Managerial Accounting: Chapter 5: Cost-Volume-Profit Relationships: Review Questions
To convert the formula for sales dollars required to attain a target profit to sales dollars required to break even, set the target profit to ______.
$0
ABC Inc. sells a product for $10 per unit. Variable costs are $4 per unit and total fixed costs equal $40,000. If sales increase from 10,000 units to 14,000 what will be the increase in overall profit? -$44,000 -$4,000 -$40,000 -$24,000
$24,000
Cakes by Jacki has $144,000 of fixed costs per year. The contribution margin ratio is 59%. The sales dollars to break-even rounded to the nearest dollar equals ______. -$228,960 -$351,220 -$244,068 -$203,040
$244,068
Shonda's Shoes sell for $95 per pair. If Shonda must sell 284 pairs of shoes to break-even, sales dollars needed to break-even equals ____________.
$26,980
A company's current profit is $25,000 for a product that sells for $100 and has a unit contribution margin of $65. Fixed costs are $40,000. If the company increases sales by 50 units, total profit will increase by ___________.
$3,250
Daisy's Dolls sold 30,000 dolls this year. Each doll sold for $40 and had a variable cost of $19. Fixed expenses were $250,000. Net operating income for the year is ______. -$630,000 -$1,520,000 -$380,000 -$(249,979)
$380,000
Shonda's Shoes sell for $95 per pair. If Shonda must sell a total of 284 pairs of shoes to break-even, and a total of 450 pairs to achieve her target profit, sales dollars needed to earn the target profit equals ______. -$69,730 -$42,750 -$26,980
$42,750
A company sells 500 sleds per month for $80. Variable costs are $41 per unit and fixed expenses are $3,500 per month. The company thinks that using a new material would increase sales by 70 units per month. If the new material increases variable costs by $4 per unit, the impact on contribution margin would be a ______. -$450 increase -$2,730 increase -$2,280 decrease -$2,450 increase
$450 increase
Budgeted sales are $982,000, break-even sales are $932,200, and fixed expenses are $429,000. The company's budgeted margin of safety in dollars is ______. -$503,200 -$(379,200) -$553,000 -$49,800
$49,800
A company needs to sell 90,000 units to reach the target profit of $180,000. If each unit sells for $7.50, the total sales dollars needed to reach the target profit is _________________.
$675,000
Seth's Speakers had actual sales of $1,630,000 If break-even sales equals $935,000, Seth's margin of safety in dollars is ______. -$2,565,000 -$1,630,000 -$695,000 -$935,000
$695,000
Company A has fixed costs of $564,000 and a contribution margin of 62%. Sales dollars to break-even rounded to the nearest whole dollar equals ______. -$920,211 -$564,000 -$1,484,211 -$909,677
$909,677
Vivian's Violins has sales of $326,000, contribution margin of $184,000, and fixed costs total $85,000. Vivian's Violins net operating income is ______. -$241,000 -$99,000 -$57,000
$99,000
Jump-It Corporation has a margin of safety of $272,000. The company sold 100,000 units this year. If the company sells each unit for $17, the margin of safety percentage is ______. -2.72% -6.25% -16% -14.3%
16%
Steel, Inc. has a margin of safety in dollars of $559,740. If actual sales were $2,946,000, Steel's margin of safety percentage is _________.
19%
JVL Enterprises has set a target profit of $126,000. The company sells a single product for $50 per unit. Variable costs are $15 per unit and fixed costs total $98,000. How many units does JVL have to sell to BREAK-EVEN? -6,400 -3,600 -2,800 -1,960
2,800
If sales increase by 5% and the degree of operating leverage is 4, net operating income should increase by ______. -1% -9% -20% -0.25%
20%
Spice sells paprika for $9.00 per bottle. Variable cost is $2.43 per bottle and Spice's annual fixed costs are $825,000. The variable expense ratio for paprika is ______. -27% -73% -54% -100%
27%
The Cutting Edge sells ice skates. Total sales are $845,000, total variable expenses are $245,050 and total fixed expenses are $302,000. The variable expense ratio is ______. -35% -29% -100% -71%
29%
Adams, Inc. has sales of $100,000 with a contribution margin of $60,000 and net income of $20,000. Baron, Inc. has sales of $110,000 with a contribution margin of $44,000 and net income of $22,000. Thus, the degree of operating leverage is ______ for Adams, Inc. and ______ for Baron, Inc.
