Quiz 9: Break-Even Point and Cost-Volume-Profit Analysis

A company's break-even point is the level where total revenues equal total costs.

Absorption costing is more useful than variable costing in determining a company's break-even point.

Variable costing is more useful than absorption costing in determining a company's break-even point.

Total variable product costs vary directly with levels of production.

Variable costs per unit vary directly with levels of production.

Variable costs per unit remain unchanged with levels of production.

Total fixed costs remain unchanged with levels of production.

Total fixed costs vary inversely with levels of production.

Fixed costs per unit vary inversely with levels of production.

Fixed costs per unit remain constant with levels of production.

Break-even point may be expressed in terms of units or dollars.

Dividing total fixed costs by the contribution margin ratio yields break-even point in sales dollars.

Dividing total fixed costs by the contribution margin ratio yields break-even point in units.

After the break-even point is reached,each dollar of contribution margin is a dollar of before-tax profit.

After the break-even point is reached,each dollar of contribution margin is a dollar of after-tax profit.

When using CVP analysis to determine sales level for a desired amount of profit,the profit is treated as an additional cost to be covered.

When computing profit on an after-tax basis,it is necessary to divide the pretax profit by the effective tax rate.

When computing profit on an after-tax basis,it is necessary to multiply the pretax profit by (1 - effective tax rate).

On a CVP graph,the total cost line intersects the y-axis at zero.

On a CVP graph,the total variable cost line intersects the y-axis at zero.

On a CVP graph,the total revenue line intersects the y-axis at zero.

On a CVP graph,the total fixed cost line parallels the x-axis.

Incremental analysis focuses on factors that change from one decision to another.

In a multi-product environment,CVP analysis makes the assumption that a company's sales mix is constant.

The margin of safety is an effective measure of risk for a company.

There is an inverse relationship between degree of operating leverage and the margin of safety.

The margin of safety is computed by dividing 1 by the degree of operating leverage.

In CVP analysis,sales and production are assumed to be equal.

The level of activity where a company's total revenues equal total costs is referred to as the ______________________________.

Contribution margin divided by revenue is referred to as the ________________________________________.

A process that focuses only on factors that change from one course of action to another is referred to as ___________________________________.

The excess of budgeted or actual sales over sales at break-even point is referred to as ______________________________.

The relationship between a company's variable costs and fixed costs is referred to as its ______________________________.

The __________________________________________________ is computed by dividing the contribution margin by profit before tax.

The formula for margin of safety is _____________________________________________.

CVP analysis requires costs to be categorized as A)either fixed or variable. B)direct or indirect. C)product or period. D)standard or actual.

With respect to fixed costs,CVP analysis assumes total fixed costs A)per unit remain constant as volume changes. B)remain constant from one period to the next. C)vary directly with volume. D)remain constant across changes in volume.

CVP analysis relies on the assumptions that costs are either strictly fixed or strictly variable.Consistent with these assumptions,as volume decreases total A)fixed costs decrease. B)variable costs remain constant. C)costs decrease. D)costs remain constant.

CVP analysis is based on concepts from A)standard costing. B)variable costing. C)job order costing. D)process costing.

Cost-volume-profit analysis is a technique available to management to understand better the interrelationships of several factors that affect a firm's profit.As with many such techniques,the accountant oversimplifies the real world by making assumptions.Which of the following is not a major assumption underlying CVP analysis? A)All costs incurred by a firm can be separated into their fixed and variable components. B)The product selling price per unit is constant at all volume levels. C)Operating efficiency and employee productivity are constant at all volume levels. D)For multi-product situations,the sales mix can vary at all volume levels.

In CVP analysis,linear functions are assumed for A)contribution margin per unit. B)fixed cost per unit. C)total costs per unit. D)all of the above.

