit contribution margin is higher than septine's,which is higher than tridol's.Which one of the following events is most likely to increase the company's overall break-even point?

A) The installation of new computer-controlled equipment and subsequent lay-off of assembly-line workers.
B) A decrease in tridol's selling price.
C) An increase in the overall market demand for septine.
D) A change in the relative market demand for the products,with the increase favouring petrol relative to septine and tridol.

Answer 3

D

Question 4

Brasher Company manufactures and sells a single product that has a positive contribution margin.If the selling price and variable expenses both decrease by 5% and fixed expenses do not change,then what would be the effect on the contribution margin per unit and the contribution margin ratio?

A) Option A
B) Option B
C) Option C
D) Option D

Question 5

A company increased the selling price for its product from $1.00 to $1.10 a unit when total fixed expenses increased from $400,000 to $480,000 and the variable expense per unit remained unchanged at $0.50.How would these changes affect the break-even point?

A) The break-even point in units would increase.
B) The break-even point in units would decrease.
C) The break-even point in units would remain unchanged.
D) The effect cannot be determined from the information given.

Question 6

If company A has a higher degree of operating leverage than company B,then which of the following statements is true?

A) Company A has higher variable expenses.
B) Company A's profits are more sensitive to percentage changes in sales.
C) Company A is more profitable.
D) Company A is less risky.

Question 7

The contribution margin ratio always increases when which of the following occurs?

A) Variable expenses as a percentage of sales increase.
B) Variable expenses as a percentage of sales decrease.
C) Break-even point increases.
D) Fixed Costs increase.

Question 8

A company has provided the following data:
If the sales volume decreases by 25%,the variable cost per unit increases by 15%,and all other factors remain the same,what will the outcome be for operating income?

A) Decrease by $31,875.
B) Decrease by $15,000.
C) Increase by $20,625.
D) Decrease by $3,125.

Question 9

How is the margin of safety percentage computed?

A) Break-even sales divided by Total sales.
B) Total sales minus Break-even sales.
C) (Total sales - Break-even sales)divided by Break-even sales.
D) (Total sales - Break-even sales)divided by Total sales.

Question 10

If the fixed expenses of a product increase while variable expenses and the selling price remain constant,what will happen to the total contribution margin and the break-even point?

A) Option A
B) Option B
C) Option C
D) Option D

Question 11

The break-even in units sold will decrease if there is an increase in which of the following?

A) Unit sales volume.
B) Total fixed expenses.
C) Unit variable expenses.
D) Selling price.

Question 12

The break-even point in unit sales increases when variable expenses do which of the following?

A) Increase,and the selling price remains unchanged.
B) Decrease,and the selling price,remains unchanged.
C) Decrease,and the selling price increases.
D) Remain unchanged,and the selling price increases.

Question 13

Last year,Twins Company reported $750,000 in sales (25,000 units)and an operating income of $25,000.At the break-even point,the company's total contribution margin equals $500,000.Based on this information,which of the following statements is true?

A) The company's contribution margin ratio is 40%.
B) The company's break-even point is 24,000 units.
C) The company's variable expense per unit is $9.
D) The company's variable expenses are 60% of sales.

Question 14

A company has sales of $87,500 at the break-even point and fixed costs are $35,000.Assuming cost behaviour does not change if sales increase by $20,000 how much will operating income will increase by?

A) $20,000.00.
B) $12,000.00.
C) $8,000.00.
D) $4,000.00.

Question 15

The total contribution margin decreases if sales volume remains the same and which of the following occurs?

A) Fixed expenses increase.
B) Fixed expenses decrease.
C) Variable expense per unit increases.
D) Variable expense per unit decreases.

Question 16

Which of the following is defined as the ratio of fixed expenses to the unit contribution margin?

A) Break-even point in unit sales.
B) Profit margin.
C) Contribution margin ratio.
D) Margin of safety.

Question 17

How is the degree of operating leverage calculated?

