Cost Accounting - Chapter 16 - CVP Analysis

How would the following be used in calculating the number of units that must be sold to earn a targeted operating income? Price per Unit Targeted Operating Income a. Denominator Numerator b. Numerator Numerator c. Not used Denominator d. Numerator Denominator

a. Denominator Numerator

_____ is the use of fixed costs to extract higher percentage changes in profits as sales activity changes. a. Operating leverage b. Margin of safety c. Financial leverage d. Contribution margin

a. Operating leverage

Which of the following statements is TRUE in a cost-volume-profit graph? a. The slope of the total cost line is dependent on the variable cost per unit. b. The total revenue line typically begins above zero. c. The total cost line normally begins at zero. d. The slope of the total revenue line is the contribution margin per unit.

a. The slope of the total cost line is dependent on the variable cost per unit.

Cost of factory landscaping is an example of a: a. common fixed expense. b. variable expense. c. direct fixed expense. d. traceable expense.

a. common fixed expense. Common fixed expenses are the fixed costs that are not traceable to the segments and that would remain even if one of the segments was eliminated. Corporate headquarters costs are common fixed expenses, as are the costs of the factory manager and factory landscaping.

A profit-volume graph is a graph of the _____. a. operating income equation b. total cost equation c. contribution margin equation d. net income equation

a. operating income equation A profit-volume graph portrays the relationship between profits and sales volume.

Using cost-volume-profit analysis, we can conclude that a 20 percent reduction in variable costs will a. reduce the slope of the total cost line by 20 percent. b. reduce total costs by 20 percent. c. reduce the break-even sales volume by 20 percent. d. not affect the break-even sales volume if there is an offsetting 20 percent increase in fixed costs.

a. reduce the slope of the total cost line by 20 percent.

degree of operating leverage

an approach to CVP analysis that uses sales revenue to measure sales activity. Variable costs and contribution margin are expressed as percentages of sales revenue.

Consider the following information for Cobalt Company: Total fixed costs - $150,000 Unit selling price - $50 Cost Driver - Units sold Unit Variable Cost - $30 Level of Cost Driver - - Cost Driver - Setups Unit Variable Cost - $1,200 Level of Cost Driver - 25 Cost Driver - Engineering hours Unit Variable Cost - $40 Level of Cost Driver - 1,100 Using the activity-based costing (ABC) equation, the units that must be sold to earn an operating income of $25,000 are: a. 12,640 units. b. 12,450 units. c. 12,750 units. d. 12,540 units.

b. 12,450 units. The total fixed cost pool under conventional costing consists of non-unit-based variable costs plus costs that are fixed regardless of the cost driver. ABC breaks out the non-unit-based variable costs. As long as the levels of activity for the non-unit-based cost drivers remain the same, then the results for the conventional and ABC computations will also be the same.

Which of the following is true of a firm that has adopted just-in-time? a. Its variable cost per unit sold increases and fixed costs decrease. b. Its variable cost per unit sold decreases and fixed costs increase. c. Its contribution margin per unit sold and profits decrease. d. Its contribution margin per unit sold decreases and profits increase.

b. Its variable cost per unit sold decreases and fixed costs increase. If a firm has adopted JIT, direct labor is viewed as a fixed cost instead of a variable cost.

Which of the following refers to the relative combination of products being sold by a firm? a. Margin of safety b. Sales mix c. Contribution margin d. Break-even sales

b. Sales mix

Which of the following assumptions does NOT pertain to cost-volume-profit analysis? a. The units produced will equal the units sold. b. Sales mix may vary during the related period. c. Inventories are constant. d. All costs are classified as fixed or variable.

b. Sales mix may vary during the related period.

Which of the following statements is true of risk in a cost-volume-profit (CVP) analysis? a. Managers do not consider risk while making a short-term decision. b. With risk, the probability distributions of the variable are known. c. Managers do not consider risk while making a long-term decision. d. With risk, the probability distributions are unknown.

b. With risk, the probability distributions of the variable are known. An important assumption of CVP analysis is that prices and costs are known with certainty, which is seldom the case.

The proportion of each sales dollar available to cover fixed costs and provide for profit is the: a. variable cost ratio. b. contribution margin ratio. c. sales mix. d. net income.

b. contribution margin ratio.

Assuming all other things are the same, if there was an increase in the break-even point, contribution margin per unit must have: a. remained the same b. decreased c. increased first, then decreased d. increased

b. decreased

In the cost-volume-profit analysis, income taxes a. increase the sales volume required to break even. b. increase the sales volume required to earn a desired profit. c. are treated as a variable cost. d. are treated as a fixed cost.

b. increase the sales volume required to earn a desired profit.

The term _____ is used to mean operating income minus income taxes. a. gross income b. net income c. contribution margin d. investment income

b. net income

The term relevant range, as used in cost accounting, means the range a. over which costs may fluctuate b. over which cost relationships are valid c. of probable production d. over which production has occurred in the past 10 years

b. over which cost relationships are valid

The relative combination of products being sold by a firm is referred to as its: a. sales lead. b. sales mix. c. sales draft. d. sales variance.

b. sales mix.

