Question 1

Would you expect the following to be high or low in a labour-intensive firm: (1) operating leverage, (2) safety margin and (3) profit potential?

Accepted Answer

In a labour-intensive firm, operating leverage is low because fixed costs are lower compared to variable costs. The safety margin is high as the firm can adjust labor costs more easily in response to changes in demand. Profit potential is low due to higher variable costs.

Question 2

Which of the following do limitations of cost volume profit include?
i. Not all costs can be classified as fixed or variable.
ii. Revenue changes may not be linear.
iii. Sales volume is the only cost driver.
iv. Inventory levels do not change.

Accepted Answer

Cost Volume Profit (CVP) analysis has several limitations, including the difficulty in classifying all costs strictly as fixed or variable (i), the assumption that revenue changes linearly with sales volume which may not always be the case (ii), the oversimplification that sales volume is the only cost driver ignoring other factors (iii), and the assumption that inventory levels remain constant which may not reflect real business operations (iv).

Question 3

Your local pizza parlour has annual fixed costs of $20 000, the pizza price is $8 and the unit variable cost $4. What is the contribution margin ratio?

Accepted Answer

The contribution margin ratio is calculated as follows:

Contribution Margin Ratio = (Unit Price - Unit Variable Cost) / Unit Price

= ($8 - $4) / $8

= 50%

This means that for every $1 of sales, $0.50 covers the fixed costs and the rest contributes to profits.

Therefore, the best choice to maximize profits would be to increase sales as much as possible while keeping costs constant, since the contribution margin ratio is 50%.

Question 4

Which of the following statements applies to cost volume profit and sensitivity analysis?
i. Only one variable is changed.
ii. All variables are changed.
iii. One or more variables are changed.
iv. Only one set of variables need be assessed.

Accepted Answer

In both cost volume profit and sensitivity analysis, one or more variables are changed to analyze their impact on overall profitability or performance. Therefore, statement iii applies. Statement i is not necessarily true as more than one variable may be changed. Statement ii is incorrect as not all variables are changed. Statement iv is also incorrect as multiple sets of variables may need to be assessed.

Question 5

For a firm that would break even at $200 000 sales and earn a profit of $30 000 at sales of $250 000, which of the following statements is always true?

Accepted Answer

The answer of For a firm that would break even...

Question 6

A firm is reorganising and reclassifying its cost structure. The firm previously classified the item 'glue and nails' as indirect material. The firm is considering now tracing this cost directly to products and treating 'glue and nails' as direct material. What is the effect on the break-even point (if any) of that change, provided all other items remain unchanged?

Accepted Answer

Classifying 'glue and nails' as direct instead of indirect materials does not change the total cost structure, only how costs are categorized. The total costs and revenue needed to reach the break-even point remain unchanged.

Question 7

Would you expect the following to be high or low in an automated firm: (1) safety margin, (2) operating leverage and (3) profit potential?

Accepted Answer

In an automated firm, the safety margin might be lower due to high fixed costs, operating leverage is high because of the same high fixed costs (meaning profits are more sensitive to changes in sales volume), and profit potential is high due to efficiency and productivity gains from automation.

Question 8

If break-even sales volume is $40 000 and contribution margin $7500, what is the net profit?

Accepted Answer

At the break-even point, net profit is $0 because revenues exactly cover all fixed and variable costs, with no surplus.

Question 9

'Goal seek' analysis provides for which of the following?
i. An output for a given set of inputs
ii. Required inputs for a given output
iii. A range of outputs for a range of inputs

Accepted Answer

'Goal seek' is a function used in spreadsheet programs like Microsoft Excel that allows the user to find the necessary input value to achieve a desired output. It does not provide an output for a given set of inputs (that would be a regular calculation or simulation) nor does it provide a range of outputs for a range of inputs (that would be more akin to sensitivity analysis or scenario analysis).

Question 10

The contribution margin ratio is calculated as

Accepted Answer

The contribution margin ratio can be calculated both as total contribution margin divided by total sales revenue (option A) and as contribution margin per unit divided by selling price per unit (option C). Therefore, options A and C are partially correct. Option B is incorrect because it calculates total profit instead of contribution margin. Option D is the best answer because it includes both correct options (A and C), which reflect the different ways to calculate the contribution margin ratio.