Which of the following factors is involved in studying cost-volume-profit relationships? A)product mix B)variable costs C)fixed costs D)all of the above

Cost-volume-profit relationships that are curvilinear may be analyzed linearly by considering only A)fixed and mixed costs. B)relevant fixed costs. C)relevant variable costs. D)a relevant range of volume.

After the level of volume exceeds the break-even point A)the contribution margin ratio increases. B)the total contribution margin exceeds the total fixed costs. C)total fixed costs per unit will remain constant. D)the total contribution margin will turn from negative to positive.

Which of the following will decrease the break-even point? A)yes yes yes B)yes no yes C)yes no no D)no yes no

At the break-even point,fixed costs are always A)less than the contribution margin. B)equal to the contribution margin. C)more than the contribution margin. D)more than the variable cost.

The method of cost accounting that lends itself to break-even analysis is A)variable. B)standard. C)absolute. D)absorption.

Given the following notation,what is the break-even sales level in units? SP = selling price per unit,FC = total fixed cost,VC = variable cost per unit A)SP/(FC/VC) B)FC/(VC/SP) C)VC/(SP - FC) D)FC/(SP - VC)

Consider the equation X = Sales - [(CM/Sales)´ (Sales)].What is X? A)net income B)fixed costs C)contribution margin D)variable costs

If a firm's net income does not change as its volume changes,the firm('s) A)must be in the service industry. B)must have no fixed costs. C)sales price must equal $0. D)sales price must equal its variable costs.

Break-even analysis assumes over the relevant range that A)total variable costs are linear. B)fixed costs per unit are constant. C)total variable costs are nonlinear. D)total revenue is nonlinear.

To compute the break-even point in units,which of the following formulas is used? A)FC/CM per unit B)FC/CM ratio C)CM/CM ratio D)(FC+VC)/CM ratio

A firm's break-even point in dollars can be found in one calculation using which of the following formulas? A)FC/CM per unit B)VC/CM C)FC/CM ratio D)VC/CM ratio

The contribution margin ratio always increases when the A)variable costs as a percentage of net sales increase. B)variable costs as a percentage of net sales decrease. C)break-even point increases. D)break-even point decreases.

In a multiple-product firm,the product that has the highest contribution margin per unit will A)generate more profit for each $1 of sales than the other products. B)have the highest contribution margin ratio. C)generate the most profit for each unit sold. D)have the lowest variable costs per unit.

____ focuses only on factors that change from one course of action to another. A)Incremental analysis B)Margin of safety C)Operating leverage D)A break-even chart

On a break-even chart,the break-even point is located at the point where the total A)revenue line crosses the total fixed cost line. B)revenue line crosses the total contribution margin line. C)fixed cost line intersects the total variable cost line. D)revenue line crosses the total cost line.

In a CVP graph,the slope of the total revenue line indicates the A)rate at which profit changes as volume changes. B)rate at which the contribution margin changes as volume changes. C)ratio of increase of total fixed costs. D)total costs per unit.

In a CVP graph,the area between the total cost line and the total revenue line represents total A)contribution margin. B)variable costs. C)fixed costs. D)profit.

In a CVP graph,the area between the total cost line and the total fixed cost line yields the A)fixed costs per unit. B)total variable costs. C)profit. D)contribution margin.

If a company's fixed costs were to increase,the effect on a profit-volume graph would be that the A)contribution margin line would shift upward parallel to the present line. B)contribution margin line would shift downward parallel to the present line. C)slope of the contribution margin line would be more pronounced (steeper). D)slope of the contribution margin line would be less pronounced (flatter).

If a company's variable costs per unit were to increase but its unit selling price stays constant,the effect on a profit-volume graph would be that the A)contribution margin line would shift upward parallel to the present line. B)contribution margin line would shift downward parallel to the present line. C)slope of the contribution margin line would be pronounced (steeper). D)slope of the contribution margin line would be less pronounced (flatter).