A) Contribution margin divided by sales.
B) Gross margin divided by operating income.
C) Operating income divided by sales.
D) Contribution margin divided by operating income.

Question 18

When interpreting a CVP graph which of the following is NOT correct?

A) When sales are below the breakeven intersection the company incurs a loss.
B) The breakeven point is where the total revenue line meets the fixed cost line.
C) The anticipated profit or loss at any given level of sales is measured by the vertical distance between the total revenue line and the total expense line.
D) The total revenue line starts at the origin.

Question 19

A company has provided the following data:
If the dollar contribution margin per unit is increased by 10%,total fixed cost is decreased by 20%,and all other factors remain the same,what will the outcome be for operating income?

A) Increase by $61,000.
B) Increase by $20,000.
C) Increase by $3,500.
D) Increase by $11,000.

Question 20

Once the break-even point is reached,which of the following statements is true?

A) The total contribution margin changes from negative to positive.
B) Operating income will increase by the unit contribution margin for each additional item sold.
C) Variable expenses will remain constant in total.
D) The contribution margin ratio begins to decrease.

Question 21

Scott Company's variable expenses are 72% of sales.The company's break-even point in sales is $2,450,000.If sales are $60,000 below the break-even point,what operating loss would the company report?

A) $43,200.
B) $60,000.
C) $16,800.
D) Cannot be determined from the data given.

Question 22

North Company sells a single product.The product has a selling price of $30 per unit and variable expenses are 70% of sales.If the company's fixed expenses total $60,000 per year,then what will be its break-even?

A) $60,000.
B) $85,714.
C) $42,000.
D) $200,000.

Question 23

The following information pertains to Rica Company:
How much is Rica's break-even point?

A) 9,848 units.
B) 10,000 units.
C) 18,571 units.
D) 26,000 units.B/E = (70,000 + 60,000)/13 = 10,000 units.

Question 24

The following is last month's contribution format income statement:
What is the company's margin of safety percentage,rounded to the nearest whole percent?

A) 42%.
B) 40%.
C) 17%.
D) 20%.

Question 25

Last year,Black Company reported sales of $640,000,a contribution margin of $160,000,and an operating loss of $40,000.Based on this information,what was the break-even point?

A) $640,000.
B) $480,000.
C) $800,000.
D) $960,000.

Question 26

Young Company has a margin of safety percentage of 20%.The break-even point is $400,000 and the variable costs are 40% of sales.Given this information,what is the operating income?

A) $48,000.
B) $80,000.
C) $60,000.
D) $0.

Question 27

At a break-even point of 800 units sold,White Company's variable expenses are $8,000 and its fixed expenses are $4,000.What will the company's operating income be at a volume of 801 units?

A) $15.
B) $10.
C) $5.
D) $20.

Question 28

Carver Company produces a product that sells for $30.Variable manufacturing costs are $15 per unit.Fixed manufacturing costs are $5 per unit based on the current level of activity,and fixed selling and administrative costs are $4 per unit.A selling commission of 10% of the selling price is paid on each unit sold.What is the contribution margin per unit?

A) $3.
B) $15.
C) $8.
D) $12.

Question 29

Dodero Company produces a single product that sells for $100 per unit.Fixed expenses total $12,000 per month,and variable expenses are $60 per unit.The company's sales average 500 units per month.Which of the following statements is correct?

A) The company's break-even point is $12,000 per month.
B) The fixed expenses remain constant at $24 per unit for any activity level within the relevant range.
C) The company's contribution margin ratio is 40%.
D) Responses A,B,and C are all correct.

Question 30

Gerber Company is planning to sell 200,000 units for $2.00 a unit and will just break even at this level of sales.The contribution margin ratio is 25%.What are the company's fixed expenses?

A) $100,000.
B) $160,000.
C) $200,000.
D) $300,000.

Question 31

Wallace,Inc. ,prepared the following budgeted data based on a sales forecast of $6,000,000:
What would be the amount of sales dollars at the break-even point?

