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Fundamentals of Cost-Volume-Profit Analysis: True / False Questions
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
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
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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
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
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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
True False
14. Microsoft Excel® is ideally suited for analyzing alternative CVP scenarios using its "What-If
Analysis" function.
True False
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
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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
20. Cost-volume-profit (CVP) analysis is more complicated for organizations with multiple products
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
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
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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
25. The difference between total sales in dollars and total variable costs is called:
A. operating profit.
B. net profit.
Sales $800,000
A. $200,000.
B. $160,000.
C. $50,000.
D. $40,000.
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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?
28. Which of the following would not cause the break-even point to change?
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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
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
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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:
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.
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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)?
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
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36. Dartmount Corporation has provided its contribution format income statement for June. The
company produces and sells a single product.
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.
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37. Goodson Inc. produces and sells a single product. The company has provided its contribution
format income statement for March.
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.
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.
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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.
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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.
Direct Materials 20
Direct Labor 15
Variable Selling 3
Total Costs 90
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 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.
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42. 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)
Based on a $10 selling price per unit, the number of T-shirts Dorcan Corporation must sell to
A. 17,000 units.
B. 16,500 units.
C. 20,000 units.
D. 22,000 units.
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43. 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)
Sales for the coming year are expected to exceed last year's by 1,000 units. If this occurs,
A. 22,600 units.
B. 21,960 units.
C. 23,400 units.
D. 21,000 units.
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44. 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)
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:
per
Fixed manufacturing cost $150,000
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.
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46. Lamar has the following data:
per
Fixed manufacturing cost $150,000
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.
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47. Lamar has the following data:
per
Fixed manufacturing cost $150,000
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.
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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:
Variable 200,000
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.
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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:
Exp.
Variable 200,000
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.
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50. You have been provided with the following information:
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.
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.
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52. The following costs have been estimated based on sales of 30,000 units:
Costs Variable
Manufacturing
250,000 50
overhead
Selling and
150,000 25
administrative
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.
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54. At the break-even point, the total contribution margin equals total: (CPA adapted)
A. Variable costs.
B. Sales.
D. Fixed costs.
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)
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
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56. A company's break-even point will not be changed by:
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.
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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:
Exp.
Variable 750,000
A. 53.6%.
B. 49.3%.
C. 46.4%.
D. 25%.
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59. 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:
Exp.
Variable 750,000
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.
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60. 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:
Exp.
Variable 750,000
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.
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61. 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:
Exp.
Variable 750,000
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.
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62. You have been provided with the following information:
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.
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63. You have been provided with the following information:
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.
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64. You have been provided with the following information:
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.
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.
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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
67. Which of the following formulas is used to calculate the contribution margin ratio?
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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
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)].
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70. Which of the following would not cause the break-even point to change?
71. Which of the following would not cause the break-even point to change?
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72. If the fixed costs for a product increase and the variable costs (as a percentage of sales dollars)
increase, what will be the effect on the contribution margin ratio and the break-even point,
respectively?
A. Decrease Increase
B. Increase Decrease
C. Decrease Decrease
D. Increase Increase
A. Option A
B. Option B
C. Option C
D. Option D
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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.
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77. A decrease in the margin of safety would be caused by a(n):
If sales decrease by 500 units, by what percent would fixed costs have to be reduced by to
A. 50.0%.
B. 33.3%.
C. 25.0%.
D. 16.7%.
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79. The following pertains to Upton Co. for the year ending December 31, 2016:
A. $300,000.
B. $400,000.
C. $500,000.
D. $800,000.
81. The amount by which a company's sales can decline before losses are incurred is called the:
C. margin of safety.
D. profit loss.
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82. The degree of operating leverage can be calculated as:
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?
A. Higher Higher
B. Lower Higher
C. Higher Lower
D. Lower Lower
A. Option A
B. Option B
C. Option C
D. Option D
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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
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
A. $2,250,000.
B. $3,000,000.
C. $1,500,000.
D. $1,250,000.
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86. Given the following information:
Sales $5,000
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.
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87. The Terrence Co. manufactures two products, Baubles and Trinkets. The following are
projections for the coming year:
Baubles Trinkets
Costs:
Income
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
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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.
per
Fixed manufacturing cost $250,000
month
A. $822,222.
B. $833,333.
C. $900,000.
D. $1,233,333.
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90. Honeysuckle Manufacturing has the following data:
per
Fixed manufacturing cost $250,000
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.
