Managerial ACCT2 2nd Edition Sawyers Test Bank Download

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Chapter 6--Cost-Volume-Profit Analysis
Student: ___________________________________________________________________________
1. The traditional income statement focuses on:

A. cost function.
B. cost behavior.
C. contribution margin.
D. variable costing.
2. Which of the following would you not find on a traditional income statement?
A. Net operating income
B. Gross profit
C. Contribution margin
D. Sales revenue
3. Which of the following would you not find on a contribution margin income statement?
B. Gross profit
D. Sales revenue
4. The difference between sales and cost of goods sold is called:

A. net income.
B. gross profit.
D. finished goods inventory.
5. The difference between sales and variable costs is called:

A. net income.
B. gross profit
D. cost of goods sold.
6. The contribution margin income statement is structured in such a way as to emphasize:

A. cost functionality.
B. cost behavior.
C. organizational efficiency.
D. cost drivers.
7. While preparing a contribution margin income statement, the costs are shown into which of the two
categories?
A. Direct materials and indirect materials
B. Product and period
C. Variable and fixed
D. Avoidable and unavoidable
8. While preparing a traditional income statement, the costs are shown into which of the two categories?
9. Which of the following statements is true regarding the traditional income statement?
A. Sales revenue is based on the units produced rather than the units sold.
B. It will include a subtotal called contribution margin.
C. It will group costs into categories based on their behavior (fixed or variable).
D. It is required for external reporting purposes.
10. Which of the following statements is false regarding the contribution margin income statement?
A. It will group costs into categories based on their behavior (fixed or variable).
B. It will include a subtotal called gross profit.
C. It is not allowed for external reporting purposes.
D. It is used by management to perform cost-volume-profit analysis.
11. Which of the following accounting system outputs is not needed for cost-volume-profit analysis?
A. Sales price per unit
B. Variable costs per unit
C. Total fixed costs
D. Fixed cost per unit
12. Which of the following is usually not one of the factors that cost-volume-profit analysis focuses on?
A. Sales prices of products
B. Mix of products or services produced
C. Variable costs per unit
D. Fixed costs per unit
13. All else being equal, which of the following would cause the total contribution margin to increase?
A. A decrease in variable costs per unit.
B. An increase in sales volume.
C. A decrease in fixed costs per unit.
D. An increase in the sales price per unit.
14. All else being equal, which of the following would not cause the contribution margin to decrease?
A. An increase in total variable costs.
B. A decrease in sales volume.
C. A decrease in variable costs per unit.
D. A decrease in the sales price per unit.
15. All else being equal, which of the following would cause the contribution margin to increase?
A. An increase in variable costs per unit.
B. An increase in total variable costs.
C. A decrease in total fixed costs.
D. An increase in sales volume.
16. All else being equal, which of the following would cause net operating income to increase?
B. A decrease in total fixed costs.
C. A decrease in sales price per unit.
D. A decrease in contribution margin.
17. Assuming a company’s income statement shows a net operating income, which of the following statements
is true regarding the contribution margin per unit?
A. It will decrease as the number of units sold increases.
B. It will decrease as the number of units purchased decreases.
C. It indicates the amount that net operating income will increase with the sale of each additional unit.
D. It indicates the amount that variable costs will decrease with the sale of each additional unit.
18. Assuming that the fixed cost do not change, with the sale of each additional unit (above the break-even
point), net operating income will increase by the ____.
A. contribution margin ratio
B. contribution margin per unit
C. sales price per unit
D. fixed cost per unit
19. For each unit sold , the contribution margin per unit:
A. will increase.
B. will decrease.
C. will stay the same.
D. can not be predicted.
20. The ____ represents the amount of each additional sales dollar that contributes towards the payment of fixed
costs and, ultimately, increasing net operating profit.
C. break-even point
D. variable cost per unit
21. If a company has a positive contribution margin but net operating income is low or negative, what are some
ways of increasing net operating income?
A. Increase sales price
B. Increase sales volume
C. Decrease variable costs
D. All of these are ways to increase net operating income
22. Assuming a company has a positive contribution margin, which of the following changes will cause net
operating income to increase?
A. A decrease in variable costs.
B. A decrease in the sale price
C. An increase in total fixed costs.
D. A decrease in the sales volume.
23. All else being equal, which of the following changes would increase a company's net operating income?
A. A decrease in sales price.
B. A decrease in contribution margin.
C. An increase in variable costs
D. A decrease in fixed costs.
24. Hunter Inc.

Hunter Inc. sells a unique product with the following information available:
Sales price $100 per unit

Variable costs $40 per unit
Fixed costs $19,500
Units produced and sold 1,300 units
Refer to Hunter Inc. information above. If one more unit is sold, net operating income will:
A. decrease by $55.
B. increase by $45.
C. increase by $60.
D. decrease by $15.
25. Hunter Inc.

Fixed costs $19,500
Refer to Hunter Inc. information above. What is the contribution margin ratio?
A. 55%
B. 25%
C. 60%
D. 40%
26. Carolina Products

Carolina Products sells a unique item with the following information available:

Fixed costs $5 per unit
Units produced and sold 2,000
Refer to the Carolina Products information above. If one more unit is sold, net operating income will:
A. increase by $30.
B. increase by $25.
C. increase by $45.
D. increase by $40.


Refer to the Carolina Products information above. What is the contribution margin per unit?
A. $25
B. $40
C. $45
D. $30

Refer to the Carolina Products information above. What is the contribution margin ratio?
A. 33.33%
B. 66.67%
C. 55.56%
D. 44.44%
29. Joe's Coffee House

Joe's Coffee House has the following information available for the month of July:
Sales (2,500 cups) $7,500

Variable costs 3,250
Fixed costs 4,000
Net operating income $ 250
Refer to the Joe's Coffee House information above. If Joe's sells 500 more cups of coffee per month, net operating income will:
A. increase by $850.
B. increase by $100.
C. increase by $150.
D. increase by $1,500.

Sales (2,500 cups) $7,500

Fixed costs 4,000
Refer to the Joe's Coffee House information above. Each additional cup of coffee sold will increase net operating income by:
A. $1.70.
B. $3.00.
C. $1.00.
D. $0.57.
Sales (2,500 cups) $7,500

Fixed costs 4,000
Refer to the Joe's Coffee House information above. All else being equal, if Joe's increases the sales price per unit by 10%, net operating income
will:
C. increase by $75.
D. not change.
32. Jazz Products has the following information available for the month of March:
Sales (5,000 units) $100,000

Fixed costs 15,000
Net operating income $40,000
The company's manager is considering several options to increase net operating income. By what amount do sales dollars need to increase in order
for net operating income to increase to $62,000?
A. $40,000
B. $62,000
C. $162,000
D. $38,000
33. If sales revenue stays the same but the contribution margin ratio decreases, then:
A. net operating income will increase.
B. fixed costs will decrease.
C. net operating income will decrease.
D. fixed costs will increase.
34. Which of the following statements is true when making decisions using cost-volume-profit (CVP) analysis?
A. As long as the contribution margin is a positive number, net operating income will be positive.
B. As long as variable costs are more than fixed costs, net operating income will be negative.
C. As long as the contribution margin is greater than fixed costs, net operating income will be positive.
D. As long as the sales price per unit is greater than fixed costs per unit, net operating income will be positive.
35. Haywood Inc. has the following information available for one of its products:
Sales price per unit $35

Contribution margin ratio 65%
Total fixed costs $10,000
In Haywood sells one more unit, net operating income will:

A. increase by $20.75.
B. increase by $12.25.
C. increase by $22.75.
D. increase by $35.
36. Laverne's Soda Shop wishes to decrease variable costs. Which of the following options should she
consider?
A. Decrease in advertising costs
B. Decrease in rent
C. Decrease in direct labor costs
D. Increase in equipment rentals
37. Last year, Brown Manufacturing had a contribution margin ratio of 40%. This year, fixed expenses are
expected to remain at $50,000 and sales are expected to increase by $90,000. What should the contribution
margin ratio be this year if the company wishes to increase net operating income by $31,500?
A. 78.75%
B. 40.00%
C. 35.00%
D. 55.56%
38. Stealth Software Inc.