A) $2,250,000.
B) $3,500,000.
C) $4,000,000.
D) $5,300,000.

Question 32

At a break-even point of 400 units sold,variable expenses were $4,000 and fixed expenses were $2,000.What will the 401^st unit sold contribute to operating income?

A) $0.
B) $5.
C) $10.
D) $15.

Question 33

The break-even point in sales for Rice Company is $360,000,and the company's contribution margin ratio is 20%.Its income tax rate is 40%.If Rice Company desires an after-tax operating profit of $84,000,what would total sales have to be?

A) $1,050,360.
B) $1,060,000.
C) $780,000.
D) Cannot be determined without additional information.Sales = (360,000 * .20 + 140,000)/.20 = $1,060,000

Question 34

Curtis Company anticipates selling 10,000 units next year.The company wants to earn an operating income equal to 10% of sales.If variable expenses are $12 per unit,and fixed expenses total $78,000 per year,what selling price must be established to achieve the desired level of operating income?

A) $19.80 per unit.
B) $18.00 per unit.
C) $21.78 per unit.
D) $22.00 per unit.Selling Price = 220,000/10,000 = $22 per unit.

Question 35

Koby Co.has sales of $200,000 with variable expenses of $150,000,fixed expenses of $60,000,and a net loss of $10,000.How much would Koby have to sell in order to achieve an operating income of 10% of sales?

A) $375,000.
B) $451,000.
C) $431,000.
D) $400,000.Sales = 60,000/(.25 - .10)= $400,000

Question 36

Green Company's variable expenses are 75% of sales.At a sales level of $400,000,the company's degree of operating leverage is 8.At this sales level,fixed expenses equal which of the following?

A) $87,500.
B) $100,000.
C) $50,000.
D) $75,000.

Question 37

Marling Corporation has budgeted the following data:
What is the break-even in sales dollars?

A) $400,000.
B) $420,000.
C) $540,000.
D) $660,000.

Question 38

Last year,Perry Company reported profits of $4,200.Its total variable expenses were $66,000,or $6 per unit.The unit contribution margin was $3.00.What is the break-even point in units for Perry Company?

A) 11,000 units.
B) 9,600 units.
C) 22,000 units.
D) 12,400 units.B/E = $28,800/3 = 9,600 units.

Question 39

The margin of safety in the Flaherty Company is $24,000.If the company's sales are $120,000 and its variable expenses are $80,000,what must its fixed expenses be?

A) $8,000.
B) $32,000.
C) $24,000.
D) $16,000.

Question 40

The following information relates to Clyde Corporation,which produced and sold 50,000 units last month.
There were no beginning or ending inventories.Production and sales next month are expected to be 40,000 units.In the next month,what should the company's unit contribution margin be?

A) $16.63.
B) $3.10.
C) $7.98.
D) $13.30.

Question 41

A product sells for $20 per unit,and has a contribution margin ratio of 40%.Fixed expenses total $120,000 annually.The company that makes and sells the product has an income tax rate of 40%.How many units must be sold to yield an after-tax operating profit of $30,000?

A) 21,250 units.
B) 18,750 units.
C) 24,375 units.
D) 14,167 units.Units required = (120,000 + 50,000)/(20 * .40)= 21,250 units.

Question 42

The following monthly data are available for the Phelps Company:
What are the break-even sales for the month for the company?

A) $91,667.
B) $203,000.
C) $148,000.
D) $137,500.

Question 43

A product sells for $20 per unit and has a contribution margin ratio of 40%.Fixed expenses total $240,000 annually.How many units of the product must be sold to yield an operating income of $60,000?

A) 37,500 units.
B) 40,000 units.
C) 65,000 units.
D) 30,000 units.

Question 44

Lindsay Company reported the following results from sales of 5,000 units for the month of June:
Assume that Lindsay increases the selling price of the product by 10% on July 1.How many units would have to be sold in July in order to generate an operating income of $20,000?

