Chapter 6 Cost-Volume-Profit Relationships

Multiple Choice Questions

1. Which of the following is correct? The break-even point occurs on the
CVP graph where:
A) total profit equals total expenses.
B) total profit equals total fixed expenses.
C) total contribution margin equals total fixed expenses.
D) total variable expenses equal total contribution margin.
Answer: C

2. East Company manufactures and sells a single product with a positive

contribution margin. If the selling price and the variable expense per unit
both increase 5% and fixed expenses do not change, what is the effect on the
contribution margin per unit and the contribution margin ratio?
Contribution margin per unit Contribution unit margin ratio
A) No change No change
B) Increase Increase
C) Increase No change
D) Increase Decrease
Answer: C

3. The contribution margin ratio is equal to:

A) Total manufacturing expenses/Sales.
B) (Sales - Variable expenses)/Sales.
C) 1 - (Gross Margin/Sales).
D) 1 - (Contribution Margin/Sales).
Answer: B

4. The contribution margin ratio always increases when the:

A) break-even point increases.
B) break-even point decreases.
C) variable expenses as a percentage of net sales decrease.
D) variable expenses as a percentage of net sales increase.
Answer: C

5. In the middle of the year, the price of Lake Corporation's major raw
material increased by 8%. How would this increase affect the company's
break-even point and margin of safety?
1
Break-even point Margin of safety
A) Increase Increase
B) Increase Decrease
C) Decrease Decrease
D) Decrease Increase
Answer: B

6. The break-even point in unit sales is found by dividing total fixed

expenses by:
A) the contribution margin ratio.
B) the variable expenses per unit.
C) the sales price per unit.
D) the contribution margin per unit.
Answer: D

7. Which of the following would not affect the break-even point?

A) number of units sold
B) variable expense per unit
C) total fixed expenses
D) selling price per unit
Answer: A

8. If a company increases its selling price by $2 per unit due to an increase in

its variable labor cost of $2 per unit, the break-even point in units will:
A) decrease.
B) increase.
C) not change.
D) change but direction cannot be determined.
Answer: C

9. To obtain the dollar sales volume necessary to attain a given target profit,
which of the following formulas should be used?
A) (Fixed expenses + Target net profit)/Total contribution margin
B) (Fixed expenses + Target net profit)/Contribution margin ratio
C) Fixed expenses/Contribution margin per unit
D) Target net profit/Contribution margin ratio
Answer: B

10. Salinas Corporation has a degree of operating leverage of 8. This means

that a 1% change in sales dollars at Salinas will generate an 8% change in:
2
A) variable expenses.
B) fixed expenses.
C) contribution margin.
D) net operating income.
Answer: D

11. In calculating the break-even point for a multi-product company, which

of the following assumptions are commonly made?
I. Selling prices are constant.
II. Variable expenses are constant per unit.
III. The sales mix is constant.
A) I and II
B) I and III
C) II and III
D) I, II, and III
Answer: D

12. The following information relates to the break-even point at Pezzo

Corporation:
Sales dollars ...................... $120,000
Total fixed expenses ......... $30,000
If Pezzo wants to generate net operating income of $12,000, what will its
sales dollars have to be?
A) $132,000
B) $136,000
C) $168,000
D) $176,000
Answer: C

13. The following information relates to Snowbird Corporation:

Sales at the break-even point ......... $312,500
Total fixed expenses ...................... $250,000
Net operating income .................... $150,000
What is Snowbird's margin of safety?
A) $62,500
B) $187,500
C) $100,000
D) $212,500
Answer: B

3
14. The “Dog Hut” hot dog stand expects the following operating results for
next year:
Sales ............................................... $280,000
Net operating income .................... $21,000
Contribution margin ratio .............. 70%
What is Dog Hut's break-even point next year in sales dollars?
A) $120,000
B) $181,300
C) $196,000
D) $250,000
Answer: D

15. The following information relates to Zinc Corporation for last year:
Sales ........................................................... $500,000
Net operating income ................................ $25,000
Degree of operating leverage .................... 5
Sales at Zinc are expected to be $600,000 next year. Assuming no change in
cost structure, this means that net operating income for next year should be:
A) $30,000
B) $45,000
C) $50,000
D) $125,000
Answer: C

16. The following information pertains to Nova Co.'s cost-volume-profit

relationships:
Breakeven point in units sold ...................... 1,000
Variable expenses per unit .......................... $500
Total fixed expenses .................................... $150,000
How much will be contributed to net operating income by the 1,001st unit
sold?
A) $650
B) $500
C) $150
D) $0
Answer: C