The most useful information derived from a cost-volume-profit chart is the A)amount of sales revenue needed to cover enterprise variable costs. B)amount of sales revenue needed to cover enterprise fixed costs. C)relationship among revenues,variable costs,and fixed costs at various levels of activity. D)volume or output level at which the enterprise breaks even.

The margin of safety would be negative if a company('s) A)was presently operating at a volume that is below the break-even point. B)present fixed costs were less than its contribution margin. C)variable costs exceeded its fixed costs. D)degree of operating leverage is greater than 100.

The margin of safety is a key concept of CVP analysis.The margin of safety is the A)contribution margin rate. B)difference between budgeted contribution margin and actual contribution margin. C)difference between budgeted contribution margin and break-even contribution margin. D)difference between budgeted sales and break-even sales.

Management is considering replacing an existing sales commission compensation plan with a fixed salary plan.If the change is adopted,the company's A)break-even point must increase. B)margin of safety must decrease. C)operating leverage must increase. D)profit must increase.

As projected net income increases the A)degree of operating leverage declines. B)margin of safety stays constant. C)break-even point goes down. D)contribution margin ratio goes up.

A managerial preference for a very low degree of operating leverage might indicate that A)an increase in sales volume is expected. B)a decrease in sales volume is expected. C)the firm is very unprofitable. D)the firm has very high fixed costs.

Parker Company Below is an income statement for Parker Company: Refer to Parker Company.What is Parker's degree of operating leverage? A)3.67 B)5.33 C)1.45 D)2.67

Parker Company Below is an income statement for Parker Company: Refer to Parker Company.Based on the cost and revenue structure on the income statement,what was Parker's break-even point in dollars? A)$200,000 B)$325,000 C)$300,000 D)$290,909

Parker Company Below is an income statement for Parker Company: Refer to Parker Company.What was Parker's margin of safety? A)$200,000 B)$75,000 C)$100,000 D)$109,091

Parker Company Below is an income statement for Parker Company: Refer to Parker Company.Assuming that the fixed costs are expected to remain at $200,000 for the coming year and the sales price per unit and variable costs per unit are also expected to remain constant,how much profit before taxes will be produced if the company anticipates sales for the coming year rising to 130 percent of the current year's level? A)$97,500 B)$195,000 C)$157,500 D)A prediction cannot be made from the information given.

Real Products Company Real Products Company produces and sells a single product.Information on its costs follow: Refer to Real Products Company.Assume Real Products Company produced and sold 5,000 units.At this level of activity,it produced a profit of $18,000.What was Real Products Company's sales price per unit? A)$15.00 B)$11.40 C)$9.60 D)$10.00

Real Products Company Real Products Company produces and sells a single product.Information on its costs follow: Refer to Real Products Company.In the upcoming year,Real Products Company estimates that it will produce and sell 4,000 units.The variable costs per unit and the total fixed costs are expected to be the same as in the current year.However,it anticipates a sales price of $16 per unit.What is Real Products Company's projected margin of safety for the coming year? A)$7,000 B)$20,800 C)$18,400 D)$13,000

Harris Manufacturing incurs annual fixed costs of $250,000 in producing and selling a single product.Estimated unit sales are 125,000.An after-tax income of $75,000 is desired by management.The company projects its income tax rate at 40 percent.What is the maximum amount that Harris can expend for variable costs per unit and still meet its profit objective if the sales price per unit is estimated at $6? A)$3.37 B)$3.59 C)$3.00 D)$3.70

Stewart Company The following information relates to financial projections of Stewart Company: Refer to Stewart Company.How many units would Stewart Company need to sell to earn a profit before taxes of $10,000? A)25,714 B)10,000 C)8,571 D)12,000

Stewart Company The following information relates to financial projections of Stewart Company: Refer to Stewart Company.If Stewart Company achieves its projections,what will be its degree of operating leverage? A)6.00 B)1.20 C)1.68 D)2.40

Putnam Company Below is an income statement for Putnam Company: Refer to Putnam Company.What is Putnam's degree of operating leverage? A)1.33 B)2.00 C)3.00 D)4.00