3, 2
Given sales of $1,452,000, variable expenses of $958,320, and fixed expenses of $354,000, the contribution margin ratio is ______. -90% -66% -34% -24%
34%
Paula's Perfumes has a target profit of $4,000 per month. Perfume sells for $15.00 per bottle and variable costs are $13.50 per bottle. Fixed costs are $3,200 per month. The number of bottles that must be sold each month to earn the target profit is ______. -7,200 -4,800 -534 -267
4,800
Company A sells its product for $10 per unit. If Company A has variable expenses of $5 per unit and fixed expenses of $200,000, the break-even point in units and dollars is ______. -13,333 units and $133,330 -20,000 units and $200,000 -50,000 units and $500,000 -40,000 units and $400,000
40,000 units and $400,000
Gifts Galore had a sales revenue of $189,000. Total contribution margin was $100,170 and total fixed expenses were $27,500. The contribution margin ratio was ______. -47% -53% -68% -38%
53%
A company has a target profit of $204,000. The company's fixed costs are $305,000. The contribution margin per unit is $40. The BREAK-EVEN point in unit sales is ______. -7,625 -5,100 -12,725
7,625
Polly's Day Planners sells its planners for $35 each. Sales this year equals $927,500. The margin of safety is $27,300. The margin of safety in units is _________.
780
A company's selling price is $90 per unit, variable cost per unit is $28 and total fixed expenses are $320,000. The number of unit sales needed to earn a target profit of $200,800 is ______. -8,400 -18,600 -5,162 -5,787
8,400
Citrus Fruits sells oranges for $20 per crate. If the company's margin of safety is $180,000, the margin of safety in units is __________.
9,000
If sales increase by 15% and the degree of operating leverage is 6, net operating income should increase by ________.
90%
Barrons has an operating leverage of 4 and Wilkens has an operating leverage of 3. If sales decrease, the company that will experience the greatest drop in profits is _______________.
Barrons
Simple CVP analysis can be relied on for changes in volume outside the relevant range. -True -False
False
When a company sells multiple products, an increase in total sales always results in an increase in total profits. -True -False
False
Which of the following statements is correct? -The higher the margin of safety, the higher the risk of incurring a loss. -The risk of loss is not impacted by the margin of safety. -The higher the margin of safety, the lower the risk of incurring a loss.
The higher the margin of safety, the lower the risk of incurring a loss.
