Managerial Accounting Stacey Whitecotton 4e - Test Bank

Managerial Accounting Stacey Whitecotton 4e – Test Bank

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Managerial Accounting, 4e (Whitecotton)

Chapter 6 Cost-Volume-Profit Analysis

1) Cost-volume-profit analysis assumes that all costs can be accurately described as either fixed or variable.

Answer: TRUE

Explanation: Cost-volume-profit analysis assumes that costs can be classified or broken down as either fixed or variable.

Difficulty: 1 Easy

Topic: Basic CVP Analysis

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

2) On a CVP graph, the break-even point is the point at which the contribution margin line crosses the total cost line.

Answer: FALSE

Explanation: The break-even point is the point at which the total revenue line crosses the total cost line.

Difficulty: 1 Easy

Topic: CVP Graph

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

3) Contribution margin is equal to fixed costs at the break-even point.

Answer: TRUE

Explanation: At the break-even point, profit, or contribution margin minus fixed costs, is zero, so contribution margin must equal fixed costs.

Difficulty: 1 Easy

Topic: Unit Contribution Margin Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

4) Break-even units can be found by dividing fixed costs by the unit contribution margin.

Answer: TRUE

Explanation: At the break-even point, the contribution margin just covers fixed costs, so dividing fixed costs by the unit contribution margin yields the number of units needed to break even.

Difficulty: 1 Easy

Topic: Unit Contribution Margin Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

5) Target units equals fixed costs plus target profit divided by the unit contribution margin.

Answer: TRUE

Explanation: The formula for target units is fixed costs plus target profit divided by the unit contribution margin.

Difficulty: 1 Easy

Topic: Unit Contribution Margin Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

6) The target sales level equals fixed costs plus variable costs divided by the contribution margin ratio.

Answer: FALSE

Explanation: Target sales level equals fixed costs plus target profit (not variable costs) divided by the contribution margin ratio.

Difficulty: 1 Easy

Topic: Contribution Margin Ratio Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

7) To determine the number of units needed to earn a target profit, divide the target contribution margin by the contribution margin per unit.

Answer: FALSE

Explanation: To determine the number of units needed to earn a target profit, divide total fixed costs plus profit by the contribution margin per unit.

Difficulty: 1 Easy

Topic: Unit Contribution Margin Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

8) The margin of safety is the difference between actual sales and budgeted sales.

Answer: FALSE

Explanation: The margin of safety is the difference between actual or budgeted sales and break-even sales.

Difficulty: 1 Easy

Topic: Margin of Safety

Learning Objective: 06-03 Compute the margin of safety.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

9) Managers can use cost-volume-profit analysis to help evaluate changes in price.

Answer: TRUE

Explanation: CVP analysis is useful in evaluating changes in price and cost structure.

Difficulty: 1 Easy

Topic: CVP for Decision Making

Learning Objective: 06-04 Analyze how changes in prices and cost structure affect cost-volume-profit relationships.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

10) Managers can use cost-volume-profit analysis to evaluate changes in cost structure.

Answer: TRUE

Explanation: CVP analysis is useful in evaluating changes in price and cost structure.

Difficulty: 1 Easy

Topic: Changes in Cost Structure

Learning Objective: 06-04 Analyze how changes in prices and cost structure affect cost-volume-profit relationships.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

11) Degree of operating leverage is calculated by dividing sales by profit.

Answer: FALSE

Explanation: Degree of operating leverage is calculated by dividing the contribution margin by profit.

Difficulty: 1 Easy

Topic: Degree of Operating Leverage

Learning Objective: 06-05 Calculate the degree of operating leverage and use it to predict the effect a change in sales will have on profit.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

12) The degree of operating leverage can be multiplied by a change in sales to determine the change in profit.

Answer: TRUE

Explanation: This is the primary use of degree of operating leverage.

Difficulty: 1 Easy

Topic: Degree of Operating Leverage

Learning Objective: 06-05 Calculate the degree of operating leverage and use it to predict the effect a change in sales will have on profit.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

13) A firm with a higher degree of operating leverage would be considered less risky than a comparable firm with a lower degree of operating leverage.

Answer: FALSE

Explanation: A company with a higher degree of operating leverage will experience larger swings in profit as a result of changes in sales revenue, and so it is usually considered to be more risky.

Difficulty: 2 Medium

Topic: Degree of Operating Leverage

Learning Objective: 06-05 Calculate the degree of operating leverage and use it to predict the effect a change in sales will have on profit.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

14) Cost-volume-profit analysis can only be performed for companies that sell only one product.

Answer: FALSE

Explanation: Firms that sell more than one product can use multiproduct cost-volume-profit analysis.

Difficulty: 1 Easy

Topic: Weighted-Average Contribution Margin

Learning Objective: 06-06 Perform multiproduct cost-volume-profit analysis and explain how the product or sales mix affects the analysis.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

15) In multiproduct cost-volume-profit analysis, a break-even point must be calculated separately for each product.

Answer: FALSE

Explanation: A combined break-even point can be calculated using a weighted average contribution margin.

Difficulty: 2 Medium

Topic: Weighted-Average Contribution Margin

Learning Objective: 06-06 Perform multiproduct cost-volume-profit analysis and explain how the product or sales mix affects the analysis.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

16) Which of the following statements is not correct about cost-volume-profit analysis?

A) CVP analysis is a decision-making tool for managers.
B) CVP analysis focuses on the relationship among volume and mix of units sold, prices, variable costs, fixed costs, and profit.
C) CVP analysis works best when all variables are changed concurrently.
D) Managers use CVP analysis to evaluate how changing one key variable will impact profitability, while holding everything else constant.

Answer: C

Explanation: CVP analysis works best when managers change one key variable to determine the impact on profitability, while holding everything else constant (not while changing all variables concurrently).

Difficulty: 1 Easy

Topic: Basic CVP Analysis

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

17) Cost-volume-profit analysis assumes that total costs behave in a ________ fashion.

A) Curvilinear
B) Linear
C) Exponential
D) Regressive

Answer: B

Explanation: Cost-volume-profit analysis assumes that total costs behave in a linear fashion.

Difficulty: 1 Easy

Topic: Basic CVP Analysis

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

18) Which of the following is not a key assumption of cost-volume-profit?

A) Costs must be fixed.
B) Production and sales are equal.
C) Changes in total cost are strictly due to changes in activity.
D) Total costs and revenues can be depicted with a straight line.

Answer: A

Explanation: CVP assumes that all costs must be classified (or classifiable) as either fixed or variable.

Difficulty: 1 Easy

Topic: Basic CVP Analysis

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

19) If production volume does not equal sales volume:

A) we must adjust the CVP formulas for that fact to use CVP.
B) we cannot use CVP, since an assumption is violated.
C) the CVP analysis will always indicate a breakeven point that cannot be reached.
D) the conclusions we draw from a CVP analysis will not be as sound as they would be if we assumed production equaled sales.

Answer: D

Explanation: Managers may use CVP analysis, but their conclusions will only be as sound as the assumptions on which the analysis are based.

Difficulty: 3 Hard

Topic: Basic CVP Analysis

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

20) Profit is indicated on a cost-volume-profit graph by:

A) the vertical difference between zero and the break-even point.
B) the horizontal difference between the revenue line and the cost line.
C) the vertical difference between the revenue line and the cost line.
D) the horizontal distance between zero and the break-even point.

Answer: C

Explanation: The vertical difference between the revenue line and the cost line is revenue minus cost, which equals profit. The horizontal difference between these lines is the change in volume, which isn’t equal to profit. The distance between zero and the break-even point (horizontally or vertically) does not indicate profit, since it would be less than the break-even point (indicating a loss).

Difficulty: 2 Medium

Topic: CVP Graph

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

21) Which of the following statements is correct about the break-even point?

A) The break-even point is the point where a company achieves its target profit.
B) The break-even point is the point where all variable costs are covered (but fixed costs are not).
C) The break-even point is the point where all fixed costs are covered (but variable costs are not).
D) The break-even point quantifies the number of units that must be sold to cover total costs with zero profit.

Answer: D

Explanation: The break-even point is the number of units that must be sold for the company to cover total costs yet not generate a profit (i.e., profit equals zero).

Difficulty: 2 Medium

Topic: CVP Graph

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

22) What component of the profit equation should be set equal to zero to find the breakeven point?

A) Total sales revenue
B) Total variable costs
C) Total fixed costs
D) Profit

Answer: D

Explanation: The break-even point is the point where profit is zero.

Difficulty: 1 Easy

Topic: Basic CVP Analysis

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

23) The break-even point is the point at which profit equals:

A) zero.
B) the target.
C) variable costs.
D) less than five percent.

Answer: A

Explanation: The break-even point is where the company breaks even, or has zero profit.

Difficulty: 1 Easy

Topic: Unit Contribution Margin Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

24) The break-even point is:

A) the point where zero contribution margin is earned.
B) the point where zero profit is earned.
C) the point where selling price just equals variable cost.
D) equal to sales revenue less fixed costs.

Answer: B

Explanation: The break-even point is the point where zero profit is earned (yet total costs are covered by sales revenue).

Difficulty: 1 Easy

Topic: Basic CVP Analysis

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

25) Which of the following statements is not correct about the methods managers use to model the relationship between revenues, costs, profit, and volume?

A) Each method provides a different way to express the CVP relationships, yet answers the same basic question.
B) Choice of method depends, in part, on personal preference.
C) Choice of method depends, in part, on the available information.
D) Each method yields a different final answer to be used in analysis.

