Chapter 3 Cost-Volume-Profit Analysis TestBank

1) The selling price per unit less the variable cost per unit is the: A) fixed cost per unit

B) gross margin

C) margin of safety

D) contribution margin per unit Answer: D Diff: 1

Terms: contribution margin

Objective: 2

AACSB: Reflective thinking

Answer the following questions using the information below:

Sherry's Custom Jewelry sells a single product. 700 units were sold resulting in $7,000 of sales revenue, $2,800 of variable costs, and $1,200 of fixed costs.

2) Breakeven point in units is: A) 200 units

B) 300 units

C) 500 units

D) None of these answers are correct. Answer: A

Explanation: A) ($7,000 - $2,800)/700 = $6 Contribution Margin Per Unit. $1,200/$6 = 200 units

Diff: 2

Terms: breakeven point (BEP)

Objective: 2

AACSB: Analytical skills

3) The number of units that must be sold to achieve $6,000 of operating income is: A) 1,000 units

B) 1,166 units

C) 1,200 units

D) None of these answers are correct. Answer: C

Explanation: C) ($7,000 - $2,800)/700 = $6. ($1,200 + $6,000)/$6 = 1,200 units Diff: 2

Terms: cost-volume-profit (CVP) analysis

Objective: 2

AACSB: Analytical skills

Answer the following questions using the information below:

Holly's Ham, Inc. sells hams during the major holiday seasons. During the current year 11,000 hams were sold resulting in $220,000 of sales revenue, $55,000 of variable costs, and $24,000 of fixed costs.

4) Breakeven point in units is:

A) 1,000 hams

B) 1,200 hams C) 1,600 hams

D) None of these answers are correct. Answer: C Diff: 2

Terms: breakeven point (BEP)

Objective: 2

AACSB: Analytical skills

5) The number of hams that must be sold to achieve $75,000 of operating income is: A) 6,600 hams

B) 7,500 hams C) 8,400 hams

D) None of these answers are correct. Answer: A

Explanation: A) 20X -5X - 24,000 = 75,000; X = 6,600 hams Diff: 2

Terms: cost-volume-profit (CVP) analysis

Objective: 2

AACSB: Analytical skills

6) At the breakeven point of 2,000 units, variable costs total $4,000 and fixed costs total $6,000. The 2,001st unit sold will contribute ________ to profits.

A) $1

B) $2

C) $3

D) $5

Answer: C

Explanation: C) Fixed costs of $6,000/2,000 units = Contribution Margin of $3 per unit. Diff: 3

Terms: contribution margin

Objective: 2

AACSB: Analytical skills

7) The breakeven point is the activity level where: A) revenues equal fixed costs

B) revenues equal variable costs

C) contribution margin equals variable costs

D) revenues equal the sum of variable and fixed costs Answer: D Diff: 3

Terms: breakeven point (BEP)

Objective: 2

AACSB: Reflective thinking

8) Breakeven point is:

A) total costs divided by variable costs per unit

B) contribution margin per unit divided by revenue per unit C) fixed costs divided by contribution margin per unit

D) the sum of fixed and variable costs divided by contribution margin per unit Answer: C Diff: 2

Terms: breakeven point (BEP)

Objective: 2

AACSB: Reflective thinking

9) Sales total $200,000 when variable costs total $150,000 and fixed costs total $30,000. The breakeven point in sales dollars is:

A) $200,000

B) $120,000

C) $ 40,000 D) $ 30,000 Answer: B

Explanation: B) ($200,000 - $150,000) / $200,000 = 25% CM%; $30,000 / 0.25 = $120,000 BE sales

Diff: 3

Terms: breakeven point (BEP)

Objective: 2

AACSB: Analytical skills

10) The breakeven point in CVP analysis is defined as:

A) when fixed costs equal total revenues

B) fixed costs divided by the contribution margin per unit

C) revenues less variable costs equal operating income

D) when the contribution margin percentage equals total revenues divided by variable costs Answer: B Diff: 2

Terms: breakeven point (BEP)

Objective: 2

AACSB: Reflective thinking

11) Which of the following statements about determining the breakeven point is FALSE? A) Operating income is equal to zero.