17. Barnes Corporation expected to sell 150,000 games during the month of
November. The following budgeted data are based on that level of sales:
Revenue (150,000 games) ..................................... $2,400,000
4
Variable expenses .................................................. 1,425,000
Fixed manufacturing overhead expenses .............. 250,000
Fixed selling & administrative expenses ............... 500,000
Net operating income ............................................ 225,000
Barnes' actual sales during November were 180,000 games. What should the
actual net operating income during November have been?
A) $450,000
B) $270,000
C) $420,000
D) $510,000
Answer: C

18. Carver Company produces a product which sells for $40. Variable
manufacturing costs are $18 per unit. Fixed manufacturing costs are $5 per
unit based on the current level of activity, and fixed selling and
administrative costs are $4 per unit. A selling
commission of 15% of the selling price is paid on each unit sold. The
contribution margin per unit is:
A) $7
B) $17
C) $22
D) $16
Answer: D

19. Tice Company is a medium-sized manufacturer of lamps. During the

year a new line called “Horolin” was made available to Tice's customers.
The break-even point for sales of Horolin is $200,000 with a contribution
margin of 40%. Assuming that the profit for the Horolin line during the year
amounted to $100,000, total sales during the year would have amounted to:
A) $300,000
B) $420,000
C) $450,000
D) $475,000
Answer: C

20. Black Company's sales are $600,000, its fixed expenses are $150,000,
and its variable expenses are 60% of sales. Based on this information, the
margin of safety is:
A) $90,000
B) $190,000
5
C) $225,000
D) $240,000
Answer: C

21. Variable expenses for Alpha Company are 40% of sales. What are sales
at the breakeven point, assuming that fixed expenses total $150,000 per year:
A) $250,000
B) $375,000
C) $600,000
D) $150,000
Answer: A

22. Minist Company sells a single product at a selling price of $15.00 per
unit. Last year, the company's sales revenue was $225,000 and its net
operating income was $18,000. If fixed expenses totaled $72,000 for the
year, the break-even point in unit sales was
A) 15,000
B) 9,900
C) 14,100
D) 12,000
Answer: D

23. Winger Corp. sells a product for $5 per unit. The fixed expenses are
$210,000 and the unit variable expenses are 60% of the selling price. What
sales would be necessary in order for Winger Corp. to realize a profit of 10%
of sales?
A) $700,000
B) $525,000
C) $472,500
D) $420,000
Answer: A

24. Darth Company sells three products. Sales and contribution margin
ratios for the three products follow:
Product
X Y Z
Sales in dollars ................. $20,000 $40,000 $100,000
contribution margin ratio ....... 45% 40% 15%

6
Given these data, the contribution margin ratio for the company as a whole
would be:
A) 25%
B) 75%
C) 33.3%
D) it is impossible to determine from the given data
Answer: A

25. Cindy, Inc. sells a product for $10 per unit. The variable expenses are $6
per unit, and the fixed expenses total $35,000 per period. By how much will
net operating income change if sales are expected to increase by $40,000?
A) $16,000 increase
B) $5,000 increase
C) $24,000 increase
D) $11,000 decrease
Answer: A

26. How much will a company's net operating income change if it

undertakes an advertising campaign given the following data:
Cost of advertising campaign ...................................... $25,000
Variable expense as a percentage of sales ................... 42%
Increase in sales ........................................................... $60,000
A) $200 increase
B) $25,200 increase
C) $15,000 increase
D) $9,800 increase
Answer: D

27. Mason Company's selling price was $20.00 per unit. Fixed expenses
totaled $54,000, variable expenses were $14.00 per unit, and the company
reported a profit of $9,000 for the year. The break-even point for Mason
Company is:
A) 10,500 units
B) 4,500 units
C) 8,500 units
D) 9,000 units
Answer: D

28. Given the following data:

Selling price per unit ................................. $2.00
7
Variable production cost per unit .............. $0.30
Fixed production cost ................................ $3,000
Sales commission per unit ......................... $0.20
Fixed selling expenses ............................... $1,500
The break-even point in dollars is:
A) $6,000
B) $4,500
C) $2,647
D) $4,000
Answer: A

29. Hollis Company sells a single product for $20 per unit. The company's
fixed expenses total $240,000 per year, and variable expenses are $12 per
unit of product. The company's break-even point is:
A) $400,000
B) $600,000
C) 20,000 units
D) 12,000 units
Answer: B

30. Darwin, Inc., sells a particular textbook for $20. Variable expenses are
$14 per book. At the current volume of 50,000 books sold per year the
company is just breaking even. Given these data, the annual fixed expenses
associated with the textbook total:
A) $300,000
B) $1,000,000
C) $1,300,000
D) $700,000
Answer: A