When a company produces and sells multiple products ______. -a change in the sales mix will most likely change the break-even point -each product most likely has a unique contribution margin -each product most likely has different costs -the sales mix has no effect on the company's profit
a change in the sales mix will most likely change the break-even point each product most likely has a unique contribution margin each product most likely has different costs
Cost behavior is considered linear whenever ______. -the difference between cost and activity is zero -a straight line approximates the difference between cost and activity -the relationship between cost and activity cannot be represented by a line -a straight line approximates the relationship between cost and activity
a straight line approximates the relationship between cost and activity
To analyze mixed costs with the high-low method, begin by identifying the periods with the lowest and highest level of ______. -both activity and cost -cost -activity
activity
To analyze mixed costs with the high-low method, begin by identifying the period with the lowest level of ______. -cost and the period with the lowest cost -activity and its related cost -cost and its related activity
activity and its related cost
Using the high-low method, the fixed cost is calculated ______. -after the variable cost per unit is calculated -using either the high or low level of activity -by adding the total cost to the variable cost
after the variable cost per unit is calculated using either the high or low level of activity
Solving for the sales level needed to achieve a profit of zero is the same process as solving for the sales level needed to ______. -reach a profit level of 100% of sales -break even -have sales equal fixed costs
break even
The sales volume level at which profits equal zero is the ______. -break-even point -target volume -contribution margin ratio -margin of safety
break-even point
Multiplying unit selling price times the number of units required to break-even is one way to calculate ______. -contribution margin -break-even sales dollars -operating leverage -net operating income
break-even sales dollars
Margin of safety in dollars is ______. -net income minus break-even sales -net income minus fixed costs -break-even sales minus budgeted (or actual) sales -budgeted (or actual) sales minus break-even sales
budgeted (or actual) sales minus break-even sales
The variable cost per unit using the high-low method is calculated as ______. -y = a + bX -change in units (activity) ÷ change in costs -change in cost ÷ change in units (activity) -total cost - total fixed cost
change in cost ÷ change in units (activity)
Using the contribution margin ratio, the impact on net income for a change in sales dollars is ______. -change in sales dollars × contribution margin ratio -change in total contribution margin × contribution margin ratio -variable expense per unit - contribution margin ratio -change in sales dollars per unit - contribution margin ratio
change in sales dollars × contribution margin ratio
When using the high-low method, if the high or low levels of cost do not match the high or low levels of activity, ______. -skip that period and move to the next highest or lowest level where costs and activity match -choose the periods with the highest and lowest levels of cost and their associated activities -choose the periods with the highest and lowest levels of activity and their associated costs
choose the periods with the highest and lowest levels of activity and their associated costs
A change in profits that occurs due to a change in sales and fixed expenses may be calculated as ______. -cm ratio × change in sales - change in fixed expenses -change in sales - change in fixed expenses -cm ratio × change in sales + change in fixed expenses
cm ratio × change in sales - change in fixed expenses
Costs are separated into variable and fixed categories when using the _____________________ approach.
contribution
The degree of operating leverage = ______. -gross margin ÷ net operating income -total sales ÷ net operating income -contribution margin ÷ net operating income -contribution margin ÷ total sales
contribution margin ÷ net operating income
The calculation of contribution margin (CM) ratio is ______. -contribution margin ÷ sales -net operating income ÷ total contribution margin -variable expenses ÷ contribution margin -contribution margin ÷ total expenses
contribution margin ÷ sales
CVP is the acronym for ______________________________.
cost-volume-profit
The break-even point calculation is affected by ______. -number of batches produced -costs per unit -sales mix -selling price per unit
costs per unit sales mix selling price per unit
Tasty Tangerine is currently selling 50,000 boxes for $25 per box. Variable cost per box is $17 and fixed costs total $260,000. A plan is being considered to spend $60,000 on advertising and reduce the selling price by $2 per box. Management believes this plan will increase sales volume by 24,000 boxes. If management's predictions are correct, making these changes will cause net income for the year to ______. -decrease by $104,000 -increase by $44,000 -increase by $132,000 -decrease by $16,000
decrease by $16,000
Company A produces and sells 10,000 units of its product for $10 per unit. Variable costs are $4 per unit and fixed costs total $30,000. A move to a larger facility would increase rent expenses by $8,000, and allow the company to meet its demand for an additional 1,000 units. If the move is made, profits will ______. -increase by $6,000 -decrease by $8,000 -increase by $10,000 -decrease by $2,000
decrease by $2,000
Sweet Dreams sells pillows for $25 each. Variable costs are $15 per pillow. The company is considering improving the quality of materials which will increase variable costs to $19. The company expects the improved materials will increase sales from 1,200 to 1,500 pillows per month. The impact of this change on total contribution margin would be a(n) _______________ of ____________.
decrease, $3,000
In a CVP graph, the vertical axis represents ______. -units -dollars
dollars
Estimating the fixed and variable components of a mixed cost using the _______________________ approach involves a detailed analysis of what cost behavior should be.