B) Contribution margin - fixed costs is equal to zero.

C) Revenues equal fixed costs plus variable costs.

D) Breakeven revenues equal fixed costs divided by the variable cost per unit. Answer: D Diff: 3

Terms: breakeven point (BEP)

Objective: 2

AACSB: Reflective thinking

12) What is the breakeven point in units, assuming a product's selling price is $100, fixed costs are $8,000, unit variable costs are $20, and operating income is $3,200? A) 100 units B) 300 units

C) 400 units

D) 500 units

Answer: A

Explanation: A) Unit Selling Price of $100 - Unit Variable Cost $20 = Unit Contribution Margin of $80. Fixed Costs of $8,000 /$80 = 100 units Diff: 2

Terms: breakeven point (BEP)

Objective: 2

AACSB: Analytical skills

13) If unit outputs exceed the breakeven point:

A) there is a loss

B) total sales revenue exceeds total costs

C) there is a profit

D) Both total sales revenue exceeds total costs and there is a profit. Answer: D

Diff: 2

Terms: breakeven point (BEP)

Objective: 2

AACSB: Reflective thinking

14) How many units would have to be sold to yield a target operating income of $22,000, assuming variable costs are $15 per unit, total fixed costs are $2,000, and the unit selling price is $20? A) 4,800 units

B) 4,400 units

C) 4,000 units

D) 3,600 units Answer: A

Explanation: A) ($2,000 + $22,000) / ($20 - $15) = 4,800 units Diff: 3

Terms: cost-volume-profit (CVP) analysis

Objective: 2

AACSB: Analytical skills

15) If the breakeven point is 1,000 units and each unit sells for $50, then:

A) selling 1,250 units will result in a profit B) sales of $40,000 will result in a loss C) sales of $50,000 will result in zero profit

D) All of these answers are correct. Answer: D

Explanation: D) 1,000 × $50 - $50,000 of BE sales Diff: 2

Terms: breakeven point (BEP)

Objective: 2

AACSB: Analytical skills

16) If breakeven point is 1,000 units, each unit sells for $30, and fixed costs are $10,000, then on a graph the:

A) total revenue line and the total cost line will intersect at $30,000 of revenue

B) total cost line will be zero at zero units sold C) revenue line will start at $10,000

D) All of these answers are correct. Answer: A Diff: 2

Terms: breakeven point (BEP)

Objective: 2

AACSB: Analytical skills

17) When fixed costs are $40,000 and variable costs are 20% of the selling price, then breakeven sales are:

A) $40,000

B) $50,000

C) $200,000

D) indeterminable Answer: B

Explanation: B) $40,000 / (1- 0.20) = $50,000 in BE sales Diff: 2

Terms: breakeven point (BEP)

Objective: 2

AACSB: Analytical skills

Answer the following questions using the information below:

Ruben intends to sell his customers a special round-trip airline ticket package. He is able to purchase the package from the airline carrier for $150 each. The round-trip tickets will be sold for $200 each and the airline intends to reimburse Ruben for any unsold ticket packages. Fixed costs include $5,000 in advertising costs.

18) What is the contribution margin per ticket package?

A) $50

B) $100 C) $150 D) $200

Answer: A

Explanation: A) $200 - $150 = $50 Diff: 1

Terms: contribution margin per unit

Objective: 2

AACSB: Analytical skills

19) How many ticket packages will Ruben need to sell to break even?

A) 34 packages

B) 50 packages

C) 100 packages

D) 150 packages Answer: C

Explanation: C) $200X - $150X - $5,000 = 0; X = 100 Diff: 2

Terms: breakeven point (BEP)

Objective: 2

AACSB: Analytical skills

20) How many ticket packages will Ruben need to sell in order to achieve $60,000 of operating income? A) 367 packages

B) 434 packages

C) 1,100 packages

D) 1,300 packages Answer: D

Explanation: D) $200X - $150X - $5,000 = $60,000; X = 1,300 Diff: 2

Terms: cost-volume-profit (CVP) analysis

Objective: 2

AACSB: Analytical skills

21) For every $25,000 of ticket packages sold, operating income will increase by: A) $6,250

