Chapter 4: CVP

Pauley Company provides home health care. Pauley charges $35/hour for professional care. Variable costs are $21/hour and fixed costs are $78,000. Next year, Pauley expects to charge out 12,000 hours of home health care. Refer to Figure 4-2. What is the contribution margin per hour? a. $14 b. $56 c. $21 d. $6.50 e. $35

a. $14

Pauley Company provides home health care. Pauley charges $35/hour for professional care. Variable costs are $21/hour and fixed costs are $78,000. Next year, Pauley expects to charge out 12,000 hours of home health care. What is the break-even point in sales dollars? a. $195,000 b. $342,000 c. $130,000 d. $420,000 e. $252,000

a. $195,000 $78,000 / 0.40 = $195,000

Paney Company makes calendars. Information on cost per unit is as follows: Direct materials $1.50 Direct labor $1.20 Variable overhead $0.90 Variable marketing expense $0.40 Fixed marketing expense totaled $13,000 and fixed administrative expense totaled $35,000. The price per calendar is $10. What is the contribution margin per unit? a. $6.00 b. $5.00 c. $6.40 d. $5.40 e. $6.30

a. $6.00 10 − $4 = $6

How many units would have to be sold to yield a target operating income of $22,000, assuming variable costs are $15 per unit, total fixed costs are $2,000, and the unit selling price is $20? a. 4,800 units b. 4,400 units c. 4,000 units d. 3,600 units

a. 4,800 units ($2,000 + $22,000) / ($20 - $15) = 4,800 units

Pauley Company provides home health care. Pauley charges $35/hour for professional care. Variable costs are $21/hour and fixed costs are $78,000. Next year, Pauley expects to charge out 12,000 hours of home health care. Refer to Figure 4-2. What is the variable cost ratio? a. 60% b. 50% c. 67% d. 40% e. 33%

a. 60%

Managers can use CVP analysis to handle risk and uncertainty. a. True b. False

a. True

The difference between total revenues and total variable costs is called contribution margin. a. True b. False

a. True

The margin of safety in dollars is a. expected sales minus sales at break-even. b. expected sales minus expected profit. c. expected costs minus costs at break-even. d. expected profit minus actual profit. e. costs at break-even minus expected profit.

a. expected sales minus sales at break-even.

If fixed costs increase, the break-even point in units will a. increase. b. remain the same. c. decrease. d. remain the same; however, contribution per unit will decrease.

a. increase.

Sales can decline by how much before losses are incurred? a. margin of safety b. sales ratio c. variable cost ratio d. common fixed costs e. contribution margin ratio

a. margin of safety

The contribution margin is a. the difference between sales and variable costs. b. the difference between operating income and margin of safety. c. when total sales equals total costs. d. equal to sales. e. the difference between target income and operating income.

a. the difference between sales and variable costs.

If actual sales equal break-even sales a. the margin of safety equals zero. b. the margin of safety is negative. c. the margin of safety is positive. d. the margin of safety is negative or positive. e. it is impossible to say anything about the margin of safety.

a. the margin of safety equals zero.

Nancy's Niche sells a single product. 8,000 units were sold resulting in $80,000 of sales revenue, $20,000 of variable costs, and $10,000 of fixed costs. The breakeven point in total sales dollars is: a. $40,000 b. $13,334 c. $100,000 d. None of these answers are correct.

b. $13,334 $10,000 / 0.75 = $13,334 (rounded up)

Kenefic Company sells its only product for $9 per unit, variable production costs are $3 per unit, and selling and administrative costs are $1.50 per unit. Fixed costs for 10,000 units are $5,000. The contribution margin is: a. $6 per unit b. $4.50 per unit c. $5.50 per unit d. $4 per unit

b. $4.50 per unit

Melody Company sells a product for $14, variable costs are $10 per unit, and total fixed costs are $5,040. If Melody wants to earn an operating profit of $880, how many units must it sell? a. 247 b. 1,480 c. 1,040 d. 1,260 e. 62

b. 1,480 ($5,040 + $880) / ($14 − $10) = 1,480

A company provided the following data: Selling price per unit $60 Variable cost per unit $40 Total fixed costs $400,000 What is the break-even point in units? a. 13,333 b. 20,000 c. 6,667 d. 10,000 e. 12,000