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91. Honeysuckle Manufacturing has the following data:
per
Fixed manufacturing cost $250,000
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.
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.
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93. Market Sales had $1,200,000 in sales last month. The variable cost ratio was 60% and operating
profits 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.
94. 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 margin of safety in sales dollars?
A. $200,000.
B. $300,000.
C. $500,000.
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.
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96. 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%.
What is the break-even sales volume for Store B?
A. $666,667.
B. $325,000.
C. $285,714.
97. 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%.
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.
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99. A company's break-even point will not be changed by:
100.Lake Sales had $2,200,000 in sales last month. The contribution margin ratio was 30% and
A. $660,000.
B. $1,540,000.
C. $1,600,000.
D. $2,020,000.
101.Lake Sales had $2,200,000 in sales last month. The contribution margin ratio was 30% and
operating 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.
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102.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 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
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.
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104.Eastwick produces and sells three products. Last month's results are as follows:
P1 P2 P3
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.
105.Eastwick produces and sells three products. Last month's results are as follows:
P1 P2 P3
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.
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106.A company has provided the following data:
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.
107.Winters Company sells three products. Sales and contribution margin ratios for the three
products follow:
A B C
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%.
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108.Break-even analysis assumes that:
109.Break-even analysis assumes that over the relevant range: (CPA adapted)
Essay Questions
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110.You have been provided with the following information regarding the Omaha Manufacturing
Company:
Variable manufacturing
24
cost per unit
Fixed manufacturing
360,000
costs
Required:
(a) What is the expected operating profit for the upcoming year?
(c) If $180,000 of operating profit is desired, how many units must be sold?
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111.Lincoln, Inc. is considering the introduction of a new music player with the following price and
cost characteristics:
Required:
(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?
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112.You have been provided with the following information regarding the Closure Manufacturing
Company:
Required:
(a) What is the expected operating profit for the upcoming year?
(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?
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113.You have been provided with the following information regarding the Pharma Manufacturing
Company:
Required:
(a) What are the expected operating profits for the upcoming year?
(b) What is the break-even point in units?
(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?
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114.Chita Corporation produces and sells a single product. The company's contribution format
income statement for January appears below:
Required:
Redo the company's contribution format income statement assuming that the company sells
5,700 units.
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115.Folsom Inc., which produces and sells a single product, has provided the following contribution
format income statement for August:
Required:
Redo the company’s contribution format income statement assuming that the company sells
4,500 units.
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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.
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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.
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.
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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.
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.
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121.Rudy Corporation produces and sells a single product. Data concerning that product appear
below:
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?
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122.Alden Corporation produces and sells a single product. Data concerning that product appear
below:
Fixed costs are $110,000 per month. The company is currently selling 1,000 units per month.
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?
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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:
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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:
Cleaning
$0.15 per haircut
Supplies
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.
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125.You have been provided with the following information regarding the Fremont Manufacturing
Company:
Variable manufacturing
24
cost per unit
Fixed manufacturing
360,000
costs
Required:
(a) What is the expected operating profit for the upcoming year?
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126.Xi-Tech, Inc. is considering the introduction of a new music player with the following price and
cost characteristics:
Required:
(c) If projected sales are 7,500 units, what is the margin of safety in units?
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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.
Other costs are incurred as follows:
Cleaning
$.15 per haircut
Supplies
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
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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
The following information has been assembled by the sales department and the production
department.
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.
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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.
(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
(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:
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(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.
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130.You have been provided with the following information regarding the Ralston Manufacturing
Company:
Variable manufacturing
24
cost per unit
Fixed manufacturing
12
costs per unit
Required:
(a) What is the expected operating profit for the upcoming year?
(c) If $160,000 of operating profit is desired, how many units must be sold?
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131.Nation Inc. sells three products. Last month's results are as follows:
P1 P2 P3
Required:
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132.Carrie sells three products. Last month's results are as follows:
P1 P2 P3
Required:
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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:
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134.Bokay Creations has budgeted annual fixed costs of $240,000 and an estimated variable cost
ratio of 60%.
Required:
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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.
The following information has been assembled by the sales department and the production
department.
The fixed costs associated with the manufacture of these three products are $175,000 per year.
Required:
Determine the number of units of each product that would be sold at the break-even point.
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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 department feels that 70% of units sold will be the original product,
20% will be new model #1 and the remainder will be new model #2.
