Finance for Non Financial Managers 7th Edition - Test Bank

Finance for Non Financial Managers 7th Edition – Test Bank

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Sample Questions Are Posted Below

Copyright © 2014 Nelson Education Ltd. 5-1
Chapter 5 Profit Planning and Decision-Making
MULTIPLE CHOICE
1. Which of the following is a fixed cost?
a. packing materials
b. insurance
c. direct labour
d. sales commission
ANS: B PTS: 1 REF: 182 OBJ: LO 2
BLM: Remember
2. Which of the following is a variable cost?
a. finance costs
b. professional fees
c. depreciation
d. overtime
ANS: D PTS: 1 REF: 182 OBJ: LO 2
BLM: Remember
3. How is the contribution margin calculated?
a. by subtracting fixed costs from revenue
b. by subtracting cost of sales from revenue
c. by subtracting variable costs from revenue
d. by subtracting operating income from revenue
ANS: C PTS: 1 REF: 186 OBJ: LO 2
BLM: Remember
4. How is the PV ratio calculated?
a. by dividing the contribution margin by revenue
b. by dividing revenue by the contribution margin
c. by multiplying the contribution margin by the unit revenue
d. by multiplying revenue by the unit contribution margin
ANS: A PTS: 1 REF: 187 OBJ: LO 2
BLM: Remember
5. When is the break-even point reached?
a. when revenue covers all fixed costs
b. when revenue covers all costs
c. when revenue covers fixed costs in excess of variable costs
d. when revenue covers all variable costs
ANS: B PTS: 1 REF: 186 OBJ: LO 2
BLM: Remember
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-2
6. What is the PV ratio divided into to calculate the revenue break-even point?
a. fixed costs
b. all operating costs
c. revenue
d. variable costs
ANS: A PTS: 1 REF: 186 OBJ: LO 2
BLM: Remember
7. Which of the following is a non-cash expense?
a. prepaid expenses
b. electricity
c. fixed costs
d. depreciation
ANS: D PTS: 1 REF: 194 OBJ: LO 3
BLM: Remember
8. What is the unit contribution margin divided into to calculate the profit break-even point?
a. fixed costs
b. profit plus fixed costs
c. profit
d. profit plus variable costs
ANS: B PTS: 1 REF: 195 OBJ: LO 3
BLM: Remember
9. A company wants to invest more money in its advertising budget. What is added to the additional
advertising expense to calculate the new break-even point?
a. the existing fixed costs
b. the existing total costs
c. the existing variable costs
d. the existing profit objective
ANS: A PTS: 1 REF: 195 OBJ: LO 3
BLM: Remember
10. What are committed fixed costs?
a. costs that should be increased to generate more volume
b. costs that should be eliminated if a company experiences a loss
c. costs that can be changed with the volume of production
d. costs that CANNOT be controlled
ANS: D PTS: 1 REF: 205 OBJ: LO 3
BLM: Remember
11. What is the break-even calculation based on?
a. the profit before tax
b. the operating margin
c. the profit for the year before depreciation
d. the gross profit
ANS: A PTS: 1 REF: 186 OBJ: LO 3
BLM: Remember
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-3
12. What tool is used to analyze the relationships among volume, price, product mix, and product costs?
a. vertical analysis
b. horizontal analysis
c. cost of sales analysis
d. cost-volume-profit analysis
ANS: D PTS: 1 REF: 182 OBJ: LO 2
BLM: Remember
13. Which of the following is a semi-variable cost?
a. purchases
b. freight in
c. rent
d. electricity
ANS: D PTS: 1 REF: 183 OBJ: LO 2
BLM: Remember
14. What variables are used to calculate the break-even point?
a. contribution margin, revenue, and fixed costs
b. revenue, fixed costs, and variable costs
c. revenue, variable costs, and gross profit
d. contribution margin, revenue, and variable costs
ANS: B PTS: 1 REF: 186 OBJ: LO 2
BLM: Remember
15. What does PV ratio stand for?
a. profit-value ratio
b. performance-value ratio
c. profit-volume ratio
d. price-volume ratio
ANS: C PTS: 1 REF: 187 OBJ: LO 2
BLM: Remember
16. What does the relevant range refer to?
a. all costs that apply to a certain level of production
b. fixed costs that apply to a certain level of production
c. revenue that applies to a certain level of production
d. variable costs that apply to a certain level of production
ANS: A PTS: 1 REF: 189 OBJ: LO 2
BLM: Remember
17. What are relevant costs?
a. variable cost alternatives that managers can choose from to operate a business