b. 20,000 400,000 / ($60 per unit − $40 per unit) = 20,000 units

Foster Company makes power tools. The budgeted sales are $420,000, budgeted variable costs are $147,000, and budgeted fixed costs are $227,500. Refer to Figure 4-1. What is the variable cost ratio? a. 54% b. 35% c. 50% d. 19% e. 89%

b. 35%

If the break-even point increases, the margin of safety increases. a. True b. False

b. False

If variable costs per unit increase, then the breakeven point will decrease. a. True b. False

b. False

Most firms would like to earn operating income equal to the break-even point. a. True b. False

b. False

Total revenues less total fixed costs equal the contribution margin. a. True b. False

b. False

The cost-volume-profit graph a. plots three separate lines. b. plots the total revenue line and the total cost line. c. measures the vertical axis in units sold and the horizontal axis in dollars. d. All of these are correct.

b. plots the total revenue line and the total cost line.

A profit-volume graph visually portrays the relationship between a. total sales and fixed cost. b. profits and units sold. c. total sales and margin of safety. d. total sales and variable costs. e. profits and degree of operating leverage.

b. profits and units sold.

A "what-if" technique that examines the impact of changes in underlying assumptions on a result is a. sales mix. b. sensitivity analysis. c. cost structure. d. margin of safety. e. indifference point.

b. sensitivity analysis.

Operating leverage is a. the difference between sales and variable expense. b. the use of fixed costs to extract higher percentage changes in profits as sales activity changes. c. the portion of each sales dollar available to cover fixed costs and provide for profit. d. visually portrays the relationship between profits and units sold.

b. the use of fixed costs to extract higher percentage changes in profits as sales activity changes.

The breakeven point decreases if: a. the variable cost per unit increases b. total fixed costs decrease c. the contribution margin per unit decreases d. the selling price per unit decreases

b. total fixed costs decrease

Paney Company makes calendars. Information on cost per unit is as follows: Direct materials $1.50 Direct labor $1.20 Variable overhead $0.90 Variable marketing expense $0.40 Fixed marketing expense totaled $13,000 and fixed administrative expense totaled $35,000. The price per calendar is $10. What is the break-even point in sales dollars? a. $21,670 b. $120,000 c. $80,000 d. $58,330 e. $28,000

c. $80,000 Rationale: break-even sales = 8,000 × $10 = $80,000 OR ($13,000 + $35,000) / 60% = $80,000

Stepford Company makes dolls. The price is $10 and the variable expense per unit is $6. What is the contribution margin ratio? a. 55% b. 62.5% c. 40% d. 37.5% e. 60%

c. 40% ($10 − $6) / $10 = 40%

Paney Company makes calendars. Information on cost per unit is as follows: Direct materials $1.50 Direct labor $1.20 Variable overhead $0.90 Variable marketing expense $0.40 Fixed marketing expense totaled $13,000 and fixed administrative expense totaled $35,000. The price per calendar is $10. What is the contribution margin ratio? a. 50% b. 40% c. 60% d. 36% e. 44%

c. 60%

Which of the following can be considered a measure of risk in cost-volume-profit analysis? a. break-even point b. sales mix c. margin of safety d. contribution margin

c. margin of safety

Foster Company makes power tools. The budgeted sales are $420,000, budgeted variable costs are $147,000, and budgeted fixed costs are $227,500. What is the break-even point in sales dollars? a. $567,000 b. $420,000 c. $650,000 d. $350,000 e. $780,000

d. $350,000 $227,500 / 0.65 = $350,000

Melody Company sells a product for $14, variable costs are $10 per unit, and total fixed costs are $5,040. What is the per unit contribution margin? a. $14 b. $24 c. $10 d. $4

d. $4

Rachel Company sells office chairs at $350 each, incurs variable cost per unit of $100, and has a total fixed expense of $30,000. How many units must be sold to achieve a target operating income of $55,000? a. 200 b. 275 c. 450 d. 340 e. 180

d. 340 Units = ($30,000 + $55,000) / ($350 − 100) = 340 units

A company provided the following data: Sales $540,000 Variable costs 378,000 Fixed costs 120,000 Expected production and sales in units 40,000 units What is the break-even point in sales dollars? a. $112,500 b. $171,429 c. $150,000 d. $498,000 e. $400,000

e. $400,000 Contribution margin ratio = ($540,000 − $378,000) / $540,000 = 30% ​ Break-even point = $120,000 / 30% = $400,000

