Break-Even Point and Cost-Volume-Profit Analysis

MULTIPLE CHOICE

            1.         CVP analysis requires costs to be categorized as

a. either fixed or variable.
b. fixed, mixed, or variable.
c. product or period.
d. standard or actual.

ANS:  A

            2.         With respect to fixed costs, CVP analysis assumes total fixed costs
a. per unit remain constant as volume changes.
b. remain constant from one period to the next.
c. vary directly with volume.
d. remain constant across changes in volume.

ANS:  D

            3.         CVP analysis relies on the assumptions that costs are either strictly fixed or strictly
variable. Consistent with these assumptions, as volume decreases total
a. fixed costs decrease.
b. variable costs remain constant.
c. costs decrease.
d. costs remain constant.

ANS:  C

            4.         CVP analysis is based on concepts from

a. standard costing.
b. variable costing.
c. job order costing.
d. process costing.

ANS:  B

            5.         Cost-volume-profit analysis is a technique available to management to understand

better the interrelationships of several factors that affect a firm's profit. As with many such techniques,
the accountant oversimplifies the real world by making assumptions. Which of the following is not a
major assumption underlying CVP analysis?
a. All costs incurred by a firm can be separated into their fixed and variable
components.
b. The product selling price per unit is constant at all volume levels.
c. Operating efficiency and employee productivity are constant at all volume levels.
d. For multi-product situations, the sales mix can vary at all volume levels.

ANS:  D

            6.         In CVP analysis, linear functions are assumed for

a. contribution margin per unit.
b. fixed cost per unit.
c. total costs per unit.
d. all of the above.

ANS:  A

            7.         Which of the following factors is involved in studying cost-volume-profit relationships?
a. product mix
b. variable costs
c. fixed costs
d. all of the above

ANS:  D

            8.         Cost-volume-profit relationships that are curvilinear may be analyzed linearly by
considering only
a. fixed and mixed costs.
b. relevant fixed costs.
c. relevant variable costs.
d. a relevant range of volume.

ANS:  D

            9.         After the level of volume exceeds the break-even point
a. the contribution margin ratio increases.
b. the total contribution margin exceeds the total fixed costs.
c. total fixed costs per unit will remain constant.
d. the total contribution margin will turn from negative to positive.

ANS:  B

            10.        Which of the following will decrease the break-even point?

Decrease in Increase in direct Increase in

fixed cost labor cost selling price

a. yes            yes            yes

b. yes            no             yes
c. yes            no             no
d. no             yes            no

ANS:  B

            11.        At the break-even point, fixed costs are always

a. less than the contribution margin.
b. equal to the contribution margin.
c. more than the contribution margin.
d. more than the variable cost.

ANS:  B

            12.        The method of cost accounting that lends itself to break-even analysis is
a. variable.
b. standard.
c. absolute.
d. absorption.

ANS:  A

            13.        Given the following notation, what is the break-even sales level in units?

SP = selling price per unit, FC = total fixed cost, VC = variable cost per unit
a. SP/(FC/VC)
b. FC/(VC/SP)
c. VC/(SP - FC)
d. FC/(SP - VC)

ANS:  D
            14.        Consider the equation X = Sales - [(CM/Sales)  (Sales)]. What is X?
a. net income
b. fixed costs
c. contribution margin
d. variable costs

ANS:  D

            15.        If a firm's net income does not change as its volume changes, the firm('s)
a. must be in the service industry.
b. must have no fixed costs.
c. sales price must equal $0.
d. sales price must equal its variable costs.

ANS:  D

            16.        Break-even analysis assumes over the relevant range that
a. total variable costs are linear.
b. fixed costs per unit are constant.
c. total variable costs are nonlinear.
d. total revenue is nonlinear.

ANS:  A

            17.        To compute the break-even point in units, which of the following formulas is used?
a. FC/CM per unit
b. FC/CM ratio
c. CM/CM ratio
d. (FC+VC)/CM ratio

ANS:  A

            18.        A firm's break-even point in dollars can be found in one calculation using which of the
following formulas?
a. FC/CM per unit
b. VC/CM
c. FC/CM ratio
d. VC/CM ratio

ANS:  C

            19.        The contribution margin ratio always increases when the
a. variable costs as a percentage of net sales increase.
b. variable costs as a percentage of net sales decrease.
c. break-even point increases.
d. break-even point decreases.