b. revenue alternatives that managers can choose from to operate a business
c. all cost alternatives that managers can choose from to operate a business
d. fixed cost alternatives that managers can choose from to operate a business
ANS: C PTS: 1 REF: 189 OBJ: LO 2
BLM: Remember
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-4
18. What is the break-even point formula?
a. SP × N = FC + VC × N
b. FC + VC = SP – N
c. N × FC = R
d. SP × FC = N × VC
ANS: A PTS: 1 REF: 192 OBJ: LO 3
BLM: Remember
19. When is the profit break-even point achieved?
a. when the revenue covers variable costs and the profit objective
b. when the revenue covers fixed costs and the profit objective
c. when the contribution margin covers fixed costs and the profit objective
d. when the contribution margin covers all costs and the profit objective
ANS: C PTS: 1 REF: 195 OBJ: LO 3
BLM: Remember
20. What does the break-even wedge help managers to determine?
a. the most appropriate way of structuring revenue and variable costs
b. the most appropriate way of structuring revenue and fixed costs
c. the most appropriate way of structuring the contribution margin to achieve higher profit
d. the most appropriate way of structuring all fixed and variable costs
ANS: D PTS: 1 REF: 203 OBJ: LO 3
BLM: Remember
21. What decisions are supported by break-even point analysis?
a. advertising effectiveness decisions
b. bookkeeping decisions
c. cost accounting decisions
d. pricing decisions
ANS: D PTS: 1 REF: 181 OBJ: LO 1
BLM: Remember
22. Within the framework of the break-even point analysis, what do profit decisions help a company to
achieve?
a. a certain level of profit before taxes
b. a certain level of gross profit
c. a certain level of operating profit
d. a certain level of contribution margin
ANS: A PTS: 1 REF: 182 OBJ: LO 1
BLM: Remember
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-5
23. What costs remain constant at varying levels of production?
a. mixed costs
b. period costs
c. direct costs
d. variable costs
ANS: B PTS: 1 REF: 182 OBJ: LO 2
BLM: Remember
24. What costs fluctuate directly with changes in volume of production?
a. period costs
b. product costs
c. out-of-pocket costs
d. sunk costs
ANS: C PTS: 1 REF: 182 OBJ: LO 2
BLM: Remember
25. What costs change disproportionately with changes in output levels?
a. fixed costs
b. semi-variable costs
c. variable costs
d. output costs
ANS: B PTS: 1 REF: 183 OBJ: LO 2
BLM: Remember
26. A business can produce 1,000 units at a zero cost per unit with a total cost of $100,000. Production
increases to 2,000 units at a zero cost per unit with a total cost of $100,000. What type of cost is the
$100,000?
a. a semi-variable cost
b. a committed cost
c. a fixed cost
d. a variable cost
ANS: C PTS: 1 REF: 182 OBJ: LO 2
BLM: Remember
27. Sales are at 2,000 units at a cost of $20,000, then increase to 4,000 units at a cost of $40,000, and
finally reach 6,000 units at a cost of $60,000. What are these costs called?
a. committed costs
b. variable costs
c. semi-variable costs
d. fixed costs
ANS: B PTS: 1 REF: 182 OBJ: LO 2
BLM: Higher Order
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-6
28. A company sells 10,000 units at a cost of $10 per unit for a total of $200,000 in costs. The same
company sells 20,000 units at the same cost of $10 per unit for a total of $300,000 in costs. What are
these costs called?
a. total semi-variable costs
b. total fixed costs
c. total variable costs
d. total costs
ANS: D PTS: 1 REF: 181 OBJ: LO 1
BLM: Higher Order
29. What costs are associated with fixed costs but are NOT related to inventory, such as distribution costs
and administrative expenses?
a. calendar costs
b. non-inventory costs
c. accounting costs
d. period costs
ANS: D PTS: 1 REF: 182 OBJ: LO 2
BLM: Remember
30. Which of the following is a period cost?
a. office salaries
b. direct labour
c. raw materials
d. purchases
ANS: A PTS: 1 REF: 182 OBJ: LO 2
BLM: Remember
31. Which of following is an out-of-pocket cost for a retail store?
a. purchases
b. advertising
c. office salaries
d. depreciation
ANS: A PTS: 1 REF: 182 OBJ: LO 2
BLM: Remember
32. Where does the break-even point occur on a break-even chart?
a. where the revenue line intersects the total fixed cost line
b. where the revenue line intersects the total cost line
c. where the revenue line intersects the total variable cost line
d. where the revenue line intersects the total semi-variable cost line
ANS: B PTS: 1 REF: 190 OBJ: LO 3
BLM: Remember
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-7
33. Which of the following is divided by the contribution margin to calculate the revenue break-even
point?
a. sales revenue
b. variable costs
c. total costs
d. fixed costs
ANS: D PTS: 1 REF: 193 OBJ: LO 3
BLM: Remember
34. Given the following information, what is the contribution margin?
Fixed costs $200
Sales revenue $1,000
Variable costs $750
a. $50
b. $250
c. $800
d. $1,950
ANS: B PTS: 1 REF: 186 OBJ: LO 3
BLM: Higher Order
35. What formula is used to calculate the PV ratio?
a. revenue ÷ contribution margin
b. revenue × contribution margin
c. contribution margin ÷ revenue
d. revenue – contribution margin
ANS: C PTS: 1 REF: 187 OBJ: LO 2
BLM: Remember
36. Given the following information, what is the PV ratio?
Contribution margin $250
Fixed costs $200
Operating profit $50
Revenue $1,000
Variable cost $750
a. 0.05
b. 0.25
c. 0.75
d. 25
ANS: B PTS: 1 REF: 187 OBJ: LO 2
BLM: Higher Order
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-8
37. What is the effect when a company decides to increase the unit selling price of its product, while
keeping variable cost per unit, units sold, and fixed costs unchanged?
a. Total variable costs decrease.
b. Fixed costs increase.
c. Profit before tax increases.
d. Total variable costs increase.
