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04. Management Services

MS.03 Costs Volume Profit (CVP) Analysis

MS.03 CVP Drill

Submissions
Here are your latest answers:

Question 1
The most useful information derived from a breakeven chart is the

Response: Relationship among revenues, variable costs, and fixed costs at various levels of activity.

Correct answer: Relationship among revenues, variable costs, and fixed costs at various levels of activity.

Score: 1 out of 1 Yes

Question 2
Which of the following items would not be considered in cost-volume-profit analysis?

Response: Gross profit margin

Correct answer: Gross profit margin

Score: 1 out of 1 Yes

Question 3
Lake Co. increased its direct labor wage rates.  All other budgeted costs and revenues were unchanged.  How did this increase affect Lake’s budgeted breakeven point and budgeted margin
of safety?

  A. B. C. D.

Budgeted Breakeven Point Increase Increase Decrease Decrease

Budgeted Margin of Safety Increase Decrease Decrease Increase

Response: Choice B
Correct answer: Choice B

Score: 1 out of 1 Yes

Question 4
Molder Company manufactures and sells three products: Good, Bad, and Ugly.  Annual fixed costs are P3,315,000, and data about the three products follow.

  Good Bad Ugly

Sales mix in units 30% 50% 20%

Selling price P250 P350  P500

Variable cost 100 150 250

What is the total break-even volume?

Response: 17,000

Feedback:

Solution:

 Good  Bad Ugly

Selling price 250 350 500

Less: Variable costs per unit 100 150 250

Contribution margin per unit 150 200 250

Weighted average unit contribution margin = [(150*0.30) + (200*0.50) + (250*0.20)]

Weighted average unit contribution margin = 195

 Total fixed costs 3,315,000

Divide by: WAUCM 195

Total break-even point 17,000

Correct answer: 17,000

Score: 1 out of 1 Yes

Question 5
Jazz Products has the following information available for the month of March:

Sales (4,000 units) P50,000

Variable costs 30,000

Fixed costs    5,000

Net income P15,000

The company's manager is considering several options to increase net income. By what amount do sales pesos need to increase in order for net income to increase to P20,000?

Response: P12,500

Feedback:

Solution:

  Ratio Total

Sales 100% 50,000

Less: Variable costs 60% 30,000

Contribution margin 40% 20,000

 

Increase in net income [20,000-15,000] 5,000

Divide by: Contribution margin ratio 40%

Increase in peso sales 12,500

Correct answer: P12,500

Score: 1 out of 1 Yes

Question 6
Which of the following is a true statement about sales mix?

Response: Profits may decline with an increase in total peso sales if the sales mix shifts to sell more of the lower contribution margin product

Correct answer: Profits may decline with an increase in total peso sales if the sales mix shifts to sell more of the lower contribution margin product

Score: 1 out of 1 Yes

Question 7
The following information relates to Yellow Corporation:

Sales at the break-even point P312

Total fixed expenses P250

Net operating income P150

What is Yellow's margin of safety?

Response: P187,500

Feedback:

Solution:
 Current At BEP

Sales 500,000 312,500

Less: Variable costs

Contribution margin 400,000 250,000

Less: Fixed costs 250,000 250,000

Net income before tax 150,000 -

CM [Equal to FC at the BEP] 250,000

CMR [250,000/312,500] 80%

Current sales [400,000/80%] 500,000

Margin of safety [500,000-312,500] 187,500

Correct answer: P187,500

Score: 1 out of 1 Yes

Question 8
Which of the following equations is true?

Response: All of the above equations are true.

Correct answer: All of the above equations are true.

Score: 1 out of 1 Yes

Question 9
Which firm tends to have higher operating leverage?
Response: A firm with high fixed costs and low variable costs

Correct answer: A firm with high fixed costs and low variable costs

Score: 1 out of 1 Yes

Question 10
Black Co.'s breakeven point was P780,000. Variable expenses averaged 60% of sales, and the margin of safety was P 130,000.  What was Black's contribution margin?

Response: P 364,000

Feedback:

Solution:

Break-even sales 780,000

Margin of safety 130,000

Current sales 910,000

*CM Ratio 40%

Total contribution margin 364,000

Correct answer: P 364,000

Score: 1 out of 1 Yes

Question 11
Assume there is an increase in advertising expenditures and all other CVP parameters remain constant. This change will

Response: reduce operating income.

Correct answer: reduce operating income.

Score: 1 out of 1 Yes

Question 12
Recent economic conditions are forcing Mega Corporation to drop its price from P50 to P40 per unit, but the company expects its sales to rise from 600,000 to 750,000 units.  The company's
current cost of production is P38 per unit.  Suppose Mega Corporation would like to maintain a 16% target operating income on its sales revenue.  To achieve this target, the company must
lower its cost of production by:

Response: P4.40 per unit

Feedback:

Solution:

Sales
30,000,000
[750,000*40]

Less: Costs 25,200,000

Income
4,800,000
[30M*16%]

Target costs per unit [25,200,000/750,000] 33.60

Less: Existing costs per unit 38.00

Decrease in costs per unit (4.40)

Correct answer: P4.40 per unit

Score: 1 out of 1 Yes

Question 13
Rafa Nadal Co. provides two products, Tennis Balls and Racquet. Tennis balls accounts for 75% percent of total sales, variable cost as a percentage of selling price are 50% for Tennis balls
and 70% for Racquet. Total fixed costs last year were P7,500,000. If the selling price, sales mix and variable cost ratios will remain unchanged but the amount of fixed costs will increase by
30 percent in the coming year, what amount of peso sales would be necessary to generate an operating profit of P1,250,000?

Response: P31,428,571

Feedback:

Solution:
 Tennis
Racquet
balls

Contribution margin ratio 50% 30%

Sales mix in pesos 75% 25%

Weighted average CMR [(50%*0.75)+(30%*0.25)] 45%

Desired profit before taxes 1,250,000

Fixed costs
9,750,000
[7,500,000*1.3]

Required total CM 11,000,000

Divide by: Weighted average CMR 45%

Required sales in pesos 24,444,444

Correct answer: P24,444,444

Score: 0 out of 1 No

Question 14
Camel Company had a margin of safety ratio of 25%, variable costs of 45% of sales, fixed costs of P495,000, a break-even point of P900,000, and operating income of P165,000 for the
current year.  What are the current year's sales?

Response: P  1,500,000

Feedback:

Solution:

Break-even sales 900,000

 Divide by: [100%-Margin of safety ratio] 75%

Current sales 1,200,000

Correct answer: P  1,200,000

Score: 0 out of 1 No

Question 15
CVP analysis relies on the assumptions that costs are either strictly fixed or strictly variable.   Consistent with these assumptions, as volume decreases total

Response: costs decrease

Correct answer: costs decrease

Score: 1 out of 1 Yes