Stealth Software Inc. has the following information available from last year for one of its software products:
Sales revenue $50,000

Fixed costs 10,000
Refer to the Stealth Software Inc. information above. If the software had a sales price of $20 per unit, what is the variable cost per unit?
A. $ 20
B. $ 14
C. $ 10
D. $ 6

Fixed costs 10,000
Refer to the Stealth Software Inc. information above. If the software had a sales price of $20 per unit, what is the contribution margin per unit?
A. $10
B. $6
C. $14
D. $20


Fixed costs 10,000
Refer to the Stealth Software Inc. information above. If the sales price per unit is $20 and the company expects a 25% increase in sales volume this
year along with a 10% decrease in fixed costs. What will be expected net operating income this year?
A. $22,250
B. $53,500
C. $32,750
D. $34,750
41. A company's manager estimates that in the upcoming year, total variable costs will increase by $7,500 and
total fixed costs will increase by $3,500. Assume that the unit sales price did not change. What will be the
anticipated effect on net operating income?
A. Net operating income will increase by $11000.
B. Net operating income will decrease by $11,000.
C. Net operating income will increase by $4,000.
D. Net operating income will decrease by $4,000.
total fixed costs will decrease by $14,000. Assume that the unit sales price did not change. What will be the
A. Net operating income will increase by $34,000.
43. A company's manager estimates that in the upcoming year, increasing advertising costs by $25,000 will
cause sales revenue to increase by $60,000. If the company's contribution margin ratio is 35%, what will be
overall effect on net operating income?
B. Net operating income will increase by $29,750.
44. A company's manager estimates that in the upcoming year, decreasing advertising costs by $50,000 will
cause sales revenue to decrease by $120,000. If the company's contribution margin ratio is 35%, what will be
45. LMN Manufacturing produces two products - Product S and Product W. The following information is
available related to each product:
Product S Product W
Sales price per unit $25 $40
Variable costs per unit 17 22
Product S accounts for 40% of total product sales and Product W accounts for the rest. LMN's total fixed costs are $24,990. How many total number
of products need to be sold in order for the company to break even?
A. 1,922 units
B. 2,403 units
C. 962 units
D. 1,785 units
46. RET Manufacturing
RET Manufacturing produces two types of children's products - Rubles and Twizzles. The following
information is available related to each product:
Rubles Twizzles
Rubles account for 60% of total product sales and Twizzles accounts for the rest. RET's total fixed costs are $30,024.
Refer to the RET Manufacturing information above. How many total number of products need to be sold in order for the company to break even?
A. 2,780 units
B. 2,730 units
C. 5,560 units
D. 2,176 units

Rubles Twizzles
Refer to the RET Manufacturing information above. How many Rubles need to be sold in order for the company to break even?
A. 1,638 units
B. 1,668 units
C. 819 units
D. 2,780 units
48. Crabtree Inc. produces two types of products - Gizmos and Gadgets. The following information is available
related to each product:
Gizmos Gadgets
Percentage of total sales 66.67% 33.33%
If total fixed costs are $29,000, how many total units need to be sold in order for the company to break even? (round computations to nearest
number)
A. 1,933 units
B. 1,036 units
C. 1,500 units
D. 1,349 units
Gizmos Gadgets
Three-fourths of the products sold are Gizmos and one-fourth are Gadgets. If total fixed costs are $50,000, how many total units need to be sold in
order for the company to break even?
A. 1,250 units
B. 1,389 units
C. 2,500 units
D. 690 units
50. Village Manufacturing

Village Manufacturing produces two types of products - Card Games and Puzzles. The following information is
Card Games Puzzles

Sales price per unit $6.00 $15.00
Variable costs per unit 2.00 3.50
60% of the products sold are Card Games and 40% are Puzzles.
Refer to the Village Manufacturing information above. If total fixed costs are $24,500, how many Puzzles need to be sold in order for the company
to break even?
A. 852 units
B. 1,265 units
C. 1,400 units
D. 3,500 units
Card Games Puzzles

Refer to the Village Manufacturing information above. If total fixed costs are $24,500, how many Card Games need to be sold in order for the
company to break even?
A. 2,100 units
B. 3,675 units
C. 4,200 units
D. 3,500 units
52. Which of the following statements is correct as it relates to a company that sells multiple products?
A. CVP analysis cannot be used.
B. Contribution margin is based on sales mix.
C. CVP analysis is much easier to use.
D. The break-even point remains the same even if sales mix changes.
53. When calculating the break-even point in a multi-product environment, which of the following statements is
false?
A. The contribution margin per unit for each product needs to be determined.
B. Total fixed costs need to be determined.
C. Each product is assumed to count for an equal percentage of total sales.
D. The weighted-average contribution margin per unit needs to be determined.
54. When calculating the break-even point in a multi-product environment, which of the following pieces of
information wouldnot be relevant?
A. Contribution margin per unit for each type of product
B. Each product's percentage of total sales
55. In a multi-product environment:

A. cost-volume-profit analysis is not advisable to use.
B. only the product with the highest contribution margin should be sold.
C. the product with the highest sales prices per unit should account for the majority of the sales.
D. a weighted-average contribution margin per unit should be computed for all products produced and sold.
56. Bergman Inc.
Bergman Inc. has the following product information available:

Fixed costs $18,000
Refer to the Bergman Inc. information above. What is the break-even point in units?
A. 1,500 units
B. 643 units
C. 600 units
D. 900 units
57. Bergman Inc.


Fixed costs $18,000
Refer to the Bergman Inc. information above. How many units need to be sold in order to earn a target profit of $180,000?
A. 24,750 units
B. 16,500 units
C. 20,842 units
D. 22,500 units
58. Poole Products Inc.

Poole Products Inc. has the following product information available:

Fixed costs $36,000
Refer to the Poole Products Inc. information above. What is the break-even point in units?
A. 1,029 units
B. 1,440 units
C. 2,400 units
D. 5,400 units

Fixed costs $36,000
Refer to the Poole Products Inc. information above. What is the break-even point in sales dollars?
A. $21,600
B. $36,000
C. $60,000
D. $90,000


Fixed costs $36,000
Refer to the Poole Products Inc. information above. How many units need to be sold in order to earn a target profit of $249,000?
A. 8,143 units
B. 14,200 units
C. 16,600 units
D. 19,000 units
61. Harrison Manufacturing

Harrison Manufacturing has the following product information available:

Fixed costs $87,600
Refer to the Harrison Manufacturing information above. What is the break-even point in units?
A. 3,369 units
B. 1,752 units
C. 3,650 units
D. 1,153 units

Fixed costs $87,600
Refer to the Harrison Manufacturing information above. What is the break-even point in sales dollars?
A. $87,600
B. $42,048
C. $168,462
D. $182,500


Fixed costs $87,600
Refer to the Harrison Manufacturing information above. How many units need to be sold in order to earn a target profit of $175,000?
A. 10,942 units
B. 7,292 units
C. 3,642 units
D. 5,252 units


Fixed costs $87,600
Refer to the Harrison Manufacturing information above. What do total sales dollars need to be in order to earn a target profit of $200,400?
A. $235,000
B. $600,000
C. $288,000
D. $417,500
65. Tucker Corp.
Tucker Corp. has the following product information:

Fixed costs $45,000
Refer to the Tucker Corp. information above. What is the break-even point in sales dollars?
A. $45,000
B. $112,500
C. $18,000
D. $3,750
66. Tucker Corp.


Fixed costs $45,000
Refer to the Tucker Corp. information above. What is the break-even point in units?
A. 1,500 units.
B. 112,500 units.
C. 216,000 units.
D. 9,375 units.
67. Tucker Corp.


Fixed costs $45,000
Refer to the Tucker Corp. information above. How many units need to be sold in order to earn a target profit of $542,400?
A. 234,960 units.
B. 216,960 units.
C. 113,000 units.
D. 122,375 units.
68. Cameron Corp.
Cameron Corp. has the following product information:

Fixed costs $59,500
Refer to the Cameron Corp. information above. What is the break-even point in sales dollars?
A. $20,825
B. $59,500
C. $170,000
D. $416,500
69. Cameron Corp.


Fixed costs $59,500
Refer to the Cameron Corp. information above. What is the break-even point in units?
A. 8,500 units
B. 2,975 units
C. 1,041 units
D. 170,000 units
70. Cameron Corp.