ANS: C PTS: 1 REF: 196 OBJ: LO 3
BLM: Remember
38. What is the effect when a company sells more units strictly on the basis of “image” improvement, and
its variable costs per unit, selling price per unit, and fixed costs remain unchanged?
a. Profit for the year remains the same.
b. Revenue increases.
c. Variable costs decrease.
d. Fixed costs increase.
ANS: B PTS: 1 REF: 196 OBJ: LO 3
BLM: Higher Order
39. What is the effect when a company decreases its fixed costs while its variable cost per unit, units sold,
and selling price per unit remain unchanged?
a. Fixed costs increase.
b. Variable costs increase.
c. Profit before tax increases.
d. Revenue decreases.
ANS: C PTS: 1 REF: 195 OBJ: LO 3
BLM: Higher Order
40. A supplier has just informed a company about an increase in the cost per unit, although the number of
units sold, the unit selling price, and the fixed costs remain unchanged. What will be the effect of these
changes?
a. Profit before tax will decrease.
b. Contribution margin will increase.
c. Revenue will increase.
d. Fixed costs will decrease.
ANS: A PTS: 1 REF: 195 OBJ: LO 3
BLM: Higher Order
41. What does the following formula calculate?
a. the unit break-even point
b. the profit break-even point
c. the contribution margin ratio
d. the revenue break-even point
ANS: A PTS: 1 REF: 193 OBJ: LO 3
BLM: Remember
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-9
42. What does the following formula calculate?
a. the revenue break-even point
b. the profit break-even point
c. the contribution margin ratio
d. the unit break-even point
ANS: A PTS: 1 REF: 193 OBJ: LO 3
BLM: Remember
43. Given the following information, what is the revenue break-even point?
Revenue $1,000 (1,000 units sold)
Variable costs $750
Fixed costs $200
a. $ 250
b. $ 800
c. $ 1,000
d. $ 2,666
ANS: B PTS: 1 REF: 193 OBJ: LO 3
BLM: Higher Order
44. Given the following information, what is the unit break-even point?
Revenue $2,000 (1,000 units sold)
Variable costs $1,500
Fixed costs $400
a. 500 units
b. 800 units
c. 1,000 units
d. 2,000 units
ANS: B PTS: 1 REF: 193 OBJ: LO 3
BLM: Remember
45. A company’s break-even point is 5,000 units, and the president sets a profit objective. What will the
company need to do to realize the objective?
a. increase its fixed costs
b. sell exactly 5,000 units
c. sell more than 5,000 units
d. sell less than 5,000 units
ANS: C PTS: 1 REF: 193 OBJ: LO 3
BLM: Higher Order
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-10
46. An entrepreneur is absolutely certain his new company will sell 10,000 units. He has already
determined the break-even point is 3,000 units. Should he launch the company, and why or why not?
a. Do NOT start the company because the risk is too high.
b. Launch the company because the risk of NOT reaching the break-even point is high.
c. Launch the company because there is little risk since the break-even point is well below
expected sales.
d. Do NOT start the company because according to the calculation, the break-even point will
not be reached.
ANS: C PTS: 1 REF: 193 OBJ: LO 3
BLM: Higher Order
47. Product A has a contribution margin of $100 while product B has a contribution margin of $50.,
Which product should the company concentrate on selling, and why?
a. Changing the sales mix will not affect the profit level.
b. The company should concentrate on selling product B because it has a lower CM and will
produce higher profit.
c. The company should concentrate on selling product A because it has a lower CM and will
produce higher profit.
d. The company should concentrate on selling product A because it has a higher CM and will
produce higher profit.