The margin of safety is a. the number of units that need to be sold to achieve a profit target. b. the amount of units expected to be sold above the break-even level. c. the sales dollars needed to cover fixed costs. d. the use of fixed costs to extract higher percentage changes in profits as sales volume changes.

b. the amount of units expected to be sold above the break-even level.

Bryan Company's break-even point is 8,500 units. Variable cost per unit is $140, and total fixed costs are $297,500 per year. What price does Bryan charge? a. $140 b. $35 c. $175 d. cannot be determined from the above data

c. $175

Information concerning Korian Corporation's product is as follows: Sales - $300,000 Variable costs - 240,000 Fixed costs - 40,000 Assuming that Korian increased sales of the product by 20 percent, what should the operating income be? a. $20,000 b. $24,000 c. $32,000 d. $80,000

c. $32,000

Consider the following information for Burgundy Company: Operating income - $50,000 Tax rate - 30% Based on the given information, Burgundy's net income will be: a. $40,000. b. $30,000. c. $35,000. d. $45,000.

c. $35,000.

Consider the following information available for Barium Company: Total fixed costs - $1,440,000 Contribution margin ratio - 0.30 Based on the given information, calculate the sales revenue needed to achieve a target profit of $360,000. a. $6,250,000 b. $5,000,000 c. $6,000,000 d. $5,750,000

c. $6,000,000 Target sales revenue = (Total fixed cost + Target profit) / Contribution margin ratio = ($1,440,000 + $360,000) / 0.30 = $6,000,000

Unique Company has provided the following information: Product A Price - $300 Unit Variable Cost - $180 Unit Contribution Margin - $120 Sales Mix - 4 Product B Price - $500 Unit Variable Cost - $250 Unit Contribution Margin - $250 Sales Mix - 1 Based on the given information, calculate the package contribution margin for Unique Company. a. $480 b. $500 c. $730 d. $400

c. $730 Unit Contribution Margin x Sales Mix Product A - $480 Found by multiplying the number of units in the package (4) by the unit contribution margin $120 Product B - $250 Found by multiplying the number of units in the package (1) by the unit contribution margin $250 $480 + 250 = $730

Which of the following equations is TRUE? a. Contribution margin ratio = Contribution margin/Variable costs b. Contribution margin = Fixed costs c. Contribution margin ratio = 1 − Variable cost ratio d. Contribution margin = Sales revenue × Variable cost ratio

c. Contribution margin ratio = 1 − Variable cost ratio

Which of the following is the formula to calculate net income? a. Net income = Operating income (1 + Tax rate) b. Net income = Operating income + Tax rate c. Net income = Operating income (1 - Tax rate) d. Net income = Operating income - Tax rate

c. Net income = Operating income (1 - Tax rate)

Assuming all other things are the same, if there was a decrease in the break-even point, selling price per unit must have: a. decreased b. remained the same c. increased d. increased first, then decreased

c. increased

In a cost-volume-profit (CVP) analysis, the cost and price relationships are assumed to be known and constant: a. when the sales mix is variable. b. when what is produced is sold. c. once a relevant range has been identified. d. when efficiency of operations change.

c. once a relevant range has been identified.

When a company sells more units than the break-even point, a. it moves above the relevant range. b. profits are negative. c. profits are positive. d. there are no new variable costs incurred.

c. profits are positive.

On a profit-volume graph, the profit line intersects the horizontal axis at a. a volume of 1,000 units. b. a point where profit is greater than zero. c. the break-even point. d. the origin.

c. the break-even point.

In multiple-product analysis, direct fixed costs are a. fixed costs that are not traceable to the segments and would remain even if one of the segments were eliminated. b. fixed costs which can be traced to each segment and would remain even if one of the segments were eliminated. c. the fixed costs which can be traced to each segment and would be avoided if the segment did not exist. d. fixed costs that are not traceable to the segments and would be avoided if the segment did not exist.

c. the fixed costs which can be traced to each segment and would be avoided if the segment did not exist.

In a cost-volume-profit graph, the total revenue line rises with a slope equal to a. the variable cost per unit. b. the contribution margin. c. the selling price. d. None of these choices are correct.

c. the selling price.

Total contribution margin is calculated by subtracting a. cost of goods sold from total revenues. b. total manufacturing costs from total revenues. c. total variable costs from total revenues. d. fixed costs from total revenues.

c. total variable costs from total revenues.

cost-volume-profit (CVP) graph

contribution margin divided by sales revenue. It is the proportion of each sales dollar available to cover fixed costs and provide for profit.