Degree of operating leverage is calculated as a. Fixed costs / Variable costs b. Operating income / Contribution margin c. Variable costs / Sales d. Total sales / Common fixed costs e. Contribution margin / Operating income

e. Contribution margin / Operating income

The break-even point is when a. the company is operating at a loss. b. total sales equal variable costs. c. total sales equals operating income. d. the company is earning a small profit. e. total revenue equals total cost.

e. total revenue equals total cost.

Head-First Company manufactures and sells bicycle helmets. Its financial information is.... Selling price per helmet $107 Direct Materials per helmet $37 Direct Labor per helmet $8 Variable factory overhead per helmet $4 Fixed factory overhead $18,129 Variable selling expense (sales commission) per helmet $1 Fixed selling & administrative expenses $27,855 Targeted Operating Income $102,829 What is the contribution margin ratio?

.5327 (Selling Price per unit - All Variable Costs per unit) / Selling Price per unit.

Head-First Company manufactures and sells bicycle helmets. Its financial information is.... Selling price per helmet $103 Direct Materials per helmet $26 Direct Labor per helmet $6 Variable factory overhead per helmet $3 Fixed factory overhead $15,150 Variable selling expense (sales commission) per helmet $2 Fixed selling & administrative expenses $28,204 Targeted Operating Income $125,713 What is the contribution margin ratio?

.6408 (Selling Price per unit - All Variable Costs per unit) / Selling Price per unit.

Head-First Company manufactures and sells bicycle helmets. Its financial information is.... Selling price per helmet $104 Direct Materials per helmet $30 Direct Labor per helmet $7 Variable factory overhead per helmet $5 Fixed factory overhead $15,199 Variable selling expense (sales commission) per helmet $4 Fixed selling & administrative expenses $29,559 Targeted Operating Income $127,713 What is the contribution margin ratio?

0.5577 (Selling Price per unit - All Variable Costs per unit) / Selling Price per unit.

Head-First Company manufactures and sells bicycle helmets. Its financial information is.... Selling price per helmet $116 Direct Materials per helmet $34 Direct Labor per helmet $6 Variable factory overhead per helmet $4 Fixed factory overhead $17,554 Variable selling expense (sales commission) per helmet $3 Fixed selling & administrative expenses $26,946 Targeted Operating Income $103,199 What is the total variable cost per unit?

47 Direct Materials + Direct Labor + Variable factory overhead + variable selling expenses.

Head-First Company manufactures and sells bicycle helmets. Its financial information is.... Selling price per helmet $115 Direct Materials per helmet $37 Direct Labor per helmet $8 Variable factory overhead per helmet $3 Fixed factory overhead $15,524 Variable selling expense (sales commission) per helmet $2 Fixed selling & administrative expenses $25,434 Targeted Operating Income $100,859 What is the total variable cost per unit?

50 Direct Materials + Direct Labor + Variable factory overhead + variable selling expenses.

Head-First Company manufactures and sells bicycle helmets. Its financial information is.... Selling price per helmet $111 Direct Materials per helmet $36 Direct Labor per helmet $11 Variable factory overhead per helmet $4 Fixed factory overhead $15,267 Variable selling expense (sales commission) per helmet $2 Fixed selling & administrative expenses $34,300 Targeted Operating Income $102,867 What is the contribution margin per unit?

58 Selling Price per unit - All Variable Costs per unit.

Head-First Company manufactures and sells bicycle helmets. Its financial information is.... Selling price per helmet $105 Direct Materials per helmet $30 Direct Labor per helmet $6 Variable factory overhead per helmet $5 Fixed factory overhead $18,669 Variable selling expense (sales commission) per helmet $4 Fixed selling & administrative expenses $25,527 Targeted Operating Income $131,808 What is the contribution margin per unit?