Answer: D

Explanation: The method a manager uses to model the relationship between revenues, costs, profit, and volume yield the same final answer (not a different final answer) as long as managers have complete information.

Difficulty: 2 Medium

Topic: Basic CVP Analysis

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

26) The profit equation is:

A) (Unit price × Q) – (Unit variable costs × Q) – Total fixed costs = Profit
B) (Unit price × Q) – (Unit variable costs × Q) + Total fixed costs = Profit
C) (Unit price – Unit variable costs – Total fixed costs) × Q = Profit
D) (Unit price × Q) + (Unit variable costs × Q) + Total fixed costs = Profit

Answer: A

Explanation: The formula for profit is sales price per unit times number of units sold, less variable costs per unit times number of units, less fixed costs.

Difficulty: 1 Easy

Topic: Profit Equation Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.; 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

27) The formula for break-even point in terms of units is:

A) Total variable costs/Unit contribution margin
B) Total fixed costs/Contribution margin ratio
C) Total fixed costs/Unit contribution margin
D) Total variable costs/Total fixed costs

Answer: C

Explanation: The formula for break-even units is total fixed costs divided by the unit contribution margin.

Difficulty: 1 Easy

Topic: Unit Contribution Margin Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

28) The formula for break-even point in terms of sales dollars is:

A) Total variable costs/Contribution margin ratio
B) Total fixed costs/Contribution margin ratio
C) Total fixed costs/Unit contribution margin
D) Total variable costs/Total fixed costs

Answer: B

Explanation: The formula for break-even sales is total fixed costs divided by contribution margin ratio.

Difficulty: 1 Easy

Topic: Contribution Margin Ratio Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

29) Mustang Corp. has a selling price of $15, variable costs of $10 per unit, and fixed costs of $35,000. How many units must be sold to break-even?

A) 7,000
B) 14,000
C) 3,500
D) 2,334

Answer: A

Explanation: Calculate the break-even point in units by dividing fixed costs by the contribution margin per unit. $35,000/($15 – $10) = 7,000

Difficulty: 2 Medium

Topic: Unit Contribution Margin Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

30) Thunder Corp. has a selling price of $25 per unit, variable costs of $20 per unit, and fixed costs of $35,000. How many units must be sold to break even?

A) 7,000
B) 14,000
C) 3,500
D) 2,334

Answer: A

Explanation: Calculate the break-even point by dividing fixed costs by the contribution margin. $35,000/($25 – $20) = 7,000

Difficulty: 2 Medium

Topic: Unit Contribution Margin Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

31) Maggie Corp. has a selling price of $20 per unit, variable costs of $10 per unit, and fixed costs of $140,000. How many units must be sold to break even?

A) 7,000
B) 14,000
C) 3,500
D) 2,334

Answer: B

Explanation: Calculate break-even point in units by dividing fixed costs by the contribution margin per unit. $140,000/($20 – $10) = 14,000

Difficulty: 2 Medium

Topic: Unit Contribution Margin Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

32) Quail, Inc., has a contribution margin of 40% and fixed costs of $130,000. What is the break-even point in sales dollars?

A) $52,000
B) $325,000
C) $225,000
D) $78,000

Answer: B

Explanation: Calculate the break-even point in sales dollars by dividing fixed costs by the contribution margin ratio. $130,000/0.40 = $325,000

Difficulty: 2 Medium

Topic: Contribution Margin Ratio Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

33) Allen, Inc., has a contribution margin of 40% and fixed costs of $250,000. What is the break-even point in sales dollars?

A) $100,000
B) $250,000
C) $375,000
D) $625,000

Answer: D

Explanation: Calculate break-even point by dividing fixed costs by the contribution margin ratio. $250,000/0.40 = $625,000

Difficulty: 2 Medium

Topic: Contribution Margin Ratio Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

34) Mira Corp. has a selling price of $50 per unit, variable costs of $40 per unit, and fixed costs of $90,000. How many units must be sold to break-even?

A) 1,800
B) 2,250
C) 9,000
D) 2,000

Answer: C

Explanation: Calculate break-even point by dividing fixed costs by the unit contribution margin. $90,000/($50 – $40) = 9,000

Difficulty: 2 Medium

Topic: Unit Contribution Margin Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

35) Jasper Corp. has a selling price of $30, and variable costs of $20 per unit. When 12,000 units are sold, profits equaled $70,000. How many units must be sold to break-even?

A) 19,000
B) 12,000
C) 14,333
D) 5,000

Answer: D

Explanation: Fixed costs are [($30 − $20) × 12,000] − $70,000 = $50,000. Break-even point is $50,000/($30 − $20) = 5,000.

Difficulty: 3 Hard

Topic: Unit Contribution Margin Method; Profit Equation Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.; 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

36) At a level of 20,000 units sold, Gail Corp. has sales of $400,000, a contribution margin ratio of 40%, and a profit of $40,000. What is the break-even point in units?

A) 12,000
B) 8,000
C) 20,000
D) 15,000

Answer: D

Explanation: Fixed costs are ($400,000 × 40%) – $40,000 = $120,000. Break-even point is $120,000/0.40 = $300,000 in sales, and $300,000/$20 = 15,000 in units.

Difficulty: 2 Medium

Topic: Contribution Margin Ratio Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.; 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

37) Last month Peggy Company had a $30,000 profit on sales of $250,000. Fixed costs are $60,000 a month. What sales revenue is needed for Peggy to break even?

A) $166,667
B) $90,000
C) $30,000
D) $280,000

Answer: A

Explanation: Contribution margin ratio is ($30,000 + $60,000)/$250,000 = 36%. Break-even point is $60,000/.36 = $166,667.

Difficulty: 2 Medium

Topic: Contribution Margin Ratio Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.; 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

38) Last month Carlos Company had a $60,000 profit on sales of $300,000. Fixed costs are $120,000 a month. What sales revenue is needed for Carlos to break even?

A) $360,000
B) $420,000
C) $200,000
D) $240,000

Answer: C

Explanation: Contribution margin ratio is ($60,000 + $120,000)/$300,000 = 60%. Break-even point in sales revenue is $120,000/0.60 = $200,000.

Difficulty: 2 Medium

Topic: Contribution Margin Ratio Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.; 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

39) Skyline Corp. has a selling price of $25 per unit, variable costs of $20 per unit, and fixed costs of $25,000. What sales revenue is needed to break-even?

A) $100,000
B) $5,000
C) $125,000
D) $50,000

Answer: C

Explanation: Break-even point in units is $25,000/($25 – $20) = 5,000. Revenue = 5,000 × $25 = $125,000. Alternatively, break-even point is fixed costs divided by contribution margin ratio. $25,000/($5/$25 or 20%) = $125,000

Difficulty: 2 Medium

Topic: Unit Contribution Margin Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

40) Dancer Corp. has a selling price of $20 per unit, and variable costs of $10 per unit. When 12,000 units are sold, profits equaled $35,000. How many units must be sold to break-even?

A) 32,300
B) 20,400
C) 24,366
D) 8,500

Answer: D

Explanation: Fixed costs are [($20 – $10) × 12,000] – $35,000 = $85,000. Break-even point is $85,000/($20 – $10) = 8,500.

Difficulty: 2 Medium

Topic: Unit Contribution Margin Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.; 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

41) Belle Corp. has a selling price of $50 per unit, variable costs of $40 per unit, and fixed costs of $100,000. What sales revenue is needed to break-even?

A) $500,000
B) $125,000
C) $5,000,000
D) $1,000,000

Answer: A

Explanation: Break-even point in units is $100,000/($50 − $40) = 10,000. Revenue = 10,000 × $50 = $500,000. Alternatively, break-even point in sales dollars is fixed costs divided by contribution margin ratio. ($100,000/($10/$50) = $500,000)

Difficulty: 2 Medium

Topic: Unit Contribution Margin Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

42) Virgil Corp. has a selling price of $30 per unit, and variable costs of $20 per unit. When 12,000 units are sold, profits equaled $55,000. How many units must be sold to break-even?

A) 4,000
B) 12,000
C) 6,500
D) 5,500

Answer: C

Explanation: Fixed costs are [($30 − $20) × 12,000] − $55,000 = $65,000. Break-even point is $65,000/($30 − $20) = 6,500 units.

Difficulty: 2 Medium

Topic: Unit Contribution Margin Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.; 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

43) Last month Dexter Company had a $15,000 loss on sales of $150,000. Fixed costs are $60,000 a month. By how much do sales have to increase for Dexter to break even?

A) $60,000
B) $75,000
C) $45,000
D) $50,000

Answer: D

Explanation: Contribution margin ratio is ($60,000 − $15,000)/$150,000 = 30%. Break-even sales is $60,000/0.30 = $200,000. Sales must increase $200,000 − $150,000 = $50,000. Current sales are 150,000 and break even sales are $200,000, so sales must increase by $50,000 in order for the company to break even.

Difficulty: 3 Hard

Topic: Contribution Margin Ratio Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.; 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

44) Last month Empire Company had a $30,000 profit on sales of $250,000. Fixed costs are $60,000 a month. By how much would sales be able to decrease for Empire to still break even?

A) $90,000
B) $83,333
C) $166,667
D) $280,000

Answer: B

Explanation: Contribution margin ratio is ($30,000 + $60,000)/$250,000 = 36%. Break-even sales is $60,000/0.36 = $166,667. Sales would be able to decrease by $83,333. ($250,000 − $166,667 = $83,333)

Difficulty: 3 Hard

Topic: Contribution Margin Ratio Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.; 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

45) Last month Angus Company had a $30,000 loss on sales of $250,000. Fixed costs are $60,000 a month. What sales revenue is needed for Angus to break even?