engineering
Target profit analysis ______. -estimates sales needed to earn a given profit -can only be done using the formula method -is similar to break-even analysis
estimates sales needed to earn a given profit is similar to break-even analysis
If two companies have the same total revenue and total expenses but different proportions of fixed and variable costs, then the company with the higher proportion of ______ costs will have higher operating leverage. -fixed -variable
fixed
In a least-squares regression line, the vertical intercept (a) of the line represents the total __________ cost.
fixed
To calculate the break-even point (in unit sales and dollar sales), managers can use the equation method or the ______________ method.
formula
A change in sales mix ______. -resulting in a decrease in total sales will always result in a decrease in profits -from high-margin to low-margin items may decrease profits despite an increase in sales -from low-margin to high-margin items may increase profits despite a decrease in sales -resulting in an increase in total sales will always result in an increase in profits
from high-margin to low-margin items may decrease profits despite an increase in sales from low-margin to high-margin items may increase profits despite a decrease in sales
Simple CVP analysis is ______. -only useful if assumptions are not violated -generally not valid outside the relevant range
generally not valid outside the relevant range
Goldin Corporation currently pays its salesperson a flat salary of $5,000 per month and is considering paying $20 per unit instead. Sales are currently 200 units per month. Goldin believes the compensation change will increase unit sales by 25%. The current contribution margin is $80 per unit. If the change is implemented, net operating income will ______. -decrease by $1,000 -decrease by $4,000 -increase by $4,000 -increase by $1,000
increase by $4,000
A company's current sales are $300,000 and fixed expenses total $85,000. The contribution margin ratio is 30%. The company has decided to expand production which is expected to increase sales by $70,000 and fixed expenses by $15,000. If these results occur, net operating income will ______. -decrease by $15,000 -increase by $6,000 -decrease by $27,000 -increase by $21,000
increase by $6,000
Bluin Corporation pays its salesperson a flat salary of $5,750 per month and is considering paying $30 per unit instead. Current unit sales are 250 per month, but Bluin believes the compensation change will increase unit sales by 50%. Bluin's current contribution margin is $100 per unit. If Bluin switches the compensation and sales grow as expected, net operating income will ______ per month. -decrease by $7,500 -increase by $1,250 -increase by $7,000 -decrease by $5,500
increase by $7,000
The best fitting line minimizes the sum of the squared errors when using ______. -least-square regression -scattergraph analysis -the high-low method
least-square regression
It makes sense to perform a high-low or regression analysis if a scattergraph plot reveals __________________ behavior.
linear cost
CM ratio = 1 ______ the Variable expense ratio. -minus -multiplied by -plus -divided by
minus
Operating leverage is a measure of how sensitive ______ is to a given percentage change in unit sales. -total gross margin -selling price per unit -total variable expense -net operating income
net operating income
A simpler form of the CVP graph is called the ________ graph.
profit
The single point where the total revenue line crosses the total expense line on the CVP graph indicates ______. -profit is less than zero -profit equals zero -profit is greater than zero -the break-even point
profit equals zero the break-even point
The vertical distance between the total revenue line and the total expense line on a CVP graph represents the total ______. -gross margin -profit or loss -units sold -contribution margin
profit or loss
Once all fixed expenses have been covered, the CM ratio defines the portion of each sales dollar contributing to ______. -profits -variable expenses
profits
The contribution margin as a percentage of sales is referred to as the contribution margin or CM __________.
ratio
The variable expense ratio is the ratio of variable expense to ______. -sales -fixed expense -the contribution margin -net operating income
sales
The relative proportions in which a company's products are sold is referred to as ___________________.
