Cost-Volume-Profit Analysis

MULTIPLE CHOICE QUESTIONS

1. CVP analysis can be used to study the effect of:

A. changes in selling prices on a company's profitability.
B. changes in variable costs on a company's profitability.
C. changes in fixed costs on a company's profitability.
D. changes in product sales mix on a company's profitability.
E. all of the above.

2. The break-even point is that level of activity where:

A. total revenue equals total cost.
B. variable cost equals fixed cost.
C. total contribution margin equals the sum of variable cost plus fixed cost.
D. sales revenue equals total variable cost.
E. profit is greater than zero.

3. The unit contribution margin is calculated as the difference between:

A. selling price and fixed cost per unit.
B. selling price and variable cost per unit.
C. selling price and product cost per unit.
D. fixed cost per unit and variable cost per unit.
E. fixed cost per unit and product cost per unit.

4. Which of the following would produce the largest increase in the contribution margin per unit?
A. A 7% increase in selling price.
B. A 15% decrease in selling price.
C. A 14% increase in variable cost.
D. A 17% decrease in fixed cost.
E. A 23% increase in the number of units sold.

5. Which of the following would take place if a company were able to reduce its variable cost per unit?
Contribution Break-even
Margin Point
A. Increase Increase
B. Increase Decrease
C. Decrease Increase
D. Decrease Decrease
E. Increase No effect

6. Which of the following would take place if a company experienced an increase in fixed costs?
A. Net income would increase.
B. The break-even point would increase.
C. The contribution margin would increase.
D. The contribution margin would decrease.
E. More than one of the above events would occur.

Chapter 8
7. Assuming no change in sales volume, an increase in a firm's per-unit contribution margin would:
A. increase net income.
B. decrease net income.
C. have no effect on net income.
D. increase fixed costs.
E. decrease fixed costs.

8. A company that desires to lower its break-even point should strive to:
A. decrease selling prices.
B. reduce variable costs.
C. increase fixed costs.
D. sell more units.
E. pursue more than one of the above actions.

9. A company has fixed costs of $900 and a per-unit contribution margin of $3. Which of the
following statements is (are) true?
A. Each unit "contributes" $3 toward covering the fixed costs of $900.
B. The situation described is not possible and there must be an error.
C. Once the break-even point is reached, the company will make money at the rate of $3 per unit.
D. The firm will definitely lose money in this situation.
E. Statements "A" and "C" are true.

10. Sanderson sells a single product for $50 that has a variable cost of $30. Fixed costs amount to $5
per unit when anticipated sales targets are met. If the company sells one unit in excess of its break-
even volume, the bottom-line profit will be:
A. $15.
B. $20.
C. $50.
D. an amount that cannot be derived based on the information presented.
E. an amount other than those in choices "A," "B," and "C" but one that can be derived based on the
information presented.

11. At a volume of 15,000 units, Boston reported sales revenues of $600,000, variable costs of$225,000,
and fixed costs of $120,000. The company's contribution margin per unit is:
A. $17.
B. $25.
C. $47.
D. $55.
E. an amount other than those above.

12. A recent income statement of Banks Corporation reported the following data:
Sales revenue $8,000,000
Variable costs 5,000,000
Fixed costs 2,200,000
If these data are based on the sale of 20,000 units, the contribution margin per unit would be:
A. $40.
B. $150.
C. $290.
D. $360.
E. an amount other than those above.
13. A recent income statement of Fox Corporation reported the following data:
Sales revenue $3,600,000
Variable costs 1,600,000
Fixed costs 1,000,000
If these data are based on the sale of 10,000 units, the break-even point would be:
A. 2,000 units.
B. 2,778 units.
C. 3,600 units.
D. 5,000 units.
E. an amount other than those above.

14. A recent income statement of Yale Corporation reported the following data:
Sales revenue $2,500,000
Variable costs 1,500,000
Fixed costs 800,000
If these data are based on the sale of 5,000 units, the break-even sales would be:
A. $2,000,000.
B. $2,206,000.
C. $2,500,000.
D. $10,000,000.
E. an amount other than those above.

15. Lawton, Inc., sells a single product for $12. Variable costs are $8 per unit and fixed costs total
$360,000 at a volume level of 60,000 units. Assuming that fixed costs do not change, Lawton's
break-even point would be:
A. 30,000 units.
B. 45,000 units.
C. 90,000 units.
D. negative because the company loses $2 on every unit sold.
E. a positive amount other than those given above.

16. Green, Inc., sells a single product for $20. Variable costs are $8 per unit and fixed costs total
$120,000 at a volume level of 5,000 units. Assuming that fixed costs do not change, Green's break-
even sales would be:
A. $160,000.
B. $200,000.
C. $300,000.
D. $480,000.
E. an amount other than those above.

17. Orion recently reported sales revenues of $800,000, a total contribution margin of $300,000, and
fixed costs of $180,000. If sales volume amounted to 10,000 units, the company's variable cost per
unit must have been:
A. $12.
B. $32.
C. $50.
D. $92.
E. an amount other than those above.

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18. Strand has a break-even point of 120,000 units. If the firm's sole product sells for $40 and fixed
costs total $480,000, the variable cost per unit must be:
A. $4.
B. $36.
C. $44.
D. an amount that cannot be derived based on the information presented.
E. an amount other than those in choices "A," "B," and "C" but one that can be derived based on the
information presented.

19. Ribco Co., makes and sells only one product. The unit contribution margin is $6 and the breakeven
point in unit sales is 24,000. The company's fixed costs are:
A. $4,000.
B. $14,400.
C. $40,000.
D. $144,000.
E. an amount other than those above.