The following data is available for Radium Company: Total fixed costs - $150,000 Variable cost per unit - $12 Selling price per unit - $20 Units sold - 30,000 Based on the given data, calculate Radium's operating income. a. $102,000 b. $115,000 c. $85,000 d. $90,000

d. $90,000 Operating Income = (Selling price per unit × Units sold) - (Variable cost per unit × Units sold) - Total fixed costs = ($20 × 30,000 units) - ($12 × 30,000 units) - $150,000 = $90,000

Which of the following formulas is used to calculate break-even point in units? a. Break-even point in units = Sales / Fixed costs b. Break-even point in units = Total costs / Unit contribution margin c. Break-even point in units = Sales / Unit variable cost d. Break-even point in units = Total fixed costs / (Price − Unit variable cost)

d. Break-even point in units = Total fixed costs / (Price − Unit variable cost)

Which of the following assumptions does NOT pertain to cost-profit-volume analysis? a. Sales price per unit remains constant. b. Fixed expenses are constant at all volumes of activities within the relevant range. c. The sales mix is constant. d. Inventories in a manufacturing entity may go up or down.

d. Inventories in a manufacturing entity may go up or down.

Which of the following formulas is used to compute operating income? a. Operating income = Sales revenues − Depreciation expenses − Fixed expenses b. Operating income = Sales revenues + Fixed expenses − Target profit c. Operating income = Sales revenues − Tangible expenses − Target profit d. Operating income = Sales revenues − Variable expenses − Fixed expenses

d. Operating income = Sales revenues − Variable expenses − Fixed expenses

Cost-volume-profit analysis includes some simplifying assumptions. Which of the following is not one of these assumptions? a. Cost and revenues are predictable. b. Cost and revenues are linear over the relevant range. c. Changes in beginning and ending inventory levels are insignificant in amount. d. Sales mix changes are irrelevant.

d. Sales mix changes are irrelevant.

Which of the following statements is true of the break-even point? a. When calculating the break-even point, fixed costs play no role. b. When calculating the break-even point, contribution margin plays no role. c. When calculating the break-even point, variable costs play no role. d. When calculating the break-even point, income taxes play no role.

d. When calculating the break-even point, income taxes play no role.

Assuming all other things are equal, if there was a decrease in the break-even point, fixed costs must have: a. remained the same b. increased c. increased first, then decreased d. decreased

d. decreased

In a profit-volume graph, the slope of the profit line represents a. the variable cost per unit. b. the selling price per unit. c. total contribution margin. d. the contribution margin per unit.

d. the contribution margin per unit.

Which of the following is NOT a use of CVP (Cost-Volume-Profit) analysis? a. the ability to conduct sensitivity analysis of cost or price changes b. how many units must be sold to break even c. what is the impact on the break-even point of an increase or decrease in fixed costs d. the identification of price and efficiency variances

d. the identification of price and efficiency variances

The results for conventional and activity-based costing (ABC) computations will be the same as long as: a. fixed costs remain constant at any level of activity. b. fixed costs decrease as the level of activity increases. c. the levels of activity for non-unit based cost drivers increase. d. the levels of activity for non-unit based cost drivers remain the same.

d. the levels of activity for non-unit based cost drivers remain the same. The ABC equation for cost-volume-profit (CVP) analysis is a richer representation of the underlying cost behavior compared to conventional CVP analysis and can provide important strategic insights.

margin of safety

fixed costs that are not traceable to the segments and that would remain even if one of the segments were eliminated

direct fixed expenses

fixed costs that can be traced to each segment and would be avoided if the segment did not exist

common fixed expenses

operating income less taxes, interest expense, and research and development expense

contribution margin

the difference between revenue and all variable expenses

break-even point

the point where total sales revenue equals total costs (i.e., the point of zero profits)

net income

the relative combination of products (or services) being sold by an organization

sales mix

the units sold or expected to be sold or sales revenue earned or expected to be earned above the break-even volume

sales-revenue approach

the use of fixed costs to extract higher percentage changes in profits as sales activity changes. Leverage is achieved by increasing fixed costs while lowering variable costs.

contribution margin ratio

variable costs divided by sales revenue. It is the proportion of each sales dollar needed to cover variable costs.

profit-volume graph

a graph that depicts the relationships among costs, volume, and profits. It consists of a total revenue line and a total cost line.

operating leverage

a graphical portrayal of the relationship between profits and sales activity

sensitivity analysis

a measure of the sensitivity of profit changes to changes in sales volume. It measures the percentage change in profits resulting from a percentage change in sales.

The following data apply to McNally Company for last year: Total variable costs per unit - $3.50 Contribution margin / Sales - 30% Break-even sales (present volume) - $1,000,000 McNally wants to sell an additional 50,000 units at the same selling price and contribution margin. By how much can fixed costs increase to generate additional profit equal to 10 percent of the sales value of the additional 50,000 units to be sold? a. $50,000 b. $57,500 c. $67,500 d. $125,000

a. $50,000

Compute the degree of operating leverage for Magenta Company from the following information. (Round answer to one decimal place.) Sales - $500,000 Variable Expenses - $200,000 Fixed expenses - $100,000 a. 1.5 b. 1.6 c. 1.2 d. 1.3

a. 1.5 Degree of operating leverage = Total contribution margin / Profit = (Sales - Variable expenses) / (Sales - Variable expenses - Fixed expenses) = ($500,000 - $200,000) / ($500,000 - $200,000 - $100,000) = $300,000 / $200,000 = 1.5

variable cost ratio

a "what-if" technique that examines altering certain key variables to assess the effect on the original outcome