A) $166,667
B) $500,000
C) $280,000
D) $220,000

Answer: B

Explanation: Contribution margin ratio is ($60,000 − $30,000)/$250,000 = 12%. Break-even sales is $60,000/0.12 = $500,000.

Difficulty: 3 Hard

Topic: Contribution Margin Ratio Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.; 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

46) At a sales level of 20,000 units, Pony Corp. has sales of $400,000, a variable cost ratio of 60%, and a profit of $40,000. What is the break-even point in units?

A) 8,000
B) 12,000
C) 15,000
D) 20,000

Answer: C

Explanation: Contribution margin ratio is 100% − 60% = 40%. Fixed costs are ($400,000 × 40%) – $40,000 = $120,000. Break-even sales are $120,000/0.40 = $300,000. In units, this is $300,000/$20 = 15,000.

Difficulty: 3 Hard

Topic: Contribution Margin Ratio Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.; 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

47) Last month Stagecoach Company had a $60,000 loss on sales of $300,000. Fixed costs are $120,000 a month. What sales revenue is needed for Stagecoach to break even?

A) $360,000
B) $480,000
C) $600,000
D) $420,000

Answer: C

Explanation: Contribution margin ratio is ($120,000 − $60,000)/$300,000 = 20%. Break-even sales in sales dollars is fixed costs divided by the contribution margin ratio. ($120,000/0.20 = $600,000) Derive fixed costs by working backwards on an income statement.

Difficulty: 3 Hard

Topic: Contribution Margin Ratio Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

48) The formula for target units is:

A) (Total fixed costs + Target profit)/Contribution margin ratio
B) (Total variable costs + Total fixed costs)/Contribution margin ratio
C) (Total fixed costs + Target profit)/Unit contribution margin
D) (Total variable costs + Total fixed costs)/Unit contribution margin

Answer: C

Explanation: The formula for target units is total fixed costs plus target profit, divided by the unit contribution margin.

Difficulty: 1 Easy

Topic: Unit Contribution Margin Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

49) The formula for target sales is:

A) (Total fixed costs + Target profit)/Contribution margin ratio
B) (Total variable costs + Total fixed costs)/Contribution margin ratio
C) (Total fixed costs + Target profit)/Unit contribution margin
D) (Total variable costs + Total fixed costs)/Unit contribution margin

Answer: A

Explanation: The formula for target sales is total fixed costs plus Target profit profit, divided by the contribution margin ratio.

Difficulty: 1 Easy

Topic: Contribution Margin Ratio Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

50) Merlot, Inc. has fixed costs of $200,000, sales price of $50, and variable cost of $30 per unit. How many units must be sold to earn profit of $80,000?

A) 2,800
B) 11,200
C) 14,000
D) 202,400

Answer: C

Explanation: Calculate target profit by adding fixed costs to target profit, and dividing the result by the per unit contribution margin. ($200,000 + $80,000)/($50 − $30) = 14,000

Difficulty: 2 Medium

Topic: Unit Contribution Margin Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

51) Martol, Inc. has fixed costs of $200,000 and a contribution margin ratio of 40%. How much sales revenue must be earned for a profit of $80,000?

A) $140,000
B) $560,000
C) $700,000
D) $1,120,000

Answer: C

Explanation: Calculate target sales by adding fixed costs to target profit and dividing the result by the contribution margin ratio. ($200,000 + $80,000)/40% = $700,000

Difficulty: 2 Medium

Topic: Contribution Margin Ratio Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

52) Megan, Inc. has fixed costs of $400,000, sales price of $40, and variable cost of $30 per unit. How many units must be sold to earn profit of $80,000?

A) 2,000
B) 10,000
C) 40,000
D) 48,000

Answer: D

Explanation: Calculate target units by adding fixed costs to target profit and dividing the result by the per unit contribution margin. ($400,000 + $80,000)/($40 − $30) = 48,000

Difficulty: 2 Medium

Topic: Unit Contribution Margin Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

53) Fern, Inc. has fixed costs of $400,000 and a contribution margin ratio of 30%. How much sales revenue must be earned for a profit of $80,000?

A) $144,000
B) $336,000
C) $1,600,000
D) $1,920,000

Answer: C

Explanation: Calculate target revenue by adding fixed costs to target profit and dividing the result by the contribution margin ratio. ($400,000 + $80,000)/30% = $1,600,000

Difficulty: 2 Medium

Topic: Contribution Margin Ratio Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

54) Pecan, Inc., has a contribution margin of 50% and fixed costs of $220,000. What sales revenue is needed to attain a $60,000 profit?

A) $70,400
B) $440,000
C) $560,000
D) $240,000

Answer: C

Explanation: Calculate target revenue by adding fixed costs to target profit and dividing the result by the contribution margin ratio. ($220,000 + $60,000)/0.50 = $560,000

Difficulty: 2 Medium

Topic: Contribution Margin Ratio Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

55) Munoz Inc. has a contribution margin ratio of 30% and fixed costs of $90,000. What sales revenue is needed to generate a $60,000 profit?

A) $45,000
B) $200,000
C) $500,000
D) $214,286

Answer: C

Explanation: Calculate target revenue by adding fixed costs to target profit and dividing the result by the contribution margin ratio. ($90,000 + $60,000)/0.30 = $500,000

Difficulty: 2 Medium

Topic: Contribution Margin Ratio Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

56) Louise Corp. has a contribution margin ratio of 35%, fixed costs of $60,000, and a profit of $45,000. What are total sales?

A) $300,000
B) $105,000
C) $36,750
D) $171,429

Answer: A

Explanation: Calculate total sales by adding fixed costs and profit, then dividing the result by the contribution margin ratio. ($60,000 + $45,000)/0.35 = $300,000

Difficulty: 2 Medium

Topic: Contribution Margin Ratio Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

57) Ironwood Inc. has a variable cost ratio of 60% and fixed costs of $90,000. What sales revenue is needed to generate a $120,000 profit?

A) $128,572
B) $225,000
C) $375,000
D) $525,000

Answer: D

Explanation: Contribution margin ratio is 100% − 60% = 40%. Target sales is ($90,000 + $120,000)/0.40 = $525,000.

Difficulty: 2 Medium

Topic: Contribution Margin Ratio Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

58) Payton Corp. has sales of $200,000, a contribution margin ratio of 35%, and a target profit of $40,000. If 10,000 units were sold, what are total variable costs?

A) $200,000
B) $130,000
C) $240,000
D) $160,000

Answer: B

Explanation: Contribution margin is $200,000 × 35% = $70,000. Total variable costs are $200,000 − $70,000 = $130,000. Alternatively if the contribution margin is 35%, then the variable cost ratio is 65%. Therefore, sales multiplied by 65% is equal to variable costs. ($200,000 × 65% = $130,000)

Difficulty: 2 Medium

Topic: Contribution Margin Ratio Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

59) Chelsea Company has sales of $400,000, variable costs of $10 per unit, fixed costs of $100,000, and a target profit of $60,000. How many units were sold?

A) 12,000
B) 18,000
C) 24,000
D) 30,000

Answer: C

Explanation: Total sales less variable costs per unit times the number of units, less fixed costs equals profit. $400,000 − ($10 × Q) − $100,000 = $60,000, so Q = 24,000.

Difficulty: 2 Medium

Topic: Profit Equation Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

60) Elk Corp. has sales of $300,000, a contribution margin ratio of 40%, and a target profit of $30,000. If 20,000 units were sold, what is the variable cost per unit?

A) $22.50
B) $9.00
C) $6.00
D) $2.00

Answer: B

Explanation: Contribution margin is $300,000 × 40% = $120,000. Total variable costs are $300,000 − $120,000 = $180,000. Variable cost per unit is $180,000/20,000 = $9.00. Alternatively, if contribution margin ratio is 40%, then variable cost ratio is 60%, so sales multiplied by the variable cost ratio divided by units is the variable cost per unit. ($300,000 × 60% = $180,000/20,000 = 9 per unit)

Difficulty: 2 Medium

Topic: Unit Contribution Margin Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

61) Bugle Corp. has sales of $400,000, a variable cost ratio of 40%, and a profit of $40,000. If 10,000 units were sold, what is the contribution margin per unit?

A) $60.00
B) $36.00
C) $24.00
D) $18.00

Answer: C

Explanation: Contribution margin is $400,000 − (40% × $400,000) = $240,000. Per unit, this is $240,000/10,000 = $24.00.

Difficulty: 2 Medium

Topic: Contribution Margin Ratio Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

62) Nancy Company has sales of $100,000, variable costs of $5 per unit, fixed costs of $25,000, and a profit of $15,000. How many units were sold?

A) 20,000
B) 16,000
C) 12,000
D) 8,000

Answer: C

Explanation: Total sales less variable costs per unit times the number of units, less fixed costs equals profit. $100,000 − ($5 × Q) − $25,000 = $15,000, so Q = 12,000 units sold.

Difficulty: 2 Medium

Topic: Profit Equation Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

63) Keith Corp. has sales of $200,000, a contribution margin ratio of 35%, and a profit of $40,000. If 10,000 units were sold, what is the variable cost per unit?