ANS:  B

            20.        In a multiple-product firm, the product that has the highest contribution margin per unit
will
a. generate more profit for each $1 of sales than the other products.
b. have the highest contribution margin ratio.
c. generate the most profit for each unit sold.
d. have the lowest variable costs per unit.

ANS:  C
            21.        _____________ focuses only on factors that change from one course of action to
another.
a. Incremental analysis
b. Margin of safety
c. Operating leverage
d. A break-even chart

ANS:  A

            22.        The margin of safety would be negative if a company('s)

a. was presently operating at a volume that is below the break-even point.
b. present fixed costs were less than its contribution margin.
c. variable costs exceeded its fixed costs.
d. degree of operating leverage is greater than 100.

ANS:  A

            23.        The margin of safety is a key concept of CVP analysis. The margin of safety is the
a. contribution margin rate.
b. difference between budgeted contribution margin and actual contribution margin.
c. difference between budgeted contribution margin and break-even contribution
margin.
d. difference between budgeted sales and break-even sales.

ANS:  D

            24.        Management is considering replacing an existing sales commission compensation plan
with a fixed salary plan. If the change is adopted, the company's
a. break-even point must increase.
b. margin of safety must decrease.
c. operating leverage must increase.
d. profit must increase.

ANS:  C                   

            25.        As projected net income increases the

a. degree of operating leverage declines.
b. margin of safety stays constant.
c. break-even point goes down.
d. contribution margin ratio goes up.

ANS:  A

            26.        A managerial preference for a very low degree of operating leverage might indicate
that
a. an increase in sales volume is expected.
b. a decrease in sales volume is expected.
c. the firm is very unprofitable.
d. the firm has very high fixed costs.

ANS:  B                   

Bolton Company

Below is an income statement for Bolton Company:

Sales $400,000 
Variable costs (125,000)
Contribution margin $275,000 
Fixed costs (200,000)
Profit before taxes $ 75,000 
            27.        Refer to Bolton Company. What is Bolton’s degree of operating leverage?
a. 3.67
b. 5.33
c. 1.45
d. 2.67

ANS:  A
$(275,000/75,000) =
3.67

            28.        Refer to Bolton Company. Based on the cost and revenue structure on the income
statement, what was Bolton’s break-even point in dollars?
a. $200,000
b. $325,000
c. $300,000
d. $290,909

ANS:  D
CM Percentage = $(275/400) = .6875
.6875x - $800,000 = 0
        x = $290,909

            29.        Refer to Bolton Company. What was Bolton’s margin of safety?

a. $200,000
b. $75,000
c. $100,000
d. $109,091

ANS:  D

Margin of Safety = $(400,000 - 290,909)

                           = $109,091

            30.        Refer to Bolton Company. Assuming that the fixed costs are expected to remain at
$200,000 for the coming year and the sales price per unit and variable costs per unit are also
expected to remain constant, how much profit before taxes will be produced if the company anticipates
sales for the coming year rising to 130 percent of the current year’s level?
a. $97,500
b. $195,000
c. $157,500
d. A prediction cannot be made from the information given.

ANS:  C
Contribution Margin * 1.30 = New Contribution Margin
$275,000 * 1.30 = $357,500

Contribution Margin - Fixed Costs = Profit

$(357,500 - 200,000) = $157,500

Value Pro

Value Pro produces and sells a single product. Information on its costs follow:

Variable costs:
    SG&A $2 per unit
    Production $4 per unit
Fixed costs:
    SG&A $12,000 per year
    Production $15,000 per year
            31.        Refer to Value Pro. Assume Value Pro produced and sold 5,000 units. At this level of
activity, it produced a profit of $18,000. What was Value Pro's sales price per unit?
a. $15.00
b. $11.40
c. $9.60
d. $10.00

ANS:  A
Profit + Fixed Costs = Contribution Margin
$18,000 + $27,000 = $45,000

$45,000 / 5,000 units = $9 contribution margin per unit

Contribution Margin + Variable Costs = Sales Price/Unit

$(9 + (4 + 2)) = $15/Unit

            32.        Refer to Value Pro. In the upcoming year, Value Pro estimates that it will produce and
sell 4,000 units. The variable costs per unit and the total fixed costs are expected to be the same as in
the current year. However, it anticipates a sales price of $16 per unit. What is Value Pro's projected
margin of safety for the coming year?
a. $7,000
b. $20,800
c. $18,400
d. $13,000