A) 4,000 units.
B) 4,300 units.
C) 4,500 units.
D) 5,000 units.Units required = (60,000 + 20,000)/20 = 4,000 units.

Question 45

A total of 30,000 units were sold last year.The contribution margin per unit was $2,and total fixed expenses were $20,000 for the year.This year,fixed expenses are expected to increase to $26,000,but the contribution margin per unit will remain unchanged at $2.How many units must be sold this year to earn the same operating income as was earned last year?

A) 23,000 units.
B) 33,000 units.
C) 30,000 units.
D) 13,000 units.Units required = (26,000 + 40,000)/2 = 33,000 units.

Question 46

Kern Company prepared the following tentative budget for next year:
The sales manager argues that the unit selling price could be increased by 20%,with an expected volume decrease of only 10%.If Kern incorporates these changes in its budget,what should be the budgeted operating income?

A) $66,000.
B) $90,000.
C) $120,000.
D) $145,000.Budgeted operating income = 90,000 * $3 - 150,000 = $120,000.

Question 47

The following is last month's contribution format income statement:
What is the company's degree of operating leverage?

A) 0.125.
B) 8.0.
C) 3.0.
D) 0.333.

Question 48

The following data pertain to last month's operations:
What is the break-even point in dollars?

A) $18,000.
B) $6,000.
C) $11,250.
D) $7,500.

Question 49

If sales increase from $80,000 per year to $120,000 per year,and if the degree of operating leverage is 5,then by what percentage should operating income increase?

A) 167%.
B) 250%.
C) 100%.
D) 334%.

Question 50

Roberts Company sells a single product at a selling price of $55 per unit.Variable costs are $30.25 per unit,and fixed costs are $113,850.What is Roberts Company's break-even point?

A) $207,000.
B) 3,764 units.
C) $253,000.
D) 2,070 units.

Question 51

The following is last month's contribution format income statement:
What is the company's margin of safety in dollars?

A) $100,000.
B) $600,000.
C) $1,500,000.
D) $250,000.

Question 52

Loren Company's single product has a selling price of $15 per unit.Last year,the company reported total variable expenses of $180,000,fixed expenses of $90,000,and an operating income of $30,000.A study by the sales manager discloses that a 15% increase in the selling price would reduce unit sales by 10%.If her proposal is adopted,what would the outcome be for operating income?

A) Increase by $45,000.
B) Increase by $37,500.
C) Increase by $7,500.
D) Increase by $28,500.New Op.Income = (20,000 * .90 * $8.25)- 90,000 = $58,500.

Question 53

The following data pertain to last month's operations:
What is the break-even point in dollars?

A) $300,000.
B) $240,000.
C) $200,000.
D) $160,000.

Question 54

Ostler Company's operating income last year was $10,000,and its contribution margin was $50,000.Using the operating leverage concept,if the company's sales increase next year by 8%,by what percentage can its operating income expect to increase?

A) 20%.
B) 16%.
C) 160%.
D) 40%.

Question 55

Austin Manufacturing had the following operating data for the year just ended:
Management plans to improve the quality of its only product by replacing a component that costs $3.50 with a higher-grade component that costs $5.50,and renting a packing machine for $18,000 a year.If the desired target operating profit is $288,000,how many units must the company sell?

A) 19,300 units.
B) 21,316 units.
C) 22,500 units.
D) 20,842 units.

Question 56

Wilson Company prepared the following preliminary budget assuming no advertising expenditures:
Based on a market study,the company estimated that it could increase the unit selling price by 15% and increase the unit sales volume by 10%,if $100,000 were spent on advertising.Assuming that these changes are incorporated in its budget,what should be the budgeted operating income?

A) $175,000.
B) $190,000.
C) $205,000.
D) $365,000.Budgeted Operating Income = 100,000 * 1.10 * $5.50 - 300,000 - 100,000 = $205,000.

Question 57

The following data pertain to Wistron Company's two products:
If fixed expenses for the company as a whole are $60,000 and the product mix is constant,what would be the overall break-even point in sales dollar for the company?

