Fundamentals of Cost-Volume-Profit Analysis: True / False Questions

Chapter 03
Fundamentals of Cost-Volume-Profit Analysis

True / False Questions

1. Both total revenues (TR) and total costs (TC) are likely to be affected by changes in the output.

True False

2. Cost-volume-profit (CVP) analysis assumes that the production volume equals sales volume so that any
changes in unit prices can be ignored.

True False

3. The total contribution margin is the unit contribution margin multiplied by the number of units minus the
fixed component of the total costs (TC).

True False

4. Profit is the unit contribution margin multiplied by the number of units minus the fixed component of the
total costs (TC).

True False

5. If the average selling price is $.60 per unit, the average variable cost is $.36 per unit, and the total fixed
costs are $1,500, then sales of 15,000 units will result in operating profits of $3,600.

True False

6. The average selling price is $.60 per unit, the average variable cost is $.36 per unit, and the total fixed costs
are $1,500. If operating profits of $900 are desired, a sales volume of 2,500 units is necessary.

True False

7. The contribution margin ratio is the contribution margin per unit divided by the selling price per unit.

True False

8. If the fixed costs are $2,400, targeted operating profits is $1,200, selling price per unit is $2, and the
contribution margin ratio is 40%, then the required sales volume is 9,000 units.

True False

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McGraw-Hill Education.
9. The break-even point in sales dollars is fixed costs divided by the contribution margin ratio.

True False

10. An organization's operating leverage is high when it has a low proportion of variable costs in its total costs.

True False

11. An increase in the selling price per unit will decrease an organization's operating leverage, assuming sales
unit volume doesn't change and there are no other changes in its cost structure.

True False

12. The break-even point for an organization with a low operating leverage will be relatively higher than the
break-even point for an organization with a high operating leverage.

True False

13. An increase in an organization's fixed costs will result in a lower margin of safety, assuming all other costs
and sales remain unchanged.

True False

14. Microsoft Excel® is ideally suited for analyzing alternative CVP scenarios using its "What-If Analysis"
function.

True False

15. Microsoft Excel® cannot be used to find break-even points.

True False

16. An increase in an organization's tax rate will cause an increase in its break-even point.

True False

17. Before-tax operating profits are equal to the after-tax operating profits divided by (1 - tax rate).

True False

18. If an organization's fixed costs are $2,400, tax rate is 40%, and contribution margin is $5,200, then its after-
tax operating profits are $1,680.

True False

19. If the fixed costs are $2,400, targeted before-tax operating profit is $1,200, tax rate is 25%, selling price per
unit is $2, and contribution margin ratio is 40%, then the sales volume is 9,000 units.

True False

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20. Cost-volume-profit (CVP) analysis is more complicated for organizations with multiple products because
typically each product has a different contribution margin ratio.

True False

21. The Frances Manufacturing Company sells two products, FRN and CES. FRN has a higher contribution
margin ratio than CES. If the product mix shifts towards CES, the company's break-even point in total units
(i.e., FRN plus CES) will increase.

True False

22. In multi-product cost-volume-profit (CVP) analysis, the fixed product mix method and the weighted-
average contribution margin method yield different break-even points.

True False

23. The more important the decision, the more the manager will want to ensure that the assumptions made for
CVP analysis are applicable.

True False

24. The best course of action in sensitive decisions is that the manager should depend upon the cost analyst's
CVP analysis without considering alternative assumptions.

True False

Multiple Choice Questions

25. The difference between total sales in dollars and total variable costs is called:

A. operating profit.
B. net profit.
C. the gross margin.
D. the contribution margin.

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26. The following information pertains to Tiller Co.:
Sales $800,000
Variable Costs 160,000
Fixed Costs 40,000
What is Tiller's break-even point in sales dollars? (CPA adapted)

A. $200,000.
B. $160,000.
C. $50,000.
D. $40,000.

27. Cost-volume-profit (CVP) analysis is a simple but powerful tool to assist management in making operating
decisions. Which of the following does not represent a potential use of CVP analysis?

A. Ability to compute the break-even point.

B. Ability to determine optimal sales volumes.
C. Aids in evaluating tax planning alternatives.
D. Aids in determining optimal pricing policies.

28. Which of the following would not cause the break-even point to change?

A. Sales price increases.

B. Fixed cost decreases.
C. Sales volume decreases.
D. Variable costs per unit increases.

29. If the fixed costs for a product decrease and the variable costs (as a percentage of sales dollars) decrease,
what will be the effect on the contribution margin ratio and the break-even point, respectively?
Contribution Margin Ratio Break-even Point

A. Decreased Increased
B. Increased Decreased
C. Decreased Decreased
D. Increased Increased

A. Option A
B. Option B
C. Option C
D. Option D

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30. The Skyways Company is currently selling its single product for $15. Variable costs are estimated to
remain at 70% of the current selling price and fixed costs are estimated to be $4,800 per month. If Skyways
increases its selling price by 10%, its variable cost ratio will:

A. not change
B. decrease
C. increase
D. Cannot determine with the information given.

31. Cost A is a fixed cost, while B is a variable cost. During the current year, the volume of output has
decreased. In terms of cost per unit of output, we would expect that:

A. cost A has remained unchanged.

B. cost B has decreased.
C. cost A has decreased.
D. cost B has remained unchanged.

32. If both the variable cost per unit and the selling price per unit decrease, the new contribution margin ratio in
relation to the old contribution margin ratio will be:

A. Lower.
B. Higher.
C. Unchanged.

33. A company's break-even point will not be increased by:

A. an increase in total fixed costs.

B. a decrease in the selling price per unit.
C. an increase in the variable cost per unit.
D. an increase in the number of units produced and sold.

34. Which of the following changes to a company's contribution income statement will always lower the break-
even point (either in units or in dollars)?

A. Sales price increases by 10%.

B. Sales price decreases by 5%.
C. Variable costs increase by 10% and fixed costs decrease by 5%.
D. Variable costs decrease by 5% and fixed costs increase by 10%.

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35. At a break-even point of 400 units, variable costs were $400 and fixed costs were $200. What will the 401st
unit sold contribute to operating profits before income taxes?

A. $0.50
B. $1.00
C. $1.50
D. $2.00

36. Dartmount Corporation has provided its contribution format income statement for June. The company
produces and sells a single product.
Sales (2,900 units) $269,700

Variable costs 107,300
Contribution margin 162,400
Fixed costs 137,100
Operating profit $25,300
If the company sells 3,100 units, its total contribution margin should be closest to:

A. $27,045.
B. $181,000.
C. $162,400.
D. $173,600.

37. Goodson Inc. produces and sells a single product. The company has provided its contribution format
income statement for March.
Sales (4,500 units) $427,500

Fixed costs 135,300
If the company sells 4,300 units, its operating profit should be closest to:

A. $7,700.
B. $25,513.
C. $26,700.
D. $19,500.

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38. The contribution margin ratio is 25% for Crowne Company and the break-even point in sales is $200,000.
If Crowne Company's target operating profit is $60,000, sales would have to be:

A. $260,000.
B. $440,000.
C. $280,000.
D. $240,000.

39. Opal Company manufactures a single product that it sells for $90 per unit and has a contribution margin
ratio of 35%. The company's fixed costs are $46,800. If Opal desires a monthly target operating profit equal
to 15% of sales, sales will have to be (rounded):

A. 1,486 units.
B. 3,467 units.
C. 1,040 units.
D. 2,600 units.

40. Razor Inc. manufactures industrial components. One of its products used as a subcomponent in auto
manufacturing is Fluoro2211. The selling price and cost per unit data for 9,000 units of Fluoro2211 are as
follows.
Per Unit Data

Selling Price $150
Direct Materials 20
Direct Labor 15
Variable Manufacturing Overhead 12
Fixed Manufacturing Overhead 30
Variable Selling 3
Fixed Selling and Administrative 10
Total Costs 90
Operating Margin $60
During the next year, sales of Fluoro2211 are expected to be 10,000 units. All costs will remain the same
except for fixed manufacturing overhead, which will increase by 20%, and material, which will increase by
10%. The selling price per unit for next year will be $160. Based on these data, Razor Inc.'s total
contribution margin for next year will be: (CMA adapted)

A. $882,000.
B. $980,000.
C. $972,000.
D. $1,080,000.

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41. Dorcan Corporation manufactures and sells T-shirts imprinted with college names and slogans. Last year,
the shirts sold for $7.50 each, and the variable cost to manufacture them was $2.25 per unit. The company
needed to sell 20,000 shirts to break-even. The after tax net income last year was $5,040. Donnelly's
expectations for the coming year include the following: (CMA adapted)
• The sales price of the T-shirts will be $9

• Variable cost to manufacture will increase by one-third
• Fixed costs will increase by 10%
• The income tax rate of 40% will be unchanged.
The selling price that would maintain the same contribution margin ratio as last year is:

A. $9.00.
B. $8.25.
C. $10.00.
D. $9.50.


Based on a $10 selling price per unit, the number of T-shirts Dorcan Corporation must sell to break-even in
the coming year is:

A. 17,000 units.
B. 16,500 units.
C. 20,000 units.
D. 22,000 units.

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Sales for the coming year are expected to exceed last year's by 1,000 units. If this occurs, Dorcan's sales
volume in the coming year will be:

A. 22,600 units.
B. 21,960 units.
C. 23,400 units.
D. 21,000 units.


Based on a $10 selling price per unit and if Dorcan Corporation wishes to earn $37,800 in after tax net
income for the coming year, the company's sales volume in dollars must be:

A. $213,750.
B. $257,625.
C. $207,000.
D. $255,000.

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45. Lamar has the following data:
Selling Price $40

Variable manufacturing cost $22
Fixed manufacturing cost $150,000 per month
Variable selling & administrative
$6
costs
Fixed selling & administrative costs $120,000 per month
How many units must Lamar produce and sell in order to break-even?

A. 8,333 units.
B. 12,500 units.
C. 15,000 units.
D. 22,500 units.

Selling Price $40

$6
costs
How many units must Lamar produce and sell in order to achieve a profit of $30,000 per month?

A. 10,000 units.
B. 8,824 units.
C. 25,000 units.
D. 15,000 units.

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Selling Price $40

$6
costs
If Lamar produces and sells 30,000 units, what is the margin of safety in units?

A. 5,000 units.
B. 7,500 units.
C. 22,500 units.
D. 30,000 units.

48. Gardner Corporation manufactures skateboards and is in the process of preparing next year's budget. The
pro forma income statement for the current year is presented below.
Sales $1,500,000
Cost of sales:
Direct Material $250,000
Direct labor 150,000
Variable Overhead 75,000
Fixed Overhead 100,000 575,000
Gross Profit $925,000
Selling and G&A
Variable 200,000
Fixed 250,000 450,000
Operating Income $475,000
The break-even point (rounded to the nearest dollar) for Gardner Corporation for the current year is:

A. $146,341.
B. $636,364.
C. $729,730.
D. $181,818.

3-11
49. Gardner Corporation manufactures skateboards and is in the process of preparing next year's budget. The
pro forma income statement for the current year is presented below.
Sales $1,500,000
Cost of sales:
Selling and General & Admin.

Exp.
Variable 200,000
Fixed 250,000 450,000
For the coming year, the management of Gardner Corporation anticipates a 10 percent increase in sales, a
12 percent increase in variable costs, and a $45,000 increase in fixed costs.
The break-even point for next year would be:

A. $729,027.
B. $862,103.
C. $214,018.
D. $474,000.

50. You have been provided with the following information:
Per Unit Total

Sales $15 $45,000
Less variable expenses 9 27,000
Contribution margin 6 18,000
Less fixed expenses 12,000
If sales decrease by 500 units, how much will fixed costs have to be reduced by to maintain the current
operating profit of $6,000?

A. $9,000.
B. $7,500.
C. $6,000.
D. $3,000.

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51. Raines Company's sales are $750,000 with operating profits of $130,000. If the contribution margin ratio is
40%, what did the fixed costs amount to?

A. $370,000.
B. $300,000.
C. $270,000.
D. $170,000.

52. The following costs have been estimated based on sales of 30,000 units:
Total Annual Percent That Is

Costs Variable
Direct materials $300,000 100%
Direct labor 250,000 100
Manufacturing
250,000 50
overhead
Selling and
150,000 25
administrative
What selling price will yield a contribution margin of 40%?

A. $59.38
B. $43.75
C. $39.58
D. $33.25

53. Gena Manufacturing Company has a fixed cost of $225,000 for the production of tubes. Estimated sales are
150,000 units. A before tax profit of $125,000 is desired by the controller. If the tubes sell for $5 each,
what unit contribution margin is required to attain the profit target?

A. $3.00.
B. $2.33.
C. $1.47.
D. $.90.

54. At the break-even point, the total contribution margin equals total: (CPA adapted)

A. Variable costs.
B. Sales.
C. Selling and administrative costs.
D. Fixed costs.

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55. On January 1, 2016, Randolph Co. increased its direct labor wage rates. All other budgeted costs and
revenues were unchanged. How did this increase affect Randolph's budgeted break-even point and
budgeted margin of safety? (CPA adapted)
Budgeted Break-even Budgeted Margin of

Point Safety
A. Increase Increase
B. Increase Decrease
C. Decrease Decrease
D. Decrease Increase

A. Option A
B. Option B
C. Option C
D. Option D

56. A company's break-even point will not be changed by:

A. a change in total fixed costs.

B. a change in the number of units produced and sold.
C. a change in the variable cost ratio.
D. a change in the contribution margin ratio.

57. If both the variable cost per unit and the selling price per unit increase, the new contribution margin ratio in
relation to the old contribution margin ratio will be:

A. Lower.
B. Higher.
C. Unchanged.

3-14
58. Evergreen Corporation manufactures circuit boards and is in the process of preparing next year's budget.
The pro forma income statement for the current year is presented below.
Sales $3,500,000
Cost of sales:
Fixed Overhead 600,000 1,625,000
Gross Profit $1,875,000

Exp.
Variable 750,000
Fixed 250,000 1,000,000
The contribution margin ratio for the current year is:

A. 53.6%.
B. 49.3%.
C. 46.4%.
D. 25%.

3-15
Sales $3,500,000
Cost of sales:

Exp.
Variable 750,000
Fixed 250,000 1,000,000
The break-even point (rounded to the nearest dollar) for Evergreen Corporation for the current year is:

A. $2,625,000.
B. $1,865,672.
C. $1,724,138.
D. $2,155,172.

3-16
Sales $3,500,000
Cost of sales:

Exp.
Variable 750,000
Fixed 250,000 1,000,000
For the coming year, the management of Evergreen Corporation anticipates a 5 percent decrease in sales, a
10 percent increase in all variable costs, and a $45,000 increase in fixed costs.
The operating profit for next year would be:

A. $477,500.
B. $492,500.
C. $552,500.
D. $831,250.

3-17
Sales $3,500,000
Cost of sales:

Exp.
Variable 750,000
Fixed 250,000 1,000,000
For the coming year, the management of Evergreen Corporation anticipates a 5 percent decrease in sales, a
10 percent increase in variable costs, and a $45,000 increase in fixed costs.

A. $3,022,500.
B. $2,947,500.
C. $2,668,750.
D. $2,168,225.

Per Unit Total

Sales $15 $45,000
If unit sales decrease by 10%, how much will fixed costs have to be reduced by to maintain the current
operating profit?

A. $12,000.
B. $4,500.
C. $6,000.
D. $1,800.

3-18
Total
Sales $90,000
Less Variable expenses 54,000
If sales decrease by 10%, what level of fixed costs will maintain the current operating profit?

A. $12,000.
B. $20,400.
C. $21,600.
D. $24,000.

Total
Sales $90,000
If sales increase by 10%, what level of fixed costs will yield a 20% increase in profits?

A. $14,400.
B. $19,200.
C. $25,200.
D. $26,400.

65. With regard to the CVP graph, which of the following statements is not correct?

A. The CVP graph assumes that volume is the only factor affecting total cost.
B. The CVP graph assumes that selling prices do not change.
C. The CVP graph assumes that variable costs go down as volume goes up.
D. The CVP graph assumes that fixed costs are constant in total within the relevant range.

3-19
66. Tower Company manufactures and sells a single product with a positive contribution margin. If the selling
price and the variable cost per unit both increase 5% and fixed costs do not change, what is the effect on
the contribution margin per unit and the contribution margin ratio?
Contribution margin per Contribution margin

unit ratio
A. No change No change
B. Increase Increase
C. Increase No change
D. Increase Decrease

A. Option A
B. Option B
C. Option C
D. Option D

67. Which of the following formulas is used to calculate the contribution margin ratio?

A. (Sales - Fixed costs) ÷ Sales.

B. (Sales - Cost of goods sold) ÷ Sales.
C. (Sales - Variable costs) ÷ Sales.
D. (Sales - Total costs) ÷ Sales.

68. Flower Company manufactures and sells a single product that has a positive contribution margin. If the
selling price and variable costs both decrease by 5% and fixed costs do not change, then what would be the
effect on the contribution margin per unit and the contribution margin ratio?

unit ratio
A. Decrease Decrease
B. Decrease No change
C. No change Decrease
D. No change No change

A. Option A
B. Option B
C. Option C
D. Option D

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69. If Q equals the level of output, P is the selling price per unit, V is the variable cost per unit, and F is the
fixed cost, then the break-even point in units is:

A. Q ÷ (P - V).
B. F ÷ (P - V).
C. V ÷ (P - V).
D. F ÷ [Q(P - V)].



B. Sales volume increases.
C. Fixed cost increases.
D. Variable costs per unit decreases.


A. Variable costs per unit increases.

B. Fixed costs increases.
C. Product mix shifts towards the more expensive products.
D. Sales volume decreases.

72. If the fixed costs for a product increase and the variable costs (as a percentage of sales dollars) increase,

A. Decrease Increase
D. Increase Increase

A. Option A
B. Option B
C. Option C
D. Option D

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A. an increase in the number of units produced and sold.

