MODULE 4

COST-VOLUME-PROFIT ANALYSIS

THEORIES:
1. To which function of management is CVP analysis most applicable?
A. Planning C. Directing
B. Organizing D. Controlling Bobadilla

2. The systematic examination of the relationships among selling prices, volume of sales and production, costs,
and profits is termed:
A. contribution margin analysis C. budgetary analysis
B. cost-volume-profit analysis D. gross profit analysis Bobadilla

3. The term contribution margin is best defined as the:

A. difference between fixed costs and variable costs.
B. difference between revenue and fixed costs.
C. amount available to cover fixed costs and profit.
D. amount available to cover variable costs. Bobadilla

4. Cost-volume-profit analysis allows management to determine the relative profitability of a product by

A. Highlighting potential bottlenecks in the production process.
B. Determining the contribution margin per unit and projected profits at various levels of production.
C. Assigning costs to a product in a manner that maximizes the contribution margin.
D. Keeping fixed costs to an absolute minimum. Bobadilla

5. Cost-volume-profit analysis cannot be used if which of the following occurs?

A. Costs cannot be properly classified into fixed and variable costs.
B. The per unit variable costs change.
C. The total fixed costs change.
D. Per unit sales prices change. Bobadilla
6. The most useful information derived from a breakeven chart is the
A. Amount of sales revenue needed to cover enterprise variable costs.
B. Amount of sales revenue needed to cover enterprise fixed costs.
C. Relationship among revenues, variable costs, and fixed costs at various levels of activity.
D. Volume or output level at which the enterprise breaks even. Bobadilla

7. Which of the factors is (are) involved in studying cost-volume-profit relationships?

A. Levels of production C. Fixed costs
B. Variable costs D. All of these Bobadilla

8. At the breakeven point, fixed cost is always

A. Less than the contribution margin C. More than the contribution margin
B. Equal to the contribution margin. D. More than the variable cost Bobadilla

9. At the break-even point:

A. net income will increase by the unit contribution margin for each additional item sold above break-even.
B. the total contribution margin changes from negative to positive
C. fixed costs are greater than contribution margin
D. the contribution margin ratio begins to increase Bobadilla

10. In cost-volume-profit analysis, the greatest profit will be earned at

A. One hundred percent at normal productive capacity.
B. The production point with the lowest marginal cost.
C. The production point at which average total revenue exceeds average marginal cost.
D. The point at which marginal cost and marginal revenue are equal. Bobadilla

11. Which of the following is not an assumption underlying C-V-P analysis?

A. The behavior of total revenue is linear.
B. Unit variable expenses remain unchanged as activity varies.
 C. Inventory levels at the beginning and end of the period are the same.
D. The number of units produced exceeds the number of units sold. Bobadilla

12. Which of the following assumptions is inherent to C-V-P analysis?

A. In manufacturing firms, the beginning and ending inventory levels are the same.
B. In a multi-product organization, the sales mix varies over time.
C. The behavior of total revenue is curvilinear.
D. he relevant range is not a consideration. Bobadilla

13. Which of the following assumptions is closely relevant to cost-volume-profit analysis?

A. for multiple product analysis, the sales mix is not important
B. inventory levels remain unchanged
C. total fixed costs and unit variable costs can be identified and remain constant over the relevant range
D. B and C Bobadilla

14. Advocates of cost-volume-profit analysis argue that:

A. Fixed costs are irrelevant for decision making.
B. Fixed costs are mandatory for CVP decision making.
C. Differentiation between the patterns of variable costs and fixed costs is critical.
D. Fixed costs are necessary to calculate inventory valuations. Bobadilla

15. With respect to fixed costs, C-V-P analysis assumes total fixed costs
A. per unit remains constant as volume changes
B. remain constant from one period to the next
C. vary directly with volume
D. remain constant across changes in volume Bobadilla

16. The CVP model assumes that over the relevant range of activity:
A. only revenues are linear. C. unit variable cost is not constant. Bobadilla
B. total fixed cost changes. D. revenues and total costs are linear.
17. Which of the following is not a limiting factor of Cost-Volume-Profit analysis?
A. The process assumes a linear relationship among the variables.
B. The process assumes variable costs per unit are available.
C. Efficiency is assumed to be constant.
D. Inventory levels are assumed to not change. Bobadilla

18. Cost-volume-profit analysis is a technique available to management to understand better the interrelationships of
several factors that affect a firm's profit. As with many such techniques, the accountant oversimplifies the real
world by making assumptions. Which of the following is not a major assumption underlying CVP analysis?
A. All costs incurred by a firm can be separated into their fixed and variable components.
B. The product’s selling price per unit is constant at all volume levels within a relevant range.
C. Operating efficiency and employee productivity is constant at all volume levels.
D. For multi-product situations, the sales mix can vary at different volume levels. Bobadilla

19. Pines Company has a higher degree of operating leverage than Tagaytay Company. Which of the following is
true?
A. Pines has higher variable expense.
B. Pines is more profitable than Tagaytay Company’s.
C. Pines is more risky than Tagaytay is.
D. Pines' profits are less sensitive to percentage changes in sales. Bobadilla

20. As projected net income increases the

A. degree of operating leverage declines. C. break-even point goes down. Bobadilla
B. margin of safety stays constant. D. contribution margin ratio goes up.