sales mix
The term used for the relative proportion in which a company's products are sold is ______. -break-even -operating leverage -sales mix -sales price
sales mix
When preparing a multi-product break-even analysis, the assumption is ordinarily made that the ______ will not change. -sales mix -total variable costs -units produced -units sold
sales mix
To convert the margin of safety in dollars to the margin of safety in terms of the number of units sold, divide the margin of safety in dollars by the ______. -break-even sales in dollars -budgeted (or actual) sales in dollars -contribution margin per unit -sales price per unit
sales price per unit
To simplify CVP calculations, it is assumed that ______ will remain constant. -selling price -total contribution margin -total variable cost -unit fixed cost
selling price
CVP analysis focuses on how profits are affected by ______. -selling price -break-even point -unit variable cost -mix of products sold -total fixed costs -sales volume
selling price unit variable cost mix of products sold total fixed costs sales volume
CVP analysis allows companies to easily identify the change in profit due to changes in ______. -selling price -location -management -volume -product mix
selling price volume product mix
Estimating the sales volume required to earn a given amount of net income is known as ___________________ analysis.
target profit
The rise-over-run formula for the slope of a straight line is the basis of ______. -the high-low method -a scattergraph -least squares regression
the high-low method
The profit graph allows users to easily identify ______. -the sales volume required to reach the break-even point -total expenses incurred at any given sales volume -the profit at any given sales volume
the sales volume required to reach the break-even point the profit at any given sales volume
The break-even point can be affected by ______. -total fixed cost -net operating income -sales mix -contribution margin per unit
total fixed cost sales mix contribution margin per unit
In a CVP graph, the horizontal axis represents ______. -unit sales -total costs -variable costs -sales dollars
unit sales
The contribution margin equals sales minus all ______ expenses. -product -variable -period -fixed
variable
When using the high-low method, the slope of the line equals the ______________ cost per unit of activity.
variable
When using the high low method, the change in cost divided by the change in units equals ______. -variable cost per unit -total variable cost -total fixed cost -fixed cost per unit -total cost
variable cost per unit
The equation that should be used in setting a target selling price for a special order bulk sale that does not affect a company's normal sales is: selling price per unit = ______. -contribution margin per unit + fixed cost per unit -variable cost per unit + desired profit per unit -variable cost per unit + fixed cost per unit
variable cost per unit + desired profit per unit
Variable expenses ÷ Sales is the calculation for the _________________________ ratio.
variable expense
Softie, Inc. produces facial tissues. The company's contribution margin ratio is 77%. Fixed expenses are $240,400. To achieve a target profit of $930,000, Softies' sales must be ______. -$5,088,695 -$1,170,400 -$1,242,408 -$1,520,000
$1,520,000
Adam's Sports Store sells an item with a contribution margin ratio of 55% and total fixed costs of $8,000. If Adam's generates additional sales of $25,000 for this item, net operating income will increase by ______. -$5,750 -$3,250 -$11,250 -$13,750
$13,750
Company A has fixed costs of $564,000 and has set a target profit of $800,000. If Company A has a contribution margin ratio of 62%, sales dollars needed to reach the target profit equals ______. -$3,000,000 -$913,880 -$1,364,000 -$2,200,000
$2,200,000
A company has an opportunity to make a bulk sale that would not impact regular sales or total fixed expenses. The variable cost per unit is $11 and the company desires a total profit of $4,500. The quoted selling price per unit for 500 units should be ________.
$20
Which tool can be used to easily calculate the change in profit resulting from a change in sales price, sales volume, variable costs, or fixed costs? -Fixed cost analysis -Variable expense ratio -CVP analysis -Return on investment
CVP analysis
Which of the following are assumptions of cost-volume-profit analysis? -Costs are linear and can be accurately divided into variable and fixed elements. -Fixed costs per unit stay the same within the relevant range. -Variable costs per unit increase over the relevant range of activity. -In multi product companies, the sales mix is constant.
Costs are linear and can be accurately divided into variable and fixed elements. In multi product companies, the sales mix is constant.
Account analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer's evaluation. -True -False
False
If operating leverage is low, a small percentage increase in unit sales can produce a much larger percentage increase in net operating income. -True -False
False