D. an increase in the variable cost ratio.

74. Obtuse Company's fixed costs total $150,000, its variable cost ratio is 60% and its variable costs are $4.50
per unit. Based on this information, the break-even point in units is:

A. 50,000.
B. 37,500.
C. 33,333.
D. 100,000.

75. Bargain Company's contribution margin ratio is 15%. If the degree of operating leverage is 12 at the
$150,000 sales level, operating profit at the $150,000 sales level must equal:

A. $1,500.
B. $2,700.
C. $2,160.
D. $1,875.

76. Operating leverage refers to the extent to which an organization's cost structure is made up of:

A. differential costs.
B. opportunity costs.
C. fixed costs.
D. relevant costs.

77. A decrease in the margin of safety would be caused by a(n):

A. increase in the total fixed costs.

B. increase in total revenue (sales).
C. decrease in the break-even point.
D. decrease in the variable cost per unit.

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78. Given the following data:
Per Unit Total

Sales $15 $45,000
Net income $6,000
If sales decrease by 500 units, by what percent would fixed costs have to be reduced by to maintain current
net income?

A. 50.0%.
B. 33.3%.
C. 25.0%.
D. 16.7%.

79. The following pertains to Upton Co. for the year ending December 31, 2016:
Budgeted Sales $1,000,000

Break-even Sales 700,000
Budgeted Contribution Margin 600,000
Cashflow Break-even 200,000
Upton's margin of safety is: (CPA adapted)

A. $300,000.
B. $400,000.
C. $500,000.
D. $800,000.

80. The margin of safety percentage is computed as:

A. Break-even sales ÷ Total sales.

B. Total sales - Break-even sales.
C. (Total sales - Break-even sales) ÷ Break-even sales.
D. (Total sales - Break-even sales) ÷ Total sales.

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81. The amount by which a company's sales can decline before losses are incurred is called the:

A. contribution margin ratio.

B. degree of operating leverage.
C. margin of safety.
D. profit loss.

82. The degree of operating leverage can be calculated as:

A. contribution margin divided by sales.

B. gross margin divided by operating profit.
C. operating profit divided by sales.
D. contribution margin divided by operating profit.

83. All other things the same, which of the following would be true of the contribution margin and variable
costs of a company with high fixed costs and low variable costs as compared to a company with low fixed
costs and high variable costs?
Contribution Margin Variable Costs

A. Higher Higher
B. Lower Higher
C. Higher Lower
D. Lower Lower

A. Option A
B. Option B
C. Option C
D. Option D

84. Corey Company has a margin of safety percentage of 20%. The break-even point is $200,000 and the
variable costs are 45% of sales. Given this information, the operating profit is:

A. $27,500
B. $18,000
C. $22,500
D. $22,000

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85. Luxus, Inc. employs 45 sales personnel to market its line of luxury automobiles. The average car sells for
$23,000, and a 6 percent commission is paid to the salesperson. Luxus Motors is considering a change to
the commission arrangement where the company would pay each salesperson a salary of $2,000 per month
plus a commission of 2 percent of the sales made by that salesperson. The amount of total monthly car sales
at which Luxus Motors would be indifferent as to which plan to select is:

A. $2,250,000.
B. $3,000,000.
C. $1,500,000.
D. $1,250,000.

86. Given the following information:
Sales $5,000
Fixed Expenses 2,000
Variable Expenses 1,750
What would expected net income be if the company experienced a 10 percent increase in fixed costs and a
10 percent increase in sales volume?

A. $1,750.
B. $1,550.
C. $1,250.
D. $1,375.

3-25
87. The Terrence Co. manufactures two products, Baubles and Trinkets. The following are projections for the
coming year:

Baubles Trinkets
10,000 units 5,000 units
Sales 10,000 10,000
Costs:
Fixed $2,000 $4,600
Variable 6,000 8,000 4,000 8,600
Income
before $2,000 $1,400
taxes
How many Baubles will be sold at the break-even point, assuming that the facilities are jointly used with
the sales mix remaining constant?

A. 9,900
B. 8,800
C. 6,600
D. 5,000

88. During 2016, Seth Britain Lab supplied hospitals with a comprehensive diagnostic kit for $120. At a
volume of 80,000 kits, Seth had fixed costs of $1,000,000 and a profit before income taxes of $200,000.
Due to an adverse legal decision, Seth's 2017 liability insurance increased by $1,200,000 over 2016.
Assuming the volume and other costs are unchanged, what should the 2017 price be if Seth is to make the
same $200,000 profit before income taxes? (CPA adapted)

A. $122.50.
B. $135.00.
C. $152.50.
D. $240.00.

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89. Honeysuckle Manufacturing has the following data:
Selling Price $60

$9
costs
What dollar sales volume does Honeysuckle need to break even?

A. $822,222.
B. $833,333.
C. $900,000.
D. $1,233,333.

Selling Price $60

$9
costs
What dollar sales volume does Honeysuckle need to achieve a $50,000 operating profit per month?

A. $1,400,000.
B. $7,560,000.
C. $933,333.
D. $1,233,333.

3-27
Selling Price $60

$9
costs
If Honeysuckle has actual monthly sales of $1,500,000 and desires an operating profit of $50,000 per
month, what is the margin of safety in sales dollars?

A. $100,000.
B. $266,667.
C. $50,000.
D. $1,130,000.

92. Market Sales had $1,200,000 in sales last month. The variable cost ratio was 60% and operating profits
were $80,000. What is Market's break-even sales volume?

A. $800,000.
B. $1,000,000.
C. $1,200,000.
D. $2,000,000.

were $80,000. What sales volume does Market's need to yield a $200,000 operating profit?

A. $1,000,000.
B. $1,200,000.
C. $1,500,000.
D. $2,000,000.

were $80,000. What is Market's margin of safety in sales dollars?

A. $200,000.
B. $300,000.
C. $500,000.

3-28
95. Artis Sales has two store locations. Store A has fixed costs of $125,000 per month and a variable cost ratio
of 60%. Store B has fixed costs of $200,000 per month and a variable cost ratio of 30%. At what sales
volume would the two stores have equal profits or losses?

A. $250,000.
B. $325,000.
C. $361,111.

of 60%. Store B has fixed costs of $200,000 per month and a variable cost ratio of 30%. What is the break-
even sales volume for Store B?

A. $666,667.
B. $325,000.
C. $285,714.

of 60%. Store B has fixed costs of $200,000 per month and a variable cost ratio of 30%. What is the break-
even sales volume for Store A?

A. $208,333.
B. $312,500.
C. $325,000.

98. Liu Sales has two store locations. Sanford has fixed costs of $250,000 per month and a contribution margin
ratio of 35%. Orlando has fixed costs of $400,000 per month and a contribution margin ratio of 65%. At
what sales volume would the two stores have equal profits or losses?

A. $500,000.
B. $650,000.
C. $1,300,000.



B. a change in the selling price per unit.
C. a change in the variable cost per unit.
D. a change in the income tax rate.

3-29
100. Lake Sales had $2,200,000 in sales last month. The contribution margin ratio was 30% and operating
profits were $180,000. What is Lake's break-even sales volume?

A. $660,000.
B. $1,540,000.
C. $1,600,000.
D. $2,020,000.

profits were $180,000. What sales volume does Lake's need to yield a $240,000 operating profit?

A. $600,000.
B. $2,020,000.
C. $2,400,000.
D. $2,440,000.

profits were $180,000. What is Lake's margin of safety in sales dollars?

A. $480,000.
B. $600,000.
C. $2,020,000.

103. Eastwick produces and sells three products. Last month's results are as follows:
P1 P2 P3
Revenues $100,000 $200,000 $200,000
Variable costs 40,000 140,000 80,000
Fixed costs total $200,000. What is Eastwick's break-even sales volume? (Assume the current product
mix.)

A. $500,000.
B. $416,667.
C. $384,615.
D. $460,000.

3-30
P1 P2 P3
Revenues $100,000 $200,000 $200,000
Variable costs 40,000 140,000 80,000
Fixed costs total $200,000. What is Eastwick's margin of safety? (Assume the current product mix.)

A. $83,333.
B. $40,000.
C. $460,000.
D. $115,385.

P1 P2 P3
Revenues $100,000 $200,000 $200,000
Variable costs 40,000 140,000 80,000
Fixed costs total $200,000. What sales volume would generate an operating profit of $150,000? (Assume
the current product mix.)

A. $650,000.
B. $610,000.
C. $729,167.
D. $850,000.

106. A company has provided the following data:
Sales 3,000 Units

Sales price $70 per unit
Variable cost $50 per unit
Fixed cost $25,000
If the sales volume decreases by 25%, the variable cost per unit increases by 15%, and all other factors
remain the same, operating profit will:

A. decrease by $31,875.
B. decrease by $15,000.
C. increase by $20,625.
D. decrease by $3,125.

3-31
107. Winters Company sells three products. Sales and contribution margin ratios for the three products follow:
Product Product Product

A B C
Sales in dollars $20,000 $40,000 $100,000
Contribution margin
45% 40% 15%
ratio
Given these data, the contribution margin ratio for the company as a whole would be:

A. 25%.
B. 75%.
C. 33.3%.

108. Break-even analysis assumes that:

A. total costs are constant.

B. the average fixed cost per unit is constant.
C. the average variable cost per unit is constant.
D. variable costs are nonlinear.

109. Break-even analysis assumes that over the relevant range: (CPA adapted)

A. Total Fixed Costs are nonlinear.

B. Total Costs are unchanged.
C. Unit Variable Costs are unchanged.
D. Unit Revenues are nonlinear.

Essay Questions

3-32
110. You have been provided with the following information regarding the Omaha Manufacturing Company:
Sales price $50

Variable manufacturing cost
24
per unit
Variable marketing cost per
6
unit
Fixed manufacturing costs 360,000
Fixed administrative costs 80,000
This information is based on forecasted sales of 30,000 units.
Required:
(a) What is the expected operating profit for the upcoming year?
(b) What is the break-even point in units?
(c) If $180,000 of operating profit is desired, how many units must be sold?

3-33
111. Lincoln, Inc. is considering the introduction of a new music player with the following price and cost
characteristics:
Sales price $125 each

Variable costs 75 each
Fixed costs 180,000 per year
Projected sales are 7,500 units per year.
Required:
(consider each question independent of each other):
(a) What will the operating profit be?

(b) What is the impact on operating profit if the selling price per unit decreases by 15%?
(c) What is the net income if variable costs per unit increase by 15% and Lincoln has a 38% tax rate?

3-34
112. You have been provided with the following information regarding the Closure Manufacturing Company:
Sales Price $50

Variable manufacturing cost per unit 24
Fixed manufacturing costs per unit 12
Variable marketing cost per unit 6
Fixed administrative costs per unit 3
Required:
(b) What is the break-even point in dollars?
(c) How much in sales dollars is required to generate an operating profit of $275,000?

3-35
113. You have been provided with the following information regarding the Pharma Manufacturing Company:
Sales Price $25

Required:
(a) What are the expected operating profits for the upcoming year?
(c) What is the break-even point in dollars?
(d) If $80,000 of operating profits is desired, how many units must be sold?
(e) How much in sales dollars is required to generate operating profits of $75,000?

3-36
114. Chita Corporation produces and sells a single product. The company's contribution format income
statement for January appears below:
Sales (5,500 units) $297,000

Fixed costs 105,300
Required:
Redo the company's contribution format income statement assuming that the company sells 5,700 units.

115. Folsom Inc., which produces and sells a single product, has provided the following contribution format
income statement for August:
Sales (4,600 units) $105,800

Fixed costs 46,000
Required:
Redo the company’s contribution format income statement assuming that the company sells 4,500 units.

3-37
116. Champion Corporation produces and sells a single product. In April, the company sold 1,700 units. Its total
sales were $153,000, its total variable costs were $79,900, and its total fixed costs were $56,800.
Required:
a. Construct the company's contribution format income statement for April in good form.
b. Redo the company's contribution format income statement assuming that the company sells 1,600 units.

117. In November, Townhouse Corporation sold 2,100 units of its only product. Its total sales were $195,300,
its total variable costs were $84,000, and its total fixed costs were $98,700.
Required:
a. Construct the company's contribution format income statement for November in good form.
b. Redo the company's contribution format income statement assuming that the company sells 2,300 units.
3-38
118. Blizzard Corporation's contribution margin ratio is 74% and its fixed monthly costs are $43,000. Assume
that the company's sales for October are expected to be $102,000.
Required:
Estimate the company's operating profit for October, assuming that the fixed monthly costs do not change.

119. The management of Toro Corporation expects sales in August to be $130,000. The company's contribution
margin ratio is 65% and its fixed monthly costs are $54,000.
Required:
Estimate the company's operating profit for August, assuming that the fixed monthly costs do not change.

3-39
120. Boxer Inc. expects its sales in June to be $111,000. The company's contribution margin ratio is 65% and its
fixed monthly costs are $64,000.
Required:
Estimate the company's operating profit for June, assuming that the fixed monthly costs do not change.

121. Rudy Corporation produces and sells a single product. Data concerning that product appear below:
Per Unit Percent of Sales

Selling price $150 100%
Variable costs 60 40%
Contribution margin $90 60%
Fixed costs are $355,000 per month. The company is currently selling 5,000 units per month.
Required:
The marketing manager believes that a $12,000 increase in the monthly advertising budget would result in
a 160 unit increase in monthly sales. What should be the overall effect on the company's monthly operating
profit of this change?

3-40
122. Alden Corporation produces and sells a single product. Data concerning that product appear below:

Required:
Management is considering using a new component that would increase the variable cost per unit by $56.
Since the new component would improve the company's product, the marketing manager predicts that
monthly sales would increase by 500 units. What should be the overall effect on the company's monthly
operating profit of this change if fixed costs are unaffected?

123. The Cornish Corporation has budgeted fixed costs of $125,000 and an estimated selling price of $16.50 per
unit. The contribution margin ratio is 40% and the company plans to sell 25,000 units in 2017.
Required:
(a) Compute the break-even point in dollars.

(b) Compute the margin of safety for 2017.
(c) Compute the expected operating profit for 2017.

3-41
124. Renee Tyne, now retired, owns the Downtown Beauty Shop. She employs five (5) stylists and pays each a
base rate of $500 per month. One of the stylists serves as the manager and receives an extra $300 per
month. In addition to the base rate, each stylist also receives a commission of $3 per haircut. A stylist can
do as many as 20 haircuts a day, but the average is 14 haircuts per day. The Downtown Beauty Shop is
open 24 days a month. You can safely ignore income taxes.
Other costs are incurred as follows:
Advertising $200 per month

Rent $400 per month
Beauty Supplies $0.90 per haircut
Utilities $175 per month plus $0.35 per haircut
Magazines $25 per month
Cleaning Supplies $0.15 per haircut
Renee currently charges $8 per haircut.
Required:
(a) Compute the break-even point in (1) number of haircuts, (2) total sales dollars, and (3) as a percentage
of capacity.
(b) In July, 1,400 haircuts were given. Compute the operating profits for the month.
(c) Renee wants a $2,160 operating profits in August. Compute the number of haircuts that must be given
in order to achieve this goal.
(d) If 1,500 haircuts are given in August, compute the selling price that would have to be charged in order
to have $2,160 in operating profits.

3-42
125. You have been provided with the following information regarding the Fremont Manufacturing Company:
Sales price $50

24
per unit
6
unit
Required:

3-43
126. Xi-Tech, Inc. is considering the introduction of a new music player with the following price and cost
characteristics:

Required:
(a) How many units must Xi-Techsell to break even?

(b) How many units must Xi-Techsell to make an operating profit of $120,000 for the year?
(c) If projected sales are 7,500 units, what is the margin of safety in units?

3-44
127. John Martin, now retired, owns the Corner Barber Shop. He employs five (5) barbers and pays each a base
rate of $500 per month. One of the barbers serves as the manager and receives an extra $300 per month. In
addition to the base rate, each barber also receives a commission of $3 per haircut. A barber can do as
many as 20 haircuts a day, but the average is 14 haircuts per day. The Corner Barber Shop is a corporation
with a 30% tax rate and is open 24 days a month.

Rent $400 per month
Barber Supplies $.90 per haircut
Utilities $175 per month plus $.35 per haircut
Cleaning Supplies $.15 per haircut
John currently charges $8 per haircut.
Required:
(a) John wants to earn $2,160 in after-tax operating profits. Compute the number of haircuts that must be
given to reach this goal in June.
(b) In June, only 1,500 haircuts were given. Compute the price per haircut that John should have charged
in June to earn $2,160 in after-tax operating profits.

3-45
128. The president of Equipment Enterprises is considering expanding sales by producing three different
versions of its product. Each will be targeted by the marketing department to different income levels and,
hence, will be produced from three different qualities of materials. After reviewing the sales forecasts, the
sales department feels that for every item of Large sold, 4 of Medium can be sold, and 8 of Small can be
sold.
The following information has been assembled by the sales department and the production department.
Large Medium Small

Sales price (per unit) $15.00 $10.00 $5.00
Material cost 5.00 4.00 2.00
Direct labor 2.00 1.50 1.25
Variable Overhead 2.00 1.50 1.25
The fixed costs associated with the manufacture of these three products are $75,000 per year.
Required:
Determine the number of units of each product that would be sold at the break-even point.