Use the following to answer questions 31-33:

A cement manufacturer has supplied the following data:
Tons of cement produced and sold 220,000
Sales revenue $924,000
Variable manufacturing expense $297,000
Fixed manufacturing expense $280,000
Variable selling and administrative expense $165,000
Fixed selling and administrative expense $82,000
Net operating income $100,000
31. What is the company's unit contribution margin?
8
A) $4.20
B) $0.45
C) $1.90
D) $2.10
Answer: D

32. The company's contribution margin ratio is closest to:

A) 40.0%
B) 50.0%
C) 60.0%
D) 10.7%
Answer: B

33. If the company increases its unit sales volume by 5% without increasing
its fixed expenses, then total net operating income should be closest to:
A) $5,000
B) $123,100
C) $105,000
D) $102,500
Answer: B

Use the following to answer questions 34-36:

A tile manufacturer has supplied the following data:
Boxes of tiles produced and sold ............................. 580,000
Sales revenue ............................................................ $2,842,000
Variable manufacturing expense .............................. 1,653,000
Fixed manufacturing expense .................................. 784,000
Variable selling and administrative expense ............ 145,000
Fixed selling and administrative expense ................ 128,000
Net operating income ............................................... $132,000

34. What is the company's unit contribution margin?

A) $0.23
B) $4.90
C) $3.10
D) $1.80
Answer:

35. The company's contribution margin ratio is closest to:

A) 29.4%
9
B) 4.7%
C) 63.3%
D) 36.7%
Answer: D

36. If the company increases its unit sales volume by 5% without increasing
its fixed expenses, then total net operating income should be closest to:
A) $6,600
B) $184,200
C) $134,422
D) $138,600
Answer: B

Use the following to answer questions 37-39:

A manufacturer of tiling grout has supplied the following data:
Kilograms produced and sold .......................................... 300,000
Sales revenue ................................................................... $1,950,000
Variable manufacturing expense ..................................... $960,000
Fixed manufacturing expense ......................................... $266,000
Variable selling and administrative expense ................... $360,000
Fixed selling and administrative expense ....................... $232,000
Net operating income ...................................................... $132,000
37. The company's break-even in unit sales is closest to:
A) 43,774
B) 237,143
C) 76,615
D) 80,606
Answer: B

38. The company's contribution margin ratio is closest to:

A) 67.7%
B) 74.2%
C) 32.3%
D) 25.8%
Answer: C

39. The company's degree of operating leverage is closest to:

A) 14.77
B) 2.65
C) 4.77
10
D) 2.27
Answer: C

Essay Questions
1. Baker Company has a product that sells for $20 per unit. The variable
expenses are $12 per unit, and fixed expenses total $30,000 per year.
Required:
a. What is the total contribution margin at the break-even point?
b. What is the contribution margin ratio for the product?
c. If total sales increase by $20,000 and fixed expenses remain unchanged,
by how much would net operating income be expected to increase?
d. The marketing manager wants to increase advertising by $6,000 per year.
How many additional units would have to be sold to increase overall net
operating income by $2,000?

Answer:
a. At the break-even, the total contribution margin equals total fixed
expenses. Therefore, the total contribution margin would be $30,000.
b. Contribution margin ratio =Unit contribution margin ÷ Selling price
= ($20 - $12) ÷ $20 = 40%
c. Increase in sales ....................................... $20,000
CM ratio .................................................. 40%
Increase in net operating income ............. $8,000

d. Increase in advertising expenses ..............$6,000

Desired increase in net operating income ..... 2,000
Total required contribution margin ............... $8,000
÷ Contribution margin per unit ...................... $8
Required unit sales ........................................ 1,000

2. Penury Company offers two products. At present, the following represents

the usual results of a month's operations:
Product K Product L
Amount Per Amount Per Combined
Unit Unit Amount

Sales revenue ..................... $120,000 $1.20 $80,000 $0.80 $200,000

Variable expenses .............. 60,000 0.60 60,000 0.60 120,000
Contribution margin .......... $ 60,000 $0.60 $20,000 $0.20 80,000
Fixed expenses .................. 50,000
Net operating income ........ $ 30,000

11
Required:
a. Find the break-even point in terms of dollars.
b. Find the margin of safety in terms of dollars.

Answer:
a. CM ratio = Contribution margin ÷ Sales revenue
= $80,000 ÷ $200,000 = 40%
Break-even in dollars = Fixed expenses ÷ CM ratio
= $50,000 ÷ 0.40 = $125,000
b. Margin of safety = Sales revenue - Sales at break-even
= $200,000 – $125,000 = $75,000

12