Putnam Company Below is an income statement for Putnam Company: Refer to Putnam Company.Based on the cost and revenue structure on the income statement,what was Putnam's break-even point in dollars? A)$300,000 B)$400,000 C)$425,000 D)$450,000

Putnam Company Below is an income statement for Putnam Company: Refer to Putnam Company.What was Putnam's margin of safety? A)$150,000 B)$175,000 C)$200,000 D)$300,000

Putnam Company Below is an income statement for Putnam Company: Refer to Putnam Company.Assuming that the fixed costs are expected to remain at $300,000 for the coming year and the sales price per unit and variable costs per unit are also expected to remain constant,how much profit before taxes will be produced if the company anticipates sales for the coming year rising to 125 percent of the current year's level? A)$112,500 B)$187,500 C)$262,500 D)$300,000

Blue Mountain Company manufactures a single product.In the prior year,the company had sales of $90,000,variable costs of $50,000,and fixed costs of $30,000.Blue Mountain expects its cost structure and sales price per unit to remain the same in the current year,however total sales are expected to increase by 20 percent.If the current year projections are realized,net income should exceed the prior year's net income by: A)100 percent. B)80 percent. C)20 percent. D)50 percent.

Daybreak Corporation Daybreak Corporation manufactures and sells two products: A and B.The operating results of the company are as follows: In addition,the company incurred total fixed costs in the amount of $10,000. A)333 B)1,111 C)2,333 D)3,332

Daybreak Corporation Daybreak Corporation manufactures and sells two products: A and B.The operating results of the company are as follows: In addition,the company incurred total fixed costs in the amount of $10,000. A)5,250 B)6,000 C)7,000 D)7,875

Daybreak Corporation Daybreak Corporation manufactures and sells two products: A and B.The operating results of the company are as follows: In addition,the company incurred total fixed costs in the amount of $10,000. A)6,000 B)6,250 C)6,923 D)7,000

Surfside Corporation Surfside Corporation manufactures and sells two products: A and B.The operating results of the company are as follows: In addition,the company incurred total fixed costs in the amount of $9,000. A)3,750 B)750 C)3,600 D)1,800

Surfside Corporation Surfside Corporation manufactures and sells two products: A and B.The operating results of the company are as follows: In addition,the company incurred total fixed costs in the amount of $9,000. A)3,000 B)4,000 C)3,600 D)3,500

Surfside Corporation Surfside Corporation manufactures and sells two products: A and B.The operating results of the company are as follows: In addition,the company incurred total fixed costs in the amount of $9,000. A)8,750 B)20,000 C)10,000 D)8,400

Jean Simmons Company Below is an income statement for Jean Simmons Company: Refer to Jean Simmons Company.What was the company's margin of safety? A)$50,000 B)$100,000 C)$150,000 D)$25,000

Jean Simmons Company Below is an income statement for Jean Simmons Company: Refer to Jean Simmons Company.If the unit sales price for Jean Simmons's sole product was $10,how many units would it have needed to sell to produce a profit of $40,000? A)27,500 B)29,000 C)28,000 D)can't be determined from the information given

A firm estimates that it will sell 100,000 units of its sole product in the coming period.It projects the sales price at $40 per unit,the CM ratio at 60 percent,and profit at $500,000.What is the firm budgeting for fixed costs in the coming period? A)$1,600,000 B)$2,400,000 C)$1,100,000 D)$1,900,000

Broncho Lids Corporation manufactures a western-style hat that sells for $10 per unit.This is its sole product and it has projected the break-even point at 50,000 units in the coming period.If fixed costs are projected at $100,000,what is the projected contribution margin ratio? A)80 percent B)20 percent C)40 percent D)60 percent

Horner Company Horner Company manufactures a single product.Each unit sells for $15.The firm's projected costs are listed below: Refer to Horner Company.What is Horner's projected margin of safety for the current year? A)$133,333 B)$150,000 C)$80,000 D)$100,000