A) $13.00
B) $20.00
C) $7.00
D) $3.00

Answer: A

Explanation: Contribution margin is $200,000 × 35% = $70,000. Variable costs are $200,000 – $70,000 = $130,000. Per unit, this is $130,000/10,000 = $13.00. Alternatively, since the contribution margin is 35%, then the variable cost ratio is 65%, so total variable costs are $200,000 multiplied by 65% ($130,000). Total variable costs divided by the number of units equals variable cost per unit. ($130,000/10,000 = $13.00)

Difficulty: 2 Medium

Topic: Contribution Margin Ratio Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

64) Vesper Company has sales of $200,000, variable costs of $8 per unit, fixed costs of $50,000, and a profit of $30,000. How many units were sold?

A) 10,000
B) 15,000
C) 20,000
D) 25,000

Answer: B

Explanation: Total sales less variable costs per unit times the number of units, less fixed costs equals profit. $200,000 – ($8 × Q) – $50,000 = $30,000, so Q = 15,000 units.

Difficulty: 2 Medium

Topic: Profit Equation Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

65) Paint Corp. has sales of $600,000, a contribution margin ratio of 30%, and a profit of $40,000. If 20,000 units were sold, what is the variable cost per unit?

A) $9.00
B) $30.00
C) $21.00
D) $3.00

Answer: C

Explanation: Contribution margin ratio = $600,000 × 30% = $180,000. Variable costs are $600,000 – $180,000 = $420,000. Per unit, this is $420,000/20,000 = $21.00.

Difficulty: 2 Medium

Topic: Profit Equation Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

66) Harvest Corp. has a contribution margin ratio of 30%, fixed costs of $45,000, and a profit of $60,000. What are total sales?

A) $31,500
B) $105,000
C) $150,000
D) $350,000

Answer: D

Explanation: Contribution margin is $60,000 + $45,000 = $105,000 = Sales × 30%. Sales = $350,000.

Difficulty: 2 Medium

Topic: Contribution Margin Ratio Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

67) Leather Company sold 20,000 units, had variable costs of $12 per unit, fixed costs of $100,000, and profits of $60,000. What is the selling price per unit?

A) $8
B) $17
C) $20
D) $32

Answer: C

Explanation: The selling price per unit times the number of units sold, less the variable cost per unit times the number of units, less fixed costs equals profit. (20,000 × SP) – (20,000 × $12) – $100,000 = $60,000. SP = $20.00.

Difficulty: 2 Medium

Topic: Profit Equation Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

68) Last month Lyle Company had a $60,000 profit on sales of $300,000. Fixed costs are $120,000 a month. How much do sales have to increase for Lyle to earn a $100,000 profit?

A) $66,667
B) $83,333
C) $220,000
D) $400,000

Answer: A

Explanation: Contribution margin ratio is ($120,000 + $60,000)/$300,000 = 60%. Target sales is ($120,000 + $100,000)/0.60 = $366,667. Sales must increase by $66,667 to earn a $100,000 profit. ($366,667 – $300,000 = $66,667)

Difficulty: 3 Hard

Topic: Contribution Margin Ratio Method

Learning Objective: 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

69) The margin of safety is the difference between:

A) actual sales and budgeted sales.
B) actual sales and break-even sales.
C) target sales and actual sales.
D) target sales and budgeted sales.

Answer: B

Explanation: Margin of safety = Actual sales or budgeted sales – break-even sales.

Difficulty: 1 Easy

Topic: Margin of Safety

Learning Objective: 06-03 Compute the margin of safety.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

70) At the break-even point, the margin of safety will be:

A) positive.
B) negative.
C) zero.
D) equal to fixed costs.

Answer: C

Explanation: The margin of safety will be zero at the break-even point.

Difficulty: 2 Medium

Topic: Margin of Safety

Learning Objective: 06-03 Compute the margin of safety.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

71) Dragon, Inc. has actual sales of $400,000 and a margin of safety of $150,000. What is Dragon’s break-even point in sales?

A) $100,000
B) $250,000
C) $350,000
D) $450,000

Answer: B

Explanation: Actual sales less margin of safety equals the break-even point. $400,000 – $150,000 = $250,000

Difficulty: 2 Medium

Topic: Margin of Safety

Learning Objective: 06-03 Compute the margin of safety.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

72) Jerome Corp. has fixed costs of $500,000 and a contribution margin ratio of 40%. Currently, sales are $3,000,000. What is Jerome’s margin of safety?

A) $1,750,000
B) $3,500,000
C) $5,250,000
D) $7,000,000

Answer: A

Explanation: Sales less fixed costs divided by contribution margin ratio equals margin of safety. $3,000,000 − ($500,000/0.40) = $1,750,000

Difficulty: 2 Medium

Topic: Margin of Safety

Learning Objective: 06-03 Compute the margin of safety.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

73) Idaho Corp. has fixed costs of $20,000 and a contribution margin ratio of 50%. Currently, sales are $75,000. What is Idaho’s margin of safety?

A) $28,000
B) $35,000
C) $42,000
D) $70,000

Answer: B

Explanation: Sales less fixed costs divided by contribution margin ratio equals margin of safety. $75,000 – ($20,000/0.50) = $35,000

Difficulty: 2 Medium

Topic: Margin of Safety

Learning Objective: 06-03 Compute the margin of safety.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

74) The margin of safety tells managers:

A) how much sales would have to increase to hit the target profit.
B) how much profit would drop if sales decreased.
C) how much sales could drop before the firm no longer earns profits.
D) how much profit would have to increase to hit target sales.

Answer: C

Explanation: The margin of safety is a buffer zone that identifies how much sales can drop before the business will suffer a loss.

Difficulty: 2 Medium

Topic: Margin of Safety

Learning Objective: 06-03 Compute the margin of safety.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

75) Dexter Corp. has fixed costs of $500,000 and a contribution margin ratio of 25%. Currently, margin of safety is $1,000,000. What are Dexter’s current sales?

A) $1,000,000
B) $2,000,000
C) $3,000,000
D) $4,000,000

Answer: C

Explanation: Break-even sales are $500,000/25% = $2,000,000. Actual sales are $2,000,000 + $1,000,000 = $3,000,000

Difficulty: 2 Medium

Topic: Margin of Safety

Learning Objective: 06-03 Compute the margin of safety.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

76) Irwin Corp. has fixed costs of $20,000 and a contribution margin ratio of 40%. Currently, margin of safety is $35,000. What are Irwin’s current sales?

A) $35,000
B) $37,500
C) $50,000
D) $85,000

Answer: D

Explanation: Break-even sales are $20,000/40% = $50,000. Actual sales are $50,000 + $35,000 = $85,000.

Difficulty: 2 Medium

Topic: Margin of Safety

Learning Objective: 06-03 Compute the margin of safety.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

77) Fountain Corp. has a selling price of $15 per unit and variable costs of $10 per unit. When 14,000 units are sold, profits equaled $45,000. What is the margin of safety?

A) $210,000
B) $105,000
C) $135,000
D) $75,000

Answer: C

Explanation: Fixed costs are [($15 – $10) × 14,000] – $45,000 = $25,000. Contribution margin ratio is ($15 – $10)/$15 = 33%. Break-even sales is $25,000/0.33 = $75,000. Actual sales is $15 × 14,000 = $210,000. Margin of safety is $210,000 – $75,000 = $135,000.

Difficulty: 3 Hard

Topic: Margin of Safety

Learning Objective: 06-03 Compute the margin of safety.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

78) Fontaine Corp. has a selling price of $15 and variable costs of $10 per unit. When 10,000 units are sold, profits equaled $25,000. What is the margin of safety?

A) $75,000
B) $25,000
C) $105,000
D) $50,000

Answer: A

Explanation: Fixed costs are [($15 – $10) × 10,000] – $25,000 = $25,000. Contribution margin ratio is ($15 – $10)/$15 = 33%. Break-even sales is $25,000/0.33 = $75,000. Actual sales is $15 × 10,000 = $150,000. Margin of safety is $150,000 – $75,000 = $75,000.

Difficulty: 3 Hard

Topic: Margin of Safety

Learning Objective: 06-03 Compute the margin of safety.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

79) Rollag Corp. has a selling price of $30 and variable costs of $20 per unit. When 14,000 units are sold, profits equaled $45,000. What is the margin of safety?

A) $420,000
B) $135,000
C) $142,500
D) $75,000

Answer: B

Explanation: Fixed costs are ($30 – $20) × 14,000 – $45,000 = $95,000. Contribution margin ratio is ($30 – $20)/$30 = 33%. Break-even sales is $95,000/0.33 = $285,000. Actual sales is $30 × 14,000 = $420,000. Margin of safety is $420,000 – $285,000 = $135,000.

Difficulty: 3 Hard

Topic: Margin of Safety

Learning Objective: 06-03 Compute the margin of safety.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

80) Indigo Corp. has a selling price of $45 and variable costs of $30 per unit. When 10,000 units are sold, profits equaled $25,000. What is the margin of safety?

A) $75,000
B) $25,000
C) $80,000
D) $150,000

Answer: A

Explanation: Fixed costs are ($45 – $30) × 10,000 – $25,000 = $125,000. Contribution margin ratio is ($45 – $30)/$45 = 33%. Break-even sales is $125,000/0.33 = $375,000. Actual sales is $45 × 10,000 = $450,000. Margin of safety is $450,000 – $375,000 = $75,000.

Difficulty: 3 Hard

Topic: Margin of Safety

Learning Objective: 06-03 Compute the margin of safety.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

81) Knoll, Inc. currently sells 15,000 units a month for $50 each, has variable costs of $20 per unit, and fixed costs of $300,000. Knoll is considering increasing the price of its units to $60 per unit. This will not affect costs, but demand is expected to drop 20%. Should Knoll increase the price of its product?