60 Selling Price per unit - All Variable Costs per unit.

Head-First Company manufactures and sells bicycle helmets. Its financial information is.... Selling price per helmet $108 Direct Materials per helmet $30 Direct Labor per helmet $7 Variable factory overhead per helmet $5 Fixed factory overhead $15,533 Variable selling expense (sales commission) per helmet $4 Fixed selling & administrative expenses $25,270 Targeted Operating Income $116,337 What is the sales revenue that Head-First must earn to break-even?

71,076 Total Fixed Costs / (Contribution Margin Ratio)

Head-First Company manufactures and sells bicycle helmets. Its financial information is.... Selling price per helmet $114 Direct Materials per helmet $32 Direct Labor per helmet $11 Variable factory overhead per helmet $5 Fixed factory overhead $18,717 Variable selling expense (sales commission) per helmet $1 Fixed selling & administrative expenses $32,420 Targeted Operating Income $124,892 What is the sales revenue that Head-First must earn to break-even?

89,686 Total Fixed Costs / (Contribution Margin Ratio) (18,717+32,420)/((114-49)/114)

Stephanie's Bridal Shoppe sells wedding dresses. The average selling price of each dress is $1,000, variable costs are $400, and fixed costs are $90,000. What is the Bridal Shoppe's operating income when 200 dresses are sold? a. $30,000 b. $80,000 c. $200,000 d. $100,000

a. $30,000 200($1,000) - 200($400) - $90,000 = $30,000

Which is the equation for operating income? a. (Price × Units sold) − (Unit variable cost × Units sold) − Fixed cost b. (Price − Units sold) + (Unit variable cost − Units sold) + Fixed cost c. (Price × Units sold) + (Unit variable cost × Units sold) − Fixed cost d. (Price × Units sold) + (Unit variable cost × Units sold) + Fixed cost e. (Price + Units sold) − (Unit variable cost + Units sold) − Fixed cost

a. (Price × Units sold) − (Unit variable cost × Units sold) − Fixed cost

Paney Company makes calendars. Information on cost per unit is as follows: Direct materials $1.50 Direct labor $1.20 Variable overhead $0.90 Variable marketing expense $0.40 Fixed marketing expense totaled $13,000 and fixed administrative expense totaled $35,000. The price per calendar is $10. How many units must be sold to yield targeted income of $36,000? a. 14,000 b. 8,167 c. 6,000 d. 5,833 e. 12,000

a. 14,000 Rationale: ($13,000 + $35,000 + $36,000) / $6 = 14,000

Pauley Company provides home health care. Pauley charges $35/hour for professional care. Variable costs are $21/hour and fixed costs are $78,000. Next year, Pauley expects to charge out 12,000 hours of home health care. What is the contribution margin ratio? a. 40% b. 50% c. 67% d. 33% e. 60%

a. 40% 100% − 60% = 40% or $14 / $35 = 40%

Bush Manufacturing produces a single product that sells for $100. Variable costs per unit equal $25. The company expects total fixed costs to be $60,000 for the next month at the projected sales level of 1,000 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. What is the current breakeven point in terms of number of units? a. 800 units b. 900 units c. 2,400 units d. None of these answers are correct.

a. 800 units $60,000/($100-$25)

Companies with a greater proportion of fixed costs have a greater risk of loss than companies with a greater proportion of variable costs. a. True b. False

a. True

If the selling price per unit of a product is $30, variable costs per unit are $20, and total fixed costs are $10,000 and a company sells 5,000 units, operating income would be $40,000. a. True b. False

a. True

If variable expenses decrease and the price increases, the break-even point decreases. a. True b. False

a. True

The break-even point is where total sales revenue equals total cost. a. True b. False

a. True

The contribution margin income statement provides a good check to determine if the sale of a certain number of units really results in operating income of the given amount. a. True b. False

a. True

The contribution margin ratio can be calculated by subtracting the variable cost ratio from one. a. True b. False

a. True

The cost-volume profit graph depicts the relationships among cost, volume, and profits, by plotting the total revenue line and the total cost line on the graph. a. True b. False

a. True

The impact on a firm's income resulting from a change in the number of units sold can be assessed by multiplying the unit contribution margin by the change in units sold assuming that fixed costs remain the same. a. True b. False

a. True

The margin of safety measures the units sold or the revenue earned above the break-even volume. a. True b. False

a. True

The profit-volume graph shows the relationship between operating income and the number of units sold. a. True b. False

a. True

The profit-volume graph shows the relationship between profits and units sold. a. True b. False

a. True

If variable costs per unit decrease, sales volume at the break-even point will a. decrease. b. increase. c. double. d. stay constant.

a. decrease.