ANS: D PTS: 1 REF: 186 OBJ: LO 2
BLM: Higher Order
48. Which of the following are variable costs?
a. general expenses
b. direct labour
c. administrative expenses
d. depreciation
ANS: B PTS: 1 REF: 182 OBJ: LO 2
BLM: Remember
49. Which of the following are period costs?
a. general expenses
b. purchases
c. contribution margin
d. electricity
ANS: D PTS: 1 REF: 182 OBJ: LO 2
BLM: Remember
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-11
50. Given the following information, what is the contribution margin?
Revenue $1,000,000
Direct material 500,000
Direct labour 250,000
Manufacturing overhead 150,000
Administration overhead 50,000
a. $ 50,000
b. $ 200,000
c. $ 250,000
d. $ 750,000
ANS: C PTS: 1 REF: 186 OBJ: LO 2
BLM: Higher Order
51. What is the contribution margin?
a. the difference between revenue and fixed costs
b. the sum of revenue and variable costs
c. the revenue minus variable and direct costs
d. the difference between revenue and variable costs
ANS: D PTS: 1 REF: 186 OBJ: LO 2
BLM: Remember
52. Given the following information, what is the PV ratio?
Variable cost per unit $100
Unit selling price per unit $200
a. 0.50
b. 2.0
c. 0.50%
d. $20,000
ANS: A PTS: 1 REF: 187 OBJ: LO 2
BLM: Higher Order
53. Given the following information, what is the unit break-even point?
Selling price per unit $200
Variable cost per unit $100
Total fixed costs $100,000
a. 1,000 units
b. 10,500 units
c. 20,000 units
d. 100,000 units
ANS: A PTS: 1 REF: 193 OBJ: LO 2
BLM: Higher Order
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-12
54. Given the following information, what is the revenue break-even point?
Selling price per unit $200
Variable cost per unit $100
Total fixed costs $100,000
a. $ 100,000
b. $ 200,000
c. $ 250,000
d. $ 500,000
ANS: B PTS: 1 REF: 193 OBJ: LO 2
BLM: Higher Order
55. Given the following information, what is the required number of units that must be sold?
Selling price per unit $300
Variable cost per unit $100
Total fixed costs $100,000
Profit objective $10,000
a. 55 units
b. 200 units
c. 550 units
d. 1,000 units
ANS: C PTS: 1 REF: 195 OBJ: LO 3
BLM: Higher Order
56. A company wants to make a $10,000 profit by selling 500 units. By how much should the selling price
per unit be increased?
Selling price per unit $300
Variable cost per unit $100
Total fixed costs $100,000
a. $ 5
b. $ 20
c. $ 33
d. $ 50
ANS: B PTS: 1 REF: 196 OBJ: LO 3
BLM: Higher Order
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-13
57. A company wants to make a $10,000 profit by selling 500 units, without changing the selling price. By
how much should the fixed costs be reduced?
Selling price per unit $300
Variable cost per unit $100
Total fixed costs $100,000
a. $ 5,000
b. $ 10,000
c. $ 30,000
d. $100,000
ANS: B PTS: 1 REF: 196 OBJ: LO 3
BLM: Higher Order
58. Given the following information, what are the maximum fixed costs the company should incur if it
wants to break even selling the three products?
Revenue Cost of sales
Product X $ 40,000 45%
Product Y 24,000 50%
Product Z 35,000 60%
a. $ 48,000
b. $ 55,000
c. $ 58,000
d. $ 60,000
ANS: A PTS: 1 REF: 203 OBJ: LO 3
BLM: Higher Order
59. Which of the following is an example of fixed costs?
a. freight in
b. purchases
c. salaries (selling)
d. sales commission
ANS: B PTS: 1 REF: 182 OBJ: LO 3
BLM: Remember
60. Which of the following is an example of variable costs?
a. office salaries
b. property taxes
c. purchases
d. telephone
ANS: C PTS: 1 REF: 182 OBJ: LO 3
BLM: Remember
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-14
61. A company provides the information below. If the company increases its selling price by 5% and
increases its fixed costs by $100,000, how much more (or less) profit will the company realize?
Revenue $2,500,000
Total variable costs $1,700,000
Total fixed costs $700,000
a. Profit will decrease $ 25,000.
b. Profit will increase $ 25,000.
c. Profit will decrease $ 50,000.
d. Profit will increase $ 50,000.
ANS: B PTS: 1 REF: 196 OBJ: LO 3
BLM: Higher Order
62. A company provides the information below. If the company increases its advertising budget by
$30,000, how much more revenue will need to be realized to maintain the same profit level?
Revenue $2,500,000
Total variable costs $1,700,000
Total fixed costs $700,000
a. $ 14,443
b. $ 20,833
c. $ 43,333
d. $ 93,750
ANS: D PTS: 1 REF: 196 OBJ: LO 3
BLM: Higher Order
63. A company provides the information below. If the company hires a new sales representative at an
estimated cost of $60,000, what is the company’s new revenue break-even point?
Revenue $2,500,000
Total variable costs $1,700,000
Total fixed costs $700,000
a. $ 2,187,500
b. $ 2,375,000
c. $ 2,575,000
d. $ 2,675,000
ANS: B PTS: 1 REF: 193 OBJ: LO 3
BLM: Higher Order
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-15
64. Given the following information, what is the company’s cash break-even point?
Revenue $ 3,700,000
Total variable costs $ 2,300,000
Total fixed costs $ 1,100,000, including depreciation
Depreciation $ 100,000
a. $ 1,500,553
b. $ 1,642,553
c. $ 2,220,245
d. $ 2,642,857
ANS: D PTS: 1 REF: 194 OBJ: LO 3
BLM: Higher Order
TRUE/FALSE
1. Break-even analysis is a straightforward and very powerful financial analytical technique than can help
managers make a wide range of important decisions related to cash flows.