The following information has been assembled by the sales department and the production
department.
The fixed costs associated with the manufacture of these three products are $250,000 per year.
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%
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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
Required:
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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:
Required:
(b) If Beach Party can sell all it can produce, how many shifts should be operated?
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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 break-even point for the company? Explain.
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140.Fortune Tools produces and sells two products. Data concerning these products for the most
recent month appear below:
Required:
b. If the sales mix shifts toward Product XYZ, with no change in total sales, what will happen to
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141.In the most recent month, Faulkner Corporation's total contribution margin was $208,000 and its
operating profit $39,400.
Required:
b. Using the degree of operating leverage, estimate the percentage change in operating profit
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142.Drum Co. has provided the following data concerning its only product:
Required:
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:
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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.
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145.Grayson Corporation produces and sells a single product. Data concerning that product appear
below:
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.
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146.Morrel Co. produces and sells a single product. The company's income statement for the most
recent month is given below:
Required:
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.
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147.Broken Arrow Inc. produces and sells a single product. Data concerning that product appear
below:
Fixed costs are $226,000 per month. The company is currently selling 2,000 units per month.
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
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148.Fairmount Corporation produces and sells a single product. Data concerning that product appear
below:
Fixed costs are $516,000 per month. The company is currently selling 7,000 units per month.
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?
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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,
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
3. Cut fixed costs by $10,000 and lower the selling price by 5 percent. Sales of 2,000 units would
Required:
a. If no changes are made to the selling price or cost structure, estimate the number of units that
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.
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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
$2,440,000 $1,320,000
cost 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:
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:
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1. capital-intensive manufacturing method.
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151.The following monthly data in contribution format are available for the Feta Company and its only
product, Product Gamma:
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
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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
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152.Morgan Designs manufactures decorative iron railings. In preparing for next year's operations,
management has developed the following estimates:
Manufacturing overhead:
Required:
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d. Margin of safety percentage.
e. If the sales volume increases by 20%, with no change in total fixed costs, what will be the
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?
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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
Combined
Unit Unit
Variable
60,000 0.60 60,000 0.60 120,000
costs
Contribution
$60,000 $0.60 $20,000 $0.20 80,000
margin
Operating
$30,000
profit
Required:
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.
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154.Data concerning Fowler Corporation's single product appear below:
Fixed costs are $444,000 per month. The company is currently selling 7,000 units per month.
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?
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155.Explain the difference between the break-even point, the margin of safety, and operating
leverage.
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?
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158.Why is the time period so important for the definition of fixed costs?
160.Why and how do managers simplify analyses for achieving a given level of profit with two
products or services?
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161.Discuss the role of assumptions that decision makers must consider when relying on CVP
analysis.
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Chapter 03 Fundamentals of Cost-Volume-Profit Analysis Answer Key
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.
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
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AICPA: FN Decision Making
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Blooms: Remember
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis
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.
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).
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Blooms: Remember
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis
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
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
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Gradable: automatic
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis
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.
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
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9. The break-even point in sales dollars is fixed costs divided by the contribution margin ratio.
TRUE
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.
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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.
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.
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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.
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.
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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.
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.
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17. Before-tax operating profits are equal to the after-tax operating profits divided by (1 - tax rate).
TRUE
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
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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
20. Cost-volume-profit (CVP) analysis is more complicated for organizations with multiple products
TRUE
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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.
22. In multi-product cost-volume-profit (CVP) analysis, the fixed product mix method and the
FALSE
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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.
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
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Multiple Choice Questions
25. The difference between total sales in dollars and total variable costs is called:
A. operating profit.
B. net profit.
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26. The following information pertains to Tiller Co.:
Sales $800,000
A. $200,000.
B. $160,000.
C. $50,000.
D. $40,000.
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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?
CVP analysis addresses pricing and volume, but it does not address tax planning.
28. Which of the following would not cause the break-even point to change?
Sales volume is not a component of the break-even point, rather it is the solution - what we
are attempting to find.
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Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis
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
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Topic: Cost-Volume-Profit Analysis
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).
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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:
Variable cost per unit has remained constant, while fixed cost in total remains unchanged but
has increased on a per unit basis.
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.
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Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis
Units sold do not affect the break-even point; instead, they indicate where we are on the
revenue curve and the margin of safety.
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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 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
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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
$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.