21. Given the following notations, what is the breakeven sales level in units?
SP = selling price per unit
FC = total fixed cost
VC = variable cost per unit
A. SP / (FC/VC) C. VC/(SP – FC)
 B. FC/(VC/SP) D. FC/(SP – VC) Bobadilla

22. A company increased the selling price for its product from P1.00 to P1.10 a unit when total fixed costs increased
from P400,000 to P480,000 and variable cost per unit remained unchanged. How would these changes affect
the breakeven point?
A. The breakeven point in units would be increased.
B. The breakeven point in units would be decreased.
C. The breakeven point in units would remain unchanged.
D. The effect cannot be determined from the information given. Bobadilla

23. On January 1, 2007, Incremental Company increased its direct labor wage rates. All other budgeted costs and
revenues were unchanged. How did this increase affect Incremental Company’s budgeted break-even point and
budgeted margin of safety?

Bobadilla A. B. C. D.
Budgeted Break-even Point Increase Increase Decrease Decrease
Expected Margin of Safety Increase Decrease Decrease Increase

24. As the variable cost increases but the selling price remains constant, the
A. Degree of operating leverage declines C. Breakeven point goes down Bobadilla
B. Margin of safety stays constant D. Contribution margin ratio goes up

25. A very high degree of operating leverage (DOL) indicates that a firm:
A. has high fixed costs. C. has high variable costs. Bobadilla
B. has a high net income. D. is operating close to its breakeven point.

26. With the aid of computer software, managers can vary assumptions regarding selling prices, costs, and volume
and can immediately see the effects of each change on the break-even point and profit. Such an analysis is
called
A. “What if” or sensitivity analysis. C. Computer aided analysis.
B. Vary the data analysis. D. Data gathering. Bobadilla

27. If a company raises its target peso profit, its

A. break-even point rises.
 B. fixed costs increase.
C. required total contribution margin increases.
D. selling price rises. Bobadilla

28. Broadway Company sells three products: A, B and C. Product A's unit contribution margin is higher than Product
B's which is higher than Products C's. Which one of the following events is most likely to increase the company's
overall break-even point?
A. The installation of new automated equipment and subsequent lay-off of factory workers.
B. A decrease in Product C's selling price.
C. An increase in the overall market demand for Product B.
D. A change in the relative market demand for the products, with the increase favoring Product A relative to
Product B and Product C. Bobadilla

29. Which of the following is not a benefit of using sensitivity analysis?

A. More people can see the impact of their ideas on the project.
B. The use of a spreadsheet program increases the accuracy of the projections.
C. What will happen is not known in advance so a variety of options can be explored prior to making a
decision.
D. A well-written spreadsheet will allow for a variety of questions to be answered in a minimal amount of time.
Bobadilla

30. A Cost-Volume-Profit graph contains an "Area of Loss" and an "Area of Profitability". Which of the following best
explains the difference between the two points on the graph?
A. The area of loss represents the difference between Sales and Variable Cost.
B. The area of loss begins with the concept that fixed costs have to be recovered prior to sales contributing to
profit.
C. The area of profit represents the difference between Sales and Variable Cost.
D. The area of profit begins with the concept that no company would have any level of sales below the break-
even point. Bobadilla

31. Which of the following best describes the impact of selling more units?
A. The increase in sales volume increases total variable cost.
B. The increase in sales volume means an increase in total fixed cost.
 C. The increase in sales increases contribution margin, causing net income to decrease.
D. The increase in sales increases contribution margin per unit causing the break-even point to decrease.
Bobadilla

32. On a cost-volume-profit chart (break-even graph), where are the total fixed costs shown?
A. As the point where the sales line intersects the vertical axis (pesos)
B. As the point where the sales line crosses the total cost line
C. As the point where the sales line crosses the horizontal axis (volume)
D. As the point where the total cost line intersects the vertical axis (pesos) Bobadilla