3-46
129. Galena Company manufactures and sells adjustable canopies that attach to motor homes and trailers. The
market covers both new unit purchases as well as replacement canopies. Galena developed its 2017
business plan based on the assumption that canopies would sell at a price of $400 each. The variable costs
for each canopy were projected to be $200, and the annual fixed costs were budgeted at $100,000. The goal
for Galena 's after-tax operating profits was $240,000; the company's effective tax rate is 40%.
While Galena 's sales usually rise during the second quarter, the May financial statements reported that
sales were not meeting expectations. For the first five months of 2017, only 350 units had been sold at the
established price, with variable costs as planned. It was clear that the 2017 after-tax operating profit goal
would not be reached unless some corrective actions were taken. Galena 's president assigned a
management committee to analyze the situation and develop several alternative courses of action.
The following mutually exclusive alternatives were presented to the president:
(1) Reduce the sales price by $40. The sales department predicts that with the significantly reduced price,
2,700 units can be sold during the remainder of 2017. Total fixed and variable unit costs will stay as
budgeted.
(2) Lower variable costs per unit by $25 through the use of less expensive materials and lightly modified
manufacturing techniques. The sales price will also be reduced by $30. These changes will yield sales of
2,200 for the remainder of 2017.
(3) Cut fixed costs by $10,000 and lower the sales price by 5%. Variable costs per unit will be unchanged.
Sales of 2,000 units can be expected for the remainder of 2017.
Required:
(a) If no changes are made to the selling price or cost structure, determine the number of units that Galena
must sell in order to break even.
(b) If no changes are made to the selling price or cost structure, determine the number of units that Galena
must sell in order to achieve its after-tax operating profit objective.
(c) Determine which one of the alternatives Galena should select to achieve its after-tax operating profit
objective. Be sure to support your selection with appropriate computations.

3-47

130. You have been provided with the following information regarding the Ralston Manufacturing Company:
Sales price $50

24
per unit
Fixed manufacturing costs
12
per unit
6
unit
Fixed administrative costs
3
per unit
Required:

3-48
131. Nation Inc. sells three products. Last month's results are as follows:
P1 P2 P3
Revenues $200,000 $300,000 $300,000
Variable costs 80,000 280,000 160,000
Total fixed costs are $100,000 marketing and $125,000 administrative.
Required:
(a) What was the operating profit last month?

(b) What is Nation's break-even sales volume (at the given mix)?
(c) What is Nation's margin of safety?

132. Carrie sells three products. Last month's results are as follows:
P1 P2 P3
Revenues $150,000 $225,000 $225,000
Variable costs 60,000 210,000 120,000
Required:
(a) What was the contribution margin ratio?

(b) What sales volume does Carrie need to achieve a $100,000 monthly profit?
(c) What will profit be if Carrie increases sales by 20%?

3-49
133. The Windsome Corporation has budgeted fixed costs of $225,000 and an estimated selling price of $24 per
unit. The variable cost ratio is 40% and the company plans to sell 48,000 units in 2017.
Required:
(a) Compute the break-even point in units.

(b) Compute the margin of safety in units for 2017.

134. Bokay Creations has budgeted annual fixed costs of $240,000 and an estimated variable cost ratio of 60%.
Required:
(a) Compute Bokay's break-even point in sales dollars.

(b) Compute Bokay's margin of safety if the company expects to earn revenues of $800,000.
(c) Compute Bokay's expected operating profit at the $800,000 revenue.

3-50
135. The sales manager of Springdale Enterprises is considering expanding sales by producing three different
versions of its product. Each will be targeted by the marketing department to different income levels and
will be produced from three different qualities of materials. After reviewing the sales forecasts, the sales
department feels that 40% of units sold will be the original product, 35% will be new model #1 and the
remainder will be new model #2.
Original Model #1 Model #2

Material cost 45.00 30.00 20.00
Direct labor 20.00 15.00 10.00
Variable overhead 15.00 11.25 7.50
Required:

3-51
136. The sales manager of Thompson Sales is considering expanding sales by producing three different versions
of its product. Each will be targeted by the marketing department to different income levels and will be
produced from three different qualities of materials. After reviewing the sales forecasts, the sales

Material cost 22.50 15.00 10.00
Direct labor 10.00 7.50 5.00
Required:
(a) Determine the number of units of each product that would be sold at the break-even point.
(b) Determine the break-even point if the sales estimates are instead 50% original product, 30% model #1
and the remainder model #2.

3-52
137. The Teri Aki Diner is a new buffet-style restaurant offering stir-fry and Thai dishes. The buffet has a fixed
price of $8.50 per person. The estimated food costs are $2.00 per person, regardless of volume. Fixed costs
are related to the number of buffet lines that are maintained, with the estimated costs as follows:
Monthly volume Fixed Costs

1 line 0 - 4,000 $30,000
2 lines 4,001 - 6,000 $37,000
3 lines 6,001 - 7,500 $40,000
Required:
Determine the break-even point(s).

138. The Beach Party packages horseradish and mustards in a factory that can operate one, two, or three shifts.
The product sells for $10 a case and has variable costs of $4 per case. Fixed costs are related to the number
of shifts that are operated, with the estimated costs as follows:
Daily volume Fixed Costs

1 shift 0 - 2,000 $3,000
2 shifts 2,001 - 4,000 $5,700
3 shifts 4,001 - 6,000 $8,200
Required:
(a) Determine the break-even point(s).

(b) If Beach Party can sell all it can produce, how many shifts should be operated?

3-53
139. Pines Inc. produces and sells two products. During the most recent month, Product DQ393's sales were
$25,000 and its variable costs were $5,750. Product BA999's sales were $40,000 and its variable costs
were $9,850. The company's fixed costs were $48,310.
Required:
a. Determine the overall break-even point for the company.
b. If the sales mix shifts toward Product DQ393, with no change in total sales, what will happen to the
break-even point for the company? Explain.

140. Fortune Tools produces and sells two products. Data concerning these products for the most recent month
appear below:
Product XYZ Product VAR

Sales $14,000 $27,000
Variable costs $6,720 $12,550
Fixed costs for the entire company were $17,570.
Required:
b. If the sales mix shifts toward Product XYZ, with no change in total sales, what will happen to the

3-54
141. In the most recent month, Faulkner Corporation's total contribution margin was $208,000 and its operating
profit $39,400.
Required:
a. Compute the degree of operating leverage to two decimal places.
b. Using the degree of operating leverage, estimate the percentage change in operating profit that should
result from a 1% increase in sales.

142. Drum Co. has provided the following data concerning its only product:
Selling price $200 per unit

Current sales 18,800 units
Break-even sales 14,288 units
Required:
Compute the margin of safety in both dollars and as a percentage of sales.

3-55
143. Garrison Inc. produces and sells a single product whose contribution margin ratio is 66%. The company's
monthly fixed cost is $667,920 and the company's monthly target profit is $72,600.
Required:
Determine the dollar sales to attain the company's target profit.

144. Blues Corporation produces and sells a single product whose selling price is $240.00 per unit and whose
variable cost is $86.40 per unit. The company's fixed cost is $720,384 per month.
Required:
Determine the monthly break-even point in both units and dollar sales.

3-56
145. Grayson Corporation produces and sells a single product. Data concerning that product appear below:
Selling price per unit $230.00

Variable cost per unit $92.00
Fixed cost per month $621,000
Required:
a. Assume the company's monthly target profit is $69,000. Determine the unit sales to attain that target
profit.
b. Assume the company's monthly target profit is $41,400. Determine the dollar sales to attain that target
profit.

3-57
146. Morrel Co. produces and sells a single product. The company's income statement for the most recent
month is given below:
Sales (6,000 units at $40 per unit) $240,000

Less manufacturing costs:
Direct materials $48,000
Direct labor (variable) 60,000
Variable factory overhead 12,000
Fixed factory overhead 30,000 150,000
Gross margin 90,000
Less selling and other costs:
Variable selling and other costs 24,000
Fixed selling and other costs 42,000 66,000
There are no beginning or ending inventories.
Required:
a. Compute the company's monthly break-even point in units of product.
b. What would the company's monthly operating profit be if sales increased by 25% and there is no
change in total fixed costs?
c. What dollar sales must the company achieve in order to earn an operating profit of $50,000 per month?
d. The company has decided to automate a portion of its operations. The change will reduce direct labor
costs per unit by 40 percent, but it will double the costs for fixed factory overhead. Compute the new
break-even point in units.

3-58
147. Broken Arrow Inc. produces and sells a single product. Data concerning that product appear below:

Required:
The marketing manager would like to cut the selling price by $12 and increase the advertising budget by
$13,000 per month. The marketing manager predicts that these two changes would increase monthly sales
by 200 units. What should be the overall effect on the company's monthly operating profit of these
changes?

3-59
148. Fairmount Corporation produces and sells a single product. Data concerning that product appear below:

Required:
The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The
marketing manager has proposed a commission of $9 per unit. In exchange, the sales staff would accept an
overall decrease in their salaries of $55,000 per month. The marketing manager predicts that introducing
this sales incentive would increase monthly sales by 200 units. What should be the overall effect on the
company's monthly operating profit of these changes?

3-60
149. Clifford Co. manufactures and sells adjustable windows for remodeling homes and new housing. Clifford
developed its budget for the current year assuming that the windows would sell at a price of $400 each.
The variable costs for each window were forecasted to be $200 and the annual fixed costs were forecasted
to be $100,000. Clifford had targeted a profit of $400,000.
While Clifford 's sales usually rise during the second quarter, the May financial statements reported that
sales were not meeting expectations. For the first five months of the year, only 350 units had been sold at
the established price, with variable cost as planned, and it was clear that the target profit for the year would
not be reached unless some actions were taken. Clifford 's president assigned a management committee to
analyze the situation and develop several alternative courses of action. The following three alternatives
were presented to the president, only one of which can be selected.
1. Reduce the selling price by $40. The marketing department forecasts that with the lower price, 2,700
units could be sold during the remainder of the year.
2. Lower variable costs per unit by $25 through the use of less expensive materials. Because of the
difference in materials, the selling price would have to be lowered by $30 and sales of 2,200 units for the
remainder of the year are forecast.
3. Cut fixed costs by $10,000 and lower the selling price by 5 percent. Sales of 2,000 units would be
expected for the remainder of the year.
Required:
a. If no changes are made to the selling price or cost structure, estimate the number of units that must be
sold during the year to break-even.
b. If no changes are made to the selling price or cost structure, estimate the number of units that must be
sold during the year to attain the target profit of $400,000.
c. Determine which of the alternatives Clifford's president should select to maximize profit.

3-61
150. Volare, Inc. has decided to introduce a new product. The product can be manufactured using either a
capital-intensive or labor-intensive method. The manufacturing method will not affect the quality or sales
of the product. The estimated manufacturing costs of the two methods are as follows:
Capital- Labor-

Intensive Intensive
Variable manufacturing
$14.00 $17.60
cost per unit
Fixed manufacturing cost
$2,440,000 $1,320,000
per year
The company's market research department has recommended an introductory selling price of $30 per unit
for the new product. The annual fixed selling and administrative costs of the new product are $500,000.
The variable selling and administrative costs are $2 per unit regardless of how the new product is
manufactured.
Required:
a. Calculate the break-even point in units if Volare, Inc. uses the:
1. capital-intensive manufacturing method.

2. labor-intensive manufacturing method.
b. Determine the unit sales volume at which the operating profit is the same for the two manufacturing
methods.
c. Assuming sales of 250,000 units, what is the degree of operating leverage if the company uses the:

d. What is your recommendation to management concerning which manufacturing method to use?

3-62

3-63
151. The following monthly data in contribution format are available for the Feta Company and its only
product, Product Gamma:
Total Per Unit

Sales $83,700 $279
Variable costs 32,700 109
Contribution margin 51,000 $170
Fixed costs 40,000
The company produced and sold 300 units during the month and had no beginning or ending inventories.
Required:
a. Without resorting to calculations, what is the total contribution margin at the break-even point?
b. Management is contemplating the use of plastic gearing rather than metal gearing in Product Gamma.
This change would reduce variable costs by $18 per unit. The company's sales manager predicts that this
would reduce the overall quality of the product and, thus, would result in a decline in sales to a level of 250
units per month. Should this change be made?
c. Assume that Feta Company is currently selling 300 units of Product Gamma per month. Management
wants to increase sales and feels this can be done by cutting the selling price by $22 per unit and increasing
the advertising budget by $20,000 per month. Management believes that these actions will increase unit
sales by 50 percent. Should these changes be made?
d. Assume that Feta Company is currently selling 300 units of Product Gamma. Management wants to
automate a portion of the production process for Product Gamma. The new equipment would reduce direct
labor costs by $20 per unit but would result in a monthly rental cost for the new robotic equipment of
$10,000. Management believes that the new equipment will increase the reliability of Product Gamma thus
resulting in an increase in monthly sales of 12%. Should these changes be made?

3-64

3-65
152. Morgan Designs manufactures decorative iron railings. In preparing for next year's operations,
management has developed the following estimates:
Total Per Unit

Sales (20,000 units) $1,000,000 $50.00
Direct materials $200,000 $10.00
Direct labor (variable) $50,000 $2.50
Manufacturing overhead:
Variable $70,000 $3.50
Fixed $80,000 $4.00
Selling & administrative:
Variable $100,000 $5.00
Fixed $30,000 $1.50
Required:
Compute the following items:
a. Unit contribution margin.
b. Contribution margin ratio.
c. Break-even in dollar sales.
d. Margin of safety percentage.
e. If the sales volume increases by 20%, with no change in total fixed costs, what will be the change in
operating profit?
f. If the per unit variable production costs increase by 15%, and fixed selling and administrative costs
increase by 12%, what will be the new break-even point in dollar sales?

3-66

153. Maryland Company offers two products. At present, the following represents the usual results of a month's
operations:
Product XX Product ZZ
Per Per Combine

Unit Unit d
Sales $120,000 $1.20 $80,000 $0.80 $200,000
Variable
60,000 0.60 60,000 0.60 120,000
costs
Contribution
$60,000 $0.60 $20,000 $0.20 80,000
margin
Fixed costs 50,000
Operating
$30,000
profit
Required:
a. Find the break-even point in dollars.

b. Find the margin of safety in dollars.
c. The company is considering decreasing product XX's unit sales to 80,000 and increasing product ZZ's
unit sales to 180,000, leaving unchanged the selling price per unit, variable cost per unit, and total fixed
costs. Would you advise adopting this plan?
d. Refer to (c) above. Under the new plan, find the break-even point in dollars.
e. Under the new plan in (c) above, find the margin of safety in dollars.

3-67
154. Data concerning Fowler Corporation's single product appear below:

Required:
Management is considering using a new component that would increase the unit variable cost by $2. Since
the new component would improve the company's product, the marketing manager predicts that monthly
sales would increase by 200 units. What should be the overall effect on the company's monthly operating
profit of this change if fixed costs are unaffected?

155. Explain the difference between the break-even point, the margin of safety, and operating leverage.

3-68
156. Explain the difference between total contribution margin and gross margin.

157. Why is it important for the profit equation to make a distinction between fixed and variable costs?

158. Why is the time period so important for the definition of fixed costs?

159. Present the profit equation and define all of the terms.

3-69
160. Why and how do managers simplify analyses for achieving a given level of profit with two products or
services?

161. Discuss the role of assumptions that decision makers must consider when relying on CVP analysis.

3-70
Chapter 03 Fundamentals of Cost-Volume-Profit Analysis Answer Key
True / False Questions

1. Both total revenues (TR) and total costs (TC) are likely to be affected by changes in the output.

TRUE
Fixed costs are not affected by changes in output, up to the point where capacity must be changed,
thereby changing fixed costs as well.

AACSB: Analytical Thinking
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis

2. Cost-volume-profit (CVP) analysis assumes that the production volume equals sales volume so that any
changes in unit prices can be ignored.

FALSE
A basic assumption of cost-volume-profit analysis is that changes in inventory are ignored, or put
another way, inventory is held constant.

Blooms: Remember
Difficulty: 2 Medium
Gradable: automatic

3. The total contribution margin is the unit contribution margin multiplied by the number of units minus
the fixed component of the total costs (TC).

FALSE
The total contribution margin is the unit contribution margin multiplied by the number of units.

3-71
Blooms: Remember
Gradable: automatic

4. Profit is the unit contribution margin multiplied by the number of units minus the fixed component of
the total costs (TC).

TRUE
It is true that profit is the unit contribution margin multiplied by the number of units minus the fixed
component of the total costs (TC).

Blooms: Remember
Gradable: automatic

5. If the average selling price is $.60 per unit, the average variable cost is $.36 per unit, and the total fixed
costs are $1,500, then sales of 15,000 units will result in operating profits of $3,600.

FALSE
($.60 - .36) × 15,000 - 1,500 = $2,100.

Blooms: Apply
Gradable: automatic

6. The average selling price is $.60 per unit, the average variable cost is $.36 per unit, and the total fixed
costs are $1,500. If operating profits of $900 are desired, a sales volume of 2,500 units is necessary.

FALSE
($1,500 + 900)/($0.60 - .36) = 10,000 units.

Blooms: Apply
3-72
Gradable: automatic

7. The contribution margin ratio is the contribution margin per unit divided by the selling price per unit.

TRUE
The statement made in the question is a definition of the contribution margin ratio.

Blooms: Remember
Gradable: automatic

8. If the fixed costs are $2,400, targeted operating profits is $1,200, selling price per unit is $2, and the
contribution margin ratio is 40%, then the required sales volume is 9,000 units.

FALSE
($2,400 + 1,200)/40% = $9,000; this is dollars, not units.

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

9. The break-even point in sales dollars is fixed costs divided by the contribution margin ratio.

TRUE
The statement made in the question is a definition of the break-even.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

3-73
10. An organization's operating leverage is high when it has a low proportion of variable costs in its total
costs.