A) Yes; profit will increase $30,000.
B) Yes, profit will increase $150,000.
C) No, profit will decrease $150,000.
D) No, profit will decrease $30,000.

Answer: A

Explanation: Profit is currently 15,000 × ($50 – $20) – $300,000 = $150,000. If price increases, demand will drop from 15,000 units to 12,000 per units per month. Profit will then be 12,000 × ($60 – $20) – $300,000 = $180,000. The increase in price per unit more than offsets the decrease in demand.

Difficulty: 3 Hard

Topic: CVP for Decision Making

Learning Objective: 06-04 Analyze how changes in prices and cost structure affect cost-volume-profit relationships.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

82) Knoll, Inc. currently sells 15,000 units a month for $50 each, has variable costs of $20 per unit, and fixed costs of $300,000. Knoll is considering increasing the price of its units to $60 per unit. If the price is changed, how many units will Knoll need to sell for profit to remain the same as before the price change?

A) 10,000
B) 11,250
C) 12,000
D) 12,500

Answer: B

Explanation: Profit is currently 15,000 × ($50 – $20) – $300,000 = $150,000. Target units = ($300,000 + $150,000)/($60 – $20) = 11,250. (Managers would then know that demand could decrease by up to 25% and Knoll would still earn additional profit.)

Difficulty: 3 Hard

Topic: CVP for Decision Making

Learning Objective: 06-04 Analyze how changes in prices and cost structure affect cost-volume-profit relationships.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

83) All else being equal, what happens to the unit contribution margin and the contribution margin ratio if the sales price per unit increases?

A) Both unit contribution margin and contribution margin ratio increase.
B) Both unit contribution margin and contribution margin ratio decrease.
C) Unit contribution margin increases while contribution margin ratio decreases.
D) Unit contribution margin decreases while contribution margin ratio increases.

Answer: A

Explanation: Both the unit contribution margin and the contribution margin ratio increase with an increase in sales price per unit.

Difficulty: 3 Hard

Topic: CVP for Decision Making

Learning Objective: 06-04 Analyze how changes in prices and cost structure affect cost-volume-profit relationships.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

84) Cost structure refers to:

A) a company’s break-even point.
B) whether fixed costs are covered by the contribution margin.
C) how a company uses variable versus fixed costs to perform operations.
D) where funds are stored.

Answer: C

Explanation: Cost structure refers to how a company uses variable versus fixed costs to perform operations.

Difficulty: 1 Easy

Topic: Changes in Cost Structure

Learning Objective: 06-04 Analyze how changes in prices and cost structure affect cost-volume-profit relationships.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

85) Plymouth Corp. sells units for $100 each. Variable costs are $75 per unit, and fixed costs are $200,000. If Plymouth leases a new machine, fixed costs will increase by $60,000 a year, but production will be more efficient, saving $5 per unit. At what level of production will Plymouth be indifferent between leasing and not leasing the new machine?

A) 5,000
B) 10,000
C) 10,400
D) 12,000

Answer: D

Explanation: Plymouth will be indifferent when the contribution margin per unit times the number of units less fixed costs is equal under both scenarios. [($100 – $75) × Q] – $200,000 = [($100 – $70) × Q] – $260,000. Q = 12,000.

Difficulty: 3 Hard

Topic: Changes in Cost Structure

Learning Objective: 06-04 Analyze how changes in prices and cost structure affect cost-volume-profit relationships.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

86) A company is debating whether to change its cost structure so that fixed costs increase from $300,000 to $400,000, but variable costs decrease from $5 per unit to $4 per unit. If it were to implement the change at its current production level of 100,000 units, profit would not change. What would happen to the company’s profit if the change were implemented and production increased to 125,000 units?

A) It will stay the same.
B) It will increase.
C) It will decrease.
D) It could increase or decrease.

Answer: B

Explanation: Since variable costs go down, the contribution margin will increase with the change. This will cause profits to increase above the point of indifference.

Difficulty: 3 Hard

Topic: Changes in Cost Structure

Learning Objective: 06-04 Analyze how changes in prices and cost structure affect cost-volume-profit relationships.

Bloom’s: Analyze

AACSB: Analytical Thinking

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87) A company is debating whether to change its cost structure so that variable costs increase from $4 per unit to $5 per unit but fixed costs decrease from $400,000 to $300,000. If it were to implement the change at its current production level of 100,000, profit would not change. What would happen to the company’s profit if the change were implemented and production increased?

A) It will stay the same.
B) It will increase.
C) It will decrease.
D) It could increase or decrease.

Answer: C

Explanation: Since variable costs go up, the contribution margin will decrease with the change. This will cause profits to decrease above the point of indifference.

Difficulty: 3 Hard

Topic: Changes in Cost Structure

Learning Objective: 06-04 Analyze how changes in prices and cost structure affect cost-volume-profit relationships.

Bloom’s: Analyze

AACSB: Analytical Thinking

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88) Plymouth Corp. sells units for $100 each. Variable costs are $75 per unit, and fixed costs are $200,000. If Plymouth leases a new machine, production will be more efficient, saving $5 per unit. If Plymouth plans to sell 12,000 units, at what lease cost will Plymouth be indifferent between leasing and not leasing the new machine?

A) $10,000
B) $40,000
C) $60,000
D) $80,000

Answer: C

Explanation: Plymouth will be indifferent when its profit under both scenarios is equal. [($100 – $75) × 12,000] – $200,000 = [($100 – $70) × 12,000] – ($200,000 + L). L = $60,000.

Difficulty: 3 Hard

Topic: Changes in Cost Structure

Learning Objective: 06-04 Analyze how changes in prices and cost structure affect cost-volume-profit relationships.

Bloom’s: Apply

AACSB: Analytical Thinking

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89) Which of the following statements about leverage is not correct?

A) Measuring the degree of operating leverage is a form of measuring risk.
B) Decisions about the use of debt or equity affect a company’s financial leverage.
C) Decisions about whether to use fixed or variable costs affect a company’s operating leverage.
D) The degree of financial leverage measures the extent to which fixed costs are used to operate the business.

Answer: D

Explanation: The degree of operating leverage, not financial leverage, measures the extent to which fixed costs are used to operate the business.

Difficulty: 2 Medium

Topic: Degree of Operating Leverage

Learning Objective: 06-05 Calculate the degree of operating leverage and use it to predict the effect a change in sales will have on profit.

Bloom’s: Understand

AACSB: Analytical Thinking

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90) Degree of operating leverage is calculated as:

A) profit divided by contribution margin.
B) break-even sales divided by profit.
C) profit divided by break-even sales.
D) contribution margin divided by profit.

Answer: D

Explanation: The degree of operating leverage is calculated as the contribution margin divided by profit.

Difficulty: 1 Easy

Topic: Degree of Operating Leverage

Learning Objective: 06-05 Calculate the degree of operating leverage and use it to predict the effect a change in sales will have on profit.

Bloom’s: Remember

AACSB: Analytical Thinking

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91) Degree of operating leverage is used to:

A) calculate change in sales given change in profit.
B) calculate change in profit given change in sales.
C) calculate break-even sales given change in sales.
D) calculate break-even sales given change in profit.

Answer: B

Explanation: The degree of operating leverage is a multiplier that we can use to predict how a percentage change in sales revenue will translate into a percentage change in profit.

Difficulty: 1 Easy

Topic: Degree of Operating Leverage

Learning Objective: 06-05 Calculate the degree of operating leverage and use it to predict the effect a change in sales will have on profit.

Bloom’s: Remember

AACSB: Analytical Thinking

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92) Frontier Corp. has a contribution margin of $450,000 and profit of $150,000. What is its degree of operating leverage?

A) 0.33
B) 1.67
C) 2.50
D) 3.00

Answer: D

Explanation: Contribution margin is ($50 − $20) × 15,000 = $450,000. Profit is $450,000 − $300,000 = $150,000. Degree of operating leverage is $450,000/$150,000 = 3.

Difficulty: 2 Medium

Topic: Degree of Operating Leverage

Learning Objective: 06-05 Calculate the degree of operating leverage and use it to predict the effect a change in sales will have on profit.

Bloom’s: Apply

AACSB: Analytical Thinking

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93) Frontier Corp. has a contribution margin of $450,000 and profit of $150,000. If sales increase 20%, by how much will profits increase?

A) 20%
B) 30%
C) 60%
D) 90%

Answer: C

Explanation: Contribution margin is ($50 − $20) × 15,000 = $450,000. Profit is $450,000 − $300,000 = $150,000. Degree of operating leverage is $450,000/$150,000 = 3. 20% × 3 = 60%.

Difficulty: 3 Hard

Topic: Degree of Operating Leverage

Learning Objective: 06-05 Calculate the degree of operating leverage and use it to predict the effect a change in sales will have on profit.

Bloom’s: Apply

AACSB: Analytical Thinking

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94) Frontier Corp. has fixed costs of $300,000 and profit of $150,000. What is its degree of operating leverage?

A) 0.33
B) 1.67
C) 2.50
D) 3.00

Answer: D

Explanation: Contribution margin is $300,000 + $150,000 = $450,000. Degree of operating leverage is $450,000/$150,000 = 3.

Difficulty: 2 Medium

Topic: Degree of Operating Leverage

Learning Objective: 06-05 Calculate the degree of operating leverage and use it to predict the effect a change in sales will have on profit.

Bloom’s: Apply

AACSB: Analytical Thinking

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95) Frontier Corp. has fixed costs of $300,000 and profit of $150,000. If sales increase 20%, by how much will profits increase?