A) $150,000.
B) $153,846.
C) $100,000.
D) $132,000.B/E sales dollars = 60,000/.40 = $150,000.

Question 58

The following is last month's contribution format income statement:
What is the company's break-even sales in units?

A) 0 units.
B) 12,000 units.
C) 6,000 units.
D) 8,000 units.

Question 59

The following is last month's contribution format income statement(Do not round intermediate computations):
What is the company's break-even in sales dollars?

A) $1,200,000.
B) $0.
C) $1,800,000.
D) $1,600,000.

Question 60

The following monthly data are available for the Eager Company and its only product:
What was the margin of safety for the company for March?

A) $315,000.
B) $225,000.
C) $135,000.
D) $495,000.Margin safety = 7,000 * $75 - 180,000/.60 = $225,000.

Question 61

What is the company's degree of operating leverage?

A) 0.12.
B) 2.5.
C) 0.4.
D) 3.3.

Question 62

What is the unit contribution margin per book?

A) $10.30.
B) $14.30.
C) $10.80.
D) $8.30.

Question 63

How many units would the company have to sell to attain after-tax profits of $72,000,assuming it is subject to a 40% income tax rate?

A) 9,440 units.
B) 11,600 units.
C) 10,400 units.
D) 12,000 units.

Question 64

What is the degree of operating leverage for July?

A) The same as that for June.
B) Higher than that for June.
C) Lower than that for June.
D) Not determinable.June CM = 8,000 * 10.30 = 82,400 DOL = 82,400/(82,400 - 80,000)= 34.33.

Question 65

Goodman Company has sales of 3,000 units at $80 per unit.Variable costs are 35% of the sales price.If total fixed costs are $66,000,what is the degree of operating leverage rounded to 2 decimal places?

A) 0.79.
B) 0.93.
C) 2.67.
D) 1.73.DOL = 156,000/(156,000 - 66,000)= 1.73

Question 66

If sales increase by 100 units,by how much should operating income increase?

A) $400.
B) $4,800.
C) $1,500.
D) $2,500.

Question 67

What is the company's margin of safety percentage?

A) 25%.
B) 20%.
C) 40%.
D) 10%.

Question 68

What is the company's contribution margin ratio?

A) 62.5%.
B) 160%.
C) 500%.
D) 20%.

Question 69

What is the company's degree of operating leverage?

A) 0.2.
B) 8.0.
C) 1.7.
D) 5.0.

Question 70

If sales increase by 200 units,by how much should before-tax profits increase?

A) $16,000.
B) $5,000.
C) $2,000.
D) $10,000.

Question 71

What is the contribution margin?

A) $240,000.
B) $560,000.
C) $632,000.
D) $72,000.

Question 72

What is the company's margin of safety in dollars?

A) $400,000.
B) $600,000.
C) $120,000.
D) $880,000.

Question 73

What is the company's break-even in units?

A) 20,000 units.
B) 0 units.
C) 18,000 units.
D) 12,000 units.

Question 74

What is the company's contribution margin ratio?

A) 250%.
B) 150%.
C) 70%.
D) 30%.

Question 75

The degree of operating leverage for July is closest to which of the following?

A) 4.48.
B) 3.48.
C) 4.22.
D) 8.70.

Question 76

What is the break-even point in units?

A) 8,247 books.
B) 7,767 books.
C) 7,407 books.
D) 6,504 books.

Question 77

What is the contribution margin ratio for the book?

A) 71.5%.
B) 54.0%.
C) 51.5%.
D) 51.9%.

Question 78

How many units would the company have to sell to attain target operating profits of $150,000?

A) 22,000 units.
B) 37,500 units.
C) 25,000 units.
D) 26,667 units.

Question 79

What is the company's break-even sales in dollars?

A) $0.
B) $640,000.
C) $700,000.
D) $400,000.

Question 80

What is the break-even point in sales dollars?

A) $240,000.
B) $560,000.
C) $728,000.
D) $408,000.