TRUE
Low variable costs and higher fixed cost cause an organization's operating leverage to be high.

Blooms: Remember
Gradable: automatic
Learning Objective: 03-02 Understand the effect of cost structure on decisions.

11. An increase in the selling price per unit will decrease an organization's operating leverage, assuming
sales unit volume doesn't change and there are no other changes in its cost structure.

TRUE
The operating leverage will decrease, even though the total cost structure does not change, because the
fixed cost decline relative to selling price.

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

12. The break-even point for an organization with a low operating leverage will be relatively higher than the
break-even point for an organization with a high operating leverage.

FALSE
A low operating leverage has lower fixed costs and higher variable costs; therefore, the break-even
point will be lower.

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

3-74
13. An increase in an organization's fixed costs will result in a lower margin of safety, assuming all other
costs and sales remain unchanged.

TRUE
This is due to an upward shift in the fixed and total cost curves relative to the revenue curve, driving the
break-even point out; thereby, reducing the difference (margin of safety) between break-even and the
point of actual performance.

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

14. Microsoft Excel® is ideally suited for analyzing alternative CVP scenarios using its "What-If Analysis"
function.

TRUE
Microsoft Excel® is ideally suited for performing CVP analyses routinely and alternative scenarios
using its "What-If" funtionality.

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 03-03 Use Microsoft Excel to perform CVP analysis.
Topic: CVP Analysis with Spreadsheets

15. Microsoft Excel® cannot be used to find break-even points.

FALSE
Microsoft Excel® can be used to perform break-even analyses, as well as more complicated CVP
relationships.

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 03-03 Use Microsoft Excel to perform CVP analysis.
Topic: CVP Analysis with Spreadsheets

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16. An increase in an organization's tax rate will cause an increase in its break-even point.

FALSE
Taxes have no impact on the break-even point because breakeven is calculated on before-tax profit.

Blooms: Apply
Gradable: automatic
Learning Objective: 03-04 Incorporate taxes, multiple products, and alternative cost structures into the CVP analysis.
Topic: Extensions of the CVP Model

17. Before-tax operating profits are equal to the after-tax operating profits divided by (1 - tax rate).

TRUE
After-tax profit = before-tax profit - before-tax profit × tax rate.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

18. If an organization's fixed costs are $2,400, tax rate is 40%, and contribution margin is $5,200, then its
after-tax operating profits are $1,680.

TRUE
$5,200 - 2,400 = 2,800 - (2,800 × 40%) = $1,680.

Blooms: Apply
Gradable: automatic

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19. If the fixed costs are $2,400, targeted before-tax operating profit is $1,200, tax rate is 25%, selling price
per unit is $2, and contribution margin ratio is 40%, then the sales volume is 9,000 units.

FALSE
(2,400 + 1,200)/(2 × 40%) = 4,500 units.

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

20. Cost-volume-profit (CVP) analysis is more complicated for organizations with multiple products
because typically each product has a different contribution margin ratio.

TRUE
Multiple products makes it necessary to develop a weighted-average contribution margin in order to

calculate break even.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

21. The Frances Manufacturing Company sells two products, FRN and CES. FRN has a higher contribution
margin ratio than CES. If the product mix shifts towards CES, the company's break-even point in total
units (i.e., FRN plus CES) will increase.

TRUE
The weighted-average contribution margin will be less when the sales mix shifts to the lower profit
product.

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

3-77
22. In multi-product cost-volume-profit (CVP) analysis, the fixed product mix method and the weighted-
average contribution margin method yield different break-even points.

FALSE
Both methods yield the same result.

Blooms: Remember
Gradable: automatic

23. The more important the decision, the more the manager will want to ensure that the assumptions made
for CVP analysis are applicable.

TRUE
The results of the CVP analysis are only as good as the assumptions the cost analyst makes.

Blooms: Remember
Gradable: automatic
Learning Objective: 03-05 Understand the assumptions and limitations of CVP analysis.

24. The best course of action in sensitive decisions is that the manager should depend upon the cost
analyst's CVP analysis without considering alternative assumptions.

FALSE
In CVP analysis, if the decisions are sensitive to the assumptions made (for example, that prices do not
depend on volume), the manager should be cautious about depending on CVP analysis without
considering alternative assumptions.

Blooms: Remember
Gradable: automatic

3-78
Multiple Choice Questions

25. The difference between total sales in dollars and total variable costs is called:

A. operating profit.

B. net profit.
C. the gross margin.
D. the contribution margin.
Contribution margin = Total sales - Total variable costs.

AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

26. The following information pertains to Tiller Co.:
Sales $800,000
Variable Costs 160,000
Fixed Costs 40,000
What is Tiller's break-even point in sales dollars? (CPA adapted)

A. $200,000.
B. $160,000.
C. $50,000.
D. $40,000.
($800,000 - 160,000)/$800,000 = 80%; $40,000/.80 = $50,000.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

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27. Cost-volume-profit (CVP) analysis is a simple but powerful tool to assist management in making
operating decisions. Which of the following does not represent a potential use of CVP analysis?

A. Ability to compute the break-even point.

B. Ability to determine optimal sales volumes.
C. Aids in evaluating tax planning alternatives.
D. Aids in determining optimal pricing policies.
CVP analysis addresses pricing and volume, but it does not address tax planning.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic



B. Fixed cost decreases.
C. Sales volume decreases.
D. Variable costs per unit increases.
Sales volume is not a component of the break-even point, rather it is the solution - what we are
attempting to find.

Blooms: Apply
Gradable: automatic

3-80
29. If the fixed costs for a product decrease and the variable costs (as a percentage of sales dollars)
decrease, what will be the effect on the contribution margin ratio and the break-even point, respectively?

A. Decreased Increased
B. Increased Decreased
C. Decreased Decreased
D. Increased Increased

A. Option A
B. Option B
C. Option C
D. Option D
If VC decreases, CM% increases, if FC decreases, the break-even will also decrease.

Blooms: Apply
Gradable: automatic

30. The Skyways Company is currently selling its single product for $15. Variable costs are estimated to
remain at 70% of the current selling price and fixed costs are estimated to be $4,800 per month. If
Skyways increases its selling price by 10%, its variable cost ratio will:

A. not change

B. decrease
C. increase
$15(.70) = $10.50 is variable cost; $15(1.10) = $16.50 is the increased selling price; $10.50/$16.50 =
63.6% (vs. 70%) is the new variable cost ratio (vs. the current variable cost ratio).

Blooms: Apply
Gradable: automatic

3-81
31. Cost A is a fixed cost, while B is a variable cost. During the current year, the volume of output has
decreased. In terms of cost per unit of output, we would expect that:

A. cost A has remained unchanged.

B. cost B has decreased.
C. cost A has decreased.
D. cost B has remained unchanged.
Variable cost per unit has remained constant, while fixed cost in total remains unchanged but has
increased on a per unit basis.

Blooms: Analyze
Gradable: automatic

32. If both the variable cost per unit and the selling price per unit decrease, the new contribution margin
ratio in relation to the old contribution margin ratio will be:

A. Lower.
B. Higher.
C. Unchanged.
In order to make a decision, we need to know the amount or percentage of change.

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

3-82

A. an increase in total fixed costs.

D. an increase in the number of units produced and sold.
Units sold do not affect the break-even point; instead, they indicate where we are on the revenue curve
and the margin of safety.

Blooms: Remember
Gradable: automatic

34. Which of the following changes to a company's contribution income statement will always lower the
break-even point (either in units or in dollars)?

A. Sales price increases by 10%.

B. Sales price decreases by 5%.
C. Variable costs increase by 10% and fixed costs decrease by 5%.
D. Variable costs decrease by 5% and fixed costs increase by 10%.
A sales price increase or a variable cost decrease will always lower the break-even point. Variable costs
decrease by 5% and fixed costs increase by 10% will depend upon the relative size of the fixed costs.

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

3-83
35. At a break-even point of 400 units, variable costs were $400 and fixed costs were $200. What will the
401st unit sold contribute to operating profits before income taxes?

A. $0.50
B. $1.00
C. $1.50
D. $2.00
$400 variable costs + $200 fixed costs at break-even makes sales $600/400 units = $1.50 a unit - $1.00
variable costs per unit = $0.50 profit per unit.

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

3-84
36. Dartmount Corporation has provided its contribution format income statement for June. The company
produces and sells a single product.
Sales (2,900 units) $269,700

Fixed costs 137,100
If the company sells 3,100 units, its total contribution margin should be closest to:

A. $27,045.
B. $181,000.
C. $162,400.
D. $173,600.
See calculation below.
Sales (3,100 units)* $288,300

Fixed costs 137,100
*Sales $269,700 ÷ 2,900 = $93.00 per unit

Variable costs $107,300 ÷ 2,900 = $37.00 per unit
Sales 3,100 units × $93 per unit = $288,300
Variable costs (Manufacturing) 3,100 units × $37 per unit = $114,700

Blooms: Apply
Gradable: automatic

3-85
37. Goodson Inc. produces and sells a single product. The company has provided its contribution format
income statement for March.
Sales (4,500 units) $427,500

Fixed costs 135,300
If the company sells 4,300 units, its operating profit should be closest to:

A. $7,700.
B. $25,513.
C. $26,700.
D. $19,500.

Sales (4,300 units)* $408,500

Fixed costs 135,300
*Sales $427,500 ÷ 4,500 = $95.00 per unit

Variable costs (Manufacturing) $265,500 ÷ 4,500 = $59.00 per unit
Sales 4,300 units × $95.00 per unit = $408,500
Variable costs (Manufacturing) 4,300 units × $59.00 per unit = $253,700

Blooms: Apply
Gradable: automatic

3-86
38. The contribution margin ratio is 25% for Crowne Company and the break-even point in sales is
$200,000. If Crowne Company's target operating profit is $60,000, sales would have to be:

A. $260,000.
B. $440,000.
C. $280,000.
D. $240,000.
Revised sales = (Target operating profit ÷ Contribution margin ratio) + Break-even sales
= $60,000 ÷ 25%
= $240,000 + $200,000 = $440,000 total sales

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

39. Opal Company manufactures a single product that it sells for $90 per unit and has a contribution margin
ratio of 35%. The company's fixed costs are $46,800. If Opal desires a monthly target operating profit
equal to 15% of sales, sales will have to be (rounded):

A. 1,486 units.

B. 3,467 units.
C. 1,040 units.
D. 2,600 units.
Sales = Variable cost + Fixed cost + Target profit

X = .65X + $46,800 + .15X = $46,800
.2X = $46,800
X = $234,000
$234,000 ÷ $90 per unit = 2,600 units

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

3-87
40. Razor Inc. manufactures industrial components. One of its products used as a subcomponent in auto
manufacturing is Fluoro2211. The selling price and cost per unit data for 9,000 units of Fluoro2211 are
as follows.
Per Unit Data

Selling Price $150
Direct Materials 20
Direct Labor 15
Variable Manufacturing Overhead 12
Fixed Manufacturing Overhead 30
Variable Selling 3
Fixed Selling and Administrative 10
Total Costs 90
Operating Margin $60
During the next year, sales of Fluoro2211 are expected to be 10,000 units. All costs will remain the
same except for fixed manufacturing overhead, which will increase by 20%, and material, which will
increase by 10%. The selling price per unit for next year will be $160. Based on these data, Razor Inc.'s
total contribution margin for next year will be: (CMA adapted)

A. $882,000.
B. $980,000.
C. $972,000.
D. $1,080,000.
[($160 - 22 - 15 - 12 - 3)10,000 units] = $1,080,000.

Blooms: Apply
Gradable: automatic

3-88
41. Dorcan Corporation manufactures and sells T-shirts imprinted with college names and slogans. Last
year, the shirts sold for $7.50 each, and the variable cost to manufacture them was $2.25 per unit. The
company needed to sell 20,000 shirts to break-even. The after tax net income last year was $5,040.
Donnelly's expectations for the coming year include the following: (CMA adapted)

The selling price that would maintain the same contribution margin ratio as last year is:

A. $9.00.
B. $8.25.
C. $10.00.
D. $9.50.
If variable cost increases by 1/3, then the selling price must also increase by 1/3 to maintain the same
contribution margin ratio. $7.50 = 1.333 × $7.50 = $10.00.

Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic

3-89

Based on a $10 selling price per unit, the number of T-shirts Dorcan Corporation must sell to break-
even in the coming year is:

A. 17,000 units.

B. 16,500 units.
C. 20,000 units.
D. 22,000 units.
FC (last year) = ($7.50 - 2.25) × 20,000 units = $105,000; FC (this year) = $105,000 × 1.10 = $115,500
$115,500/(10 - 3) = 16,500 units.

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

3-90

Sales for the coming year are expected to exceed last year's by 1,000 units. If this occurs, Dorcan's sales
volume in the coming year will be:

A. 22,600 units.

B. 21,960 units.
C. 23,400 units.
D. 21,000 units.
$5,040/(1 - .40) = $8,400; ($105,000 + $8,400)/($7.50 - 2.25) = 21,600 units sold last year
21,600 + 1,000 = 22,600 units.

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

3-91

Based on a $10 selling price per unit and if Dorcan Corporation wishes to earn $37,800 in after tax net
income for the coming year, the company's sales volume in dollars must be:

A. $213,750.
B. $257,625.
C. $207,000.
D. $255,000.
$37,800/(1 - .40) = $63,000; ($115,500 + $63,000)/($10 - 3) = 25,500 units; 25,500 × $10 = $255,000.

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

3-92
Selling Price $40

per
Fixed manufacturing cost $150,000
month
$6
costs
Fixed selling & administrative per
$120,000
costs month
How many units must Lamar produce and sell in order to break-even?

A. 8,333 units.

B. 12,500 units.
C. 15,000 units.
D. 22,500 units.
($150,000 + 120,000)/($40 - 22 - 6) = 22,500 units.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

3-93
Selling Price $40

per
month
$6
costs
$120,000
costs month
How many units must Lamar produce and sell in order to achieve a profit of $30,000 per month?

A. 10,000 units.

B. 8,824 units.
C. 25,000 units.
D. 15,000 units.
($150,000 + 120,000 + 30,000)/($40 - 22 - 6) = 25,000 units.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

3-94
Selling Price $40

per
month
$6
costs
$120,000
costs month
If Lamar produces and sells 30,000 units, what is the margin of safety in units?

A. 5,000 units.

B. 7,500 units.
C. 22,500 units.
D. 30,000 units.
30,000 - 22,500 = 7,500 units

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

3-95
48. Gardner Corporation manufactures skateboards and is in the process of preparing next year's budget.
Sales $1,500,000
Cost of sales:
Selling and G&A
Variable 200,000
Fixed 250,000 450,000
The break-even point (rounded to the nearest dollar) for Gardner Corporation for the current year is:

A. $146,341.
B. $636,364.
C. $729,730.
D. $181,818.
$250,000 + 150,000 + 75,000 + 200,000 = $675,000 variable costs; ($1,500,000 - 675,000)/1,500,000 =

55% contribution margin; ($100,000 + 250,000)/.55 = $636,364 break-even.

Blooms: Apply
Gradable: automatic

3-96
49. Gardner Corporation manufactures skateboards and is in the process of preparing next year's budget.
Sales $1,500,000
Cost of sales:

Exp.
Variable 200,000
Fixed 250,000 450,000
For the coming year, the management of Gardner Corporation anticipates a 10 percent increase in sales,
a 12 percent increase in variable costs, and a $45,000 increase in fixed costs.

A. $729,027.
B. $862,103.
C. $214,018.
D. $474,000.
($1,500,000 × 1.10) - ($675,000 × 1.12)/$1,650,000 = .541818 contribution margin

($350,000 + 45,000)/.541818 = $729,027 break-even.

Blooms: Apply
Gradable: automatic

3-97
Per Unit Total

Sales $15 $45,000
If sales decrease by 500 units, how much will fixed costs have to be reduced by to maintain the current
operating profit of $6,000?

A. $9,000.
B. $7,500.
C. $6,000.
D. $3,000.
$45,000/$15 = 3,000 units - 500 units = 2,500 units × ($15 - $9) = $15,000 - $12,000 = $3,000 new
profit. To maintain current profit level of $6,000 fixed costs will have to be reduced by $3,000.

Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic

51. Raines Company's sales are $750,000 with operating profits of $130,000. If the contribution margin
ratio is 40%, what did the fixed costs amount to?

A. $370,000.
B. $300,000.
C. $270,000.
D. $170,000.
($750,000 × .40) - FC = $130,000, FC = $170,000.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

3-98
52. The following costs have been estimated based on sales of 30,000 units:
Total Annual Percent That Is

Costs Variable
Direct materials $300,000 100%
Direct labor 250,000 100
Manufacturing
250,000 50
overhead
Selling and
150,000 25
administrative
What selling price will yield a contribution margin of 40%?

A. $59.38
B. $43.75
C. $39.58
D. $33.25
$23.75 variable cost per unit/0.6 = $39.58
$39.58 (100%)
selling price;
23.75 (60%)
Less: VC
CM $15.84 (40%)

Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic

3-99
53. Gena Manufacturing Company has a fixed cost of $225,000 for the production of tubes. Estimated sales
are 150,000 units. A before tax profit of $125,000 is desired by the controller. If the tubes sell for $5
each, what unit contribution margin is required to attain the profit target?

A. $3.00.
B. $2.33.
C. $1.47.
D. $.90.
($225,000 + $125,000)/150,000 = $2.33.

Blooms: Analyze
Gradable: automatic

54. At the break-even point, the total contribution margin equals total: (CPA adapted)

A. Variable costs.

B. Sales.
C. Selling and administrative costs.
D. Fixed costs.
This statement defines break-even (e.g., contribution margin - fixed costs = zero).