A) 20%
B) 30%
C) 60%
D) 90%

Answer: C

Explanation: Contribution margin is $300,000 + $150,000 = $450,000. Degree of operating leverage is $450,000/$150,000 = 3. 20% × 3 = 60%.

Difficulty: 3 Hard

Topic: Degree of Operating Leverage

Learning Objective: 06-05 Calculate the degree of operating leverage and use it to predict the effect a change in sales will have on profit.

Bloom’s: Apply

AACSB: Analytical Thinking

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96) Frontier Corp. sells units for $50, has unit variable costs of $20, and fixed costs of $300,000. If Frontier sells 15,000 units, what is its degree of operating leverage?

A) 0.33
B) 1.67
C) 2.50
D) 3.00

Answer: D

Explanation: Contribution margin is ($50 – $20) × 15,000 = $450,000. Profit is $450,000 – $300,000 = $150,000. Degree of operating leverage is $450,000/$150,000 = 3.

Difficulty: 2 Medium

Topic: Degree of Operating Leverage

Learning Objective: 06-05 Calculate the degree of operating leverage and use it to predict the effect a change in sales will have on profit.

Bloom’s: Apply

AACSB: Analytical Thinking

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97) Frontier Corp. sells units for $50, has unit variable costs of $20, and fixed costs of $300,000. Frontier sells 15,000 units. If sales increase 20%, by how much will profits increase?

A) 20%
B) 30%
C) 60%
D) 90%

Answer: C

Explanation: Contribution margin is ($50 – $20) × 15,000 = $450,000. Profit is $450,000 – $300,000 = $150,000. Degree of operating leverage is $450,000/$150,000 = 3. 20% × 3 = 60%.

Difficulty: 3 Hard

Topic: Degree of Operating Leverage

Learning Objective: 06-05 Calculate the degree of operating leverage and use it to predict the effect a change in sales will have on profit.

Bloom’s: Apply

AACSB: Analytical Thinking

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98) In multiproduct cost-volume-profit analysis, an assumption made in addition to those used in single-product CVP analysis is that:

A) the sales mix remains constant.
B) all costs can be classified as fixed or variable.
C) costs are linear in the relevant range.
D) production and sales are equal.

Answer: A

Explanation: In multiproduct CVP analysis, we must assume that the sales mix remains constant. All other assumptions are the same as in single-product CVP analysis.

Difficulty: 1 Easy

Topic: Weighted-Average Contribution Margin

Learning Objective: 06-06 Perform multiproduct cost-volume-profit analysis and explain how the product or sales mix affects the analysis.

Bloom’s: Remember

AACSB: Analytical Thinking

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99) If a firm sells more than one product, the break-even point in units represents:

A) the number of units of the largest-selling product required to break even.
B) the number of units of the most profitable product required to break even.
C) the number of units of the highest-revenue product required to break even.
D) the sum of the units of all products required to break even.

Answer: D

Explanation: The multi-product cost volume profit formula yields total units required to break even for all products.

Difficulty: 2 Medium

Topic: Weighted-Average Contribution Margin

Learning Objective: 06-06 Perform multiproduct cost-volume-profit analysis and explain how the product or sales mix affects the analysis.

Bloom’s: Understand

AACSB: Analytical Thinking

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100) Friar Corp. sells two products. Product A sells for $100 per unit, and has unit variable costs of $60. Product B sells for $70 per unit, and has unit variable costs of $50. Currently, Friar sells three units of product B for every one unit of product A sold. Friar has fixed costs of $750,000. What is Friar’s break-even point in units?

A) 30,000 units of A and 30,000 units of B
B) 7,500 units of A and 22,500 units of B
C) 22,500 units of A and 7,500 units of B
D) 15,000 units of A and 15,000 units of B

Answer: B

Explanation: The weighted average unit contribution margin is [($100 – $60) × 1/4] + [($70 – $50) × 3/4] = $25. Break-even point is $750,000/$25 = 30,000 units: 30,000 × 1/4 = 7,500 of product A, and 30,000 × 3/4 = 22,500 of product B.

Difficulty: 3 Hard

Topic: Weighted-Average Contribution Margin

Learning Objective: 06-06 Perform multiproduct cost-volume-profit analysis and explain how the product or sales mix affects the analysis.

Bloom’s: Apply

AACSB: Analytical Thinking

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101) Friar Corp. sells two products. Product A sells for $100 per unit, and has unit variable costs of $60. Product B sells for $70 per unit, and has unit variable costs of $50. Currently, Friar sells three units of Product B for every one unit of Product A sold. Friar has fixed costs of $750,000. How many units would Friar have to sell to earn a profit of $250,000?

A) 40,000 units of A and 40,000 units of B
B) 10,000 units of A and 30,000 units of B
C) 30,000 units of A and 10,000 units of B
D) 20,000 units of A and 20,000 units of B

Answer: B

Explanation: The weighted average unit contribution margin is [($100 – $60) × 1/4] + [($70 – $50) × 3/4] = $25. Target units are ($750,000 + $250,000)/$25 = 40,000 units: 40,000 × 1/4 = 10,000 of product A, and 40,000 × 3/4 = 30,000 of product B.

Difficulty: 3 Hard

Topic: Weighted-Average Contribution Margin

Learning Objective: 06-06 Perform multiproduct cost-volume-profit analysis and explain how the product or sales mix affects the analysis.

Bloom’s: Apply

AACSB: Analytical Thinking

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102) Graham Corp. sells two products. Product A sells for $200 per unit, and has unit variable costs of $150. Product B sells for $50 per unit, and has unit variable costs of $20. Currently, Graham sells three units of Product B for every two units of Product A sold. Graham has fixed costs of $760,000. What is Graham’s break-even point in units?

A) 20,000 units of A and 20,000 units of B
B) 12,000 units of A and 8,000 units of B
C) 8,000 units of A and 12,000 units of B
D) 10,000 units of A and 10,000 units of B

Answer: C

Explanation: The weighted average unit contribution margin is [($200 – $150) × 2/5] + [($50 – $20) × 3/5] = $38. Break-even point is $760,000/$38 = 20,000 units: 20,000 × 2/5 = 8,000 of product A, and 20,000 × 3/5 = 12,000 of product B.

Difficulty: 3 Hard

Topic: Weighted-Average Contribution Margin

Learning Objective: 06-06 Perform multiproduct cost-volume-profit analysis and explain how the product or sales mix affects the analysis.

Bloom’s: Apply

AACSB: Analytical Thinking

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103) Graham Corp. sells two products. Product A sells for $200 per unit, and has unit variable costs of $150. Product B sells for $50 per unit, and has unit variable costs of $20. Currently, Graham sells three units of Product B for every two units of Product A sold. Graham has fixed costs of $760,000. How many units would Graham have to sell to earn a profit of $57,000?

A) 21,500 units of A and 21,500 units of B
B) 12,900 units of A and 8,600 units of B
C) 8,600 units of A and 12,900 units of B
D) 10,750 units of A and 10,750 units of B

Answer: C

Explanation: The weighted average unit contribution margin is [($200 – $150) × 2/5] + [($50 – $20) × 3/5] = $38. Target units are ($760,000 + $57,000)/$38 = 21,500 units: 21,500 × 2/5 = 8,600 of product A, and 21,500 × 3/5 = 12,900 of product B.

Difficulty: 3 Hard

Topic: Weighted-Average Contribution Margin

Learning Objective: 06-06 Perform multiproduct cost-volume-profit analysis and explain how the product or sales mix affects the analysis.

Bloom’s: Apply

AACSB: Analytical Thinking

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Match the assumption for cost behavior patterns used in cost-volume-profit analysis with its corresponding explanation.

A) Determine the total fixed and variable costs per unit (including for mixed costs); step costs remain fixed within the relevant range.
B) Even if a company makes and sells multiple products, we assume the relative proportion of units sold remains the same.
C) Simplify the analysis with this assumption, even though we know some costs vary with production while others vary with sales.
D) Ignore other factors that affect cost and revenue, for example employee learning curves and productivity gains.
E) Use a straight line to approximate the relationship between total cost and sales volume and between total revenue and sales volume.

104) All costs can be classified as either fixed or variable.

Difficulty: 2 Medium

Topic: Basic CVP Analysis

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Understand

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105) There is a constant product mix.

Difficulty: 2 Medium

Topic: Basic CVP Analysis

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Understand

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106) There is a linear relationship between cost and revenue.

Difficulty: 2 Medium

Topic: Basic CVP Analysis

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Understand

AACSB: Analytical Thinking

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107) Only volume affects total cost and total revenue.

Difficulty: 2 Medium

Topic: Basic CVP Analysis

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Understand

AACSB: Analytical Thinking

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108) Production volume is equal to sales volume.

Difficulty: 2 Medium

Topic: Basic CVP Analysis

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.

Bloom’s: Understand

AACSB: Analytical Thinking

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Answers: 104) A 105) B 106) E 107) D 108) C

109) Roland had revenues of $600,000 in March. Fixed costs in March were $200,000 and profit was $40,000. Answer the following questions:

What was the contribution margin percentage?
What monthly sales volume (in dollars) would be needed to break-even?
What sales volume (in dollars) would be needed to earn $150,000?

Answer:

40% = ($200,000 + $40,000)/$600,000
$500,000 = $200,000/40%
$875,000 = ($200,000 + $150,000)/40%

Target sales = (Fixed costs + Target profit)/Contribution margin ratio. Break-even sales = Fixed costs/Contribution margin ratio.