ANS:  B
Profit at 4,000 units
Gross Sales = $16 * 4,000 units = $64,000
Contribution Margin = $(16 - 6) = $10/unit
($10*4,000) - $27,000 = $(40,000 - 27,000) = $13,000

Breakeven
0.625x - $27,000 = $0
x = $43,200

$(64,000 - 43,200) = $20,800

            33.        Meixner Manufacturing incurs annual fixed costs of $250,000 in producing and selling
a single product. Estimated unit sales are 125,000. An after-tax income of $75,000 is desired by
management. The company projects its income tax rate at 40 percent. What is the maximum amount
that Meixner can expend for variable costs per unit and still meet its profit objective if the sales price
per unit is estimated at $6?
a. $3.37
b. $3.59
c. $3.00
d. $3.70

ANS:  C
Before Tax Income:   $75,000 / 0.60 = $125,000
Fixed Costs:                                         250,000
Contribution Margin:                            $375,000

Projected Sales                                  $750,000

less:  Contribution Margin                     375,000
Variable Costs                                   $375,000

$375,000 / 125,000 units                           

$3/unit
Jarvis Company

The following information relates to financial projections of Jarvis Company:

Projected sales 60,000 units

Projected variable costs $2.00 per unit
Projected fixed costs $50,000 per year
Projected unit sales price $7.00

            34.        Refer to Jarvis Company. How many units would Jarvis Company need to sell to earn
a profit before taxes of $10,000?
a. 25,714
b. 10,000
c. 8,571
d. 12,000

ANS:  D
Contribution Margin per Unit: 
$5
$5x = $50,000 + $10,000
$5x = $60,000
  x =   12,000 units

            35.        Refer to Jarvis Company. If Jarvis Company achieves its projections, what will be its
degree of operating leverage?
a. 6.00
b. 1.20
c. 1.68
d. 2.40

ANS:  B
Net profit = (60,000 units * $5/unit) - $50,000
               = $300,000 - $50,000
               =  $250,000
DOL = $(300,000/250,000) = 1.20

            36.        Unique Company manufactures a single product. In the prior year, the company had
sales of $90,000, variable costs of $50,000, and fixed costs of $30,000. Unique expects its cost
structure and sales price per unit to remain the same in the current year, however total sales are
expected to increase by 20 percent. If the current year projections are realized, net income should
exceed the prior year’s net income by:
a. 100 percent.
b. 80 percent.
c. 20 percent.
d. 50 percent.

ANS:  B
Contribution margin:  $40,000
Net profit:                 $(40,000 - 30,000) = 
$10,000

20% CM increase:    $40,000 * 1.20 = $48,000

Net profit:                 $(48,000 - 30,000) = $18,000

Increase in profit       $8,000

 $8,000/$10,000 = 80%
Electra Corporation

Electra Corporation  manufactures and sells two products: A and B. The operating results of the
company are as follows:

Product A Product B
Sales in units 2,000 3,000
Sales price per unit $10 $5
Variable costs per unit 7 3

In addition, the company incurred total fixed costs in the amount of $9,000.

            37.        Refer to Electra Corporation.. How many total units would the company have needed
to sell to break even?
a. 3,750
b. 750
c. 3,600
d. 1,800

ANS:  A
Let B = 1.5A

3A + 2(1.5A) - $9,000 = $0
6A - $9,000 = $0
  A = 1,500
  B = 2,250

Total units = 3,750

            38.        Refer to Electra Corporation. If the company would have sold a total of 6,000 units,
consistent with CVP assumptions how many of those units would you expect to be Product B?
a. 3,000
b. 4,000
c. 3,600
d. 3,500

ANS:  C
A + 1.5A = 6,000 units
2.5A = 6,000 units
A = 2,400 units
B = 3,600 units

            39.        Refer to Electra Corporation. How many units would the company have needed to sell
to produce a profit of $12,000?
a. 8,750
b. 20,000
c. 10,000
d. 8,400

ANS:  A
3A + 2(1.5A) - $9,000 = $12,000
                           6A  = $21,000 
                             A = 3,500 units
                             B = 5,250 units
Total  = 8,750 units      
Tori Spelling Company

Below is an income statement for Tori Spelling Company:

Sales $300,000 
Variable costs (150,000)
Contribution margin $150,000 
Fixed costs (100,000)
Profit before taxes $ 50,000 

            40.        Refer to Tori Spelling Company.  What was the company's margin of safety?
a. $50,000
b. $100,000
c. $150,000
d. $25,000

ANS:  B
Margin of safety = Sales - BEP
Sales
CM = .50
BEP Sales = .50x - $100,000 = 0
                 = .50x = $100,000
                        x =  $200,000
$(300,000 - 200,000) = $100,000

            41.        Refer to Tori Spelling Company. If the unit sales price for Tori Spelling’s sole product
was $10, how many units would it have needed to sell to produce a profit of $40,000?
a. 27,500
b. 29,000
c. 28,000
d. can't be determined from the information given

ANS:  C
Contribution Margin at $40,000 profit:  $(40,000 + 100,000) =
$140,000
Contribution Margin Ratio: 0.50
$140,000 / .50 = $280,000
$280,000 / $10 = 28,000 units

            42.        A firm estimates that it will sell 100,000 units of its sole product in the coming period. It
projects the sales price at $40 per unit, the CM ratio at 60 percent, and profit at $500,000. What is the
firm budgeting for fixed costs in the coming period?
a. $1,600,000
b. $2,400,000
c. $1,100,000
d. $1,900,000

ANS:  D
Profit + Fixed Cost = (100,000 units * $60/unit CM)
            Fixed Cost = (100,000 units * $24/unit CM) -
Profit
                             = $2,400,000 - $500,000
                             = $1,900,000
            43.        Sombrero Company manufactures a western-style hat that sells for $10 per unit. This
is its sole product and it has projected the break-even point at 50,000 units in the coming period. If
fixed costs are projected at $100,000, what is the projected contribution margin ratio?
a. 80 percent
b. 20 percent
c. 40 percent
d. 60 percent

ANS:  B
Fixed Costs=Contribution Margin at Breakeven
Point
                 = $100,000
Breakeven Sales:  $500,000
CM Ratio: $(100,000/500,000) = 20%

Camryn Company

Camryn Company manufactures a single product. Each unit sells for $15. The firm's projected costs
are listed below:

Variable costs per unit:

    Production $5
    SG&A $1
Fixed costs:
    Production $40,000
    SG&A $60,000
    Estimated volume 20,000
units

            44.        Refer to Camryn Company. What is Camryn's projected margin of safety for the
current year?
a. $133,333
b. $150,000
c. $80,000
d. $100,000

ANS:  A
Contribution Margin = $9/unit
Contribution Margin Ratio = 60%
Breakeven Point = $100,000/.60 = $166,667
Sales Volume = 20,000 units * $15/unit =
$300,000
Margin of Safety = $(300,000 - 166,667) =
$133,333

            45.        Refer to Camryn Company.  What is Camryn's projected degree of operating leverage
for the  current year?
a. 2.25
b. 1.80
c. 3.75
d. 1.67

ANS:  A
Contribution Margin = $180,000
            Net Income =    80,000
 Degree of Operating Leverage = $180,000/80,000 =
2.55 

Alpha, Beta, and Epsilon Companies

Below are income statements that apply to three companies: Alpha, Beta, and Epsilon:

Alpha Co. Beta Co. Epsilon Co.

Sales $100 $100 $100
Variable costs   (10)   (20)   (30)
Contribution margin $ 90 $ 80 $ 70
Fixed costs   (30)   (20)   (10)
Profit before taxes $ 60 $ 60 $ 60

            46.        Refer to Alpha, Beta, and Epsilon Companies. Within the relevant range, if sales go up
by $1 for each firm, which firm will experience the greatest increase in profit?
a. Alpha Company
b. Beta Company
c. Epsilon Company
d. can't be determined from the information given

ANS:  A
Alpha Company will have the greatest increase in profit, because it has the
greatest contribution margin per unit.

            47.        Refer to Alpha, Beta, and Epsilon Companies. Within the relevant range, if sales go up
by one unit for each firm, which firm will experience the greatest increase in net income?
a. Alpha Company
b. Beta Company
c. Epsilon Company
d. can't be determined from the information given

ANS:  D
Price per unit is not
given.

            48.        Refer to Alpha, Beta, and Epsilon Companies. At sales of $100, which firm has the
highest margin of safety?
a. Alpha Company
b. Beta Company
c. Epsilon Company
d. They all have the same margin of safety.