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

3-100
55. On January 1, 2016, Randolph Co. increased its direct labor wage rates. All other budgeted costs and
revenues were unchanged. How did this increase affect Randolph's budgeted break-even point and
budgeted margin of safety? (CPA adapted)
Budgeted Break-even Budgeted Margin of

Point Safety
A. Increase Increase
D. Decrease Increase

A. Option A
B. Option B
C. Option C
D. Option D
Direct labor is a variable cost, so the unit contribution margin will decrease, increasing the break-even
point. Since break-even increases and sales are unchanged, the margin of safety decreases.

Blooms: Analyze
Gradable: automatic



B. a change in the number of units produced and sold.
C. a change in the variable cost ratio.
D. a change in the contribution margin ratio.
Volume changes do not affect the break-even point.

Blooms: Apply
Gradable: automatic

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57. If both the variable cost per unit and the selling price per unit increase, the new contribution margin
ratio in relation to the old contribution margin ratio will be:

A. Lower.
B. Higher.
C. Unchanged.
Need to know size of increase of each.

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

Sales $3,500,000
Cost of sales:

Exp.
Variable 750,000
Fixed 250,000 1,000,000
The contribution margin ratio for the current year is:

A. 53.6%.
B. 49.3%.
C. 46.4%.
D. 25%.
$500,000 + 250,000 + 275,000 + 750,000 = $1,775,000; ($3,500,000 - 1,775,000)/3,500,000 = 49.3%.

3-102
Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

Sales $3,500,000
Cost of sales:

Exp.
Variable 750,000
Fixed 250,000 1,000,000
The break-even point (rounded to the nearest dollar) for Evergreen Corporation for the current year is:

A. $2,625,000.
B. $1,865,672.
C. $1,724,138.
D. $2,155,172.
$500,000 + 250,000 + 275,000 + 750,000 = $1,775,000; ($3,500,000 - 1775,000)/3,500,000 = 49.3%;

($600,000 + 250,000)/.493 = $1,724,138.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

3-103
Sales $3,500,000
Cost of sales:

Exp.
Variable 750,000
Fixed 250,000 1,000,000
For the coming year, the management of Evergreen Corporation anticipates a 5 percent decrease in
sales, a 10 percent increase in all variable costs, and a $45,000 increase in fixed costs.
The operating profit for next year would be:

A. $477,500.
B. $492,500.
C. $552,500.
D. $831,250.
($3,500,000 × .95) - ($1,775,000 × 1.10) - ($850,000 + 45,000) = $477,500.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

3-104
Sales $3,500,000
Cost of sales:

Exp.
Variable 750,000
Fixed 250,000 1,000,000
For the coming year, the management of Evergreen Corporation anticipates a 5 percent decrease in
sales, a 10 percent increase in variable costs, and a $45,000 increase in fixed costs.

A. $3,022,500.
B. $2,947,500.
C. $2,668,750.
D. $2,168,225.
($3,500,000 × .95) - ($1,775,000 × 1.10)/($3,500,000 × .95) = .41278;

($850,000 + 45,000)/.41278 = $2,168,225.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

3-105
Per Unit Total

Sales $15 $45,000
If unit sales decrease by 10%, how much will fixed costs have to be reduced by to maintain the current
operating profit?

A. $12,000.
B. $4,500.
C. $6,000.
D. $1,800.
$45,000/15 = 3,000 units; [($15 - 9)(3,000 × .9)] - FC = $6,000; FC = $10,200; thus FC will have to
decrease by $1,800.

Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic

3-106
Total
Sales $90,000
If sales decrease by 10%, what level of fixed costs will maintain the current operating profit?

A. $12,000.
B. $20,400.
C. $21,600.
D. $24,000.
$36,000 × .9 - 12,000 = $20,400.

Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic

3-107
Total
Sales $90,000
If sales increase by 10%, what level of fixed costs will yield a 20% increase in profits?

A. $14,400.
B. $19,200.
C. $25,200.
D. $26,400.
($36,000 × 1.1) - (12,000 × 1.2) = $25,200.

Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic

65. With regard to the CVP graph, which of the following statements is not correct?

A. The CVP graph assumes that volume is the only factor affecting total cost.
B. The CVP graph assumes that selling prices do not change.
C. The CVP graph assumes that variable costs go down as volume goes up.
D. The CVP graph assumes that fixed costs are constant in total within the relevant range.
Total variable costs go up as volume goes up.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

3-108
66. Tower Company manufactures and sells a single product with a positive contribution margin. If the
selling price and the variable cost per unit both increase 5% and fixed costs do not change, what is the
effect on the contribution margin per unit and the contribution margin ratio?

unit ratio
A. No change No change
B. Increase Increase
C. Increase No change
D. Increase Decrease

A. Option A
B. Option B
C. Option C
D. Option D
The contribution margin per unit increases and there is no change in the contribution margin ratio.
For example: Static 5% Change

Selling price $100 $105
Variable cost 60 63
Contribution margin $40 $42
Contribution margin per unit Increase
Contribution margin ratio 40% 40%
Contribution margin per unit No change

Blooms: Remember
Gradable: automatic

3-109
67. Which of the following formulas is used to calculate the contribution margin ratio?

A. (Sales - Fixed costs) ÷ Sales.

B. (Sales - Cost of goods sold) ÷ Sales.
C. (Sales - Variable costs) ÷ Sales.
D. (Sales - Total costs) ÷ Sales.
(Sales - Variable costs) ÷ Sales.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

3-110
68. Flower Company manufactures and sells a single product that has a positive contribution margin. If the
selling price and variable costs both decrease by 5% and fixed costs do not change, then what would be
the effect on the contribution margin per unit and the contribution margin ratio?

unit ratio
A. Decrease Decrease
B. Decrease No change
C. No change Decrease
D. No change No change

A. Option A
B. Option B
C. Option C
D. Option D
The contribution margin per unit decreases and there is no change in the contribution margin ratio.

For example: Static 5% Change

Variable cost 60 57
Contribution margin per unit Decrease
Contribution margin ratio 40% 40%
Contribution margin per unit No change

Blooms: Remember
Difficulty: 3 Hard
Gradable: automatic

3-111
69. If Q equals the level of output, P is the selling price per unit, V is the variable cost per unit, and F is the
fixed cost, then the break-even point in units is:

A. Q ÷ (P - V).
B. F ÷ (P - V).
C. V ÷ (P - V).
D. F ÷ [Q(P - V)].
Unit sales to break-even = Fixed costs ÷ Unit CM or F ÷ (P - V).

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic



B. Sales volume increases.
C. Fixed cost increases.
D. Variable costs per unit decreases.

Blooms: Remember
Gradable: automatic


A. Variable costs per unit increases.

B. Fixed costs increases.
C. Product mix shifts towards the more expensive products.
D. Sales volume decreases.

3-112
Blooms: Remember
Gradable: automatic

72. If the fixed costs for a product increase and the variable costs (as a percentage of sales dollars) increase,

A. Decrease Increase
D. Increase Increase

A. Option A
B. Option B
C. Option C
D. Option D
A variable cost increase will decrease CM%; a fixed cost increase will increase the break-even point.

Blooms: Apply
Gradable: automatic


A. an increase in the number of units produced and sold.

D. an increase in the variable cost ratio.

Blooms: Apply
Gradable: automatic
3-113

74. Obtuse Company's fixed costs total $150,000, its variable cost ratio is 60% and its variable costs are
$4.50 per unit. Based on this information, the break-even point in units is:

A. 50,000.
B. 37,500.
C. 33,333.
D. 100,000.
Contribution margin = Sales - Variable cost ratio

= 100% - 60%
= 40% contribution margin
Dollar sales to break even = Fixed costs ÷ CM ratio

= $150,000 ÷ 40% = $375,000 sales
Sales price per unit = Variable cost per unit ÷ Variable cost ratio
= $4.50 ÷ 60%
= $7.50 sales price per unit
$375,000 ÷ $7.50 = 50,000 unit break-even point

Blooms: Apply
Gradable: automatic

3-114
75. Bargain Company's contribution margin ratio is 15%. If the degree of operating leverage is 12 at the
$150,000 sales level, operating profit at the $150,000 sales level must equal:

A. $1,500.
B. $2,700.
C. $2,160.
D. $1,875.
Operating profit percentage = Contribution margin ratio ÷ Operating leverage

= 15% ÷ 12
= 1.25%
= 1.25% × $150,000
= $1,875 operating profit

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

76. Operating leverage refers to the extent to which an organization's cost structure is made up of:

A. differential costs.

B. opportunity costs.
C. fixed costs.
D. relevant costs.
Operating leverage is determined by the cost structure of the organization, the amount of the fixed
versus variable costs.

Blooms: Understand
Gradable: automatic

3-115
77. A decrease in the margin of safety would be caused by a(n):

A. increase in the total fixed costs.

B. increase in total revenue (sales).
C. decrease in the break-even point.
D. decrease in the variable cost per unit.
An increase in fixed costs will increase the break-even point which lowers the margin of safety, all the
other choices decrease the break-even point.

Blooms: Remember
Difficulty: 3 Hard
Gradable: automatic

78. Given the following data:
Per Unit Total

Sales $15 $45,000
Net income $6,000
If sales decrease by 500 units, by what percent would fixed costs have to be reduced by to maintain
current net income?

A. 50.0%.
B. 33.3%.
C. 25.0%.
D. 16.7%.
$45,000/15 = 3,000 units; [($15 - 9) × (3,000 - 500)] - FC = $6,000; FC = $9,000; thus FC will have to
decrease by $3,000; $3,000/12,000 = 25%.

Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic

3-116
79. The following pertains to Upton Co. for the year ending December 31, 2016:
Budgeted Sales $1,000,000

Break-even Sales 700,000
Budgeted Contribution Margin 600,000
Cashflow Break-even 200,000
Upton's margin of safety is: (CPA adapted)

A. $300,000.
B. $400,000.
C. $500,000.
D. $800,000.
$1,000,000 - $700,000 = $300,000.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

80. The margin of safety percentage is computed as:

A. Break-even sales ÷ Total sales.

B. Total sales - Break-even sales.
C. (Total sales - Break-even sales) ÷ Break-even sales.
D. (Total sales - Break-even sales) ÷ Total sales.
Margin of safety percentage = Margin of safety in dollars ÷ Total budgeted (or actual) sales

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

3-117
81. The amount by which a company's sales can decline before losses are incurred is called the:

A. contribution margin ratio.

B. degree of operating leverage.
C. margin of safety.
D. profit loss.
This is a basic description for margin of safety.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

82. The degree of operating leverage can be calculated as:

A. contribution margin divided by sales.

B. gross margin divided by operating profit.
C. operating profit divided by sales.
D. contribution margin divided by operating profit.
Degree of operating leverage = Contribution margin ÷ Operating profit.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

3-118
83. All other things the same, which of the following would be true of the contribution margin and variable
costs of a company with high fixed costs and low variable costs as compared to a company with low
fixed costs and high variable costs?
Contribution Margin Variable Costs

A. Higher Higher
B. Lower Higher
C. Higher Lower
D. Lower Lower

A. Option A
B. Option B
C. Option C
D. Option D
The contribution margin would be higher and the variable costs would be lower.

For example: Alt. 1 Alt. 2

Variable cost 100 300
Fixed Costs 300 100
Contribution Margin Higher
Variable Costs Lower

Blooms: Remember
Gradable: automatic

3-119
84. Corey Company has a margin of safety percentage of 20%. The break-even point is $200,000 and the
variable costs are 45% of sales. Given this information, the operating profit is:

A. $27,500
B. $18,000
C. $22,500
D. $22,000
$200,000 ÷ (1 - .20) = $250,000; ($250,000 - 200,000) × (1 - .45) = $27,500.

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

85. Luxus, Inc. employs 45 sales personnel to market its line of luxury automobiles. The average car sells
for $23,000, and a 6 percent commission is paid to the salesperson. Luxus Motors is considering a
change to the commission arrangement where the company would pay each salesperson a salary of
$2,000 per month plus a commission of 2 percent of the sales made by that salesperson. The amount of
total monthly car sales at which Luxus Motors would be indifferent as to which plan to select is:

A. $2,250,000.
B. $3,000,000.
C. $1,500,000.
D. $1,250,000.
($2,000 × 45) + (.02)(total revenue) = (.06)(total revenue); $90,000 + .02TR = .06TR; $90,000 = .04TR;
TR = $90,000/.04 = $2,250,000.

Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic

3-120
86. Given the following information:
Sales $5,000
Fixed Expenses 2,000
Variable Expenses 1,750
What would expected net income be if the company experienced a 10 percent increase in fixed costs
and a 10 percent increase in sales volume?

A. $1,750.
B. $1,550.
C. $1,250.
D. $1,375.
[($5,000 - $1,750)(1.10)] - [($2,000)(1.10)] = $1,375.

Blooms: Apply
Gradable: automatic

3-121
87. The Terrence Co. manufactures two products, Baubles and Trinkets. The following are projections for
the coming year:

Baubles Trinkets
10,000 units 5,000 units
Sales 10,000 10,000
Costs:
Fixed $2,000 $4,600
Variable 6,000 8,000 4,000 8,600
Income
before $2,000 $1,400
taxes
How many Baubles will be sold at the break-even point, assuming that the facilities are jointly used
with the sales mix remaining constant?

A. 9,900
B. 8,800
C. 6,600
D. 5,000
Baubles CM: ($10,000 - 6,000)/10,000 units = $0.40/unit; Trinkets: ($10,000 - 4,000)/5,000 units =
$1.20/unit;
Sales mix 2 Bauble: 1 Trinket; CM per bundle = 2 × $0.40 + 1 × $1.20 = $2.00/bundle; Fixed cost =
$2,000 + 4,600 = $6,600; Break-even: $6,600/$2 = 3,300 bundles; Baubles: 2 × 3,300 bundles = 6,600
units.

Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic

3-122
88. During 2016, Seth Britain Lab supplied hospitals with a comprehensive diagnostic kit for $120. At a
volume of 80,000 kits, Seth had fixed costs of $1,000,000 and a profit before income taxes of $200,000.
Due to an adverse legal decision, Seth's 2017 liability insurance increased by $1,200,000 over 2016.
Assuming the volume and other costs are unchanged, what should the 2017 price be if Seth is to make
the same $200,000 profit before income taxes? (CPA adapted)

A. $122.50.
B. $135.00.
C. $152.50.
D. $240.00.
2016 CM% is 12.5% ($15/$120). 2017 CM = $2,400,000 ($1,000,000 + $200,000; 2017 CM per unit =
$2,400,000/80,000 units = $30 CM per unit; 2017 selling price per unit = $30/.125 = $240
Proof-2017:
Sales = $19,200,000 ($240 × 80,000)
Less VC = $16,800,000 ($210 × 80,000)
CM = $2,400,000 ($30 × 80,000)
Less FC = $2,200,000 ($1,000,000 + $1,200,000)
IBT = $200,000

Blooms: Analyze
Gradable: automatic

3-123
Selling Price $60

per
month
$9
costs
$120,000
costs month
What dollar sales volume does Honeysuckle need to break even?

A. $822,222.
B. $833,333.
C. $900,000.
D. $1,233,333.
($60 - 33 - 9)/$60 = 30%; ($250,000 + 120,000)/30% = $1,233,333.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

3-124
Selling Price $60

per
month
$9
costs
$120,000
costs month
What dollar sales volume does Honeysuckle need to achieve a $50,000 operating profit per month?

A. $1,400,000.
B. $7,560,000.
C. $933,333.
D. $1,233,333.
($60 - 33 - 9)/$60 = 30%; ($250,000 + 120,000 + 50,000)/30% = $1,400,000.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

3-125
Selling Price $60

per
month
$9
costs
$120,000
costs month
If Honeysuckle has actual monthly sales of $1,500,000 and desires an operating profit of $50,000 per
month, what is the margin of safety in sales dollars?

A. $100,000.
B. $266,667.
C. $50,000.
D. $1,130,000.
($60 - 33 - 9)/$60 = 30%; BE = ($250,000 + 120,000)/30% = $1,233,333; $1,500,000 - 1,233,333 =

$266,667.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

were $80,000. What is Market's break-even sales volume?

A. $800,000.
B. $1,000,000.
C. $1,200,000.
D. $2,000,000.
Fixed costs = $1,200,000 × (1 - .6) - 80,000 = $400,000; $400,000/(1 - .6) = $1,000,000.

Blooms: Apply
Gradable: automatic
3-126

were $80,000. What sales volume does Market's need to yield a $200,000 operating profit?

A. $1,000,000.
B. $1,200,000.
C. $1,500,000.
D. $2,000,000.
Fixed costs = $1,200,000 × (1 - .6) - 80,000 = $400,000; ($400,000 + 200,000)/(1 - .6) = $1,500,000.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

were $80,000. What is Market's margin of safety in sales dollars?

A. $200,000.
B. $300,000.
C. $500,000.
Fixed costs = $1,200,000 × (1 - .6) - 80,000 = $400,000; $400,000/(1 - .6) = $1,000,000; $1,200,000 -
1,000,000 = $200,000.

Blooms: Apply
Gradable: automatic

3-127
95. Artis Sales has two store locations. Store A has fixed costs of $125,000 per month and a variable cost
ratio of 60%. Store B has fixed costs of $200,000 per month and a variable cost ratio of 30%. At what
sales volume would the two stores have equal profits or losses?

A. $250,000.
B. $325,000.
C. $361,111.
(1 - .6)TR - $125,000 = (1 - .3)TR - $200,000; $75,000 = .3TR; TR = $250,000.

Blooms: Analyze
Gradable: automatic

ratio of 60%. Store B has fixed costs of $200,000 per month and a variable cost ratio of 30%. What is
the break-even sales volume for Store B?