Fixed costs $59,500
Refer to the Cameron Corp. information above. How many units need to be sold in order to earn a target profit of $299,950?
A. 42,850 units
B. 51,350 units
C. 34,350 units
D. 125,808 units
71. Angelo's is a locally run and operated pizza parlor. Last month, the restaurant broke-even when 400 pizzas
were served. The average variable costs per pizza are $2.50 and fixed costs for the month totaled $6,000. What
is the average selling price of a pizza?
A. $15.00
B. $12.50
C. $17.50
D. $6.00
72. Floyd's Barbershop has fixed costs of $3,000 per month. Floyd currently breaks-even when it performs 400
haircuts a month. Floyd charges customers $10 per cut. What is Floyd's variable cost per cut?
A. $2.50
B. $7.50
C. $17.50
D. $1.33
73. Floyd's Barbershop has fixed costs of $3,000 per month. Floyd regularly performs 400 haircuts a month and
he does not anticipate this to change. Each haircut has a variable cost of $4.00. If Floyd would like to earn a
target profit of $2,000, what does he need to charge for each haircut?
A. $12.50
B. $16.50
C. $11.50
D. $8.50
74. Charlie's Hotdog Stand

Charlie's Hotdog Stand sells hotdogs for $2.50 each. The variable costs per hotdog are $.50. Charlie's fixed
costs are currently $800 per month. Charlie is considering expanding his business to three hotdog stands which
will increase fixed costs per month by $1,200.
Refer to the Charlie's Hotdog Stand information above. If Charlie does expand his business to three stands,
how many additional hotdogs will need to be sold per month in order to break even?
A. 1,000 hotdogs
B. 600 hotdogs
C. 200 hotdogs
D. 480 hotdogs
how many hotdogs will need to be sold per month in order to earn a target profit of $5,000?
A. 2,500 hotdogs
B. 3,100 hotdogs
C. 3,500 hotdogs
D. 2,800 hotdogs
76. Grisham Inc. wishes to have an after-tax profit of $400,000. If Grisham's tax rate is 35%, what is their
before-tax profit?
A. $615,385
B. $540,000
C. $1,142,857
D. $660,000
77. Mulvaney Inc. ignored the effect of income taxes in its calculation of the sales volume needed to achieve a
target profit of $1,000,000. If the company considers the impact of income taxes in its calculation, which of the
following statements would be true?
A. Total fixed costs will increase.
B. Contribution margin per unit will decrease.
C. Sales volume will increase to reach an after-tax profit.
D. Sales price per unit will decrease.
78. When a company desires to achieve a after-tax profit, which of the following statements is true?
A. Fixed costs will increase.
B. As the tax rate increases, the number of units that need to be sold will decrease.
C. The before-tax profit will need to be calculated.
D. The contribution margin per unit will decrease.
79. Harrison Manufacturing has the following product information available:

Fixed costs $87,600
If Harrison is in the 35% tax bracket, how many units need to be sold in order to earn an after-tax target profit of $260,000?
A. 16,667 units
B. 14,483 units
C. 22,282 units
D. 20,317 units
80. Poole Products Inc. has the following product information available:

Fixed costs $36,000
If Poole is in the 40% tax bracket, how many units need to be sold in order to earn an after-tax target profit of $249,000?
A. 30,067 units
B. 12,360 units
C. 27,667 units
D. 31,667 units
81. LeBlanc Manufacturing has the following product information available:

Fixed costs $50,000
If LeBlanc is in the 30% tax bracket, how many units need to be sold in order to earn an after-tax target profit of $490,000?
A. 17,500 units
B. 18,750 units
C. 19,286 units
D. 9,450 units
82. Blinson Manufacturing has the following product information available:

Before-tax profit $180,000
If Blinson has calculated that it needs to sell 20,000 units in order to earn an after-tax target profit of $126,000, what were Blinson's fixed costs?
A. $54,000
B. $1,180,000
C. $820,000
D. $874,000
83. Howard Enterprises has a contribution margin ratio of 65% and fixed costs of $15,000. What would sales
have to be in order for Howard to earn an after-tax profit of $50,000? The company is in the 40% tax bracket.
A. $23,077
B. $100,000
C. $151,282
D. $75,000
84. Which of the following is an assumption of CVP analysis?

A. Inventory levels increase at a constant rate.
B. Costs are linear throughout the relevant range.
C. The number of units sold is constant.
D. Fixed costs increase as production increases.
85. Which of the following is not an assumption of CVP analysis?

A. Selling prices change only at the end of the month.
B. Costs can be thought of as fitting a linear function within the relevant range.
C. Sales mix is constant.
D. Inventory levels do not change.
86. One of the major assumptions used in CVP analysis is:

A. that number of units sold each year remains the same.
B. that in a multi-product environment, all products are assumed to be sold in identical proportion to total sales.
C. that the tax rate is not known.
D. that the sales price of a product will not change as volume changes.
87. Cost structure refers to the relative proportion of:
A. variable costs to contribution margin.
B. total costs to sales.
C. fixed costs to variable costs.
D. sales price per unit to variable costs per unit.
88. Operating leverage measures:

A. how sensitive profit is to a change in fixed costs.
B. how sensitive profit is to a change in sales volume.
C. how sensitive profit is to a change in sales price per unit.
D. how sensitive profit is to a change in tax rates.
89. Carson Cabana's Inc. has the following information available regarding last year's operations:
Sales $1,500,000
Contribution margin 900,000
Fixed costs 300,000
Net operating income $ 600,000
The company's operating leverage was:

A. 1.50.
B. 0.67.
C. 2.50.
D. 0.60.
90. Hillary's Restaurant has the following information available regarding last year's operations:
Sales $900,000
Fixed costs 175,000

A. 0.71.
B. 1.50.
C. 2.12.
D. 1.41.
91. Which of the following statements is most likely true if Red Inc. has an operating leverage of 2.0 while Blue
Corp. has an operating leverage of 1.4?
A. Red Inc. is selling its products for a higher sales price than Blue Corp.
B. Red Inc.'s net operating income will be less sensitive to a change in sale volume than Blue Corp.
C. Blue Corp.'s fixed costs in relation to variable costs are lower than Red Inc.'s.
D. Blue Corp. has a lower contribution margin per unit than Red Inc.
92. A company with a high level of operating leverage will:

A. experience fewer fluctuations in income as sales fluctuate than a company with a low level of operating
leverage.
B. experience wider fluctuations in income as sales fluctuate than a company with a low level of operating
leverage.
C. earn higher profits than a company with a low level of operating leverage.
D. earn lower profits than a company with a low level of operating leverage.
93. Your boss read a recent magazine article about income statements, but he was unclear about the differences
between a traditional income statement and a contribution margin income statement. Explain the difference by:
a) presenting a sample format for each statement, b) describing the focus of each statement, and c) discussing
how and by whom each statement is used.
94. For each of the following statements, fill in the blank with either the word increase, decrease, or stay the
same.
a. All else being equal, as the sales price per unit increases, the contribution margin per unit will _________________.
b. All else being equal, as variable costs per unit increase, the contribution margin per unit will _________________.
c. All else being equal, as total fixed costs increase, the contribution margin per unit will ________________.
d. All else being equal, as sales volume increases, total fixed costs will _______________.
e. All else being equal, as sales volume increases, total variable costs will _____________.
95. How is contribution margin ratio computed?
96. When using CVP analysis, why is it important to consider qualitative factors? Provide one example of a
qualitative factor and explain how it might affect a decision.
97. What is meant by the term "break-even point" and how is it computed in a single versus a multi-product
environment?
98. All else being equal, explain how each of the following independent changes will affect a company's break-
even point in terms of the number of units that need to be sold.
a. Fixed costs increase

b. Sales price per unit increases
c. Variable costs per unit increase
d. Fixed costs decrease
e. Variable costs per unit decrease
99. In 2011 Dillon Inc. had a total contribution margin of $100,000 and net operating income of $60,000. For
the upcoming year, the company would like to earn a target profit of $80,000. Assuming sales volume is
expected to be the same in the upcoming year as it was in the past year, give three separate options the company
could implement in order to achieve their target profit in the upcoming year.
100. When and why should income taxes be considered in profit planning? What is the impact on target profit
when income taxes are taken into account?
101. In a multi-product environment, what are the four assumptions used in CVP analysis?
a.
b.
c.
d.
102. What does operating leverage reveal about a company?
103. Lowman Inc. sells a product with a sales price of $25 per unit, variable costs of $10 per unit, and total
fixed costs of $100,000. Lowman is looking into implementing an aggressive advertising campaign that will
cost $45,000.
By what amount do sales dollars need to at least increase by in order for the company's overall profits to not
decrease by having the advertising campaign?
104. Sweet Baby Inc. produces two types of children's specialty bed products - Baby Cribs and Toddler Beds.
The following information is available related to each product:
Baby Crib Toddler Bed

Baby cribs account for 60% of total product sales and toddler beds account for the rest. Sweet Baby's total fixed costs are $1,170,000.
Required:
A. How many total children's bed products does the company need to produce and sell in order to break even?
B. How many baby cribs need to be sold in order to break even?