ANS: F PTS: 1 REF: 181
2. Break-even analysis can help managers improve their decisions related to pricing and modernization.
ANS: T PTS: 1 REF: 181-182
3. Pricing and automation decisions can be made more clearly with break-even analysis.
ANS: T PTS: 1 REF: 181-182
4. Break-even analysis is an effective decision-making tool for market share analysis.
ANS: F PTS: 1 REF: 181-182
5. Fixed costs remain constant at varying levels of production.
ANS: T PTS: 1 REF: 182
6. Sales commissions are considered a fixed cost.
ANS: F PTS: 1 REF: 182
7. Costs that fluctuate directly with changes in volume of production are called semi-variable.
ANS: F PTS: 1 REF: 183
8. Cost of sales is considered a variable cost.
ANS: T PTS: 1 REF: 182
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-16
9. Packing materials is considered is a semi-variable cost because this type of cost varies almost
automatically with volume of production.
ANS: F PTS: 1 REF: 183
10. Semi-variable costs change disproportionately with changes in output levels.
ANS: T PTS: 1 REF: 183
11. Finance costs on a mortgage are considered fixed costs because they vary directly with sales volume.
ANS: F PTS: 1 REF: 182
12. Depreciation expense is usually considered a fixed cost.
ANS: T PTS: 1 REF: 182
13. The factors that affect profit levels are: market share, price | earnings ratio, fixed costs and variable
costs.
ANS: F PTS: 1 REF: 182-183
14. Changes in product mix can have an impact on the level of the break-even point.
ANS: T PTS: 1 REF: 186
15. Break-even point takes place when revenue equals fixed costs.
ANS: F PTS: 1 REF: 186
16. When total costs meet revenue, it is the point where break-even is achieved.
ANS: T PTS: 1 REF: 186
17. The contribution margin is the difference between revenue and variable costs.
ANS: T PTS: 1 REF: 186
18. You can calculate the PV ratio by dividing the contribution margin by variable costs.
ANS: F PTS: 1 REF: 187
19. The higher the PV ratio the better it is.
ANS: T PTS: 1 REF: 187
20. Changes in variables costs can alter the PV ratio.
ANS: T PTS: 1 REF: 187
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-17
21. The break-even point can be calculated by dividing the total costs by the unit contribution margin.
ANS: F PTS: 1 REF: 186
22. Relevant range means costs (fixed and variable) that apply to a certain level of production.
ANS: T PTS: 1 REF: 189
23. Relevant costs are costs alternatives that managers can choose from to operate their business.
ANS: T PTS: 1 REF: 189
24. The break-even chart shows a graphic effect of change in both revenue and market share.
ANS: F PTS: 1 REF: 190
25. Total cost line includes all variable and fixed costs.
ANS: T PTS: 1 REF: 190
26. The break-even point can be calculated in two ways: dividing fixed costs by either the unit
contribution margin or the PV ratio.
ANS: T PTS: 1 REF: 186-187
27. The cash break-even point shows the number of units or revenue that can be reached in order to cover
total cash variable costs less depreciation.
ANS: F PTS: 1 REF: 194
28. To calculate the cash break-even point, one has to deduct depreciation from the variable costs.
ANS: F PTS: 1 REF: 190
29. To calculate the cash break-even point, one should divide all fixed costs less depreciation by the PV
ratio.
ANS: T PTS: 1 REF: 190
30. To calculate the profit break-even point, one has to add the profit objective to the fixed costs and
divide this number by the unit contribution margin.
ANS: T PTS: 1 REF: 195
31. To calculate the profit break-even point, one has to add the profit objective to the total fixed costs and
divide it by the PV ratio.
ANS: T PTS: 1 REF: 195
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-18
32. Sensitivity analysis is a technique that shows to what extent a change in an investment decision
impacts on the break-even point.
ANS: F PTS: 1 REF: 196
33. Break-even analysis can be applied in any type of business as long as there is revenue and fixed costs.
ANS: F PTS: 1 REF: 190
34. Break-even analysis can be applied to any types of businesses such as retail stores, service centres,
movie theatres or manufacturing plants.
ANS: T PTS: 1 REF: 190
35. To calculate the break-even point for a retail store, the unit contribution margin is more useful than the
PV ratio.
ANS: F PTS: 1 REF: 186-187
36. The break-even wedge method helps managers determine the most appropriate way to structure
operating costs (fixed versus variable).
ANS: T PTS: 1 REF: 203
37. Committed costs are considered variable costs and do NOT have to be incurred in order to operate a
business.