B) $12,500 C) $18,750

D) an indeterminable amount Answer: A

Explanation: A) $25,000 × [($200 - $150 / $200)] = $6,250 Diff: 3

Terms: cost-volume-profit (CVP) analysis

Objective: 2

AACSB: Analytical skills

Answer the following questions using the information below:

Northenscold Company sells several products. Information of average revenue and costs is as follows:

Selling price per unit $20.00

Variable costs per unit:

Direct material $4.00

Direct manufacturing labor $1.60

Manufacturing overhead $0.40

Selling costs $2.00

Annual fixed costs $96,000

22) The number of units that Northenscold's must sell each year to break even is: A) 8,000 units

B) 12,000 units

C) 16,000 units

D) indeterminable Answer: A

Explanation: A) $20X - $8X - $96,000 = 0; X = 8,000 units Diff: 2

Terms: breakeven point (BEP)

Objective: 2

AACSB: Analytical skills

23) The number of units that Northenscold's must sell annually to make a profit of $144,000 is: A) 12,000 units

B) 18,000 units

C) 20,000 units

D) 30,000 units Answer: C

Explanation: C) $20X - $8X - $96,000 = $144,000; X = 20,000 units Diff: 2

Terms: cost-volume-profit (CVP) analysis

Objective: 2

AACSB: Analytical skills

Answer the following questions using the information below:

Franscioso Company sells several products. Information of average revenue and costs is as follows:

Selling price per unit $28.50

Variable costs per unit:

Direct material $5.25

Direct manufacturing labor $1.15

Manufacturing overhead $0.25

Selling costs $1.85

Annual fixed costs $110,000

24) The number of units that Franscioso must sell each year to break even is: A) 1,000 units

B) 4,000 units

C) 5,500 units

D) indeterminable Answer: C

Explanation: C) 28.5 X - 8.5 X - 110,000 = 0; X = 5,500 units Diff: 2

Terms: breakeven point (BEP)

Objective: 2

AACSB: Analytical skills

25) The number of units that Franscioso must sell annually to make a profit of $90,000 is: A) 10,000 units

B) 12,000 units

C) 15,000 units

D) 20,000 units Answer: A

Explanation: A) 28.5 X - 8.5 X - 90,000 = 0; X = 10,000 units Diff: 2

Terms: cost-volume-profit (CVP) analysis

Objective: 2

AACSB: Analytical skills

Answer the following questions using the information below:

The following information is for Nichols Company:

Selling price $50 per unit

Variable costs $30 per unit Total fixed costs $100,000

26) The number of units that Nichols Company must sell to reach targeted operating income of $30,000 is:

A) 5,000 units

B) 6,500 units

C) 3,334 units

D) 4,334 units Answer: B

Explanation: B) ($100,000 + $30,000)/($50 - $30) = 6,500 units Diff: 2

Terms: cost-volume-profit (CVP) analysis

Objective: 2

AACSB: Analytical skills

27) If targeted operating income is $40,000, then targeted sales revenue is:

A) $350,000

B) $233,333 C) $166,667 D) $250,000 Answer: A

Explanation: A) ($100,000 + $40,000) / [($50 - $30) / $50] = $350,000 Diff: 2

Terms: cost-volume-profit (CVP) analysis

Objective: 2

AACSB: Analytical skills

Answer the following questions using the information below:

Stephanie's Bridal Shoppe sells wedding dresses. The average selling price of each dress is $1,000, variable costs are $400, and fixed costs are $90,000.

28) What is the Bridal Shoppe's operating income when 200 dresses are sold?