Difficulty: 2 Medium

Topic: Contribution Margin Ratio Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.; 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

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110) Portia Company is a retailer of hammers. Portia pays $4.75 for each hammer and sells them for $8.00. Monthly fixed costs are $26,000. The hammer cost is the only variable cost.

What is the contribution margin per unit?
What is the break-even point in units?
How many units will Portia need to sell to earn target profit of $13,000?

Answer:

$3.25 = $8.00 – $4.75
8,000 = $26,000/$3.25
12,000 = ($26,000 + $13,000)/$3.25

Unit contribution margin = Sales price – Variable cost per unit. Break-even units = Fixed costs/Unit contribution margin. Target units = (Fixed costs + Target profit)/Unit contribution margin.

Difficulty: 2 Medium

Topic: Unit Contribution Margin Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.; 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

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111) Nora Inc. sells a single product for $15. Variable costs include $6 for each unit plus a 10% sales commission. Fixed costs are $150,000 per month.

What is the contribution margin percentage?
What is the break-even sales revenue?
What sales revenue is needed to achieve a $100,000 per month profit?

Answer:

50% = [$15 – $6 – (10% × $15)]/$15
$300,000 = $150,000/50%
$500,000 = ($150,000 + $100,000)/50%

Contribution margin percentage = Unit contribution margin/Selling price. Break-even sales = Fixed costs/Contribution margin percentage. Target sales = (Fixed costs + Target Profit)/Contribution margin percentage.

Difficulty: 2 Medium

Topic: Contribution Margin Ratio Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.; 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

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112) Raven Inc. sells a single product for $45. Variable costs include $26 for each unit plus a $10 selling expense per unit. Fixed costs are $200,000 per month.

What is the contribution margin percentage?
What is the breakeven sales revenue?
What sales revenue is needed to achieve a $175,000 per month profit?

Answer:

20% = ($45 – $26 – $10)/$45
$1,000,000 = $200,000/20%
$1,875,000 = ($200,000 + $175,000)/20%

Difficulty: 2 Medium

Topic: Contribution Margin Ratio Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.; 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

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113) Holly Inc. sells a single product for $40. Variable costs include $22 for each unit plus a 10% sales commission. Fixed costs are $105,000 per month.

What is the contribution margin percentage?
What is the breakeven sales revenue?
What sales revenue is needed to achieve a $140,000 per month profit?

Answer:

35% = ($40 – $22 – 10% × $40)/$40.00
$300,000 = $105,000/35%
$700,000 = ($105,000 + $140,000)/35%

Difficulty: 2 Medium

Topic: Contribution Margin Ratio Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.; 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.

Bloom’s: Apply

AACSB: Analytical Thinking

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114) Jasmine Inc. sells a product for $50 per unit. Variable costs per unit are $30, and monthly fixed costs are $150,000. Answer the following questions:

What is the break-even point in units?
What unit sales would be required to earn a target profit of $100,000?
Assume they achieve the level of sales required in part b, what is the margin of safety in sales dollars?

Answer:

7,500 units = $150,000/($50 – $30)
12,500 units = ($150,000 + $100,000)/($50 – $30)
$250,000 = (12,500 units – 7,500 units) × $50

Break-even units = Fixed costs/Unit contribution margin. Target units = (Fixed costs + Target profit)/Unit contribution margin. Margin of safety = Actual sales – Break-even sales.

Difficulty: 2 Medium

Topic: Unit Contribution Margin Method; Margin of Safety

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.; 06-02 Use cost-volume-profit analysis to determine the sales needed to achieve a target profit.; 06-03 Compute the margin of safety.

Bloom’s: Apply

AACSB: Analytical Thinking

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115) Halifax Products sells a product for $75. Variable costs per unit are $50, and monthly fixed costs are $75,000. Answer the following questions:

What is the break-even point in units?
How many units would need to be sold to earn a target profit of $200,000?
Assuming they achieve the level of sales required in part b, what is the margin of safety in sales dollars?

Answer:

3,000 units = $75,000/($75 – $50)
11,000 units = ($75,000 + $200,000)/($75 – $50)
$600,000 = (11,000 units – 3,000 units) × $75

Break-even units = Fixed costs / Unit contribution margin. Target units = (Fixed costs + Target profit) / Unit contribution margin. Margin of safety = Actual sales — Break-even sales.

Difficulty: 2 Medium

Topic: Unit Contribution Margin Method; Margin of Safety

Bloom’s: Apply

AACSB: Analytical Thinking

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116) Juniper had revenues of $450,000 in March. Fixed costs in March were $240,000 and profit was $30,000. Answer the following questions:

What was the contribution margin percentage?
What monthly sales volume (in dollars) would be needed to break-even?
What was the margin of safety for March?

Answer:

60% = ($240,000 + $30,000)/$450,000
$400,000 = $240,000/60%
$50,000 = $450,000 – $400,000

Target sales = (Fixed costs + Target profit ) / Contribution margin ratio. Break-even sales = Fixed costs / Contribution margin ratio. Margin of safety = Actual sales — Break-even sales

Difficulty: 2 Medium

Topic: Contribution Margin Ratio Method; Margin of Safety

Bloom’s: Apply

AACSB: Analytical Thinking

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117) Dallas Inc. sells a product for $60. Variable costs are 60% of sales, and monthly fixed costs are $54,000. Answer the following questions:

What is the break-even point in units?
What unit sales would be required to earn a target profit of $120,000?
Assume they achieve the level of sales required in part b, what is the margin of safety in sales dollars?

Answer:

2,250 units = $54,000/[$60 – ($60 × .60)]
7,250 units = ($54,000 + $120,000)/[$60 – ($60 × .60)]
$300,000 = (7,250 units – 2,250 units) × $60

Break-even units = Fixed costs/Unit contribution margin. Target units = (Fixed costs + Target profit)/Unit contribution margin. Margin of safety = Actual sales — Break-even sales.

Difficulty: 2 Medium

Topic: Unit Contribution Margin Method; Margin of Safety

Bloom’s: Apply

AACSB: Analytical Thinking

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118) Duncan had revenues of $900,000 in March. Fixed costs in March were $480,000 and profit was $60,000. Answer the following questions:

What was the contribution margin percentage?
What monthly sales volume (in dollars) would be needed to break-even?
What was the margin of safety for March?

Answer:

60% = ($480,000 + $60,000)/$900,000
$800,000 = $480,000/60%
$100,000 = $900,000 – $800,000

Target sales = (Fixed costs + Target profit)/Contribution margin ratio. Break-even sales = Fixed costs/Contribution margin ratio. Margin of safety = Actual sales – Break-even sales

Difficulty: 2 Medium

Topic: Contribution Margin Ratio Method; Margin of Safety

Bloom’s: Apply

AACSB: Analytical Thinking

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119) Boise Corp had a margin of safety of $375,000 last month, with sales revenue of $1,000,000 and fixed costs of $250,000.

What are break-even sales?
What is the contribution margin ratio?
How much profit did Boise earn last month?
How much would sales have to increase for Boise to earn profit of 600,000?

Answer:

$625,000 = $1,000,000 – $375,000
40% = $250,000/$625,000
$150,000 = ($1,000,000 × 40%) – $250,000
$1,125,000 = [($250,000 + $600,000)/0.40] – $1,000,000

Margin of safety = Actual sales – Break-even sales. Break-even sales = Fixed costs/Contribution margin ratio. Target sales = (Fixed costs + Target profit)/Contribution margin ratio.

Difficulty: 3 Hard

Topic: Contribution Margin Ratio Method; Margin of Safety

Bloom’s: Apply

AACSB: Analytical Thinking

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120) Akron Corp. had a margin of safety of $500,000 last month, with sales revenue of $1,250,000 and fixed costs of $150,000.

What are break-even sales?
What is the contribution margin ratio?
How much profit did Akron earn last month?
How much would sales have to be for Akron to earn profit of 500,000?

Answer:

$750,000 = $1,250,000 – $500,000
20% = $150,000/$750,000
$100,000 = ($1,250,000 × 20%) – $150,000
$3,250,000 = [($150,000 + $500,000)/0.20]

Margin of safety = Actual sales – Break-even sales. Break-even sales = Fixed costs/Contribution margin ratio. Target sales = (Fixed costs + Target profit)/Contribution margin ratio.

Difficulty: 3 Hard

Topic: Contribution Margin Ratio Method; Margin of Safety

Bloom’s: Apply

AACSB: Analytical Thinking

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121) The manager of Calypso, Inc. is considering raising its current price of $30 per unit by 10%. If she does so, she estimates that demand will decrease by 20,000 units per month. Calypso currently sells 50,000 units per month, each of which costs $25 in variable costs. Fixed costs are $180,000.

What is the current profit?
What is the current break-even point in units?
If the manager raises the price, what will profit be?
If the manager raises the price, what will be the new break-even point in units?
Assume the manager does not know how much demand will drop if the price increases. By how much would demand have to drop before the manager would not want to implement the price increase?

Answer:

$70,000 = ($30 × 50,000) – ($25 × 50,000) – $180,000
36,000 = $180,000/($30 – $25)
$60,000 = [($30 × 1.10) × 30,000] – ($25 × 30,000) – $180,000
22,500 = $180,000/($33 – $25)
18,750 = 50,000 – [($180,000 + $70,000)/($33 – $25)]

Profit = (Unit price × Q) – (Unit variable costs × Q) – Total fixed costs. Break-even units = Fixed costs/Unit contribution margin. Target units = (Fixed costs + Target profit)/Unit contribution margin.