105. Hugo Inc. sells three sizes of umbrellas: small, medium, and large. The company has annual fixed costs of
$390,400. For the past several years, 20% of Hugo's sales have been the small and large umbrellas each and
with the remaining 60% being the medium size. Hugo does not expect this to change in the upcoming year.
The following information is also available for each of the umbrellas:
Small Medium Large

Sales price per unit $8 $14 $35
Variable costs per unit 3 4 9
Required:
A. How many total umbrellas does the company need to produce and sell in order to break even?
B. How many medium umbrellas need to be sold in order to break even?
C. If Hugo experiences a higher demand of large umbrellas than it anticipated, will the break-even point increase, decrease, or stay the same?
Why?
106. Greenwood Manufacturing has the following product information:
Sales price $60.00 per unit

Variable costs $28.00 per unit
Fixed costs $60,800
Required: Calculate the following based on the above information:
A. What is the break-even point in units?
B. What is the break-even point in sales dollars?
C. How many units need to be sold in order for the company to earn a target-profit of $500,000? (ignore taxes)
107. Sienna Manufacturing has the following product information:

Fixed costs $45,000
108. Eason Products has the following product information available:

Fixed costs $90,000
Required: If Eason is in the 40% tax bracket, how many units need to be sold in order to earn an after-tax target profit of $450,000?
109. Carson Products has the following product information available:

Fixed costs $50,000
Required: If Carson is in the 40% tax bracket, how many units need to be sold in order to earn an after-tax target profit of $300,000?
110. The following information is available for the Blue and Red Companies for 2011
Blue Red
Sales (200,000 units) $1,800,000 $1,800,000
Variable costs 800,000 1,200,000
Contribution margin 1,000,000 600,000
Fixed costs 500,000 100,000
Net operating income $ 500,000 $ 500,000
Required:
A. Compute the operating leverage for each company and explain what operating leverage measures.
B. If both companies experience a 20% increase in sales volume, will they continue to have the same net operating income? Why or why not?
Explain your answer with respect to each company's operating leverage.
111. Chapman Products produces a unique item with the following information:

Fixed costs $70,000
B. Contribution margin per unit
C. Contribution margin ratio
D. If Chapman sells 500 more additional units, by what amount will net operating income increase?
E. If Chapman has an additional $25,000 in sales, by what amount will net operating income increase?
112. Vincent Products manufactures a particular item with the following information:

A. Contribution margin per unit
B. Contribution margin ratio
C. Break-even point in units
D. Break-even point in sales dollars

113. Trenton Inc. manufactures a single product. The following information is available for 2011
Number of units produced and sold 21,000 units
Sales price per unit $18 per unit

Variable manufacturing costs $7 per unit
Variable selling and administrative costs $1.5 per unit
Total fixed manufacturing costs $15,000

Total fixed selling and administrative costs $10,000
Required:
A. Prepare a traditional format income statement (ignore taxes).
B. Prepare a contribution margin format income statement (ignore taxes).
114. Amanda's Silver Company produces a unique item with the following information:

Fixed costs $15,000
D. If Amanda's sells 100 more additional units, by what amount will net operating income increase?
E. If Amanda's has an additional $2,000 in sales, by what amount will net operating income increase?
115. Carolina Products has the following product information:

Fixed costs $50,000
A. How many units need to be sold in order to break even?
B. Calculate the increase in net operating income if an additional 1,000 units over the break-even point are sold.
C. How many units need to be sold in order to earn a target profit of $600,000? (Ignore taxes)
116. Bradford Products has the following product information available:

Fixed costs $50,000
Required: Answer each of the following independent questions.
A. What is the contribution margin per unit?
B. What is the contribution margin ratio?
C. How many units must be sold in order to break even?
D. How many units must be sold in order to earn a target profit of $400,000? (ignore taxes)
E. Bradford is considering an advertising campaign that has a cost of $70,000. The marketing department estimates that the campaign will
increase sales by $250,000. Should the company have the advertising campaign? Why or why not? Show your calculations.
117. Harrison Inc. has a contribution margin ratio of 60% and fixed costs of $91,000.
Required:
A. If Harrison ignores income taxes, what do sales dollars need to be in order to have net operating income of $500,000?
B. If Harrison takes into account income taxes, and the company is in the 40% tax bracket, what do sales dollars need to be in order to have
an after-tax net operating income of $500,000?
Chapter 6--Cost-Volume-Profit Analysis Key
1. The traditional income statement focuses on:

A. cost function.
B. cost behavior.
D. variable costing.
2. Which of the following would you not find on a traditional income statement?
B. Gross profit
D. Sales revenue
3. Which of the following would you not find on a contribution margin income statement?
B. Gross profit
D. Sales revenue
4. The difference between sales and cost of goods sold is called:

A. net income.
B. gross profit.
D. finished goods inventory.
5. The difference between sales and variable costs is called:

A. net income.
B. gross profit
D. cost of goods sold.
6. The contribution margin income statement is structured in such a way as to emphasize:
A. cost functionality.
B. cost behavior.
C. organizational efficiency.
D. cost drivers.
7. While preparing a contribution margin income statement, the costs are shown into which of the two
categories?
8. While preparing a traditional income statement, the costs are shown into which of the two categories?
9. Which of the following statements is true regarding the traditional income statement?
A. Sales revenue is based on the units produced rather than the units sold.
B. It will include a subtotal called contribution margin.
C. It will group costs into categories based on their behavior (fixed or variable).
D. It is required for external reporting purposes.
10. Which of the following statements is false regarding the contribution margin income statement?
A. It will group costs into categories based on their behavior (fixed or variable).
B. It will include a subtotal called gross profit.
C. It is not allowed for external reporting purposes.
D. It is used by management to perform cost-volume-profit analysis.
11. Which of the following accounting system outputs is not needed for cost-volume-profit analysis?
A. Sales price per unit
B. Variable costs per unit
D. Fixed cost per unit
12. Which of the following is usually not one of the factors that cost-volume-profit analysis focuses on?
A. Sales prices of products
B. Mix of products or services produced
C. Variable costs per unit
13. All else being equal, which of the following would cause the total contribution margin to increase?
A. A decrease in variable costs per unit.
B. An increase in sales volume.
C. A decrease in fixed costs per unit.
D. An increase in the sales price per unit.
14. All else being equal, which of the following would not cause the contribution margin to decrease?
B. A decrease in sales volume.
C. A decrease in variable costs per unit.
D. A decrease in the sales price per unit.
15. All else being equal, which of the following would cause the contribution margin to increase?
A. An increase in variable costs per unit.
B. An increase in total variable costs.
C. A decrease in total fixed costs.
D. An increase in sales volume.
16. All else being equal, which of the following would cause net operating income to increase?
B. A decrease in total fixed costs.
C. A decrease in sales price per unit.
D. A decrease in contribution margin.
17. Assuming a company’s income statement shows a net operating income, which of the following statements
is true regarding the contribution margin per unit?
A. It will decrease as the number of units sold increases.
B. It will decrease as the number of units purchased decreases.
C. It indicates the amount that net operating income will increase with the sale of each additional unit.
D. It indicates the amount that variable costs will decrease with the sale of each additional unit.
18. Assuming that the fixed cost do not change, with the sale of each additional unit (above the break-even
point), net operating income will increase by the ____.
C. sales price per unit
D. fixed cost per unit
19. For each unit sold , the contribution margin per unit:
A. will increase.
B. will decrease.
C. will stay the same.
D. can not be predicted.
20. The ____ represents the amount of each additional sales dollar that contributes towards the payment of fixed
costs and, ultimately, increasing net operating profit.
C. break-even point
D. variable cost per unit
21. If a company has a positive contribution margin but net operating income is low or negative, what are some
ways of increasing net operating income?
A. Increase sales price
B. Increase sales volume
C. Decrease variable costs
D. All of these are ways to increase net operating income
22. Assuming a company has a positive contribution margin, which of the following changes will cause net
operating income to increase?
A. A decrease in variable costs.
B. A decrease in the sale price
C. An increase in total fixed costs.
D. A decrease in the sales volume.
23. All else being equal, which of the following changes would increase a company's net operating income?
A. A decrease in sales price.
B. A decrease in contribution margin.
C. An increase in variable costs
D. A decrease in fixed costs.
24. Hunter Inc.

Fixed costs $19,500
Refer to Hunter Inc. information above. If one more unit is sold, net operating income will:
A. decrease by $55.
B. increase by $45.
C. increase by $60.
D. decrease by $15.
25. Hunter Inc.


Fixed costs $19,500
Refer to Hunter Inc. information above. What is the contribution margin ratio?
A. 55%
B. 25%
C. 60%
D. 40%


Refer to the Carolina Products information above. If one more unit is sold, net operating income will:
A. increase by $30.
B. increase by $25.
C. increase by $45.
D. increase by $40.