A) $30,000

B) $80,000 C) $200,000 D) $100,000 Answer: A

Explanation: A) 200($1,000) - 200($400) - $90,000 = $30,000 Diff: 2

Terms: cost-volume-profit (CVP) analysis

Objective: 2

AACSB: Analytical skills

29) How many dresses are sold when operating income is zero? A) 225 dresses B) 150 dresses C) 100 dresses

D) 90 dresses

Answer: B

Explanation: B) $1,000N - $400N - $90,000 = 0; $600N = $90,000; N = 150 dresses Diff: 2

Terms: cost-volume-profit (CVP) analysis

Objective: 2

AACSB: Analytical skills

Answer the following questions using the information below:

Dr. Charles Hunter, MD, performs a certain outpatient procedure for $1,000. His fixed costs are $20,000, while his variable costs are $500 per procedure. Dr. Hunter currently plans to perform 200 procedures this month.

30) What is the breakeven point for the month assuming that Dr. Hunter plans to perform the procedure 200 times? A) 40 times

B) 30 times

C) 20 times D) 10 times Answer: A

Explanation: A) $1,000N - $500N - $20,000 = 0; $500N = $20,000; N = 40 times Diff: 2

Terms: breakeven point (BEP)

Objective: 2

AACSB: Analytical skills

Answer the following questions using the information below:

Nancy's Niche sells a single product. 8,000 units were sold resulting in $80,000 of sales revenue, $20,000 of variable costs, and $10,000 of fixed costs.

31) The breakeven point in total sales dollars is:

A) $40,000

B) $13,334

C) $100,000

D) None of these answers are correct. Answer: B

Explanation: B) $10,000 / 0.75 = $13,334 (rounded up) Diff: 2

Terms: breakeven point (BEP)

Objective: 2

AACSB: Analytical skills

Answer the following questions using the information below:

Martha Manufacturing produces a single product that sells for $80. Variable costs per unit equal $32.

The company expects total fixed costs to be $72,000 for the next month at the projected sales level of 2,000 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately.

32) What is the current breakeven point in terms of number of units? A) 1,500 units

B) 2,250 units

C) 3,333 units

D) None of these answers are correct. Answer: A

Explanation: A) $80X - $32X - $72,000 = 0; X = 1,500 units Diff: 2

Terms: breakeven point (BEP)

Objective: 2

AACSB: Analytical skills

Answer the following questions using the information below:

Bush Manufacturing produces a single product that sells for $100. Variable costs per unit equal $25. The company expects total fixed costs to be $60,000 for the next month at the projected sales level of 1,000 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately.

33) What is the current breakeven point in terms of number of units? A) 800 units

B) 900 units

C) 2,400 units

D) None of these answers are correct. Answer: A

Explanation: A) $60,000/($100-$25) Diff: 2

Terms: breakeven point (BEP)

Objective: 2

AACSB: Analytical skills

34) The selling price per unit is $25, variable cost per unit $15, and fixed cost per unit is $4. When this company operates above the breakeven point, the sale of one more unit will increase net income by $6.

Answer: FALSE

Explanation: The sale of one more unit will increase net income by $10, ($25 - $15 = $10). Diff: 2

Terms: contribution income statement

Objective: 2

AACSB: Analytical skills

35) A company with sales of $50,000, variable costs of $35,000, and fixed costs of $25,000 will reach its breakeven point if sales are increased by $20,000.

Answer: FALSE

Explanation: $25,000 / 0.30 = $83,333 of total sales are needed to break even. Diff: 2

Terms: breakeven point (BEP)

Objective: 2

AACSB: Analytical skills

36) Breakeven point is NOT a good planning tool since the goal of business is to make a profit.

Answer: FALSE

Explanation: Breakeven point is an important planning tool that helps managers determine volume of sales/production needed to be profitable. Diff: 2

Terms: breakeven point (BEP)

Objective: 2

AACSB: Reflective thinking

37) Breakeven point is that quantity of output where total revenues equal total costs. Answer: TRUE

Diff: 1

Terms: breakeven point (BEP)

Objective: 2

AACSB: Reflective thinking

38) In the graph method of CVP analysis, the breakeven point is the (X-axis) quantity of units sold for which the total revenues line crosses the total costs line. Answer: TRUE

Diff: 1

Terms: breakeven point (BEP)

Objective: 2

AACSB: Reflective thinking

39) In the graph method of CVP analysis, the total revenue line can be calculated by determining the total revenue at only one real output level because the starting point of the line is always the intersection of the X and Y axes. Answer: TRUE