Which of the following will increase a company's breakeven point? a. increasing variable cost per unit b. increasing contribution margin per unit c. reducing its total fixed costs d. increasing the selling price per unit

a. increasing variable cost per unit

Paney Company makes calendars. Information on cost per unit is as follows: Direct materials $1.50 Direct labor $1.20 Variable overhead $0.90 Variable marketing expense $0.40 Fixed marketing expense totaled $13,000 and fixed administrative expense totaled $35,000. The price per calendar is $10. What is the break-even point in units? a. 2,800 b. 8,000 c. 12,000 d. 2,167 e. 5,833

b. 8,000 ($13,000 + $35,000) / $6 = 8,000

A company with a low degree of operating leverage is at greater risk during downturns in the economy. a. True b. False

b. False A company with a low degree of operating leverage is at lesser risk during downturns in the economy.

The margin of safety is the difference between: a. budgeted expenses and breakeven expenses b. budgeted revenues and breakeven revenues c. actual operating income and budgeted operating income d. actual contribution margin and budgeted contribution margin

b. budgeted revenues and breakeven revenues

Pauley Company provides home health care. Pauley charges $35/hour for professional care. Variable costs are $21/hour and fixed costs are $78,000. Next year, Pauley expects to charge out 12,000 hours of home health care. Refer to Figure 4-2. What is the budgeted operating income? a. $174,000 b. $342,000 c. $90,000 d. $168,000 e. $420,000

c. $90,000

Contribution margin equals: a. revenues minus period costs b. revenues minus product costs c. revenues minus variable costs d. revenues minus fixed costs

c. revenues minus variable costs

Paney Company makes calendars. Information on cost per unit is as follows: Direct materials $1.50 Direct labor $1.20 Variable overhead $0.90 Variable marketing expense $0.40 Fixed marketing expense totaled $13,000 and fixed administrative expense totaled $35,000. The price per calendar is $10. What is the variable cost per unit? a. $3.70 b. $5.00 c. $1.30 d. $4.00 e. $4.60

d. $4.00 $1.50 + $1.20 + $0.90 + $0.40 = $4.00

Sales (10,000 units) $120,000 Variable expenses $72,000 Contribution margin$ 48,000 Fixed expenses $36,000 Operating income $ 12,000 What is the contribution margin per unit? a. $1.20 b. $120,000 c. $7.20 d. $4.80

d. $4.80 $48,000 / 10,000 = $4.80

Melody Company sells a product for $14, variable costs are $10 per unit, and total fixed costs are $5,040. What is the break-even point in units? a. 210 b. 504 c. 640 d. 1,260 e. 360

d. 1,260

A company provided the following data: Selling price per unit $60 Variable cost per unit 40 Total fixed costs 400,000 Refer to Figure 4-7. How many units must be sold to earn a profit of $40,000? a. 8,500 b. 20,000 c. 23,333 d. 22,000 e. 2,000

d. 22,000 ($400,000 + $40,000) / ($60 per unit − $40 per unit) = 22,000 units

Nancy's Niche sells a single product. 8,000 units were sold resulting in $80,000 of sales revenue, $20,000 of variable costs, and $10,000 of fixed costs. The contribution margin percentage is: a. 12.5% b. 25.0% c. 37.5% d. 75.0%

d. 75.0% ($80,000 - $20,000) / $80,000 = 75%

To determine contribution margin use: a. only variable manufacturing costs b. only fixed manufacturing costs c. both variable and fixed manufacturing costs d. both variable manufacturing costs and variable nonmanufacturing costs

d. both variable manufacturing costs and variable nonmanufacturing costs

If the selling price per unit increases, the break-even point in units will a. increase. b. remain the same. c. remain the same; however, contribution per unit will decrease. d. decrease.

d. decrease.

The contribution income statement highlights: a. gross margin b. products costs and period costs c. different product lines d. variable and fixed costs

d. variable and fixed costs