Refer to the Carolina Products information above. What is the contribution margin per unit?
A. $25
B. $40
C. $45
D. $30


Refer to the Carolina Products information above. What is the contribution margin ratio?
A. 33.33%
B. 66.67%
C. 55.56%
D. 44.44%

Sales (2,500 cups) $7,500

Fixed costs 4,000
Refer to the Joe's Coffee House information above. If Joe's sells 500 more cups of coffee per month, net operating income will:
C. increase by $150.
D. increase by $1,500.
Sales (2,500 cups) $7,500

Fixed costs 4,000
Refer to the Joe's Coffee House information above. Each additional cup of coffee sold will increase net operating income by:
A. $1.70.
B. $3.00.
C. $1.00.
D. $0.57.

Sales (2,500 cups) $7,500

Fixed costs 4,000
Refer to the Joe's Coffee House information above. All else being equal, if Joe's increases the sales price per unit by 10%, net operating income
will:
C. increase by $75.
D. not change.
32. Jazz Products has the following information available for the month of March:
Sales (5,000 units) $100,000

Fixed costs 15,000
The company's manager is considering several options to increase net operating income. By what amount do sales dollars need to increase in order
for net operating income to increase to $62,000?
A. $40,000
B. $62,000
C. $162,000
D. $38,000
33. If sales revenue stays the same but the contribution margin ratio decreases, then:
A. net operating income will increase.
B. fixed costs will decrease.
C. net operating income will decrease.
D. fixed costs will increase.
34. Which of the following statements is true when making decisions using cost-volume-profit (CVP) analysis?
A. As long as the contribution margin is a positive number, net operating income will be positive.
B. As long as variable costs are more than fixed costs, net operating income will be negative.
C. As long as the contribution margin is greater than fixed costs, net operating income will be positive.
D. As long as the sales price per unit is greater than fixed costs per unit, net operating income will be positive.
35. Haywood Inc. has the following information available for one of its products:
Sales price per unit $35

Total fixed costs $10,000
In Haywood sells one more unit, net operating income will:

A. increase by $20.75.
B. increase by $12.25.
C. increase by $22.75.
D. increase by $35.
36. Laverne's Soda Shop wishes to decrease variable costs. Which of the following options should she
consider?
A. Decrease in advertising costs
B. Decrease in rent
C. Decrease in direct labor costs
D. Increase in equipment rentals
37. Last year, Brown Manufacturing had a contribution margin ratio of 40%. This year, fixed expenses are
expected to remain at $50,000 and sales are expected to increase by $90,000. What should the contribution
margin ratio be this year if the company wishes to increase net operating income by $31,500?
A. 78.75%
B. 40.00%
C. 35.00%
D. 55.56%

Fixed costs 10,000
Refer to the Stealth Software Inc. information above. If the software had a sales price of $20 per unit, what is the variable cost per unit?
A. $ 20
B. $ 14
C. $ 10
D. $ 6


Fixed costs 10,000
Refer to the Stealth Software Inc. information above. If the software had a sales price of $20 per unit, what is the contribution margin per unit?
A. $10
B. $6
C. $14
D. $20


Fixed costs 10,000
Refer to the Stealth Software Inc. information above. If the sales price per unit is $20 and the company expects a 25% increase in sales volume this
year along with a 10% decrease in fixed costs. What will be expected net operating income this year?
A. $22,250
B. $53,500
C. $32,750
D. $34,750
total fixed costs will increase by $3,500. Assume that the unit sales price did not change. What will be the
A. Net operating income will increase by $11000.
total fixed costs will decrease by $14,000. Assume that the unit sales price did not change. What will be the
43. A company's manager estimates that in the upcoming year, increasing advertising costs by $25,000 will
cause sales revenue to increase by $60,000. If the company's contribution margin ratio is 35%, what will be
B. Net operating income will increase by $29,750.
44. A company's manager estimates that in the upcoming year, decreasing advertising costs by $50,000 will
cause sales revenue to decrease by $120,000. If the company's contribution margin ratio is 35%, what will be
45. LMN Manufacturing produces two products - Product S and Product W. The following information is
Product S Product W
Product S accounts for 40% of total product sales and Product W accounts for the rest. LMN's total fixed costs are $24,990. How many total number
of products need to be sold in order for the company to break even?
A. 1,922 units
B. 2,403 units
C. 962 units
D. 1,785 units

Rubles Twizzles
Refer to the RET Manufacturing information above. How many total number of products need to be sold in order for the company to break even?
A. 2,780 units
B. 2,730 units
C. 5,560 units
D. 2,176 units

Rubles Twizzles
Refer to the RET Manufacturing information above. How many Rubles need to be sold in order for the company to break even?
A. 1,638 units
B. 1,668 units
C. 819 units
D. 2,780 units
Gizmos Gadgets
Percentage of total sales 66.67% 33.33%
If total fixed costs are $29,000, how many total units need to be sold in order for the company to break even? (round computations to nearest
number)
A. 1,933 units
B. 1,036 units
C. 1,500 units
D. 1,349 units
Gizmos Gadgets
Three-fourths of the products sold are Gizmos and one-fourth are Gadgets. If total fixed costs are $50,000, how many total units need to be sold in
order for the company to break even?
A. 1,250 units
B. 1,389 units
C. 2,500 units
D. 690 units

Card Games Puzzles

Refer to the Village Manufacturing information above. If total fixed costs are $24,500, how many Puzzles need to be sold in order for the company
to break even?
A. 852 units
B. 1,265 units
C. 1,400 units
D. 3,500 units
Card Games Puzzles

Refer to the Village Manufacturing information above. If total fixed costs are $24,500, how many Card Games need to be sold in order for the
company to break even?
A. 2,100 units
B. 3,675 units
C. 4,200 units
D. 3,500 units
52. Which of the following statements is correct as it relates to a company that sells multiple products?
A. CVP analysis cannot be used.
B. Contribution margin is based on sales mix.
C. CVP analysis is much easier to use.
D. The break-even point remains the same even if sales mix changes.
53. When calculating the break-even point in a multi-product environment, which of the following statements is
false?
A. The contribution margin per unit for each product needs to be determined.
B. Total fixed costs need to be determined.
C. Each product is assumed to count for an equal percentage of total sales.
D. The weighted-average contribution margin per unit needs to be determined.
54. When calculating the break-even point in a multi-product environment, which of the following pieces of
information wouldnot be relevant?
A. Contribution margin per unit for each type of product
B. Each product's percentage of total sales
55. In a multi-product environment:

A. cost-volume-profit analysis is not advisable to use.
B. only the product with the highest contribution margin should be sold.
C. the product with the highest sales prices per unit should account for the majority of the sales.
D. a weighted-average contribution margin per unit should be computed for all products produced and sold.
56. Bergman Inc.

Fixed costs $18,000
Refer to the Bergman Inc. information above. What is the break-even point in units?
A. 1,500 units
B. 643 units
C. 600 units
D. 900 units
57. Bergman Inc.


Fixed costs $18,000
Refer to the Bergman Inc. information above. How many units need to be sold in order to earn a target profit of $180,000?
A. 24,750 units
B. 16,500 units
C. 20,842 units
D. 22,500 units


Fixed costs $36,000
Refer to the Poole Products Inc. information above. What is the break-even point in units?
A. 1,029 units
B. 1,440 units
C. 2,400 units
D. 5,400 units

Fixed costs $36,000
Refer to the Poole Products Inc. information above. What is the break-even point in sales dollars?
A. $21,600
B. $36,000
C. $60,000
D. $90,000


Fixed costs $36,000
Refer to the Poole Products Inc. information above. How many units need to be sold in order to earn a target profit of $249,000?
A. 8,143 units
B. 14,200 units
C. 16,600 units
D. 19,000 units


Fixed costs $87,600
Refer to the Harrison Manufacturing information above. What is the break-even point in units?
A. 3,369 units
B. 1,752 units
C. 3,650 units
D. 1,153 units

Fixed costs $87,600
Refer to the Harrison Manufacturing information above. What is the break-even point in sales dollars?
A. $87,600
B. $42,048
C. $168,462
D. $182,500


Fixed costs $87,600
Refer to the Harrison Manufacturing information above. How many units need to be sold in order to earn a target profit of $175,000?
A. 10,942 units
B. 7,292 units
C. 3,642 units
D. 5,252 units


Fixed costs $87,600
Refer to the Harrison Manufacturing information above. What do total sales dollars need to be in order to earn a target profit of $200,400?
A. $235,000
B. $600,000
C. $288,000
D. $417,500
65. Tucker Corp.

Fixed costs $45,000
Refer to the Tucker Corp. information above. What is the break-even point in sales dollars?
A. $45,000
B. $112,500
C. $18,000
D. $3,750
66. Tucker Corp.