33. When using conventional cost-volume-profit analysis, some assumptions about costs and sales prices are made.
Which of the following is one of those assumptions?
A. The contribution margin will change as volume increases
B. The variable cost per unit will decrease as volume increases
C. The sales price per unit will remain constant as volume increases
D. Fixed cost per unit will remain the same as volume increases Bobadilla

34. Classifying a cost as fixed or variable depends on how it behaves

A. per unit, as the volume of activity changes.
B. in total, as the volume of activity changes.
C. both A and B are correct.
D. none of the above. Bobadilla

35. A fixed cost is the same percentage of sales in three different months. Which of the following is true?
A. The company had the same sales in each of those months.
B. The cost is both fixed and variable.
C. The company is operating at its break-even point.
D. The company is achieving its target level of profit. Bobadilla

36. Per-unit variable cost

A. remains constant within the relevant range.
 B. increases as volume increases within the relevant range.
C. decreases as volume increases within the relevant range.
D. decreases if volume increases beyond the relevant range. Bobadilla

37. In planning product mix for maximum profit, CVP analysis would stimulate sales of the product by increasing the:
A. sales price C. contribution margin
B. variable cost per unit D. emphasis on customer priority Bobadilla

38. A relatively low margin of safety ratio for a product is usually an indication that the product:
A. is losing money
B. has a high contribution margin
C. is riskier than higher margin of safety products
D. is less risky than higher margin of safety products Bobadilla

39. Within the relevant range, total revenues and total costs
A. increase, but at a decreasing rate. C. remain constant.
B. decrease. D. can be graphed as straight lines. Bobadilla

40. An assumption in a CVP analysis is that a change in costs is caused by a change in

A. unit direct material cost C. sales commission per unit Bobadilla
B. the number of units D. efficiency due to learning curve effect

41. In CVP analysis, when the number of units changes, which one of the following will remain the same?
A. Total sales revenues C. Total fixed costs
B. Total variable costs D. Total contribution margin Bobadilla

42. As fixed costs for a firm rise, all other things held constant, the breakeven point will
A. be unchanged C. increase
B. not be affected by fixed costs D. decrease Bobadilla
43. Which of the following would not affect the breakeven point?
A. Number of units sold. C. Total fixed costs.
B. Variable cost per unit. D. Sales price per unit. Bobadilla

44. The margin of safety is a key concept of CVP analysis. The margin of safety is
A. The contribution margin rate.
B. The difference between budgeted contribution margin and actual contribution margin.
C. The difference between budgeted contribution margin and breakeven contribution margin
D. The difference between budgeted sales and breakeven sales. Bobadilla

45. A technique for determining what would happen in a decision analysis if a key prediction or assumption proves to
be wrong is called:
A. CVP analysis. C. Post-audit analysis. Bobadilla
B. Sensitivity analysis. D. Contribution-margin variation analysis.

46. An increase in the unit variable cost will generally cause an increase in all of the following except
A. the break-even point. C. total variable costs.
B. contribution margin. D. unit selling price. Bobadilla

47. The most likely strategy to reduce the breakeven point would be to
A. Increase both the fixed costs and the contribution margin.
B. Decrease both the fixed costs and the contribution margin.
C. Decrease the fixed costs and increase the contribution margin.
D. Increase the fixed costs and decrease the contribution margin. Bobadilla

48. The break-even point in total sales decreases when:

A. variable cost increases and sales remain unchanged
B. variable cost increases and sales increase
C. fixed cost increases
D. fixed cost decreases Bobadilla
49. Which of the following best describes the impact of an increase in fixed cost?
A. The increase in fixed cost will result in an increase in selling more units.
B. The increase in fixed cost will cause an increase in variable cost.
C. The increase in fixed cost causes net income to decrease and the break-even point to decrease.
D. The increase in fixed cost causes net income to decrease and the break-even point to increase.
Bobadilla

50. A company’s breakeven point in peso sales may be affected by equal percentage increases in both selling price
and variable cost per unit (assume all other factors are equal within the relevant range). The equal percentage
changes in selling price and variable cost per unit will cause the breakeven point in peso sales to
A. Decrease by less than the percentage increase in selling price.
B. Decrease by more than the percentage increase in the selling price.
C. Increase by less than the percentage increase in selling price.
D. Remain unchanged. Bobadilla

51. If the fixed costs attendant to a product increase while variable costs and sales price remains constant, what will
happen to contribution margin (CM) and breakeven point (BEP)?