A. $666,667.
B. $325,000.
C. $285,714.
$200,000/(1 - .3) = $285,714.

Blooms: Apply
Gradable: automatic

3-128
ratio of 60%. Store B has fixed costs of $200,000 per month and a variable cost ratio of 30%. What is
the break-even sales volume for Store A?

A. $208,333.
B. $312,500.
C. $325,000.
$125,000/(1 - .6) = $312,500.

Blooms: Apply
Gradable: automatic

98. Liu Sales has two store locations. Sanford has fixed costs of $250,000 per month and a contribution
margin ratio of 35%. Orlando has fixed costs of $400,000 per month and a contribution margin ratio of
65%. At what sales volume would the two stores have equal profits or losses?

A. $500,000.
B. $650,000.
C. $1,300,000.
.35TR - $250,000 = .65TR - $400,000; $150,000 = .3TR; TR = $500,000.

Blooms: Analyze
Gradable: automatic

3-129


B. a change in the selling price per unit.
C. a change in the variable cost per unit.
D. a change in the income tax rate.
Income taxes do not affect the break-even point; taxes are based on before tax profit.

Blooms: Apply
Gradable: automatic

profits were $180,000. What is Lake's break-even sales volume?

A. $660,000.
B. $1,540,000.
C. $1,600,000.
D. $2,020,000.
Fixed costs = $2,200,000 × .3 - 180,000 = $480,000; $480,000/.3 = $1,600,000.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

3-130
profits were $180,000. What sales volume does Lake's need to yield a $240,000 operating profit?

A. $600,000.
B. $2,020,000.
C. $2,400,000.
D. $2,440,000.
Fixed costs = $2,200,000 × .3 - 180,000 = $480,000; ($480,000 + 240,000)/.3 = $2,400,000.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

profits were $180,000. What is Lake's margin of safety in sales dollars?

A. $480,000.
B. $600,000.
C. $2,020,000.
Fixed costs = $2,200,000 × .3 - 180,000 = $480,000; $480,000/.3 = $1,600,000; $2,200,000 - 1,600,000

= $600,000.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

3-131
P1 P2 P3
Revenues $100,000 $200,000 $200,000
Variable costs 40,000 140,000 80,000
Fixed costs total $200,000. What is Eastwick's break-even sales volume? (Assume the current product
mix.)

A. $500,000.
B. $416,667.
C. $384,615.
D. $460,000.
CM = (100,000 - 40,000) + (200,000 - 140,000) + (200,000 - 80,000) = $240,000; CM% =

240,000/500,000 = 48%;
BE = $200,000/.48 = $416,667.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

P1 P2 P3
Revenues $100,000 $200,000 $200,000
Variable costs 40,000 140,000 80,000
Fixed costs total $200,000. What is Eastwick's margin of safety? (Assume the current product mix.)

A. $83,333.
B. $40,000.
C. $460,000.
D. $115,385.
CM = (100,000 - 40,000) + (200,000 - 140,000) + (200,000 - 80,000) = $240,000; CM% =

240,000/500,000 = 48%;
BE = $200,000/.48 = $416,667; $500,000 - 416,667 = $83,333.

3-132
Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

P1 P2 P3
Revenues $100,000 $200,000 $200,000
Variable costs 40,000 140,000 80,000
Fixed costs total $200,000. What sales volume would generate an operating profit of $150,000?
(Assume the current product mix.)

A. $650,000.
B. $610,000.
C. $729,167.
D. $850,000.
CM = (100,000 - 40,000) + (200,000 - 140,000) + (200,000 - 80,000) = $240,000; CM% =

240,000/500,000 = 48%;
($200,000 + 150,000)/.48 = $729,167.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

3-133
106. A company has provided the following data:
Sales 3,000 Units

Sales price $70 per unit
Variable cost $50 per unit
Fixed cost $25,000
If the sales volume decreases by 25%, the variable cost per unit increases by 15%, and all other factors
remain the same, operating profit will:

A. decrease by $31,875.

B. decrease by $15,000.
C. increase by $20,625.
D. decrease by $3,125.

Contribution Income Statement

Current v. Changes
Volume1 3,000 2,250
Sales $210,000 $157,500
Variable costs2 150,000 129,375
Contribution margin 60,000 28,125
Fixed costs 25,000 25,000
Operating profit3 $35,000 $3,125
1
Decrease in sales volume 3,000 units × 75% = 2,250
2
Increase in variable costs $50 × 115% = $57.50
3
Decrease in operating profit $35,000 - $3,125 = $31,875

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

3-134
107. Winters Company sells three products. Sales and contribution margin ratios for the three products
follow:

A B C
Sales in dollars $20,000 $40,000 $100,000
Contribution margin
45% 40% 15%
ratio
Given these data, the contribution margin ratio for the company as a whole would be:

A. 25%.
B. 75%.
C. 33.3%.

Total
A B C
Sales in
$20,000 $40,000 $100,000 $160,000
dollars (a)
Contribution
margin ratio 45% 40% 15% 25%
(b)
Contribution
margin (a) × $9,000 $16,000 $15,000 $40,000
(b)

Blooms: Apply
Gradable: automatic

3-135
108. Break-even analysis assumes that:

A. total costs are constant.

B. the average fixed cost per unit is constant.
C. the average variable cost per unit is constant.
D. variable costs are nonlinear.
The average variable cost per unit is constant.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

109. Break-even analysis assumes that over the relevant range: (CPA adapted)

A. Total Fixed Costs are nonlinear.

B. Total Costs are unchanged.
C. Unit Variable Costs are unchanged.
D. Unit Revenues are nonlinear.
The assumption is that over the relevant range unit variable costs remain unchanged or linear.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

Essay Questions

3-136
110. You have been provided with the following information regarding the Omaha Manufacturing Company:
Sales price $50

24
cost per unit
6
unit
Required:

(a) [($50 - 24 - 6) × 30,000] - ($360,000 + 80,000) = $160,000

(b) $440,000/$20 = 22,000 units
(c) ($440,000 + 180,000)/$20 = 31,000 units

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

3-137
111. Lincoln, Inc. is considering the introduction of a new music player with the following price and cost
characteristics:

Projected sales are 7,500 units per year.
Required:
(consider each question independent of each other):
(a) What will the operating profit be?

(b) What is the impact on operating profit if the selling price per unit decreases by 15%?
(c) What is the net income if variable costs per unit increase by 15% and Lincoln has a 38% tax rate?

(a) [($125 - 75)7,500] - 180,000 = $195,000

(b) [($106.25 - 75)7,500] - 180,000 = $54,375, a decrease of 72%
(c) {[($125 - 86.25)7,500] - 180,000]}(1 - .38) = $68,587.50

Blooms: Analyze
Gradable: manual

3-138
112. You have been provided with the following information regarding the Closure Manufacturing
Company:
Sales Price $50

Fixed manufacturing costs per unit 12
Fixed administrative costs per unit 3
Required:

(a) [($50 - 24 - 6) × 33,000] - ((12 + 3) × 33,000) = $165,000

(b) $495,000/(($50 - $30)/$50) = $1,237,500
(c) ($495,000 + 275,000)/.4 = $1,925,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

3-139
113. You have been provided with the following information regarding the Pharma Manufacturing
Company:
Sales Price $25

Required:
(a) What are the expected operating profits for the upcoming year?
(c) What is the break-even point in dollars?
(d) If $80,000 of operating profits is desired, how many units must be sold?
(e) How much in sales dollars is required to generate operating profits of $75,000?

(a) [($25 - 12 - 3) × 25,000] - (180,000 + 40,000) = $30,000

(b) $220,000/$10 = 22,000 units
(c) 22,000 × $25 = $550,000
(d) ($220,000 + 80,000)/10 = 30,000 units
(e) ($220,000 + 75,000)/10 = 29,500 units × $25 = $737,500

Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual

3-140
114. Chita Corporation produces and sells a single product. The company's contribution format income
statement for January appears below:
Sales (5,500 units) $297,000

Fixed costs 105,300
Required:
Redo the company's contribution format income statement assuming that the company sells 5,700 units.
Sales (5,700 units) $307,800

Fixed costs 105,300

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

3-141
115. Folsom Inc., which produces and sells a single product, has provided the following contribution format
income statement for August:
Sales (4,600 units) $105,800

Fixed costs 46,000
Required:
Redo the company’s contribution format income statement assuming that the company sells 4,500
units.

Sales (4,500 units) $103,500

Fixed costs 46,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

3-142
116. Champion Corporation produces and sells a single product. In April, the company sold 1,700 units. Its
total sales were $153,000, its total variable costs were $79,900, and its total fixed costs were $56,800.
Required:
a. Construct the company's contribution format income statement for April in good form.
b. Redo the company's contribution format income statement assuming that the company sells 1,600
units.

a. Sales (1,700 units) $153,000

Fixed costs 56,800
b. Sales (1,600 units) $144,000

Fixed costs 56,800

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

3-143
117. In November, Townhouse Corporation sold 2,100 units of its only product. Its total sales were
$195,300, its total variable costs were $84,000, and its total fixed costs were $98,700.
Required:
a. Construct the company's contribution format income statement for November in good form.
b. Redo the company's contribution format income statement assuming that the company sells 2,300
units.

a. Sales (2,100 units) $195,300

Fixed costs 98,700
b. Sales (2,300 units) $213,900

Fixed costs 98,700

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

3-144
118. Blizzard Corporation's contribution margin ratio is 74% and its fixed monthly costs are $43,000.
Assume that the company's sales for October are expected to be $102,000.
Required:
Estimate the company's operating profit for October, assuming that the fixed monthly costs do not
change.

Sales $102,000
CM ratio 74%
Contribution margin (sales × contribution
$75,480
margin ratio)
Fixed costs 43,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

119. The management of Toro Corporation expects sales in August to be $130,000. The company's
contribution margin ratio is 65% and its fixed monthly costs are $54,000.
Required:
Estimate the company's operating profit for August, assuming that the fixed monthly costs do not
change.

Sales $130,000
CM ratio 65%
$84,500
margin ratio)
Fixed costs 54,000

Blooms: Apply
3-145
Difficulty: 1 Easy
Gradable: manual

120. Boxer Inc. expects its sales in June to be $111,000. The company's contribution margin ratio is 65% and
its fixed monthly costs are $64,000.
Required:
Estimate the company's operating profit for June, assuming that the fixed monthly costs do not change.

Sales $111,000
CM ratio 65%
$72,150
margin ratio)
Fixed costs 64,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

3-146
121. Rudy Corporation produces and sells a single product. Data concerning that product appear below:

Required:
The marketing manager believes that a $12,000 increase in the monthly advertising budget would result
in a 160 unit increase in monthly sales. What should be the overall effect on the company's monthly
operating profit of this change?

Increase in total contribution margin ($90 per

$14,400
unit × 160 units)
Less incremental fixed costs 12,000
Change in operating profit $2,400

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

3-147
122. Alden Corporation produces and sells a single product. Data concerning that product appear below:

Required:
Management is considering using a new component that would increase the variable cost per unit by
$56. Since the new component would improve the company's product, the marketing manager predicts
that monthly sales would increase by 500 units. What should be the overall effect on the company's
monthly operating profit of this change if fixed costs are unaffected?

New variable cost per unit ($38 per unit +

$94
$56 per unit)
New contribution margin per unit ($190 per
$96
unit – $94 per unit)
New unit monthly sales (1,000 units + 500
1,500
units)
New total contribution margin:
1,500 units × $96 per unit $144,000
Current total contribution margin:
1,000 units × $152 per unit 152,000
Change in total contribution margin and in
($8,000)
operating profit
Since fixed costs are not affected by this change, the change in operating profit will be equal to the
change in total contribution margin.

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

3-148
123. The Cornish Corporation has budgeted fixed costs of $125,000 and an estimated selling price of $16.50
per unit. The contribution margin ratio is 40% and the company plans to sell 25,000 units in 2017.
Required:
(a) Compute the break-even point in dollars.

(b) Compute the margin of safety for 2017.

(a) BE = $125,000/.40 = $312,500

(b) Estimated sales = 25,000 units × $16.50 = $412,500
Margin of safety = $412,500 - 312,500 = $100,000
(c) $412,500 × 40% - $125,000 = $40,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

3-149
124. Renee Tyne, now retired, owns the Downtown Beauty Shop. She employs five (5) stylists and pays each
a base rate of $500 per month. One of the stylists serves as the manager and receives an extra $300 per
month. In addition to the base rate, each stylist also receives a commission of $3 per haircut. A stylist
can do as many as 20 haircuts a day, but the average is 14 haircuts per day. The Downtown Beauty
Shop is open 24 days a month. You can safely ignore income taxes.

Rent $400 per month
Beauty Supplies $0.90 per haircut
$175 per month plus $0.35 per
Utilities
haircut
Cleaning Supplies $0.15 per haircut
Renee currently charges $8 per haircut.
Required:
(a) Compute the break-even point in (1) number of haircuts, (2) total sales dollars, and (3) as a
percentage of capacity.
(b) In July, 1,400 haircuts were given. Compute the operating profits for the month.
(c) Renee wants a $2,160 operating profits in August. Compute the number of haircuts that must be
given in order to achieve this goal.
(d) If 1,500 haircuts are given in August, compute the selling price that would have to be charged in
order to have $2,160 in operating profits.

Fixed costs = 5($500) + $300 + $200 + $400 + $175 + $25 = $3,600

Variable costs = $3.00 + $0.90 + $0.35 + $0.15 = $4.40 per haircut
(a) (1) $3,600/($8 - 4.40) = 1,000 haircuts
(2) 1,000 × $8.00 = $8,000
(3) 1,000/(5 × 14 × 24) = 59.5%
(b) [($8.00 - 4.40) × 1,400] - $3,600 = $1,440
(c) ($3,600 + $2,160)/($8.00 - 4.40) = 1,600 haircuts
(d) [($SP - 4.40) × 1,500] - 3,600 = 2,160; SP = $8.24 per haircut.

Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual

3-150
125. You have been provided with the following information regarding the Fremont Manufacturing
Company:
Sales price $50

24
cost per unit
6
unit
Required:

(a) [($50 - 24 - 6) × 33,000] - ($360,000 + 80,000) = $220,000

(b) $440,000/(($50 - $30)/$50) = $1,100,000
(c) ($440,000 + 275,000)/.4 = $1,787,500

Blooms: Apply
Difficulty: 3 Hard
Gradable: manual

3-151
126. Xi-Tech, Inc. is considering the introduction of a new music player with the following price and cost
characteristics:

Required:
(a) How many units must Xi-Techsell to break even?

(b) How many units must Xi-Techsell to make an operating profit of $120,000 for the year?
(c) If projected sales are 7,500 units, what is the margin of safety in units?

(a) $180,000/(125 - 75) = 3,600 units

(b) ($180,000 + 120,000)/(125 - 75) = 6,000 units
(c) 7,500 - 3,600 = 3,900 units

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

3-152
127. John Martin, now retired, owns the Corner Barber Shop. He employs five (5) barbers and pays each a
base rate of $500 per month. One of the barbers serves as the manager and receives an extra $300 per
month. In addition to the base rate, each barber also receives a commission of $3 per haircut. A barber
can do as many as 20 haircuts a day, but the average is 14 haircuts per day. The Corner Barber Shop is a
corporation with a 30% tax rate and is open 24 days a month.

Rent $400 per month
Barber Supplies $.90 per haircut
$175 per month plus $.35 per
Utilities
haircut
Cleaning Supplies $.15 per haircut
John currently charges $8 per haircut.
Required:
(a) John wants to earn $2,160 in after-tax operating profits. Compute the number of haircuts that must
be given to reach this goal in June.
(b) In June, only 1,500 haircuts were given. Compute the price per haircut that John should have
charged in June to earn $2,160 in after-tax operating profits.

Fixed costs = 5($500) + $300 + $200 + $400 + $175 + $25 = $3,600

Variable costs = $3.00 + $0.90 + $0.35 + $0.15 = $4.40 per haircut
(a) [($8.00 - 4.40) × number of haircuts] - $3,600 = $2,160/(1 - .3); number of haircuts = 1,858
(b) [($SP - 4.40) × 1,500] - $3,600 = $2,160/(1 - .30); SP = $8.86 per haircut

Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual

3-153
128. The president of Equipment Enterprises is considering expanding sales by producing three different
versions of its product. Each will be targeted by the marketing department to different income levels
and, hence, will be produced from three different qualities of materials. After reviewing the sales
forecasts, the sales department feels that for every item of Large sold, 4 of Medium can be sold, and 8 of
Small can be sold.
Large Medium Small

Material cost 5.00 4.00 2.00
Direct labor 2.00 1.50 1.25
Variable Overhead 2.00 1.50 1.25
Required:

Weighted average CM = [(15 - 9)(1) + (10 - 7)(4) + (5 - 4.50)(8)]/(1 + 4 + 8) = $1.69231

BE = $75,000/$1.69231 = 44,319 total units
Large = 44,319 × (1/13) = 3,409
Medium = 44,319 × (4/13) = 13,637
Small = 44,319 × (8/13) = 27,273

Blooms: Apply
Gradable: manual

3-154
129. Galena Company manufactures and sells adjustable canopies that attach to motor homes and trailers.
The market covers both new unit purchases as well as replacement canopies. Galena developed its 2017
business plan based on the assumption that canopies would sell at a price of $400 each. The variable
costs for each canopy were projected to be $200, and the annual fixed costs were budgeted at $100,000.
The goal for Galena 's after-tax operating profits was $240,000; the company's effective tax rate is 40%.
While Galena 's sales usually rise during the second quarter, the May financial statements reported that
sales were not meeting expectations. For the first five months of 2017, only 350 units had been sold at
the established price, with variable costs as planned. It was clear that the 2017 after-tax operating profit
goal would not be reached unless some corrective actions were taken. Galena 's president assigned a
management committee to analyze the situation and develop several alternative courses of action.
The following mutually exclusive alternatives were presented to the president:
(1) Reduce the sales price by $40. The sales department predicts that with the significantly reduced
price, 2,700 units can be sold during the remainder of 2017. Total fixed and variable unit costs will stay
as budgeted.
(2) Lower variable costs per unit by $25 through the use of less expensive materials and lightly
modified manufacturing techniques. The sales price will also be reduced by $30. These changes will
yield sales of 2,200 for the remainder of 2017.
(3) Cut fixed costs by $10,000 and lower the sales price by 5%. Variable costs per unit will be
unchanged. Sales of 2,000 units can be expected for the remainder of 2017.
Required:
(a) If no changes are made to the selling price or cost structure, determine the number of units that
Galena must sell in order to break even.
(b) If no changes are made to the selling price or cost structure, determine the number of units that
Galena must sell in order to achieve its after-tax operating profit objective.
(c) Determine which one of the alternatives Galena should select to achieve its after-tax operating profit
objective. Be sure to support your selection with appropriate computations.

