Chap 7 : Cost-Volume-Profit Analysis.

The correct answer for each question is indicated by a .

1
INCORRECT Total contribution margin can be defined as which of the following?

A)Total sales revenue minus total fixed expenses

B)Total sales revenue minus the total of fixed and variable expenses

C)Total sales revenue minus total variable expenses

D)Total sales revenue minus profit

E)Total fixed expenses minus total variable costs

Feedback:
Total contribution margin is defined as total sales revenues minus total
variable expenses. It is the amount of revenue that is available
to contribute to covering fixed expenses after all variable expenses have
been covered. LO 1

2 CORRECT
If fixed expenses are $54,000, break-even sales units are 15,000, and the
contribution margin ratio is .60, what is the unit contribution margin?

A)$2.40

B)$3.60

C)$6.00

D)$5.40

E)$4.50

Feedback:
The break-even point in sales dollars is equal to total fixed expenses
divided by the contribution margin ratio. In this case, the break-even
point is sales dollars is $90,000 ($54,000/0.60). The unit sale price is $6
($90,000/15,000). The unit contribution margin is $3.60 ($6 x 0.60).
Proof:
 LO 2

3
INCORRECT If fixed expenses are $38,000, break-even sales units are 9,500, and the
contribution margin ratio is .40, what is the unit selling price?

A)$4.00

B)$6.00

C)$10.00

D)$2.00

E)None of the above

Feedback:
Step one: Solve for the unit contribution margin. The break-even point in
units (9,500) is equal to total fixed expenses ($38,000) divided by the
unit contribution margin (unknown). Solve the problem as follows:
$38,000/X
= 9,500
X = $4

Step 2: The contribution margin ratio is the unit contribution margin

(found in step 1) divided by the unit sales price. Use the contribution
margin ratio (.4) and contribution margin ($4) to solve for the unit sales
price:

$4/X = .4
X= Unit Sales Price = $10. LO 2

4 CORRECT
Fixed expenses are $75,000. The unit sales price is $25. The contribution
margin ratio is .60. What are the break-even sales units?

A)10,000

B)5,000

C)7,500
 D)125,000

E)None of the above

Feedback:
Using the contribution-margin approach, the break-even point in units is
equal to the fixed expenses divided by the unit contribution margin. The
break-even point in units is 5,000 (= $75,000/($25 x 0.60)). LO 1

5 CORRECT
Consider the following:

In constructing a cost-volume-profit (CVP) graph, at what level on the vertical

axis will the total expenses line begin?

A)$120,000

B)$80,000

C)$240,000

D)$40,000

E)$200,000

Feedback: The total cost line will begin on the vertical axis at the dollar
amount of total fixed expenses. LO 3

6 CORRECT
Consider the following:

At what sales volume was the above data derived?

A)12,500 units

B)7,500 units
 C)15,000 units

D)10,000 units

E)5,000 units

Feedback:
The sales volume can be calculated by dividing total variable expenses by
the unit variable cost. The unit variable cost can be calculated by
subtracting the unit contribution margin from the unit sales price.

$24- $8 = $16 of variable cost per unit

$120,000 total variable expense/ $16 = 7,500 units. LO 3

7
INCORRECT An increase in a company's variable cost per unit will:

A)decrease the number of units which must be sold to break even.

B)decrease the fixed costs on a per unit basis.

increase the number of units that must be sold to cover variable and fixed
C)costs.

D)increase net income

E)make it impossible for the company to break-even.

Feedback: If variable cost per unit increases, more units will need to be
sold in order to break-even. This can be seen mathematically using the
Contribution Margin Approach and noting that the unit contribution
margin is smaller, making the break-even point in units larger. LO4

8
INCORRECT Consider the following:

How many sales units are required to earn the target profit?

A)15,000 units

B)12,000 units
 C)6,400 units

D)12,800 units

E)10,000 units

Feedback:
The number of units required to earn the target profit is equal to fixed
expenses plus the target profit, divided by the unit contribution margin.
The number of units required to earn the target profit is 10,000 (=
($78,000 + $42,000)/$12)). LO 4

9 CORRECT
Consider the following:

Use the equation method and compute the units of sales required to earn a
target profit of $12,000.