Bobadilla A. B. C. D.
CM Increase Decrease Unchanged Unchanged
BEP Decrease Increase Increase Unchanged

52. Which of the following will decrease the breakeven point? Bobadilla

Decrease in Selling Price Increase in Direct Labor Increase in Fixed Cost

A. YES YES YES
B. YES NO YES
C NO NO YES
.
D NO NO NO
.

53. Which of the following is an incorrect statement?

A. The contribution income statement that is prepared for internal users is better than the traditional income
statement as a management tool to predict the results of increases or decreases in sales volume, variable
costs, and fixed costs.
 B. The greater the proportion of fixed costs in a firm's cost structure, the smaller will be the impact on profit
from a given percentage change in sales revenue.
C. In an economic recession, the highly automated company with high fixed costs will be less able to adapt to
lower consumer demand than will a firm with a more labor-intensive production process.
D. A major difference between income statements prepared under the traditional format and those prepared
under the contribution format is that expenses under the traditional format are shown by function, while the
expenses shown under the contribution format are shown by function and cost behavior.Bobadilla

54. If a company is operating at a loss,

A. fixed costs are greater than sales.
B. selling price is lower than the variable cost per unit.
C. selling price is less than the average total cost per unit.
D. fixed cost per unit is greater than variable cost per unit. Bobadilla

55. As volume increases, average cost per unit

A. increases.
B. decreases.
C. remains constant.
D. increases in proportion to the change in volume. Bobadilla

56. If all goes according to plan except that unit variable cost falls,
A. total contribution margin will be lower than expected.
B. the contribution margin percentage will be lower than expected.
C. profit will be higher than expected.
D. per-unit contribution margin will be lower than expected. Bobadilla

57. Which of the following decreases per-unit contribution margin the most for a company that is currently earning a
profit?
A. A 10% decrease in selling price. C. A 10% increase in fixed costs. Bobadilla
B. A 10% increase in variable cost per unit. D. A 10% increase in fixed cost per unit.

58. If variable cost as a percentage of sales increases, the

 A. contribution margin percentage increases.
B. selling price increases.
C. break-even point in pesos increases.
D. fixed costs decrease. Bobadilla

59. Introducing income taxes into cost-volume-profit analysis

A. raises the break-even point.
B. lowers the break-even point.
C. increases unit sales needed to earn a particular target profit.
D. decreases the contribution margin percentage. Bobadilla

60. If a company is earning a profit, its fixed costs

A. are less than total contribution margin.
B. are equal to total contribution margin.
C. are greater than total variable costs.
D. can be greater than or less than total contribution margin. Bobadilla

61. A cost-volume-profit graph reflects relationships

A. that are expected to hold over the relevant range.
B. of results over the past few years.
C. that the company's managers would like to have happen.
D. likely to prevail for the industry. Bobadilla

62. The following diagram is a cost-volume-profit graph for a manufacturing company.

P
C
D

A B
 O
Volume
The difference between line AB and line AC (area BAC) is the
A. contribution ratio. C. total variable cost.
B. contribution margin per unit. D. total fixed cost. Bobadilla

63. Select the answer that best describes the labeled item on the diagram.
A. Area CDE represents the area of net loss.
B. Line AC graphs total fixed costs.
C. Point D represents the point at which the contribution margin per unit increases.
D. Line AC graphs total costs. Bobadilla

64. In a cost-volume-profit graph

A. the total revenue line crosses the horizontal axis at the breakeven point. Bobadilla
B. beyond the breakeven sales volume, profits are maximized at the sales volume where total revenues equal
total costs.
C. an increase in unit variable costs would decrease the slope of the total cost line.
D. an increase in the unit selling price would shift the breakeven point in units to the left.

65. An increase in the income tax rate

A. raises the break-even point.
B. lowers the break-even point.
C. decreases sales required to earn a particular after-tax profit.
D. increases sales required to earn a particular after-tax profit. Bobadilla

66. If the sales mix shifts toward higher contribution margin products, the break-even point
A. decreases.
B. increases.
C. remains constant.
D. it is impossible to tell without more information. Bobadilla
67. Target costing is
A. a substitute for CVP analysis.
B. used by companies that cannot classify their costs by behavior.
C. inappropriate if a company has already established a target profit.
D. used in decisions to offer a new product or enter a new market. Bobadilla

68. In order for the break-even computation to be meaningful to management, sales mix should be computed using
the
A. expected mix C. most desirable mix
B. least desirable mix D. traditional mix Bobadilla

69. Which of the following is a true statement about sales mix?

A. Profits may decline with an increase in total peso of sales if the sales mix shifts to sell more of the high
contribution margin product.
B. Profits may decline with an increase in total peso of sales if the sales mix shifts to sell more of the lower
contribution margin product.
C. Profits will remain constant with an increase in total peso of sales if the total sales in units remains constant.
D. Profits will remain constant with a decrease in total peso of sales if the sales mix also remains constant.
Bobadilla