(a) (1) $100,000/($400 - 200) = 500 units

(b) [$100,000 + 240,000/(1 - .40)]/(400 - 200) = 2,500 units
(c) Only alternative 1 achieves the targeted operating profit objective of $240,000, although alternative
2 is close.
(1) {[(400 - 200)350] + [(360 - 200)2,700] - 100,000}(1 - .40) = $241,200

(2) {[(400 - 200)350] + [(370 - 175)2,200] - 100,000}(1 - .40) = $239,400
(3) {[(400 - 200)350] + [(380 - 200)2,000] - 90,000}(1 - .40) = $204,000

Blooms: Create
Difficulty: 3 Hard
Gradable: manual
3-155

130. You have been provided with the following information regarding the Ralston Manufacturing
Company:
Sales price $50

24
cost per unit
Fixed manufacturing costs
12
per unit
6
unit
Fixed administrative costs
3
per unit
Required:

(a) [($50 - 24 - 6) × 30,000] - ((12 + 3) × 30,000) = $150,000

(b) $450,000/$20 = 22,500 units
(c) ($450,000 + 160,000)/20 = 30,500 units

Blooms: Apply
Difficulty: 3 Hard
Gradable: manual

3-156
131. Nation Inc. sells three products. Last month's results are as follows:
P1 P2 P3
Revenues $200,000 $300,000 $300,000
Variable costs 80,000 280,000 160,000
Required:
(a) What was the operating profit last month?

(b) What is Nation's break-even sales volume (at the given mix)?
(c) What is Nation's margin of safety?

(a) $800,000 - 520,000 - 225,000 = $55,000

(b) $225,000/(280,000/800,000) = $642,857
(c) $800,000 - $642,857 = $157,143

Blooms: Apply
Difficulty: 3 Hard
Gradable: manual

3-157
132. Carrie sells three products. Last month's results are as follows:
P1 P2 P3
Revenues $150,000 $225,000 $225,000
Variable costs 60,000 210,000 120,000
Required:
(a) What was the contribution margin ratio?

(b) What sales volume does Carrie need to achieve a $100,000 monthly profit?
(c) What will profit be if Carrie increases sales by 20%?

(a) ($600,000 - 390,000)/600,000 = 35%

(b) ($225,000 + 100,000)/35% = $928,571
(c) ($600,000 - 390,000) × 1.2 = $252,000 - 225,000 = $27,000

Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual

133. The Windsome Corporation has budgeted fixed costs of $225,000 and an estimated selling price of $24
per unit. The variable cost ratio is 40% and the company plans to sell 48,000 units in 2017.
Required:
(a) Compute the break-even point in units.

(b) Compute the margin of safety in units for 2017.

(a) BE = $225,000/($24 - .40 × $24) = 15,625 units

(b) Margin of safety = 48,000 - 15,625 = 32,375 units
(c) 48,000 × ($24 × .6) - $225,000 = $466,200

Blooms: Apply
Gradable: manual
3-158

134. Bokay Creations has budgeted annual fixed costs of $240,000 and an estimated variable cost ratio of
60%.
Required:
(a) Compute Bokay's break-even point in sales dollars.

(b) Compute Bokay's margin of safety if the company expects to earn revenues of $800,000.
(c) Compute Bokay's expected operating profit at the $800,000 revenue.

(a) BE = $240,000/(1 - .60) = $600,000

(b) Margin of safety = $800,000 - $600,000 = $200,000
(c) $800,000 × .4 - $240,000 = $80,000

Blooms: Apply
Gradable: manual

3-159
135. The sales manager of Springdale Enterprises is considering expanding sales by producing three different

Material cost 45.00 30.00 20.00
Direct labor 20.00 15.00 10.00
Required:

Weighted-average CM = ($100 - 80)(.4) + ($70 - 56.25)(.35) + ($50 - 37.50)(.25) = $15.9375

BE = $175,000/$15.9375 = 10,980 total units
Original = 10,980 × 40% = 4,392 units
Model #1 = 10,980 × 35% = 3,843 units
Model #2 = 10,980 × 25% = 2,745 units

Blooms: Apply
Gradable: manual

3-160
136. The sales manager of Thompson Sales is considering expanding sales by producing three different
Origina
Model #1 Model #2
l
Material cost 22.50 15.00 10.00
Direct labor 10.00 7.50 5.00
Required:
(a) Determine the number of units of each product that would be sold at the break-even point.
(b) Determine the break-even point if the sales estimates are instead 50% original product, 30% model
#1 and the remainder model #2.

(a) Weighted-average CM = ($50 - 39.50)(.7) + ($35 - 27.75)(.2) + ($25 - 18.50)(.1) = $9.45

BE = $250,000/$9.45 = 26,455 total units
Original = 26,455 × 70% = 18,519 units
Model #1 = 26,455 × 20% = 5,291 units
Model #2 = 26,455 × 10% = 2,645 units
(b) Weighted-average CM = ($50 - 39.50)(.5) + ($35 - 27.75)(.3) + ($25 - 18.50)(.2) = $8.725

BE = $250,000/$8.725 = 28,653 total units
Original = 28,653 × 50% = 14,327 units
Model #1 = 28,653 × 30% = 8,596 units
Model #2 = 28,653 × 20% = 5,730 units

Blooms: Analyze
Gradable: manual

3-161
137. The Teri Aki Diner is a new buffet-style restaurant offering stir-fry and Thai dishes. The buffet has a
fixed price of $8.50 per person. The estimated food costs are $2.00 per person, regardless of volume.
Fixed costs are related to the number of buffet lines that are maintained, with the estimated costs as
follows:
Monthly volume Fixed Costs

1 line 0 - 4,000 $30,000
2 lines 4,001 - 6,000 $37,000
3 lines 6,001 - 7,500 $40,000
Required:
Determine the break-even point(s).

1 line = $30,000/($8.50 - 2) = 4,615 customers: not a feasible break-even scenario because it exceeds
volume capability for 1 line
2 line = $37,000/$6.50 = 5,692 customers: break-even
3 line = $40,000/$6.50 = 6,154 customers: break-even
Teri Aki will break-even with 2 or 3 lines. Teri Aki will not break-even operating just one line.

Blooms: Create
Difficulty: 3 Hard
Gradable: manual

3-162
138. The Beach Party packages horseradish and mustards in a factory that can operate one, two, or three
shifts. The product sells for $10 a case and has variable costs of $4 per case. Fixed costs are related to
the number of shifts that are operated, with the estimated costs as follows:
Daily volume Fixed Costs

1 shift 0 - 2,000 $3,000
2 shifts 2,001 - 4,000 $5,700
3 shifts 4,001 - 6,000 $8,200
Required:
(a) Determine the break-even point(s).

(b) If Beach Party can sell all it can produce, how many shifts should be operated?

(a) 1 shift = $3,000/($10 - 4) = 500 cases: break-even point

2 shifts = $5,700/$6 = 950 cases: break-even point
3 shifts = $8,200/$6 = 1,367 cases: break-even point
(b)
(c)
(d)
(e)
(f)
(g)
Beach Party will break even at any shift level
(b) 1 shift: 2,000 × $6 - $3,000 = $9,000

2 shift: 4,000 × $6 - $5,700 = $18,300
3 shift: 6,000 × $6 - $8,200 = $27,800
Beach Party will maximize profits by operating 3 shifts

Blooms: Create
Difficulty: 3 Hard
Gradable: manual

3-163
139. Pines Inc. produces and sells two products. During the most recent month, Product DQ393's sales were
$25,000 and its variable costs were $5,750. Product BA999's sales were $40,000 and its variable costs
were $9,850. The company's fixed costs were $48,310.
Required:
b. If the sales mix shifts toward Product DQ393, with no change in total sales, what will happen to the

Product Product
a. Total
DQ393 BA999
Sales $25,000 $40,000 $65,000
Variable costs 5,750 9,850 15,600
Contribution
$19,250 $30,150 49,400
margin
Fixed costs 48,310
Overall CM ratio = Total contribution margin ÷ Total sales = $49,400 ÷ $65,000 = 0.76
Break-even point in total sales dollars = Fixed costs ÷ Overall CM ratio
= $48,310 ÷ 0.76 = $63,566

Product Product
b.
DQ393 BA999
Sales (a) $25,000 $40,000
Contribution margin
$19,250 $30,150
(b)
CM ratio (b) ÷ (a) 0.770 0.754
Since Product DQ393's CM ratio is greater than Product BA999's, a shift in the sales mix toward
Product DQ393 will result in a decrease in the company's overall break-even point.

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

3-164
140. Fortune Tools produces and sells two products. Data concerning these products for the most recent
month appear below:
Product XYZ Product VAR

Sales $14,000 $27,000
Variable costs $6,720 $12,550
Fixed costs for the entire company were $17,570.
Required:
b. If the sales mix shifts toward Product XYZ, with no change in total sales, what will happen to the

Product Product
a. Total
XYZ VAR
Sales $14,000 $27,000 $41,000
Variable costs 6,720 12,550 19,270
Contribution
$7,280 $14,450 21,730
margin
Fixed costs 17,570
Overall CM ratio = Total contribution margin ÷ Total sales = $21,730 ÷ $41,000 = 0.53
Break-even point in total sales dollars = Fixed costs ÷ Overall CM ratio
= $17,570 ÷ 0.53 = $33,151

Product Product
b.
XYZ VAR
Sales (a) $14,000 $27,000
Contribution margin (b) $7,280 $14,450
CM ratio (b) ÷ (a) 0.520 0.535
Since Product XYZ's CM ratio is less than Product VAR's, a shift in the sales mix toward Product XYZ
will result in an increase in the company's overall break-even point.

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual
3-165

141. In the most recent month, Faulkner Corporation's total contribution margin was $208,000 and its
operating profit $39,400.
Required:
a. Compute the degree of operating leverage to two decimal places.
b. Using the degree of operating leverage, estimate the percentage change in operating profit that should
result from a 1% increase in sales.

a. Degree of operating leverage = Contribution margin ÷ Operating profit

= $208,000 ÷ $39,400 = 5.28
b. Percent increase in operating profit = Percent increase in sales × Degree of operating leverage
= 1% × 5.28 = 5.28%

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

142. Drum Co. has provided the following data concerning its only product:
Selling price $200 per unit

Current sales 18,800 units
Break-even sales 14,288 units
Required:
Compute the margin of safety in both dollars and as a percentage of sales.

Sales (at the current volume of 18,800

$3,760,000
units) (a)
Break-even sales (at 14,288 units) 2,857,600
Margin of safety (in dollars) (b) $902,400
Margin of safety percentage, (b) ÷ (a) 24%

3-166
Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

143. Garrison Inc. produces and sells a single product whose contribution margin ratio is 66%. The
company's monthly fixed cost is $667,920 and the company's monthly target profit is $72,600.
Required:
Determine the dollar sales to attain the company's target profit.

Dollar sales to attain target profit = (Target profit + Fixed costs) ÷ CM ratio
= ($667,920 + $72,600) ÷ 0.66 = $1,122,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

144. Blues Corporation produces and sells a single product whose selling price is $240.00 per unit and whose
variable cost is $86.40 per unit. The company's fixed cost is $720,384 per month.
Required:
Determine the monthly break-even point in both units and dollar sales.

Per Percent of

Unit Sales
Selling price per unit $240.00 100%
Variable cost per unit 86.40 36%
Contribution margin per unit and
$153.60 64%
contribution margin ratio
Unit sales to break even = Fixed costs ÷ Unit CM = $720,384 ÷ $153.60 per unit = 4,690 units
Dollar sales to break even = Fixed costs ÷ CM ratio = $720,384 ÷ 0.64 = $1,125,600

Blooms: Apply
Difficulty: 1 Easy
3-167
Gradable: manual

145. Grayson Corporation produces and sells a single product. Data concerning that product appear below:

Variable cost per unit $92.00
Fixed cost per month $621,000
Required:
a. Assume the company's monthly target profit is $69,000. Determine the unit sales to attain that target
profit.
b. Assume the company's monthly target profit is $41,400. Determine the dollar sales to attain that
target profit.

Per Percent of

Unit Sales
Selling price per unit $230.00 100%
Variable cost per unit 92.00 40%
Contribution margin per unit
$138.00 60%
and CM ratio
a. Unit sales to attain target profit = (Target profit + Fixed costs) ÷ Unit CM
= ($621,000 + $69,000) ÷ $138.00 per unit = 5,000 units
b. Dollar sales to attain target profit = (Target profit + Fixed costs) ÷ CM ratio
= ($621,000 + $41,400) ÷ 0.60 = $1,104,000

Blooms: Apply
Gradable: manual

3-168
3-169
146. Morrel Co. produces and sells a single product. The company's income statement for the most recent
month is given below:
Sales (6,000 units at $40 per unit) $240,000

Less manufacturing costs:
Direct labor (variable) 60,000
Fixed factory overhead 30,000 150,000
Gross margin 90,000
Less selling and other costs:
Variable selling and other costs 24,000
There are no beginning or ending inventories.
Required:
a. Compute the company's monthly break-even point in units of product.
b. What would the company's monthly operating profit be if sales increased by 25% and there is no
change in total fixed costs?
c. What dollar sales must the company achieve in order to earn an operating profit of $50,000 per
month?
d. The company has decided to automate a portion of its operations. The change will reduce direct labor
costs per unit by 40 percent, but it will double the costs for fixed factory overhead. Compute the new
break-even point in units.

a. The company's income statement in contribution format would be:
Sales $240,000
Variable costs:
Direct labor 60,000
Variable selling and other costs 24,000 144,000
Fixed costs:
Fixed factory overhead 30,000
3-170
The break-even point in units would be: $72,000 ÷ $16 per unit = 4,500 units
b. 6,000 units × 125% = 7,500 units
Sales (7,500 units × $40 per unit) $300,000

Variable costs (7,500 units × $24 per unit) 180,000
Fixed costs 72,000
c. ($72,000 + $50,000) ÷ 0.40 = $305,000
d. Direct labor costs are presently $10 per unit ($60,000 ÷ 6,000 units) and will decrease by $4 per unit
($10 × 40%). Therefore, the company's new cost structure will be:

Variable costs ($24 – $4) 20 50%
((2 × $30,000) + $42,000) ÷ $20 per unit = 5,100 units

Blooms: Apply
Difficulty: 3 Hard
Gradable: manual

3-171
147. Broken Arrow Inc. produces and sells a single product. Data concerning that product appear below:

Required:
The marketing manager would like to cut the selling price by $12 and increase the advertising budget
by $13,000 per month. The marketing manager predicts that these two changes would increase monthly
sales by 200 units. What should be the overall effect on the company's monthly operating profit of these
changes?

New selling price ($190 per unit – $12 per

$178
unit)
New contribution margin ($178 per unit –
$121
$57 per unit)
2,200
units)
2,200 units × $121 per unit $266,200
Present total contribution margin:
2,000 units × $133 per unit 266,000
Change in total contribution margin 200
Less increase in advertising budget 13,000
Change in operating profit ($12,800)

Blooms: Apply
Gradable: manual

3-172
148. Fairmount Corporation produces and sells a single product. Data concerning that product appear below:

Required:
The marketing manager would like to introduce sales commissions as an incentive for the sales staff.
The marketing manager has proposed a commission of $9 per unit. In exchange, the sales staff would
accept an overall decrease in their salaries of $55,000 per month. The marketing manager predicts that
introducing this sales incentive would increase monthly sales by 200 units. What should be the overall
effect on the company's monthly operating profit of these changes?