Horner Company Horner Company manufactures a single product.Each unit sells for $15.The firm's projected costs are listed below: Refer to Horner Company.What is Horner's projected degree of operating leverage for the current year? A)2.25 B)1.80 C)3.75 D)1.67

Austin,Brown,and Freeman Companies Below are income statements that apply to three companies: Austin,Brown,and Freeman: Refer to Austin,Brown,and Freeman Companies.Within the relevant range,if sales go up by $1 for each firm,which firm will experience the greatest increase in profit? A)Austin Company B)Brown Company C)Freeman Company D)can't be determined from the information given

Austin,Brown,and Freeman Companies Below are income statements that apply to three companies: Austin,Brown,and Freeman: Refer to Austin,Brown,and Freeman Companies.Within the relevant range,if sales go up by one unit for each firm,which firm will experience the greatest increase in net income? A)Austin Company B)Brown Company C)Freeman Company D)can't be determined from the information given

Austin,Brown,and Freeman Companies Below are income statements that apply to three companies: Austin,Brown,and Freeman: Refer to Austin,Brown,and Freeman Companies.At sales of $100,which firm has the highest margin of safety? A)Austin Company B)Brown Company C)Freeman Company D)They all have the same margin of safety.

McDonald Company The following information relates to financial projections of McDonald Company: Refer to McDonald Company.How many units would McDonald Company need to sell to earn a profit before taxes of $15,000? A)9,375 B)12,000 C)15,000 D)37,500

McDonald Company The following information relates to financial projections of McDonald Company: Refer to McDonald Company.If McDonald Company achieves its projections,what will be its degree of operating leverage? A)6.25 B)1.19 C)1.68 D)3.00

Lance is interested in entering the catfish farming business.He estimates if he enters this business,his fixed costs would be $50,000 per year and his variable costs would equal 30 percent of sales.If each catfish sells for $2,how many catfish would Lance need to sell to generate a profit that is equal to 10 percent of sales? A)40,000 B)41,667 C)35,000 D)No level of sales can generate a 10 percent net return on sales.

Robert Wilson Company Below is an income statement for Robert Wilson Company: Refer to Robert Wilson Company.What was the company's margin of safety? A)$ 37,500 B)$ 75,000 C)$125,000 D)$150,000

Robert Wilson Company Below is an income statement for Robert Wilson Company: Refer to Robert Wilson Company.What is the company's degree of operating leverage (DOL)? A)2.67 B)3.2 C)5.33 D)10.67

The following information pertains to Venus Company's cost-volume-profit relationships: How much will be contributed to profit before taxes by the 1,001st unit sold? A)$650 B)$500 C)$150 D)$0

The following information pertains to Gemini Company's cost-volume-profit relationships: How much will be contributed to profit before taxes by the 1,501st unit sold? A)$850 B)$700 C)$150 D)$0

Information concerning Thompson Corporation's Product A follows: Assuming that Thompson increased sales of Product A by 20 percent,what should the profit from Product A be? A)$20,000 B)$24,000 C)$32,000 D)$80,000

Information concerning Lynch Corporation's Product A follows: Assuming that Lynch increased sales of Product A by 25 percent,what should the profit from Product A be? A)$ 50,000 B)$ 62,500 C)$ 75,000 D)$170,000

Tisdale Company reported the following results from sales of 5,000 units of Product A for June: Assume that Tisdale increases the selling price of Product A by 10 percent in July.How many units of Product A would have to be sold in July to generate an operating income of $20,000? A)4,000 B)4,300 C)4,545 D)5,000

How do changes in volume affect the break-even point?

What major assumption do multi-product firms need to make in using CVP analysis that single-product firms need not make?

What important information is conveyed by the margin of safety calculation in CVP analysis?

What are the major assumptions of CVP analysis?