Question 11

Would you expect the following to be high or low in a labour-intensive industry: (1) operating leverage, (2) break-even point and (3) safety margin?

Accepted Answer

In a labor-intensive industry, operating leverage (which measures a firm's fixed costs relative to its variable costs) is typically low because the industry relies more on variable labor costs than on fixed capital costs. Consequently, the break-even point (the point at which total revenues equal total costs) is also lower, as less revenue is needed to cover lower fixed costs. The safety margin (the difference between actual or projected sales and the break-even sales) tends to be higher because the lower break-even point allows for a larger buffer before losses occur.

Question 12

Cost volume profit analysis, including customer-related costs, must incorporate which of the following costs:
i. market level costs
ii. customer level costs
iii. order level costs
iv. batch level costs

Accepted Answer

Cost volume profit analysis, when including customer-related costs, must incorporate market level costs, customer level costs, order level costs, and batch level costs to accurately assess the impact of different cost behaviors and customer interactions on profitability.

Question 13

Which of the following will increase a company's break-even point?

Accepted Answer

Increasing the variable cost per unit will increase the break-even point because more revenue will need to be generated to cover the increased costs. A higher break-even point means the company needs to sell more units or generate more revenue before it can make a profit. Increasing the contribution margin per unit or selling price per unit would decrease the break-even point, while reducing total fixed costs would have a similar effect.

Question 14

The firm uses activity-based costing and has the following cost structure: selling price $50, batch cost $20 000, unit level costs $30 per unit, facility costs $120 000 and product costs $60 000. What is the break-even point in units?

Accepted Answer

The answer of The firm uses activity-based costing and has...

Question 15

Under activity-based costing systems, break-even point in units treats which costs as included in the numerator?
i. Batch costs
ii. Product costs
iii. Faculty level costs

Accepted Answer

Activity-based costing (ABC) includes all types of costs (batch costs, product costs, and facility level costs) in its calculations to provide a more accurate picture of the costs associated with producing specific products. This comprehensive approach ensures that all relevant costs are considered in the break-even analysis.

Question 16

Would you expect the following to be high or low in an automated firm: (1) level of fixed costs, (2) level of risk and (3) break-even point?

Accepted Answer

Automated firms typically have high fixed costs due to investment in machinery and technology, high risk due to dependency on technology and market fluctuations, and a high break-even point because of the need to cover substantial fixed costs before making a profit.

Question 17

Which of the following are assumptions of cost volume profit analysis?
i. Sales mix is constant.
ii. External factors do not change.
iii. Fixed costs change with sales volume.
iv. Variable costs are constant per unit of sales.

Accepted Answer

Assumption i is that sales mix is constant, which means that the proportion of different products or services sold remains the same. Assumption ii is that external factors, such as competition or economic conditions, do not change. Assumption iv is that variable costs are constant per unit of sales, which means that the cost per unit remains the same regardless of the level of sales. However, assumption iii is incorrect as fixed costs do not change with sales volume. Therefore, the correct answer is C, which includes assumptions i, ii, and iv.

Question 18

Econ Pty Ltd produced and sold 45 000 units of a single product last year. Data concerning the year's profit and loss statement is as follows: 
Assuming sales revenue increases by 15 per cent, what will be the percentage increase in profit before income tax?

Accepted Answer

The answer of Econ Pty Ltd produced and sold 45...

Question 19

Econ Pty Ltd produced and sold 45 000 units of a single product last year. Data concerning the year's profit and loss statement is as follows: 
Assuming all cost relationships will remain constant for the coming year, how many units must be sold for the company to earn an after-tax profit of $180 000 if the income tax rate is 40 per cent?