Diff: 1

Terms: breakeven point (BEP)

Objective: 2

AACSB: Reflective thinking

40) A profit-volume graph shows the impact on operating income from changes in the output level. Answer: TRUE

Diff: 1

Terms: PV Graph

Objective: 2

AACSB: Reflective thinking

41) If the selling price per unit of a product is $50, variable costs per unit are $40, and total fixed costs are $50,000, a company must sell 6,000 units to make a target operating income of $10,000. Answer: TRUE

Diff: 3

Terms: cost-volume-profit (CVP) analysis

Objective: 2

AACSB: Analytical skills

42) Gilley, Inc., sells a single product. The company's most recent income statement is given below.

Sales (4,000 units)

$120,000

Less variable expenses

(68,000)

Contribution margin

52,000

Less fixed expenses

(40,000)

Net income

$ 12,000

Required:

a. Contribution margin per unit is $ ________ per unit

b. If sales are doubled to $240,000,

total variable costs will equal $ ________

c. If sales are doubled to $240,000,

total fixed costs will equal $ ________

d. If 10 more units are sold, profits will increase by $ ________

e. Compute how many units must be sold to break even. # ________

f. Compute how many units must be sold

to achieve profits of $20,000. # ________

Answer:

a. Contribution margin per unit is $30 - $17 = $13

b. $68,000 × 2 = $136,000

c. $40,000

d. Contribution margin of $13 × 10 units = $130

e. Fixed costs of $40,000 / Contribution margin per unit $13 = 3,077 units

f. (Fixed costs of $40,000 + Profits $20,000) / CM per unit $13 = 4,616 units Diff: 2

Terms: cost-volume-profit (CVP) analysis

Objective: 1, 2

AACSB: Analytical skills

43) Black Pearl, Inc., sells a single product. The company's most recent income statement is given below.

Sales

$50,000

Less variable expenses

(30,000)

Contribution margin

20,000

Less fixed expenses

(12,500)

Net income

$ 7,500

Required:

a. Contribution margin ratio is ________ %

b. Breakeven point in total sales dollars is $ ________

c. To achieve $40,000 in net income, sales must total $ ________

d. If sales increase by $50,000, net income will increase by $ ________ Answer:

a. Contribution margin ratio is $20,000 / $50,000 = 40%

b. Fixed costs $12,500 / 0.40 CM% = $31,250 in sales

c. [Fixed costs $12,500 + Net income $40,000] / 0.40 CM% = $131,250 in sales

d. $50,000 × 0.40 CM% = $20,000 increase in net income

Diff: 2

Terms: cost-volume-profit (CVP) analysis

Objective: 1, 2

AACSB: Analytical skills

44) Berhannan's Cellular sells phones for $100. The unit variable cost per phone is $50 plus a selling commission of 10%. Fixed manufacturing costs total $1,250 per month, while fixed selling and administrative costs total $2,500.

Required:

a. What is the contribution margin per phone?

b. What is the breakeven point in phones?

c. How many phones must be sold to earn pretax income of $7,500?

Answer:

a. CM per phone = $100 - $50 - 0.1($100) = $40

b. N = Breakeven in phones

$100N - $50N - $10N - $1,250 - $2,500 = 0

$40N - $3,750 = 0

N = $3,750 / $40 = 93.75 phones

Breakeven is 94 phones

c. N = Phones to be sold

$100N - $50N - $10N - $1,250 - $2,500 = $7,500

$40N = $11,250

N = $11,250 / $40 = 281.25 phones

282 phones must be sold

Diff: 2

Terms: contribution margin per unit

Objective: 2

AACSB: Analytical skills

45) What is meant by the term breakeven point? Why should a manager be concerned about the breakeven point?

Answer: The breakeven point is the level of production and sales at which total revenues equal total costs. Managers should be concerned about the breakeven point because it helps determine when a business venture will be profitable. Breakeven point shows a company how far sales can decline before a net loss will be incurred. It helps to assess the risk of loss. Diff: 2

Terms: breakeven point (BEP)

Objective: 2

AACSB: Reflective thinking

Objective 3.3