ANS: F PTS: 1 REF: 205
38. Operating managers can control discretionary fixed costs.
ANS: T PTS: 1 REF: 205
39. Controllable costs are usually indirect costs that managers are NOT accountable for.
ANS: F PTS: 1 REF: 206
40. Operating managers are accountable for both, controllable and direct costs.
ANS: T PTS: 1 REF: 206
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-19
COMPLETION
1. _______________________________ analysis is a tool used for analyzing how volume, price, product
mix, and product costs relate to one another.
ANS: Cost-volume-profit
PTS: 1 REF: 182
2. __________________ costs remain constant at varying levels of production.
ANS: Fixed
PTS: 1 REF: 182
3. Costs that fluctuate directly with changes in volume of production are referred to as
_______________________ costs.
ANS: variable
PTS: 1 REF: 182
4. _________________________ costs change in a disproportionate way with output levels.
ANS: Semi-variable
PTS: 1 REF: 183
5. Rent and interest charges are considered _______________________ costs.
ANS: fixed
PTS: 1 REF: 182
6. The main factors that affect levels of profit are volume of production, ________________ , costs
(fixed and variable) and changes in product mix.
ANS: unit price
PTS: 1 REF: 192
7. Break-even point is the level of production where revenue equals ___________________ costs.
ANS: total
PTS: 1 REF: 192
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-20
8. The contribution margin is calculated by finding the different between revenue and the
__________________ costs.
ANS: variable
PTS: 1 REF: 182
9. The contribution margin is the level of profit that contributes for paying ________________ costs.
ANS: fixed
PTS: 1 REF: 182
10. The letters PV stands for ___________________________ ratio.
ANS: profit-volume
PTS: 1 REF: 187
11. To calculate the PV ratio, you need to divide the __________________________ margin by revenue.
ANS: contribution
PTS: 1 REF: 87
12. The __________________ range means that costs (fixed and variable) apply to a certain level of
production.
ANS: relevant
PTS: 1 REF: 189
13. Changes in __________________ costs can alter the PV ratio.
ANS: variable
PTS: 1 REF: 182 | 187
14. To calculate the break-even point, you need to divide the fixed costs by the PV ratio or the unit
__________________ margin.
ANS: contribution
PTS: 1 REF: 186
15. You can find the break-even point in units by dividing fixed costs by the ______________
contribution margin.
ANS: unit
PTS: 1 REF: 186
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-21
16. You can find the revenue break-even point by dividing fixed costs by the ___________________ ratio.
ANS: PV
PTS: 1 REF: 187
17. To calculate the cash break-even point, you need to deduct _____________________ from fixed costs
so that this sum can be divided by the contribution margin.
ANS: depreciation
PTS: 1 REF: 182 | 194
18. The cash break-even point can be defined as the number of units or revenue that must be reached in
order to cover total cash __________________ costs.
ANS: fixed
PTS: 1 REF: 182 | 194
19. To calculate the profit break-even point, you need to add the profit objective to the
__________________ costs so that the sum can be divided by the unit contribution.
ANS: fixed
PTS: 1 REF: 182 | 195
20. __________________ analysis is a technique that shows to what extent a change in one variable (e.g.,
selling price, fixed costs) impacts on the break-even point.
ANS: Sensitivity
PTS: 1 REF: 196
21. The break-even __________________ is a method that helps determine the most appropriate way of
structure operating costs (fixed versus variable).
ANS: wedge
PTS: 1 REF: 203
22. ____________________ fixed costs must be incurred in order to operate a business.
ANS: Committed
PTS: 1 REF: 205
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-22
23. _______________________ fixed costs are those that can be controlled by managers from one period
to another if necessary.
ANS: Discretionary
PTS: 1 REF: 205
24. Costs that operating managers are accountable for are ____________________ costs.
ANS: controllable
PTS: 1 REF: 206
25. ____________________ costs are necessary in the production cycle but that cannot be clearly
allocated to specific products or services.
ANS: Indirect
PTS: 1 REF: 207
MATCHING
Match the words with the term.
a. electricity
b. rent
c. purchases
d. tool
e. margin
1. semi-variable cost
2. variable cost
3. fixed cost
4. cost-volume-profit analysis
5. contribution
1. ANS: A PTS: 1 REF: 183
2. ANS: C PTS: 1 REF: 182
3. ANS: B PTS: 1 REF: 182
4. ANS: D PTS: 1 REF: 182
5. ANS: E PTS: 1 REF: 186
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-23
Match the words with the term.
a. break-even
b. purchases
c. amortization
d. PV
e. relevant range
6. applies to a certain level of production
7. variable costs
8. non-cash expense
9. ratio
10. revenue equals total costs
6. ANS: E PTS: 1 REF: 189
7. ANS: B PTS: 1 REF: 182
8. ANS: C PTS: 1 REF: 194
9. ANS: D PTS: 1 REF: 187
10. ANS: A PTS: 1 REF: 186
Match the words with the term.