Fixed costs $45,000
Refer to the Tucker Corp. information above. What is the break-even point in units?
A. 1,500 units.
B. 112,500 units.
C. 216,000 units.
D. 9,375 units.
67. Tucker Corp.


Fixed costs $45,000
Refer to the Tucker Corp. information above. How many units need to be sold in order to earn a target profit of $542,400?
A. 234,960 units.
B. 216,960 units.
C. 113,000 units.
D. 122,375 units.
68. Cameron Corp.

Fixed costs $59,500
Refer to the Cameron Corp. information above. What is the break-even point in sales dollars?
A. $20,825
B. $59,500
C. $170,000
D. $416,500
69. Cameron Corp.


Fixed costs $59,500
Refer to the Cameron Corp. information above. What is the break-even point in units?
A. 8,500 units
B. 2,975 units
C. 1,041 units
D. 170,000 units
70. Cameron Corp.


Fixed costs $59,500
Refer to the Cameron Corp. information above. How many units need to be sold in order to earn a target profit of $299,950?
A. 42,850 units
B. 51,350 units
C. 34,350 units
D. 125,808 units
71. Angelo's is a locally run and operated pizza parlor. Last month, the restaurant broke-even when 400 pizzas
were served. The average variable costs per pizza are $2.50 and fixed costs for the month totaled $6,000. What
is the average selling price of a pizza?
A. $15.00
B. $12.50
C. $17.50
D. $6.00
72. Floyd's Barbershop has fixed costs of $3,000 per month. Floyd currently breaks-even when it performs 400
haircuts a month. Floyd charges customers $10 per cut. What is Floyd's variable cost per cut?
A. $2.50
B. $7.50
C. $17.50
D. $1.33
73. Floyd's Barbershop has fixed costs of $3,000 per month. Floyd regularly performs 400 haircuts a month and
he does not anticipate this to change. Each haircut has a variable cost of $4.00. If Floyd would like to earn a
target profit of $2,000, what does he need to charge for each haircut?
A. $12.50
B. $16.50
C. $11.50
D. $8.50

how many additional hotdogs will need to be sold per month in order to break even?
A. 1,000 hotdogs
B. 600 hotdogs
C. 200 hotdogs
D. 480 hotdogs
how many hotdogs will need to be sold per month in order to earn a target profit of $5,000?
A. 2,500 hotdogs
B. 3,100 hotdogs
C. 3,500 hotdogs
D. 2,800 hotdogs
76. Grisham Inc. wishes to have an after-tax profit of $400,000. If Grisham's tax rate is 35%, what is their
before-tax profit?
A. $615,385
B. $540,000
C. $1,142,857
D. $660,000
77. Mulvaney Inc. ignored the effect of income taxes in its calculation of the sales volume needed to achieve a
target profit of $1,000,000. If the company considers the impact of income taxes in its calculation, which of the
following statements would be true?
A. Total fixed costs will increase.
B. Contribution margin per unit will decrease.
C. Sales volume will increase to reach an after-tax profit.
D. Sales price per unit will decrease.
78. When a company desires to achieve a after-tax profit, which of the following statements is true?
A. Fixed costs will increase.
B. As the tax rate increases, the number of units that need to be sold will decrease.
C. The before-tax profit will need to be calculated.
D. The contribution margin per unit will decrease.
79. Harrison Manufacturing has the following product information available:

Fixed costs $87,600
If Harrison is in the 35% tax bracket, how many units need to be sold in order to earn an after-tax target profit of $260,000?
A. 16,667 units
B. 14,483 units
C. 22,282 units
D. 20,317 units
80. Poole Products Inc. has the following product information available:

Fixed costs $36,000
If Poole is in the 40% tax bracket, how many units need to be sold in order to earn an after-tax target profit of $249,000?
A. 30,067 units
B. 12,360 units
C. 27,667 units
D. 31,667 units
81. LeBlanc Manufacturing has the following product information available:

Fixed costs $50,000
If LeBlanc is in the 30% tax bracket, how many units need to be sold in order to earn an after-tax target profit of $490,000?
A. 17,500 units
B. 18,750 units
C. 19,286 units
D. 9,450 units
82. Blinson Manufacturing has the following product information available:

Before-tax profit $180,000
If Blinson has calculated that it needs to sell 20,000 units in order to earn an after-tax target profit of $126,000, what were Blinson's fixed costs?
A. $54,000
B. $1,180,000
C. $820,000
D. $874,000
83. Howard Enterprises has a contribution margin ratio of 65% and fixed costs of $15,000. What would sales
have to be in order for Howard to earn an after-tax profit of $50,000? The company is in the 40% tax bracket.
A. $23,077
B. $100,000
C. $151,282
D. $75,000
84. Which of the following is an assumption of CVP analysis?

A. Inventory levels increase at a constant rate.
B. Costs are linear throughout the relevant range.
C. The number of units sold is constant.
D. Fixed costs increase as production increases.
85. Which of the following is not an assumption of CVP analysis?

A. Selling prices change only at the end of the month.
B. Costs can be thought of as fitting a linear function within the relevant range.
C. Sales mix is constant.
D. Inventory levels do not change.
86. One of the major assumptions used in CVP analysis is:

A. that number of units sold each year remains the same.
B. that in a multi-product environment, all products are assumed to be sold in identical proportion to total sales.
C. that the tax rate is not known.
D. that the sales price of a product will not change as volume changes.
87. Cost structure refers to the relative proportion of:
A. variable costs to contribution margin.
B. total costs to sales.
C. fixed costs to variable costs.
D. sales price per unit to variable costs per unit.
88. Operating leverage measures:

A. how sensitive profit is to a change in fixed costs.
B. how sensitive profit is to a change in sales volume.
C. how sensitive profit is to a change in sales price per unit.
D. how sensitive profit is to a change in tax rates.
89. Carson Cabana's Inc. has the following information available regarding last year's operations:
Sales $1,500,000
Fixed costs 300,000
Net operating income $ 600,000

A. 1.50.
B. 0.67.
C. 2.50.
D. 0.60.
90. Hillary's Restaurant has the following information available regarding last year's operations:
Sales $900,000
Fixed costs 175,000

A. 0.71.
B. 1.50.
C. 2.12.
D. 1.41.
91. Which of the following statements is most likely true if Red Inc. has an operating leverage of 2.0 while Blue
Corp. has an operating leverage of 1.4?
A. Red Inc. is selling its products for a higher sales price than Blue Corp.
B. Red Inc.'s net operating income will be less sensitive to a change in sale volume than Blue Corp.
C. Blue Corp.'s fixed costs in relation to variable costs are lower than Red Inc.'s.
D. Blue Corp. has a lower contribution margin per unit than Red Inc.
92. A company with a high level of operating leverage will:

A. experience fewer fluctuations in income as sales fluctuate than a company with a low level of operating
leverage.
B. experience wider fluctuations in income as sales fluctuate than a company with a low level of operating
leverage.
C. earn higher profits than a company with a low level of operating leverage.
D. earn lower profits than a company with a low level of operating leverage.
93. Your boss read a recent magazine article about income statements, but he was unclear about the differences
between a traditional income statement and a contribution margin income statement. Explain the difference by:
a) presenting a sample format for each statement, b) describing the focus of each statement, and c) discussing
how and by whom each statement is used.
a. Traditional format: Contribution margin format:

Sales $XX Sales $XX
Less: Cost of goods sold (XX) Less: Variable costs (XX)
Gross profit XX Contribution margin XX
Less: Selling, general, and admin. costs (XX) Less: Fixed costs (XX)
Net operating income $XX Net operating income $XX
b. The traditional statement focuses on cost function (product costs versus period costs), while the contribution margin statement focuses on
cost behavior (variable costs versus fixed costs).
c. The traditional statement is used for external financial reporting and income taxes and is used primarily by external parties (ex. creditors
and stockholders). The contribution margin statement is used for internal financial reporting, cost-volume-profit analysis, or decision-
making, and used by internal parties (ex. management).
94. For each of the following statements, fill in the blank with either the word increase, decrease, or stay the
same.
a. All else being equal, as the sales price per unit increases, the contribution margin per unit will _________________.
b. All else being equal, as variable costs per unit increase, the contribution margin per unit will _________________.
c. All else being equal, as total fixed costs increase, the contribution margin per unit will ________________.
d. All else being equal, as sales volume increases, total fixed costs will _______________.
e. All else being equal, as sales volume increases, total variable costs will _____________.
a. increase
b. decrease
c. stay the same
d. stay the same
e. increase
95. How is contribution margin ratio computed?
The contribution margin ratio is computed by dividing the contribution margin by sales. It indicates the dollar
increase in contribution margin for each additional dollar of sales.
96. When using CVP analysis, why is it important to consider qualitative factors? Provide one example of a
qualitative factor and explain how it might affect a decision.
While quantitative or monetary factors are important, qualitative factors often affect monetary factors in the
long run and, therefore, become very important. For example, before raising the price of a product, managers
must consider the effect that the price increase might have on consumers (qualitative factor). Another example
is a change in direct materials used for production. If the quality of the product will diminish (qualitative
factor), then the monetary savings may be eliminated.
97. What is meant by the term "break-even point" and how is it computed in a single versus a multi-product
environment?
The "break-even point" is the level of sales at which net operating income is equal to zero. This will occur when
the contribution margin is equal to fixed costs.
To compute the break-even point in units in a single product environment, divide total fixed costs by the
contribution margin per unit. In a multi-product environment, divide total fixed costs by the weighted-average
contribution margin per unit.
98. All else being equal, explain how each of the following independent changes will affect a company's break-
even point in terms of the number of units that need to be sold.
a. Fixed costs increase

b. Sales price per unit increases
c. Variable costs per unit increase
d. Fixed costs decrease
e. Variable costs per unit decrease
a. Increase
b. Decrease
c. Increase
d. Decrease
e. Decrease
99. In 2011 Dillon Inc. had a total contribution margin of $100,000 and net operating income of $60,000. For
the upcoming year, the company would like to earn a target profit of $80,000. Assuming sales volume is
expected to be the same in the upcoming year as it was in the past year, give three separate options the company
could implement in order to achieve their target profit in the upcoming year.
They could do the following:
a. increase the sales price per unit.

b. decrease the variable costs per unit.
c. decrease fixed costs.
100. When and why should income taxes be considered in profit planning? What is the impact on target profit
when income taxes are taken into account?
Income taxes should be considered in profit planning whenever a company is responsible for paying income
taxes to the government. They should be considered in a decision-making process because the payment of
income taxes will decrease the profits remaining in the business that may, in turn, be used to pay dividends to
shareholders, pay off debt, and/or invest back into the business.
Target profit calculations will be different when income taxes are taken into account. Since income taxes are an
additional expense, the company will have to sell an even higher number of units in order to earn a desired
target profit than they otherwise would if income taxes were ignored or not a consideration.
101. In a multi-product environment, what are the four assumptions used in CVP analysis?
a.
b.
c.
d.
a. The selling price is constant throughout the entire relevant range.
b. Costs are linear throughout the relevant range.
c. In a multi-product environment, the sales mix is constant.
d. Inventory levels are held constant (ex. number of units produced and sold are the same)
102. What does operating leverage reveal about a company?
Operating leverage provides an indication of how sensitive a company's net operating income is to changes in
sales volume. A company with a high level of operating leverage will see wider fluctuations in income as sales
fluctuate than a company with a low level of operating leverage.
103. Lowman Inc. sells a product with a sales price of $25 per unit, variable costs of $10 per unit, and total
fixed costs of $100,000. Lowman is looking into implementing an aggressive advertising campaign that will
cost $45,000.
By what amount do sales dollars need to at least increase by in order for the company's overall profits to not
decrease by having the advertising campaign?
The contribution margin needs to increase by at least $45,000 in order for the company to just break even on the
advertising campaign. In order to increase the contribution margin by $45,000, sales dollars need to increase by
at least $75,000 calculated as follows:
Contribution margin ratio ´ Sales dollars increase = Increase in contribution margin

Contribution margin ratio = $15 ¸ $25 = 60%
Therefore: 60% ´ Sales dollars increase = $45,000

Sales dollars increase = $75,000
104. Sweet Baby Inc. produces two types of children's specialty bed products - Baby Cribs and Toddler Beds.
The following information is available related to each product:
Baby Crib Toddler Bed

Baby cribs account for 60% of total product sales and toddler beds account for the rest. Sweet Baby's total fixed costs are $1,170,000.
Required:
A. How many total children's bed products does the company need to produce and sell in order to break even?
B. How many baby cribs need to be sold in order to break even?

A. The
total
number
of bed
product
s that
need to
be
produc
ed and
sold in
order to
break
even is
3,000
calculat
ed as
follows
:
Break-
even
units in
a
multipr
oduct
environ
ment =
FC ¸
Weight
ed-
average
CM per
unit
Break-
even
units in
a
multipr
oduct
environ
ment =
$1,170,
000 ¸
390 =
3,000
total
units
where
the
weight
ed-
average
contrib
ution
margin
of $390
is
calculat
ed as
follows
:
Baby crib weighted contribution margin = $450 ´ 60% = $270, and

Toddler bed weighted contribution margin = $300 ´ 40% = $120
Therefore, total weighted average contribution margin = $390 ($270 + 120)

B. If
3,000
total
product
s need
to be
sold,
and
60% of
those
product
s will
be baby
cribs,
then
1,800
baby
cribs
(3,000
units ´
60%)
need to
be sold
in order
to
break
even.
105. Hugo Inc. sells three sizes of umbrellas: small, medium, and large. The company has annual fixed costs of
$390,400. For the past several years, 20% of Hugo's sales have been the small and large umbrellas each and
with the remaining 60% being the medium size. Hugo does not expect this to change in the upcoming year.
The following information is also available for each of the umbrellas:
Small Medium Large

Sales price per unit $8 $14 $35
Variable costs per unit 3 4 9
Required:
A. How many total umbrellas does the company need to produce and sell in order to break even?
B. How many medium umbrellas need to be sold in order to break even?
C. If Hugo experiences a higher demand of large umbrellas than it anticipated, will the break-even point increase, decrease, or stay the same?
Why?
A. The
total
number
of
umbrell
as that
need to
be
produc
ed and
sold in
order to
break
even is
32,000
calculat
ed as
follows
:
Break-
even
units in
a
multipr
oduct
environ
ment =
FC ¸
Weight
ed-
average
CM per
unit
Break-
even
units in
a
multipr
oduct
environ
ment =
$390,4
00 ¸
12.20 =
32,000
total
units
where
the
weight
ed-
average
contrib
ution
margin
of
$12.20
is
calculat
ed as
follows
:
Small umbrella weighted contribution margin = $5 ´ 20% = $1, and

Medium umbrella weighted contribution margin = $10 ´ 60% = $6, and
Large umbrella weighted contribution margin = $26 ´ 20% = $5.20
Therefore, total weighted average contribution margin = $12.20 ($1 + 6 + 5.20)

B. If
32,000
total
product
s need
to be
sold,
and
60% of
those
product
s will
be
mediu
m
umbrell
as, then
19,200
mediu
m
umbrell
as
(32,000
units ´
60%)
need to
be sold
in order
to
break
even.
C. The
break-
even
point
will
decreas
e if the
sales
mix
change
s so
that
more
large
umbrell
as are
sold
than
previou
sly
assume
d. It
will
decreas
e
becaus
e the
overall
weight
ed-
average
contrib
ution
margin
will
increas
e since
the
large
umbrell
as have
a
higher
contrib
ution
margin
per
unit,
and if
more of
them
are
sold,
their
"weight
" as a
percent
age of
sales
will
also
increas
e.
These
two
effects
will
cause
the
overall
weight
ed
contrib
ution
margin
to
increas
e.
106. Greenwood Manufacturing has the following product information:

Fixed costs $60,800
A. Break-even units = $60,800 ¸ 32.00 = 1,900 units
B. Contribution margin ratio = $32.00 ¸ 60.00 = 53.33%

Break-even sales dollars = $60,800 ¸ 53.33% = $114,000
C. Sales volume to reach a target profit = ($60,800 + 500,000) ¸ 32.00 = 17,525 units
107. Sienna Manufacturing has the following product information:

Fixed costs $45,000
A. Break-even units = $45,000 ¸ 12.00 = 3,750 units
B. Contribution margin ratio = $12.00 ¸ 20.00 = 60%

Break-even sales dollars = $45,000 ¸ 60% = $75,000
C. Sales volume to reach a target profit = ($45,000 + $499,800) ¸ $12.00 = 45,400 units
108. Eason Products has the following product information available:

Fixed costs $90,000
Required: If Eason is in the 40% tax bracket, how many units need to be sold in order to earn an after-tax target profit of $450,000?
Sales volume (units) to earn an after-tax target profit =

Sales volume (units) to earn an after-tax target profit = 33,600 units
109. Carson Products has the following product information available:

Fixed costs $50,000
Required: If Carson is in the 40% tax bracket, how many units need to be sold in order to earn an after-tax target profit of $300,000?