The O'Brien Company sells two products,A and B,with contribution margin ratios of 40 and 30 percent and selling prices of $5 and $2.50 a unit.Fixed costs amount to $72,000 a month.Monthly sales average 30,000 units of product A and 40,000 units of product B. Required: At current sales levels increase advertising.

The Jordan Company makes three products.The cost data for these three products is as follows: C. Required:

Carson Company produces and sells two products: A and B in the ratio of 3A to 5B.Selling prices for A and B are,respectively,$1,200 and $240;respective variable costs are $480 and $160.The company's fixed costs are $1,800,000 per year. Compute the volume of sales in units of each product needed to: Required:

Burns Corporation Information relating to the current operations of Burns Corporation follows:

Burns Corporation Information relating to the current operations of Burns Corporation follows:

Bridges Corporation Bridges Corporation manufactures and sells two products: A and B. B.The overall company break-even point is found by dividing total fixed costs by the contribution margin on one unit of sales mix: $10,000/$20 = 500 units.The 500 units of sales mix contain 500 ´ 5 units of product for a total of 2,500.Of the 2,500 total units,2,000 are units of Product A and 500 are units of Product B.The projected information on these two products for the coming year is presented below: Total fixed costs for the company are projected at $10,000.B.The total contribution margin for one unit of sales mix would be $20.This consists of $16 of contribution margin from the 4 units of Product A and $4 of contribution margin from 1 unit of Product Refer to Bridges Corporation.Compute Bridges Corporation's projected break-even point in total units. The company anticipates a sales mix consisting of 4 units of Product A and 1 unit of Product

Bridges Corporation Bridges Corporation manufactures and sells two products: A and B. B.The projected information on these two products for the coming year is presented below: Total fixed costs for the company are projected at $10,000. Refer to Bridges Corporation.How many units would the company need to sell to produce an income before income taxes equal to 15 percent of sales? Again,using a unit of sales mix as the unit of analysis,one unit of sales mix sells for $56.Since the contribution margin is $20 on one unit of sales mix,the CM ratio on one unit of sales mix is $20/$56 = .3571.This implies that variable costs as a percentage of sales are equal to 1 - .3571 = .6429.Income before income taxes equal to 15 percent of sales can be found by solving a formula of the following type: Sales - VC - FC = Income before income taxes In this particular case,we solve the following formula: Sales - (.6429 ´ Sales)- $10,000 = (.15 ´ Sales) Solving for Sales,we get $48,286.We can find out how many units of sales mix are required to generate sales of $48,286 by dividing $48,286 by $56 = 863.These 863 units of sales mix each contain 5 units of product,so the correct answer would be 863 ´ 5 = 4,315 units of product,3,452 of Product A and 863 of Product

Whitmore Corporation Whitmore Corporation predicts it will produce and sell 40,000 units of its sole product in the current year.At that level of volume,it projects a sales price of $30 per unit,a contribution margin ratio of 40 percent,and fixed costs of $5 per unit. Refer to Whitmore Corporation.What is the company's projected breakeven point in dollars and units?

Whitmore Corporation Whitmore Corporation predicts it will produce and sell 40,000 units of its sole product in the current year.At that level of volume,it projects a sales price of $30 per unit,a contribution margin ratio of 40 percent,and fixed costs of $5 per unit. Refer to Whitmore Corporation.What would the company's projected profit be if it produced and sold 30,000 units?

Castle Corporation The following questions are based on the following data pertaining to two types of products manufactured by Castle Corporation: Fixed costs total $300,000 annually.The expected mix in units is 60 percent for Product Y and 40 percent for Product Z. Refer to Castle Corporation.How much is Castle's break-even point sales in units?

Castle Corporation The following questions are based on the following data pertaining to two types of products manufactured by Castle Corporation: Fixed costs total $300,000 annually.The expected mix in units is 60 percent for Product Y and 40 percent for Product Z. Refer to Castle Corporation.What is Castle's break-even point in sales dollars?