Difficulty: 3 Hard

Topic: Unit Contribution Margin Method; CVP for Decision Making; Profit Equation Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.; 06-04 Analyze how changes in prices and cost structure affect cost-volume-profit relationships.

Bloom’s: Analyze

AACSB: Analytical Thinking

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122) The manager of Arbor, Inc. is considering raising its current price of $50 per unit by 10%. If she does so, she estimates that demand will decrease by 30,000 units per month. Arbor currently sells 100,000 units per month, each of which costs $35 in variable costs. Fixed costs are $1,200,000.

What is the current profit?
What is the current break-even point in units?
If the manager raises the price, what will profit be?
If the manager raises the price, what will be the new break-even point in units?
Assume the manager does not know how much demand will drop if the price increases. By how much would demand have to drop before the manager would not want to implement the price increase?

Answer:

$300,000 = ($50 × 100,000) – ($35 × 100,000) – $1,200,000
80,000 = $1,200,000/($50 – $35)
$200,000 = [($50 × 1.10) × 70,000] – ($35 × 70,000) – $1,200,000
60,000 = $1,200,000/($55 – $35)
25,000 = 100,000 – [($1,200,000 + $300,000)/($55 – $35)]

Profit = Unit price × Q – Unit variable costs × Q – Total fixed costs. Break-even units = Fixed costs/Unit contribution margin. Target units = (Fixed costs + Target profit)/Unit contribution margin.

Difficulty: 3 Hard

Topic: Unit Contribution Margin Method; CVP for Decision Making; Profit Equation Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.; 06-04 Analyze how changes in prices and cost structure affect cost-volume-profit relationships.

Bloom’s: Analyze

AACSB: Analytical Thinking

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123) Glade, Inc. is trying to decide whether to increase the commission-based pay of its salespeople. Currently, each of its five salespeople earns a 15% commission on the units they sell for $100 each, plus a fixed salary of $40,000 per person. Glade hopes that by increasing commissions to 20% and decreasing each salesperson’s salary to $25,000, sales will increase because salespeople will be more motivated. Currently, sales are 13,000 units. Glade’s other fixed costs, NOT including the salespeople’s salaries, total $580,000. Glade’s other variable costs, NOT including commissions, total $20 per unit.

What is current profit?
What is the current break-even point in units?
What would the break-even point in units be if commissions are increased and salaries decreased?
If sales increase by 4,000 units, what will profit be under the new plan?
At what sales level would Glade be indifferent between the lower-commission plan and the higher-commission plan?

Answer:

$65,000 = ($100 × 13,000) – [(($100 × 15%) + $20) × 13,000] – [(5 × $40,000) + $580,000]
12,000 = [(5 × $40,000) + $580,000]/[$100 – ($100 × 15%) – $20]
11,750 = [(5 × $25,000) + $580,000]/[$100 – ($100 × 20%) – $20]
$315,000 = ($100 × 17,000) – [(($100 × 20%) + $20) × 17,000] – [(5 × $25,000) – $580,000]
15,000: ($65 × Q) – $780,000 = ($60 × Q) – $705,000; Q = 15,000

Profit = (Unit price × Q) – (Unit variable costs × Q) – Total fixed costs. Break-even units = Fixed costs/Unit contribution margin. To find the point of indifference, set the profit functions under each plan equal to each other.

Difficulty: 3 Hard

Topic: Unit Contribution Margin Method; Changes in Cost Structure; Profit Equation Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.; 06-04 Analyze how changes in prices and cost structure affect cost-volume-profit relationships.

Bloom’s: Analyze

AACSB: Analytical Thinking

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124) Forge, Inc. is trying to decide whether to increase the commission-based pay of its salespeople. Currently, each of its ten salespeople earns a 10% commission on the units they sell for $90 each, plus a fixed salary of $30,000 each. Forge hopes that by increasing commissions to 20% and decreasing each salesperson’s salary to $21,000, sales will increase because salespeople will be more motivated. Currently, sales are 12,000 units. Forge’s other fixed costs, not including the salespeople’s salaries, total $188,580. Forge’s other variable costs, not including commissions, total $30 per unit.

What is current profit?
What is the current break-even point in units?
What would the break-even point in units be if commissions are increased and salaries decreased?
If sales increase by 1,000 units, what will profit be under the new plan?
At what sales level would Forge be indifferent between the lower-commission plan and the higher-commission plan?

Answer:

$123,420 = ($90 × 12,000) – [(($90 × 10%) + $30) × 12,000] – [(10 × $30,000) + $188,580]
9,580 = [(10 × $30,000) + $188,580]/[$90 – ($90 × 10%) – $30]
9,490 = [(10 × $21,000) + $188,580]/[$90 – ($90 × 20%) – $30]
$147,420 = ($90 × 13,000) – [($90 × 20%) + $30) × 13,000] – [(10 × $21,000) + $188,500]
10,000: ($51 × Q) – $488,580 = ($42 × Q) – $398,580; Q = 10,000

Difficulty: 3 Hard

Topic: Unit Contribution Margin Method; Changes in Cost Structure; Profit Equation Method

Learning Objective: 06-01 Use cost-volume-profit analysis to find the break-even point.; 06-04 Analyze how changes in prices and cost structure affect cost-volume-profit relationships.

Bloom’s: Analyze

AACSB: Analytical Thinking

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125) Cantor Products sells a product for $75. Variable costs per unit are $50, and monthly fixed costs are $75,000. Answer the following questions:

What is the break-even point in units?
What unit sales would be required to earn a target profit of $200,000?
Assume they achieve the level of sales required in part b, what is the degree of operating leverage?
If sales decrease by 30% from that level, by what percentage will profits decrease?

Answer:

3,000 units = $75,000/($75 – $50)
11,000 units = ($75,000 + $200,000)/($75 – $50)
1.375 = [11,000 × ($75 – $50)]/$200,000
41.25% = 30% × 1.375

Break-even units = Fixed costs/Unit contribution margin. Target units = (Fixed costs + Target profit)/Unit contribution margin. Degree of operating leverage = Contribution margin/Profit. Change in revenue × Degree of operating leverage = Change in profit.

Difficulty: 2 Medium

Topic: Unit Contribution Margin Method; Degree of Operating Leverage

Bloom’s: Apply

AACSB: Analytical Thinking

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126) Harmony sells a product for $50 per unit. Variable costs per unit are $30, and monthly fixed costs are $150,000. Answer the following questions:

What is the break-even point in units?
What unit sales would be required to earn a target profit of $100,000?
Assume they achieve the level of sales required in part b, what is the degree of operating leverage?
If sales increase by 40% from that level, by what percentage will profits increase?

Answer:

7,500 units = $150,000/($50 – $30)
12,500 units = ($150,000 + $100,000)/($50 – $30)
2.5 = [12,500 × ($50 – $30)]/$100,000
100% = 40% × 2.5

Difficulty: 2 Medium

Topic: Unit Contribution Margin Method; Degree of Operating Leverage

Bloom’s: Apply

AACSB: Analytical Thinking

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127) Malibu, Inc., which has fixed costs of $2,150,000, sells three products whose sales price, variable cost per unit, and percentage of sales units are presented in the table below.

	Product A			Product B			Product C
Sales Price	$	7.00		$	12.00		$	25.00
Variable Cost	$	3.00		$	10.00		$	12.00
Product Mix		60	%		30	%		10	%

What is the weighted average unit contribution margin?
At the break-even point, how many units of Product A must be sold?
To make a profit of $1,075,000, how many units of Product B must be sold?

Answer:

$4.30 = [($7.00 – $3.00) × 60%] + [($12.00 – $10.00) × 30%] + [($25.00 – $12.00) × 10%]
300,000 units of A = ($2,150,000/$4.30) × 60%
225,000 units of B = [($2,150,000 + $1,075,000)/$4.30] × 30%

The weighted average unit contribution margin is the sum of the unit contribution margins for each product times their sales mix percentages. Total break-even units = Total fixed costs/Weighted average unit contribution margin. For each product, multiply total break-even units by the sales mix percentage. Total target units = (Total fixed costs + target profit)/Weighted average unit contribution margin. For each product, multiply total target units by the sales mix percentage.

Difficulty: 3 Hard

Topic: Weighted-Average Contribution Margin

Learning Objective: 06-06 Perform multiproduct cost-volume-profit analysis and explain how the product or sales mix affects the analysis.

Bloom’s: Apply

AACSB: Analytical Thinking

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128) Drake, Inc., which has fixed costs of $1,400,000, sells three products whose sales price, variable cost per unit, and percentage of sales units are presented in the table below.

	Product A			Product B				Product C
Sales Price	$	16.00			$	48.00			$	103.00
Variable Cost	$	8.00			$	30.00			$	85.00
Sales Mix		40	%			50	%			10	%

What is the weighted average unit contribution margin?
At the break-even point, how many units of Product A must be sold?
To make a profit of $910,000, how many units of Product B must be sold?

Answer:

$14.00 = [($16.00 – $8.00) × 40%] + [($48.00 – $30.00) × 50%] + [($103.00 – $85.00) × 10%]
40,000 units of A = ($1,400,000/$14.00) × 40%
82,500 units of B = [($1,400,000 + $910,000)/$14.00] × 50%

Difficulty: 3 Hard

Topic: Weighted-Average Contribution Margin

Learning Objective: 06-06 Perform multiproduct cost-volume-profit analysis and explain how the product or sales mix affects the analysis.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

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