ANS:  C
Epsilon Company has the lowest amount of fixed costs to be covered.

            49.        Roy is interested in entering the catfish farming business. He estimates if he enters
this business, his fixed costs would be $50,000 per year and his variable costs would equal 30 percent
of sales. If each catfish sells for $2, how many catfish would Roy need to sell to generate a profit that
is equal to 10 percent of sales?
a. 40,000
b. 41,667
c. 35,000
d. No level of sales can generate a 10 percent net return on sales.

ANS:  B
Let x = sales in dollars
x - .30x - $50,000 = .10x
.60x = $50,000
 x = $83,333  Units = $83,333/$2 per unit = 41,667
units

            50.        The following information pertains to Neptune Company’s cost-volume-profit

relationships:

Break-even point in units sold 1,000

Variable costs per unit $500
Total fixed costs $150,000

How much will be contributed to profit before taxes by the 1,001st unit sold?
a. $650
b. $500
c. $150
d. $0

ANS:  C
Fixed Cost = Contribution Margin
                 = $150,000
Contribution Margin/Unit = Contribution Margin/Units
$150,000/1,000 units = $150/unit

            51.        Information concerning Allison Corporation's Product A follows:

Sales $300,000
Variable costs 240,000
Fixed costs 40,000

Assuming that Allison increased sales of Product A by 20 percent, what should the profit from Product
A be?
a. $20,000
b. $24,000
c. $32,000
d. $80,000

ANS:  C
Contribution margin at $300,000 in sales = $60,000
Increase contribution margin by 20% = $60,000 * 1.20 =
$72,000
Contribution margin - fixed costs = Profit
$(72,000 - 40,000) = $32,000

            52.        Lynch Company reported the following results from sales of 5,000 units of Product A
for June:

Sales $200,000 
Variable costs (120,000)
Fixed costs  (60,000)
Operating income $ 20,000 

Assume that Lynch increases the selling price of Product A by 10 percent in July. How many units of
Product A would have to be sold in July to generate an operating income of $20,000?
a. 4,000
b. 4,300
c. 4,545
d. 5,000

ANS:  C
If sales price per unit is increased by 10 percent, less units will have to be sold to
generate gross revenues of $200,000.
Sales price per unit = $200,000/5,000 units = $40/unit
$40/unit * 1.10 = $44/unit
$(200,000 / 44/unit) =  4,545 units
            53.        On a break-even chart, the break-even point is located at the point where the total
a. revenue line crosses the total fixed cost line.
b. revenue line crosses the total contribution margin line.
c. fixed cost line intersects the total variable cost line.
d. revenue line crosses the total cost line.

ANS:  D

            54.        In a CVP graph, the slope of the total revenue line indicates the
a. rate at which profit changes as volume changes.
b. rate at which the contribution margin changes as volume changes.
c. ratio of increase of total fixed costs.
d. total costs per unit.

ANS:  B                   

            55.        In a CVP graph, the area between the total cost line and the total revenue line
represents total
a. contribution margin.
b. variable costs.
c. fixed costs.
d. profit.

ANS:  D

            56.        In a CVP graph, the area between the total cost line and the total fixed cost line yields
the
a. fixed costs per unit.
b. total variable costs.
c. profit.
d. contribution margin.

ANS:  B

            57.        If a company's fixed costs were to increase, the effect on a profit-volume graph would
be that the
a. contribution margin line would shift upward parallel to the present line.
b. contribution margin line would shift downward parallel to the present line.
c. slope of the contribution margin line would be more pronounced (steeper).
d. slope of the contribution margin line would be less pronounced (flatter).

ANS:  B                   

            58.        If a company's variable costs per unit were to increase but its unit selling price stays
constant, the effect on a profit-volume graph would be that the
a. contribution margin line would shift upward parallel to the present line.
b. contribution margin line would shift downward parallel to the present line.
c. slope of the contribution margin line would be pronounced (steeper).
d. slope of the contribution margin line would be less pronounced (flatter).

ANS:  D

            59.        The most useful information derived from a cost-volume-profit chart is the
a. amount of sales revenue needed to cover enterprise variable costs.
b. amount of sales revenue needed to cover enterprise fixed costs.
c. relationship among revenues, variable costs, and fixed costs at various levels of
activity.
d. volume or output level at which the enterprise breaks even.
ANS:  C