Accepted Answer

First, we need to calculate the current after-tax profit:
Profit before tax = $240,000
Income tax = 40% x $240,000 = $96,000
Profit after tax = $240,000 - $96,000 = $144,000

Next, we need to find the number of units needed to earn an after-tax profit of $180,000:
Let x be the number of units to be sold
Revenue from selling x units = x x $18 = $18x

Variable cost per unit = ($8 + $1)/unit = $9/unit
Total variable cost for x units = $9x

Fixed costs = $210,000

Profit before tax = Revenue - Total variable cost - Fixed costs
$180,000 + $96,000 (income tax) = $18x - $9x - $210,000
$276,000 = $9x - $210,000
$486,000 = $9x
x = 54,000 units

However, we must check if selling 54,000 units will achieve an after-tax profit of $180,000:
Revenue from selling 54,000 units = 54,000 x $18 = $972,000
Total variable cost for 54,000 units = $9 x 54,000 = $486,000
Fixed costs = $210,000
Profit before tax = $276,000

Income tax = 40% x $276,000 = $110,400
Profit after tax = $276,000 - $110,400 = $165,600

Therefore, we need to sell more than 54,000 units to achieve an after-tax profit of $180,000. The closest option is 61,000 units, thus the answer is C.

Question 20

Nesto sells two products: X and Y. The contribution margin ratio for X is 40 per cent and for Y is 50 per cent. If the proportion of sales of X decreases, what will happen to the weighted average contribution margin?

Accepted Answer

Since product Y has a higher contribution margin ratio (50%) compared to product X (40%), decreasing the proportion of sales of X and presumably increasing the proportion of sales of Y would increase the overall weighted average contribution margin.

Quiz 18: Cost Volume Profit Analysis

Would you expect the following to be high or low in a labour-intensive firm: (1) operating leverage, (2) safety margin and (3) profit potential?

Which of the following do limitations of cost volume profit include? i. Not all costs can be classified as fixed or variable. ii. Revenue changes may not be linear. iii. Sales volume is the only cost driver. iv. Inventory levels do not change.

Your local pizza parlour has annual fixed costs of $20 000, the pizza price is $8 and the unit variable cost $4. What is the contribution margin ratio?

Which of the following statements applies to cost volume profit and sensitivity analysis? i. Only one variable is changed. ii. All variables are changed. iii. One or more variables are changed. iv. Only one set of variables need be assessed.

For a firm that would break even at $200 000 sales and earn a profit of $30 000 at sales of $250 000, which of the following statements is always true?

Would you expect the following to be high or low in an automated firm: (1) safety margin, (2) operating leverage and (3) profit potential?

If break-even sales volume is $40 000 and contribution margin $7500, what is the net profit?

'Goal seek' analysis provides for which of the following? i. An output for a given set of inputs ii. Required inputs for a given output iii. A range of outputs for a range of inputs

The contribution margin ratio is calculated as

Would you expect the following to be high or low in a labour-intensive industry: (1) operating leverage, (2) break-even point and (3) safety margin?

Cost volume profit analysis, including customer-related costs, must incorporate which of the following costs: i. market level costs ii. customer level costs iii. order level costs iv. batch level costs

Which of the following will increase a company's break-even point?

The firm uses activity-based costing and has the following cost structure: selling price $50, batch cost $20 000, unit level costs $30 per unit, facility costs $120 000 and product costs $60 000. What is the break-even point in units?

Under activity-based costing systems, break-even point in units treats which costs as included in the numerator? i. Batch costs ii. Product costs iii. Faculty level costs

Would you expect the following to be high or low in an automated firm: (1) level of fixed costs, (2) level of risk and (3) break-even point?

Which of the following are assumptions of cost volume profit analysis? i. Sales mix is constant. ii. External factors do not change. iii. Fixed costs change with sales volume. iv. Variable costs are constant per unit of sales.

Econ Pty Ltd produced and sold 45 000 units of a single product last year. Data concerning the year's profit and loss statement is as follows: Assuming sales revenue increases by 15 per cent, what will be the percentage increase in profit before income tax?

Nesto sells two products: X and Y. The contribution margin ratio for X is 40 per cent and for Y is 50 per cent. If the proportion of sales of X decreases, what will happen to the weighted average contribution margin?