A)3,220

B)4,440

C)3,840

D)4,267

E)4,560

Feedback:
The equation is: $38X – $18X – $76,800 = $12,000. Solve for X (X = the
units required to earn the target profit). X = $88,800/$20X; X = 4,440
units. Proof:

LO 4

10
INCORRECT Consider the following:
 What is the weighted-average unit contribution margin for the sales mix?

A)$12.00

B)$17.33

C)$26.00

D)$16.00

E)$15.00

Feedback:
The weighted-average unit contribution margin is the average of the unit
contribution margins weighted by the relative sales proportion of each
product: ($4 x 4/8) + ($16 x 3/8) + ($32 x 1/8), or $2 + $6 + $4, or
$12. (Alternative: [(($4 x 4) + ($16 x 3) + ($32 x 1)) / 8]. LO 5

11 CORRECT
Consider the following:

Fixed expenses are $32,000. What is the number of units of Product A sold at
the break-even point?

A)6,000

B)4,000

C)1,500

D)1,000
 E)2,500

Feedback:
The weighted-average unit contribution margin is $6.40, or ($4 x 4/5) +
($16 x 1/5). Fixed expenses divided by the weighted-average unit
contribution margin determines total units sold at break even:
$32,000/$6.40= 5,000. Units of Product A break-even: 5,000 x 4/5 =
4,000. Proof: (4,000 x $4) + (1,000 x $16) = $32,000. LO 5

12 CORRECT
Consider the following:

Sales revenues were $300,000. There was no beginning or ending inventory.

Which of the following statements is false?

A)Income in a traditional income statement is $75,000.

B)Income in a contribution income statement is $80,000.

C)The contribution margin is $190,000.

D)A contribution income statement is an internal document (report).

E)A traditional income statement would include gross margin.

Feedback: Income in a traditional income statement: $300,000 –

$110,000 – ($70,000 + $45,000) = $75,000. The contribution margin is
$190,000 ($300,000 – ($60,000 + $10,000 + $40,000)). Income in a
contribution income statement is $75,000 (=$190,000 – ($50,000 +
$60,000 + $5,000)), which is the contribution margin minus all fixed
expenses. Income computed under either method equals $75,000
because there was no beginning or ending inventories. LO 7

13
INCORRECT Consider the following:

Which of the following statements about the companies is false?

 A)The operating leverage for Company A is 6.

B)The operating leverage for Company B is more than that of Company C.

C)The break-even point in sales dollars for Company C is $360,000.

D)The operating leverage for Company B is 5.

E)The operating leverage for Company B is 7.

Feedback: Operating leverage is determined by dividing total contribution

margin by income. The operating leverage for Company A is 6 (=
$360,000/$60,000). The operating leverage for Company B is 5 (=
$200,000/$40,000); the operating leverage for Company C is 2 (=
$360,000/$180,000). The break even point for Company C (in sales
dollars) is $180,000/50% = $360,000. LO 8

14
INCORRECT Consider the following:

Management is considering installing a new, automated manufacturing

process that will increase fixed costs by $50,000, and reduce variable
manufacturing costs by $3 per unit. Assume that management desires to
achieve a target profit of $70,000 with or without the acquisition of the
automated machine. If the automated machine is installed, what will be the
change in the number of units required to achieve the target profit?

A)6,667 unit increase

B)5,667 unit decrease

C)3,000 unit decrease

 D)2,000 unit increase

E)3,333 unit decrease

Feedback: Currently, the number of units required to earn the target

profit is 30,000 (($200,000 + $70,000)/$9). If the automated machine is
placed into service, the number of units required to earn the target profit
will be 26,667 (= ($250,000 + $70,000)/$12). Change in units: 30,000 –
26,667 = 3,333 decrease in sales units. LO 9

15
INCORRECT Consider the following:

What will be (1) the increase or decrease in break-even units, and (2) the
increase or decrease in units necessary to achieve a target income of $45,000
when changing from current conditions to advanced technology in machinery
and JIT implementation?

No change in break-even point; increase in sales volume to achieve target

A)income

Increase in break-even point; increase in sales volume to achieve target

B)income

No change in break-even point; decrease in sales volume to achieve target

C)income

Decrease in break-event point; decrease in sales volume to achieve target

D)income

E)None of the above

Feedback: Under current conditions, the break-even point is 10,000 units

($130,000/$13); and the sales volume to achieve a target income of
$45,000 is 13,462 units (= ($130,000 + $45,000) / $13). Under
advanced technology, the break-even point is 10,000 units (=
$170,000/$17); and the sales volume to achieve a target income of
$45,000 is 12,647 units (= ($170,000 + $45,000)/ $17). LO 10