Sales volume (units) to earn an after-tax target profit = 34,375 units
110. The following information is available for the Blue and Red Companies for 2011
Blue Red
Sales (200,000 units) $1,800,000 $1,800,000
Variable costs 800,000 1,200,000
Contribution margin 1,000,000 600,000
Fixed costs 500,000 100,000
Net operating income $ 500,000 $ 500,000
Required:
A. Compute the operating leverage for each company and explain what operating leverage measures.
B. If both companies experience a 20% increase in sales volume, will they continue to have the same net operating income? Why or why not?
Explain your answer with respect to each company's operating leverage.
A. Operating leverage = Contribution margin ¸ Net operating income. It measures how sensitive a company's net operating income is to a
given percentage change in sales. The higher a company's operating leverage, the more sensitive its net operating income is to a change in
sales.
Blue Company's operating leverage = $1,000,000 ¸ $500,000 = 2

Red Company's operating leverage = $600,000 ¸ $500,000 = 1.2
B. No, they will not continue to have the same net operating income. Blue Company has a higher operating leverage, therefore, a 20%
increase in sales will increase Blue's net operating income more than a 20% increase in sales will increase Red's income. This is because
Blue has higher fixed costs in relation to variable costs than Red company. As sales increase, fixed costs stay the same but variable costs
will increase; therefore, Blue's overall expenses will increase less than Red's.
111. Chapman Products produces a unique item with the following information:

Fixed costs $70,000
D. If Chapman sells 500 more additional units, by what amount will net operating income increase?
E. If Chapman has an additional $25,000 in sales, by what amount will net operating income increase?
A. Sales (6,000 units´ $125) $750,000

Less: Variable costs (6,000 units ´ $50) 300,000
Less: Fixed costs 70,000
B. Contribution margin per unit: $125 - 50 = $75
C. Contribution margin ratio = $75 / 125 = 60%
D. Net operating income will increase by $37,500 = ($75 contribution margin per unit ´ 500 units)
E. Net operating income will increase by $15,000 = ($25,000 ´ 60%)

112. Vincent Products manufactures a particular item with the following information:

A. Contribution margin per unit
B. Contribution margin ratio
C. Break-even point in units
D. Break-even point in sales dollars
A. Contribution margin per unit = $60 - 18 = $42
B. Contribution margin ratio = $42 ¸ 60 = 70%
C. Break-even point in units = Fixed costs ¸ CM per unit = $84,000 ¸ 42 = 2,000 units
(note: Fixed costs = 12,000 units ´ $7 = $84,000)
D. Break-even point in sales dollars = Fixed costs ¸ CM ratio = $84,000 ¸ 70% = $120,000
113. Trenton Inc. manufactures a single product. The following information is available for 2011
Number of units produced and sold 21,000 units
Sales price per unit $18 per unit

Variable manufacturing costs $7 per unit
Variable selling and administrative costs $1.5 per unit
Total fixed manufacturing costs $15,000

Total fixed selling and administrative costs $10,000
Required:
A. Prepare a traditional format income statement (ignore taxes).
B. Prepare a contribution margin format income statement (ignore taxes).
A. Traditional format:
Sales (21,000 units ´ $18) $378,000
Less: Cost of goods sold [$15,000 + ($7 ´ 21,000 units)] 162,000
Gross profit 216,000
Less: Selling and administrative costs [$10,000 + ($1.5 ´ 21,000 units)] 41,500
B. Contribution margin format:

Sales (21,000 units ´ $18) $378,000
Less: Variable costs [21,000 units ´ ($7 + 1.5)] 178,500
Less: Fixed costs ($15,000 + 10,000) 25,000
114. Amanda's Silver Company produces a unique item with the following information:

Fixed costs $15,000
D. If Amanda's sells 100 more additional units, by what amount will net operating income increase?
E. If Amanda's has an additional $2,000 in sales, by what amount will net operating income increase?
A. Sales (2,000 units ´ $40) $80,000

Less: Variable costs (2,000 units ´ $10) 20,000
Less: Fixed costs 15,000
B. Contribution margin per unit: $40 - 10 = $30
C. Contribution margin ratio = $30 / 40 = 75%
D. Net operating income will increase by $3,000 = ($30 contribution margin per unit ´ 100 units)
E. Net operating income will increase by $1,500 = ($2,000 ´ 75%)

115. Carolina Products has the following product information:

Fixed costs $50,000
A. How many units need to be sold in order to break even?
B. Calculate the increase in net operating income if an additional 1,000 units over the break-even point are sold.
C. How many units need to be sold in order to earn a target profit of $600,000? (Ignore taxes)
A. Break-even units = $50,000 ¸ 10.00 contribution margin per unit = 5,000 units
B. 1,000 units ´ $10 contribution margin per unit = $10,000 increase in net operating income
C. Sales volume to reach a target profit = ($50,000 + 600,000) ¸ $10.00 = 65,000 units
116. Bradford Products has the following product information available:

Fixed costs $50,000
Required: Answer each of the following independent questions.
A. What is the contribution margin per unit?
B. What is the contribution margin ratio?
C. How many units must be sold in order to break even?
D. How many units must be sold in order to earn a target profit of $400,000? (ignore taxes)
E. Bradford is considering an advertising campaign that has a cost of $70,000. The marketing department estimates that the campaign will
increase sales by $250,000. Should the company have the advertising campaign? Why or why not? Show your calculations.
A. Contribution margin per unit = $10 = ($25 - 15)
B. Contribution margin ratio = $10 ¸ 25 = 40%
C. Break-even units = $50,000 ¸ 10 = 5,000 units
B. Sales volume to earn target profit = ($50,000 + 400,000) ¸ 10 = 45,000 units
E. Yes, net profit will increase if they have the advertising campaign.
Calculations:
The effect on contribution margin if sales increase $250,000:
$250,000 ´ 40% = $100,000 increase in contribution margin
Comparing the increase in contribution margin ($100,000) to the increase in fixed costs ($70,000) shows that overall net operating income
will increase $30,000 ($100,000 - 70,000) with the implementation of the advertising campaign.
117. Harrison Inc. has a contribution margin ratio of 60% and fixed costs of $91,000.
Required:
A. If Harrison ignores income taxes, what do sales dollars need to be in order to have net operating income of $500,000?
B. If Harrison takes into account income taxes, and the company is in the 40% tax bracket, what do sales dollars need to be in order to have
an after-tax net operating income of $500,000?
A. Sales volume (dollars) to earn target profit = (Fixed costs + Target profit) ¸ CM ratio
Sales volume (dollars) to earn target profit = ($91,000 + $500,000) ¸ .60 = $985,000
B.
Sales volume (dollars) to earn an after-tax target profit =
Sales volume (dollars) to earn an after-tax target profit =
Sales volume (dollars) to earn an after-tax target profit = $1,540,555.56 or $1,540,556 (rounded).

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Chapter 6--Cost-Volume-Profit Analysis

1. The traditional income statement focuses on:

4. The difference between sales and cost of goods sold is called:

5. The difference between sales and variable costs is called:

6. The contribution margin income statement is structured in such a way as to emphasize:

24. Hunter Inc.

Sales price $100 per unit

Sales price $100 per unit

26. Carolina Products

Sales price $45 per unit

27. Carolina Products

Sales price $45 per unit

Sales price $45 per unit

29. Joe's Coffee House

Sales (2,500 cups) $7,500

30. Joe's Coffee House

Sales (2,500 cups) $7,500

Sales (2,500 cups) $7,500

Sales (5,000 units) $100,000

Sales price per unit $35

In Haywood sells one more unit, net operating income will:

38. Stealth Software Inc.

Sales revenue $50,000

Sales revenue $50,000

40. Stealth Software Inc.

Sales revenue $50,000

47. RET Manufacturing

Percentage of total sales 66.67% 33.33%

50. Village Manufacturing

Card Games Puzzles

Card Games Puzzles

55. In a multi-product environment:

Sales price $20 per unit

57. Bergman Inc.

Sales price $20 per unit

58. Poole Products Inc.

Sales price $25 per unit

Sales price $25 per unit

60. Poole Products Inc.

Sales price $25 per unit

61. Harrison Manufacturing

Sales price $50 per unit

Sales price $50 per unit

63. Harrison Manufacturing

Sales price $50 per unit

64. Harrison Manufacturing

Sales price $50 per unit

Sales price $12 per unit

66. Tucker Corp.

Sales price $12 per unit

67. Tucker Corp.

Sales price $12 per unit

Sales price $20 per unit

69. Cameron Corp.

Sales price $20 per unit

70. Cameron Corp.

Sales price $20 per unit