a. PV ratio
b. contribution margin
c. total costs
d. fixed costs
e. variable costs
11. fixed and variable costs
12. change with level of volume
13. constant
14. revenue less variable costs
15. contribution margin ÷ revenue
11. ANS: C PTS: 1 REF: 184 | 190
12. ANS: E PTS: 1 REF: 182
13. ANS: D PTS: 1 REF: 182
14. ANS: B PTS: 1 REF: 186
15. ANS: A PTS: 1 REF: 187
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-24
Match the words with the term.
a. constant
b. change
c. disproportionate
d. revenue
e. total costs
16. semi-variable costs
17. fixed costs
18. variable costs
19. fixed and variable costs
20. units multiplied by selling price
16. ANS: C PTS: 1 REF: 183
17. ANS: A PTS: 1 REF: 182
18. ANS: B PTS: 1 REF: 182
19. ANS: E PTS: 1 REF: 184 | 190
20. ANS: D PTS: 1 REF: 193
Match the words with the term.
a. freight
b. property taxes
c. telephone
d. depreciation
e. profit
21. semi-variable costs
22. difference between revenue and total costs
23. variable costs
24. fixed costs
25. non-cash expense
21. ANS: C PTS: 1 REF: 183
22. ANS: E PTS: 1 REF: 195
23. ANS: A PTS: 1 REF: 182
24. ANS: B PTS: 1 REF: 182
25. ANS: D PTS: 1 REF: 194
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-25
Match the words with the term.
a. depreciation
b. variables
c. PV ratio
d. relevant range
e. objective
26. sensitivity analysis
27. revenue and contribution margin
28. costs that apply to level of production
29. cash break-even point
30. profit break-even point
26. ANS: B PTS: 1 REF: 196
27. ANS: C PTS: 1 REF: 195
28. ANS: D PTS: 1 REF: 189
29. ANS: A PTS: 1 REF: 194
30. ANS: E PTS: 1 REF: 186
Match the words with the term.
a. accountable
b. purchases
c. overhead
d. must be incurred
e. depreciation
31. non-cash cost
32. committed costs
33. controllable costs
34. direct costs
35. indirect costs
31. ANS: E PTS: 1 REF: 194
32. ANS: D PTS: 1 REF: 205
33. ANS: A PTS: 1 REF: 206
34. ANS: B PTS: 1 REF: 206
35. ANS: C PTS: 1 REF: 207
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-26
Match the words with the term.
a. committed
b. change
c. controllable
d. non-cash cost
e. indirect
36. must be incurred
37. depreciation
38. overhead costs
39. variable costs
40. managers are accountable for these costs
36. ANS: A PTS: 1 REF: 205
37. ANS: D PTS: 1 REF: 194
38. ANS: E PTS: 1 REF: 207
39. ANS: B PTS: 1 REF: 182
40. ANS: C PTS: 1 REF: 206
PROBLEM
Total fixed costs allocated to the department are $25,000. Total number of units expected to be sold
based on a market study are 12,000. Total variable costs are $24,000 and the unit selling price is $6.50
1. The break-even point in units is ___________________.
ANS:
The break-even point in units is 5,555.
Unit selling price $ 6.50
Unit variable costs 2.00 ($24,000 units ÷ 12,000)
Contribution margin $ 4.50
Fixed costs $ 25,000 ÷
Contribution margin $ 4.50
PTS: 1 REF: 186
2. The break-even point in revenue is ___________________.
ANS:
The break-even point in revenue is $ 36,107.50.
Number of units 5,555 ×
Unit selling price $ 6.50
PTS: 1 REF: 186
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-27
3. Should the project be accepted? ___________________ .
ANS:
Yes.
PTS: 1 REF: 193
4. Why? ________________________________________________ .
ANS:
Why?
Because the break-even point is realized at 46.3% of the objective.
Break-even point in revenue $ 36,107 ÷
Revenue objective $ 78,000
PTS: 1 REF: 193
5. If fixed costs were increased by $5,000 and variable costs and unit selling price remained unchanged,
the PV ratio would be ___________________ .
ANS:
If fixed costs were increased by $5,000 and variable costs and unit selling price remained unchanged,
the PV ratio would be .692
Revenue $ 78,000 (12,000 × $ 6.50)
Variable costs 24,000 (12,000 × $ 2.00)
Contribution margin $ 54,000
Contribution margin $ 54,000 ÷
Sales revenue $ 78,000
PTS: 1 REF: 187 | 196
6. If fixed costs were increased by $5,000 and variable costs and unit selling price remained unchanged,
the new break-even point in units would be ___________________ .
ANS:
If fixed costs were increased by $5,000 and variable costs and unit selling price remained unchanged,
the new break-even point in units would be 6,667.
New fixed costs $ 30,000 ÷ ($ 25,000 + $ 5,000)
Unit contribution $ 4.50
PTS: 1 REF: 186 | 196
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-28
7. If fixed costs were increased by $5,000 and variable costs and unit selling price remained unchanged,
the new break-even revenue would be ___________________ .