20. The contribution-margin ratio is:

A. the difference between the selling price and the variable cost per unit.
B. fixed cost per unit divided by variable cost per unit.
C. variable cost per unit divided by the selling price.
D. unit contribution margin divided by the selling price.
E. unit contribution margin divided by fixed cost per unit.

21. At a volume level of 500,000 units, Sullivan reported the following information:
Sales price $60
Variable cost per unit 20
Fixed cost per unit 4
The company's contribution-margin ratio is:
A. 0.33.
B. 0.40.
C. 0.60.
D. 0.67.
E. an amount other than those above.

22. Which of the following expressions can be used to calculate the break-even point with the
contribution-margin ratio (CMR)?
A. CMR ÷ fixed costs.
B. CMR x fixed costs.
C. Fixed costs ÷ CMR.
D. (Fixed costs + variable costs) x CMR.
E. (Sales revenue - variable costs) ÷ CMR.
EXERCISES
1. Vince's Pizza delivers pizzas to dormitories and apartments near a major state university. The
company's annual fixed costs are $48,000. The sales price averages $9, and it costs the company $3
to make and deliver each pizza.

Required:
A. How many pizzas must Vince's sell to break even?
Selling price $9
Less: Variable cost 3
CM $6

BP (units) = FC/CM
BP (units) = $48,000/$6 = 8,000 pizzas

B. How many pizzas must the company sell to earn a target net profit of $54,000?
Sales (units) = (FC + Desired profit) / CM in units
$48,000 + $54,000 = $102,000/$6 = 17,000 pizzas

C. If budgeted sales total 9,900 pizzas, how much is the company's safety margin?
MS (pesos) = Actual Sales – Breakeven Sales
(9,900 x $9) – (8,000 x $9) = $17,100

D. Vince's assistant manager, an accounting major, has suggested that the firm should try to
increase the contribution margin per pizza. Explain the meaning of "contribution margin" in
layman's terms.
Answer: The contribution margin is the amount that each unit (pizza) contributes toward
covering the fixed cost and producing a profit. Once a company's fixed costs are covered,
operating income will increase by the amount of the contribution margin. Mathematically, it
is computed as the difference between the selling price and the variable cost per unit.

2. Seventh Heaven takes tourists on helicopter tours of Hawaii. Each tourist buys a $150 ticket; the
variable costs average $60 per person. Seventh Heaven has annual fixed costs of $702,000.

Required:
A. How many tours must the company conduct in a month to break even?
Selling price $150
Less: Variable cost 60
CM $ 90

BP (units) = FC/CM
BP (units) = ($702,000/12 months)/$90 = 650 tours in a month

B. Compute the sales revenue needed to produce a target net profit of $36,000 per month.
Sales (pesos) = (FC + Desired profit) / CM in units
[($702,000/12 months) + $36,000] / $90 = $1,050

C. Calculate the contribution margin ratio: $90/$150 = 0.6

D. Determine whether the actions that follow will increase, decrease, or not affect the company's
break-even point.
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 1. A decrease in tour prices. Increase
2. The termination of a salaried clerk (no replacement is planned). Decrease
3. A decrease in the number of tours sold. No effect

3. The Bruggs & Strutton Company manufactures an engine for carpet cleaners called the
"Snooper." Budgeted cost and revenue data for the "Snooper" are given below, based on sales of
40,000 units.

Sales $1,600,000
Less: Cost of goods sold 1,120,000
Gross margin $ 480,000
Less: Operating expenses 100,000
Net income $ 380,000

Cost of goods sold consists of $800,000 of variable costs and $320,000 of fixed costs. Operating
expenses consist of $40,000 of variable costs and $60,000 of fixed costs.

Required:
A. Calculate the break-even point in units and sales dollars.
Sales $1,600,000
Less: Variable cost 840,000
CM $ 760,000

SP (units) = Sales/VC (OpEx)

SP (unit) = $1,600,000/40,000 units = $40

CM (units) = CM/VC
CM (units) = $760,000/40,000 units = $19

BP (units) = FC/CM
BP (units) = ($320,000+$60,000)/$19 = 20,000 units

BP (sales) = BP in units x Selling price

BP (sales) = 20,000 units x $40 = $800,000

B. Calculate the safety margin: $1,600,000 - $800,000 = $800,000

C. Bruggs & Strutton received an order for 6,000 units at a price of $25.00. There will be no
increase in fixed costs, but variable costs will be reduced by $0.54 per unit because of
cheaper packaging. Determine the projected increase or decrease in profit from the order.
Sales (6,000 x $25) $150,000
Less: VC @ $20.46* 122,760
Increase in profit $ 27,240

*($800,000 + $40,000)/40,000 units = $21

$21 - $0.54 = $20.46
5. Wilcox Company is studying the impact of the following:
 1. An increase in sales price.
2. An increase in the variable cost per unit.
3. An increase in the number of units sold (note: each unit produces a $6 contribution
margin).
4. A decrease in fixed costs.
5. A proposed change in the method of compensation for salespeople, away from
commissions based on gross sales dollars and toward higher monthly salaries.

Required:
Determine the impact of each of these operating changes on Wilcox's per-unit contribution
margin and break-even point by completing the chart that follows. Your responses should be
Increase (INC), Decrease (DEC), No Effect (NE), or Insufficient Information to Judge (II).

Per-Unit
Contribution Break-Even
Margin Point
1. INC DEC
2. DEC INC
3. NE NE
4. NE DEC
5. INC II

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