New contribution margin ($84 per unit – $9

$75
per unit)
7,200
units)
7,200 units × $75 per unit $540,000
7,000 units × $84 per unit 588,000
Change in total contribution margin (48,000)
Plus savings in salespersons’ salaries 55,000
Change in operating profit $7,000

Blooms: Apply
Gradable: manual

3-173
3-174
149. Clifford Co. manufactures and sells adjustable windows for remodeling homes and new housing.
Clifford developed its budget for the current year assuming that the windows would sell at a price of
$400 each. The variable costs for each window were forecasted to be $200 and the annual fixed costs
were forecasted to be $100,000. Clifford had targeted a profit of $400,000.
While Clifford 's sales usually rise during the second quarter, the May financial statements reported that
sales were not meeting expectations. For the first five months of the year, only 350 units had been sold
at the established price, with variable cost as planned, and it was clear that the target profit for the year
would not be reached unless some actions were taken. Clifford 's president assigned a management
committee to analyze the situation and develop several alternative courses of action. The following three
alternatives were presented to the president, only one of which can be selected.
1. Reduce the selling price by $40. The marketing department forecasts that with the lower price, 2,700
units could be sold during the remainder of the year.
2. Lower variable costs per unit by $25 through the use of less expensive materials. Because of the
difference in materials, the selling price would have to be lowered by $30 and sales of 2,200 units for
the remainder of the year are forecast.
3. Cut fixed costs by $10,000 and lower the selling price by 5 percent. Sales of 2,000 units would be
expected for the remainder of the year.
Required:
a. If no changes are made to the selling price or cost structure, estimate the number of units that must be
sold during the year to break-even.
b. If no changes are made to the selling price or cost structure, estimate the number of units that must be
sold during the year to attain the target profit of $400,000.
c. Determine which of the alternatives Clifford's president should select to maximize profit.

a. Unit sales to break even = Fixed costs ÷ Unit CM

= $100,000 ÷ ($400 per unit - $200 per unit) = $100,000 ÷ $200 per unit = 500 units
b. Unit sales to attain target profit = (Target profit + Fixed costs) ÷ Unit CM
= ($400,000 + $100,000) ÷ $200 per unit = 2,500 units
c. Which alternative should be selected?

Profit = Sales - Variable costs - Fixed costs
Alternative 1:
Sales = ($400 per unit × 350 units) + ($360 per unit × 2,700 units) = $1,112,000
Variable costs = ($200 per unit × 350 units) + ($200 per unit × 2,700 units) = $610,000
Fixed costs = $100,000
Profit = Sales - Variable costs - Fixed costs = $1,112,000 - $610,000 - $100,000
= $402,000
Alternative 2:
3-175
Sales = ($400 per unit × 350 units) + ($370 per unit × 2,200 units) = $954,000
Profit = Sales - Variable costs - Fixed costs = $954,000 - $455,000 - $100,000
= $399,000
Alternative 3:
Sales = ($400 per unit × 350 units) + ($380 per unit × 2,000 units) = $900,000
Profit = Sales - Variable costs - Fixed costs = $900,000 - $510,000 - $90,000
= $300,000
Alternative 1 would yield the highest profit.

Blooms: Apply
Difficulty: 3 Hard
Gradable: manual

3-176
3-177
150. Volare, Inc. has decided to introduce a new product. The product can be manufactured using either a
capital-intensive or labor-intensive method. The manufacturing method will not affect the quality or
sales of the product. The estimated manufacturing costs of the two methods are as follows:
Capital- Labor-

Intensive Intensive
$14.00 $17.60
cost per unit
Fixed manufacturing cost
$2,440,000 $1,320,000
per year
The company's market research department has recommended an introductory selling price of $30 per
unit for the new product. The annual fixed selling and administrative costs of the new product are
$500,000. The variable selling and administrative costs are $2 per unit regardless of how the new
product is manufactured.
Required:
a. Calculate the break-even point in units if Volare, Inc. uses the:

b. Determine the unit sales volume at which the operating profit is the same for the two manufacturing
methods.
c. Assuming sales of 250,000 units, what is the degree of operating leverage if the company uses the:

d. What is your recommendation to management concerning which manufacturing method to use?

a. 1. Capital-intensive:
Unit sales to break even = Fixed costs ÷ Unit CM
= ($2,440,000 + $500,000) ÷ ($30 per unit - $14 per unit - $2 per unit)
= $2,940,000 ÷ $14 per unit
= 210,000 units
2. Labor-intensive:
Unit sales to break even = Fixed costs ÷ Unit CM
= ($1,320,000 + $500,000) ÷ ($30 per unit - $17.60 per unit - $2 per unit)
= $1,820,000 ÷ $10.40 per unit
= 175,000 units
b. Profit = Sales - Variable costs - Fixed costs
3-178
Capital-intensive:
Profit = $30Q - $16Q - $2,940,000 = $14Q - $2,940,000
Labor-intensive:
Profit = $30Q - $19.60Q - $1,820,000 = $10.40Q - $1,820,000
The profits are equal when:
$14Q - $2,940,000 = $10.40Q - $1,820,000
$3.60Q = $1,120,000
Q = $1,120,000 ÷ $3.60
Q = 311,111 units
c. 1. Capital-intensive:

Sales (250,000 units × $30

$7,500,000
per unit)
Variable costs (250,000
4,000,000
units × $16 per unit)
Contribution margin 3,500,000
Fixed costs 2,940,000
Degree of operating leverage = Contribution margin ÷ Operating profit

= $3,500,000 ÷ $560,000 = 6.25
2. Labor-intensive:

Sales (250,000 units × $30 per unit) $7,500,000
Variable costs (250,000 units × $19.60 per
4,900,000
unit)
Contribution margin 2,600,000
Fixed costs 1,820,000
Degree of operating leverage = Contribution margin ÷ Operating profit

= $2,600,000 ÷ $780,000 = 3.33
d. The decision hinges upon the expected sales of the new product. If management is confident that
sales will be in excess of 311,111 units, then the capital-intensive method should be used. If sales are
likely to fall below this number, then the labor-intensive method should be used. Management should
also be aware that operating profit will be more volatile with the capital-intensive method since it has
higher operating leverage.

Blooms: Apply
Difficulty: 3 Hard
Gradable: manual
3-179

3-180
3-181
151. The following monthly data in contribution format are available for the Feta Company and its only
product, Product Gamma:
Total Per Unit

Sales $83,700 $279
Variable costs 32,700 109
Contribution margin 51,000 $170
Fixed costs 40,000
The company produced and sold 300 units during the month and had no beginning or ending
inventories.
Required:
a. Without resorting to calculations, what is the total contribution margin at the break-even point?
b. Management is contemplating the use of plastic gearing rather than metal gearing in Product
Gamma. This change would reduce variable costs by $18 per unit. The company's sales manager
predicts that this would reduce the overall quality of the product and, thus, would result in a decline in
sales to a level of 250 units per month. Should this change be made?
c. Assume that Feta Company is currently selling 300 units of Product Gamma per month. Management
wants to increase sales and feels this can be done by cutting the selling price by $22 per unit and
increasing the advertising budget by $20,000 per month. Management believes that these actions will
increase unit sales by 50 percent. Should these changes be made?
d. Assume that Feta Company is currently selling 300 units of Product Gamma. Management wants to
automate a portion of the production process for Product Gamma. The new equipment would reduce
direct labor costs by $20 per unit but would result in a monthly rental cost for the new robotic
equipment of $10,000. Management believes that the new equipment will increase the reliability of
Product Gamma thus resulting in an increase in monthly sales of 12%. Should these changes be made?

a. The total contribution margin would be $40,000 since it is equal to the fixed costs at the break-even
point.
b. The $18 decrease in variable costs will cause the contribution margin per unit to increase from $170
to $188.

Expected total contribution margin:

250 units × $188 per unit $47,000
300 units × $170 per unit 51,000
3-182
Decrease in total contribution margin ($4,000)
The less costly components should not be used in the manufacture of Product Gamma. Operating profit
will decrease by $4,000.
c. The decrease in selling price per unit will cause the unit contribution margin to decrease from $170
to $148.

300 units × 150% × $148 per unit $66,600
300 units × $170 per unit 51,000
Incremental contribution margin 15,600
Change in fixed costs:
Less incremental advertising cost 20,000
Reduction in operating profit ($4,400)
The changes should not be made.
d. The use of the automated process would affect both fixed and variable costs. Fixed costs will
increase by $10,000 from $40,000 to $50,000. Variable costs will decrease by $20 from $109 to $89,
and the unit contribution margin will increase from $170 to $190.

300 units × 112% × $190 per unit $63,840
300 units × $170 per unit 51,000
Increase in total contribution margin 12,840
Change in fixed costs:
Less monthly equipment rental 10,000
Increase in operating profit $2,840
The changes should be made.

Blooms: Apply
Difficulty: 3 Hard
Gradable: manual

3-183
3-184
152. Morgan Designs manufactures decorative iron railings. In preparing for next year's operations,
management has developed the following estimates:
Total Per Unit

Sales (20,000 units) $1,000,000 $50.00
Direct materials $200,000 $10.00
Direct labor (variable) $50,000 $2.50
Manufacturing overhead:
Variable $70,000 $3.50
Fixed $80,000 $4.00
Selling & administrative:
Variable $100,000 $5.00
Fixed $30,000 $1.50
Required:
Compute the following items:
a. Unit contribution margin.
b. Contribution margin ratio.
c. Break-even in dollar sales.
d. Margin of safety percentage.
e. If the sales volume increases by 20%, with no change in total fixed costs, what will be the change in
operating profit?
f. If the per unit variable production costs increase by 15%, and fixed selling and administrative costs
increase by 12%, what will be the new break-even point in dollar sales?

a. Variable cost per unit:

Direct materials $10.00
Direct labor 2.50
Variable factory overhead 3.50
Variable selling & administrative 5.00
Total variable cost per unit $21.00
Less: Variable cost per unit 21.00
Unit CM $29.00
3-185
b. CM ratio = Unit CM ÷ Selling price = $29.00 per unit ÷ $50.00 per unit = 58%

c. Fixed factory overhead $80,000
Fixed selling & administrative 30,000
Total fixed costs $110,000
Dollar sales to break-even = Fixed costs ÷ CM ratio = $110,000 ÷ 0.58 = $189,655 (rounded)

d. Current sales $1,000,000
Less break-even sales 189,655
Margin of safety in dollars $810,345
Margin of safety percentage = Margin of safety in dollars ÷ Current sales

= $810,345 ÷ $1,000,000 = 81.03%

e. Current operating profit:
Units sold 20,000
× Contribution margin per unit $29
Total contribution margin $580,000
Less: Fixed costs 110,000
Current operating profit $470,000
Operating profit with a 20% sales

increase:
Units sold 24,000
Total contribution margin $696,000
Less: Fixed costs 110,000
Operating profit 586,000
Less: Current operating profit 470,000
Alternate solution:
Increase in units sold 4,000
f Current variable products costs per

. unit:
Direct materials $10.00
Direct labor 2.50
Variable factory overhead 3.50
Variable production costs $16.00
15% increase 2.40
Total new variable production cost $18.40
Current fixed selling & admin. $30,000
3-186
12% increase 3,600
Total new fixed selling & admin. $33,600
New contribution margin per unit:
Selling price $50.00
Less variable cost
Production $18.40
Selling & administrative 5.00 23.40
Contribution margin $26.60
CM ratio = $26.60 ÷ $50.00 = 53.2%
Fixed factory overhead $80,000

Fixed selling & administrative 33,600
Total fixed costs $113,600
New break-even in sales dollars = $113,600 ÷ 0.532 = $213,534 (rounded)

Blooms: Apply
Gradable: manual

3-187
3-188
153. Maryland Company offers two products. At present, the following represents the usual results of a
month's operations:
Product XX Product ZZ
Per Per Combine

Unit Unit d
Sales $120,000 $1.20 $80,000 $0.80 $200,000
Variable
60,000 0.60 60,000 0.60 120,000
costs
Contributio
$60,000 $0.60 $20,000 $0.20 80,000
n margin
Fixed costs 50,000
Operating
$30,000
profit
Required:
a. Find the break-even point in dollars.

b. Find the margin of safety in dollars.
c. The company is considering decreasing product XX's unit sales to 80,000 and increasing product
ZZ's unit sales to 180,000, leaving unchanged the selling price per unit, variable cost per unit, and total
fixed costs. Would you advise adopting this plan?
d. Refer to (c) above. Under the new plan, find the break-even point in dollars.
e. Under the new plan in (c) above, find the margin of safety in dollars.

a. CM ratio = Contribution margin ÷ Sales = $80,000 ÷ $200,000 = 40%
Dollar sales to break-even = Fixed costs ÷ CM ratio = $50,000 ÷ 0.40 = $125,000
b. Margin of safety = Sales - Sales at break-even = $200,000 - $125,000 = $75,000
Product Product
c. Total
XX ZZ
Units 80,000 180,000
Sales $96,000 $144,000 $240,000
Variable costs 48,000 108,000 156,000
Contribution
$48,000 $36,000 84,000
margin
Fixed costs 50,000
Yes, the new arrangement is more profitable.
3-189
d. CM ratio = Contribution margin ÷ Sales = $84,000 ÷ $240,000 = 35%
Dollar sales to break-even = Fixed cost ÷ CM ratio = $50,000 ÷ 0.35 = $142,857
e. Margin of safety = Sales - Sales at break-even = $240,000 - $142,857 = $97,143

Blooms: Apply
Gradable: manual

3-190
154. Data concerning Fowler Corporation's single product appear below:

Required:
Management is considering using a new component that would increase the unit variable cost by $2.
Since the new component would improve the company's product, the marketing manager predicts that
monthly sales would increase by 200 units. What should be the overall effect on the company's monthly
operating profit of this change if fixed costs are unaffected?

New variable cost per unit ($126 per unit +

$128
$2 per unit)
New contribution margin per unit ($210 per
$82
unit – $128 per unit)
7,200
units)
7,200 units × $82 per unit $590,400
Current total contribution margin:
7,000 units × $84 per unit 588,000
Change in total contribution margin and in
$2,400
operating profit
Since fixed costs are not affected by this change, the change in operating profit will be equal to the
change in total contribution margin.

Blooms: Apply
Gradable: manual

3-191
155. Explain the difference between the break-even point, the margin of safety, and operating leverage.

Break-even is the point where the organization will make zero profit; the margin of safety is the
difference between the actual sales level and the break-even sales level; and operating leverage
describes the extent to which the organization's cost structure is made up of fixed costs.

Blooms: Remember
Difficulty: 1 Easy
Gradable: manual

156. Explain the difference between total contribution margin and gross margin.

Total contribution margin recognizes the distinction between fixed and variable costs and is defined as
total revenues minus total variable costs. Contribution margin does not make a distinction between
production costs and selling or administrative costs. Gross margin is total revenues minus cost of goods
sold. Gross margin recognizes the functional breakdown between production costs and
selling/administrative costs, but ignores the fixed/variable cost behaviors.

Blooms: Remember
Gradable: manual

157. Why is it important for the profit equation to make a distinction between fixed and variable costs?

Total fixed costs will not change as volume changes, while total variable costs will change.

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

3-192
158. Why is the time period so important for the definition of fixed costs?

Over a short time period, fixed costs do not change while over a long time period, all costs become
variable. The time period is important to make this distinction.

Blooms: Apply
Gradable: manual

159. Present the profit equation and define all of the terms.

Profits = Total revenues - total costs. Total revenues = selling price × units sold. Total costs = fixed
costs + variable cost per unit × units sold

Blooms: Understand
Gradable: manual

160. Why and how do managers simplify analyses for achieving a given level of profit with two products or
services?

Without some assumptions, there is an infinite number of combinations of the two services that would
achieve a given level of profit. To simplify matters, managers often assume a particular product mix and
compute break-even or target volumes using either of two methods, a fixed product mix or weighted-
average contribution margin, both of which give the same result.

Blooms: Understand
Gradable: manual

3-193
161. Discuss the role of assumptions that decision makers must consider when relying on CVP analysis.

All analysis methods require assumptions that limit the applicability of the results. The cost analyst
must understand which assumptions are most important for the decision being made and consider how
sensitive the decision is to the assumptions before relying on CVP analysis alone to make a decision.

Blooms: Understand
Gradable: manual

3-194

Fundamentals of Cost-Volume-Profit Analysis: True / False Questions

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Fundamentals of Cost-Volume-Profit Analysis: True / False Questions

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Chapter 03

Fundamentals of Cost-Volume-Profit Analysis

True / False Questions

Multiple Choice Questions

What is Tiller's break-even point in sales dollars? (CPA adapted)

A. Ability to compute the break-even point.

A. Sales price increases.

Contribution Margin Ratio Break-even Point

A. cost A has remained unchanged.

A. an increase in total fixed costs.

A. Sales price increases by 10%.

Sales (2,900 units) $269,700

Sales (4,500 units) $427,500

Per Unit Data

• The sales price of the T-shirts will be $9

• The sales price of the T-shirts will be $9

• The sales price of the T-shirts will be $9

• The sales price of the T-shirts will be $9

Selling Price $40

Selling Price $40

Selling Price $40

Per Unit Total

Total Annual Percent That Is

What selling price will yield a contribution margin of 40%?

Budgeted Break-even Budgeted Margin of

A. a change in total fixed costs.

The contribution margin ratio for the current year is:

Per Unit Total

Contribution margin per Contribution margin

A. (Sales - Fixed costs) ÷ Sales.

Contribution margin per Contribution margin

A. Sales price increases.

A. Variable costs per unit increases.

Contribution Margin Ratio Break-even Point

A. an increase in the number of units produced and sold.

A. increase in the total fixed costs.

Per Unit Total

Budgeted Sales $1,000,000

Upton's margin of safety is: (CPA adapted)

A. Break-even sales ÷ Total sales.

A. contribution margin ratio.

A. contribution margin divided by sales.

Contribution Margin Variable Costs

Selling Price $60

What dollar sales volume does Honeysuckle need to break even?

Selling Price $60

Selling Price $60

A. a change in total fixed costs.

Sales 3,000 Units

Product Product Product

A. total costs are constant.

A. Total Fixed Costs are nonlinear.

Sales price $50

This information is based on forecasted sales of 30,000 units.

Sales price $125 each

Projected sales are 7,500 units per year.

(consider each question independent of each other):

(a) What will the operating profit be?

Sales Price $50

This information is based on forecasted sales of 33,000 units.

Sales Price $25

This information is based on forecasted sales of 25,000 units.

Sales (5,500 units) $297,000