ANS:
If fixed costs were increased by $5,000 and variable costs and unit selling price remained unchanged,
the new revenue break-even point would be $ 43,353.
New fixed costs $ 30,000 ÷ ($ 25,000 + $ 5,000)
.692
Number of units 6,667 ×
Unit selling price $ 6.50
PTS: 1 REF: 186 | 196
A supplier approaches a company to sell a new product line. Based on the supplier’s estimates, the
company could sell as many as 2,500 units. The suggested retail price for each unit is $17.50. The
purchase price for each unit is $8.00. The amount of fixed costs allocated to that particular department
is $9,000.
8. The contribution margin is ___________________ .
ANS:
The contribution margin is $ 23,750.
Revenue $ 43,750 (2,500 × $ 17.50)
Variable costs 20,000 (2,500 × $ 8.00)
Contribution margin $ 23,750
PTS: 1 REF: 186
9. The PV ratio is ___________________ .
ANS:
The PV ratio is .543
PTS: 1 REF: 187
10. The revenue break-even point is ___________________ .
ANS:
The revenue break-even point is $ 16,574.
Fixed costs $ 9,000 ÷
PV ratio .543
PTS: 1 REF: 193
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-29
11. The profit realized is ___________________ .
ANS:
The profit realized is $ 14,750.
Revenue $ 43,750 (2,500 × $ 17.50)
Variable costs 20,000 (2,500 × $ 8.00)
Contribution margin 23,750
Fixed costs 9,000
Profit $ 14,750
PTS: 1 REF: 188
With the following information, answer the following questions.
Revenue for product A – $ 55,000
Revenue for product B – $ 25,000
Revenue for product C – $ 45,000
Cost of sales for the above product lines are 40%, 45%, and 50% of revenue respectively. Fixed costs
are estimated at $40,000. The company would like to realize $ 25,000 in profit.
12. The total variable costs are ___________________ .
ANS:
The total variable costs are $ 55,750.
Revenue Cost of sales
Product A $ 55,000 × 40% = $ 22,000
Product B 25,000 × 45% = 11,250
Product C 45,000 × 50% = 22,500
Total $ 125,000 $ 55,750
PTS: 1 REF: 182
13. The contribution margin is ___________________.
ANS:
The contribution margin is $ 69,250.
Revenue $ 125,000
Cost of sales 55,750
Contribution margin $ 69,250
PTS: 1 REF: 186
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-30
14. The PV ratio is ___________________.
ANS:
The PV ratio is .554.
Contribution margin $ 69,250 ÷
Revenue $ 125,000
PTS: 1 REF: 187
15. The revenue break-even point is ___________________.
ANS:
The revenue break-even point is $ 72,202.
Fixed costs $ 40,000 ÷
PV ratio .554
PTS: 1 REF: 193
16. Profit break-even point is ___________________.
ANS:
Profit break-even point is $ 117,328.
Fixed costs $ 40,000
Profit objective 25,000
Total $ 65,000 ÷
PV ratio .554
PTS: 1 REF: 195
With the following information, answer the following questions.
Advertising $ 20,000
Depreciation 50,000
Freight in 17 ,000
Finance costs 18,000
Leasing 9,000
Office salaries 40,000
Office supplies 5,000
Purchases 250,000
Salaries (selling) 65,000
Sales commission. 26,000
Revenue 550,000
Travelling 7,000
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-31
17. The profit is ___________________.
ANS:
The profit is $ 43,000.
Revenue 550,000
Variable costs
Freight-in ($ 17,000)
Purchases (250,000)
Sales commission (26,000)
Total variable costs (293,000)
Contribution margin 257,000
Fixed costs
Advertising ($ 20,000)
Depreciation (50,000)
Finance costs (18,000)
Leasing (9,000)
Office salaries (40,000)
Office supplies (5,000)
Salaries (selling) (65,000)
Travelling (7,000)
Total fixed costs (214,000)
Profit $ 43,000
PTS: 1 REF: 188
18. PV ratio is ___________________.
ANS:
The PV ratio is .467.
Contribution margin $ 257,000 ÷
Revenue 550,000
PTS: 1 REF: 187
19. The break-even point in revenue is ___________________.
ANS:
The break-even point in revenue is $ 458,244.
Fixed costs $ 214,000
Contribution margin .467
PTS: 1 REF: 193
Chapter 5 Profit Planning and Decision-Making
Copyright © 2014 Nelson Education Ltd. 5-32
20. Total variable costs are ___________________.
ANS:
Total variable costs are $ 293,000 (see above for breakdown).
PTS: 1 REF: 182
21. Total fixed costs are ___________________.
ANS:
Total fixed costs are $ 214,000 (see above for breakdown).
PTS: 1 REF: 182
22. The cash break-even point is ___________________.
ANS:
The cash break-even point is $ 351,178.
Total fixed costs $ 214,000
Depreciation (50,000)
Cash fixed costs $ 164,000 ÷
PV ratio .467
PTS: 1 REF: 194