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36. Dartmount Corporation has provided its contribution format income statement for June. The
company produces and sells a single product.
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.
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Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis
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37. Goodson Inc. produces and sells a single product. The company has provided its contribution
format income statement for March.
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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Gradable: automatic
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis
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
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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.
X = $234,000
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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.
Direct Materials 20
Direct Labor 15
Variable Selling 3
Total Costs 90
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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Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis
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.
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Topic: Cost-Volume-Profit Analysis
42. 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
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.
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43. 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)
Sales for the coming year are expected to exceed last year's by 1,000 units. If this occurs,
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.
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44. 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)
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.
$255,000.
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45. Lamar has the following data:
per
Fixed manufacturing cost $150,000
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.
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46. Lamar has the following data:
per
Fixed manufacturing cost $150,000
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.
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47. Lamar has the following data:
per
Fixed manufacturing cost $150,000
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.
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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:
Variable 200,000
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.
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Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis
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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:
Admin. Exp.
Variable 200,000
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.
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Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis
If sales decrease by 500 units, how much will fixed costs have to be reduced by to maintain
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.
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Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis
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.
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52. The following costs have been estimated based on sales of 30,000 units:
Costs Variable
Manufacturing
250,000 50
overhead
Selling and
150,000 25
administrative
A. $59.38
B. $43.75
C. $39.58
D. $33.25
$39.58 (100%)
selling price;
23.75 (60%)
Less: VC
CM $15.84 (40%)
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Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis
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.
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54. At the break-even point, the total contribution margin equals total: (CPA adapted)
A. Variable costs.
B. Sales.
D. Fixed costs.
This statement defines break-even (e.g., contribution margin - fixed costs = zero).
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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)
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
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.
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56. A company's break-even point will not be changed by:
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.
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Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis
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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:
Admin. Exp.
Variable 750,000
A. 53.6%.
B. 49.3%.
C. 46.4%.
D. 25%.
3-150
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Gradable: automatic
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis
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59. 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:
Admin. Exp.
Variable 750,000
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.
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Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
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60. 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:
Admin. Exp.
Variable 750,000
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.
A. $477,500.
B. $492,500.
C. $552,500.
D. $831,250.
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Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis
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61. 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:
Admin. Exp.
Variable 750,000
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.
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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
If unit sales decrease by 10%, how much will fixed costs have to be reduced by to maintain
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.
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Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis
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.
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64. You have been provided with the following information:
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.
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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.
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.
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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.
Variable cost 60 63
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AACSB: Reflective Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis
67. Which of the following formulas is used to calculate the contribution margin ratio?
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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.
Variable cost 60 57
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Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis
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)].
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70. Which of the following would not cause the break-even point to change?
71. Which of the following would not cause the break-even point to change?
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Gradable: automatic
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis
72. If the fixed costs for a product increase and the variable costs (as a percentage of sales
dollars) increase, what will be the effect on the contribution margin ratio and the break-even
point, respectively?
A. Decrease Increase
B. Increase Decrease
C. Decrease Decrease
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.
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73. A company's break-even point will not be increased by:
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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.
Sales price per unit = Variable cost per unit ÷ Variable cost ratio
= $4.50 ÷ 60%
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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.
= 1.25%
= 1.25% × $150,000
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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.
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.
3-170
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AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 03-02 Understand the effect of cost structure on decisions.
Topic: Cost-Volume-Profit Analysis
If sales decrease by 500 units, by what percent would fixed costs have to be reduced by to
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%.
3-171
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Gradable: automatic
Learning Objective: 03-02 Understand the effect of cost structure on decisions.
Topic: Cost-Volume-Profit Analysis
79. The following pertains to Upton Co. for the year ending December 31, 2016:
A. $300,000.
B. $400,000.
C. $500,000.
D. $800,000.
3-172
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80. The margin of safety percentage is computed as:
Margin of safety percentage = Margin of safety in dollars ÷ Total budgeted (or actual) sales
81. The amount by which a company's sales can decline before losses are incurred is called the:
C. margin of safety.
D. profit loss.
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Gradable: automatic
Learning Objective: 03-02 Understand the effect of cost structure on decisions.
Topic: Cost-Volume-Profit Analysis
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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?
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.
3-175
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Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 03-02 Understand the effect of cost structure on decisions.
Topic: Cost-Volume-Profit Analysis
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
3-176
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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
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
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86. Given the following information:
Sales $5,000
What would expected net income be if the company experienced a 10 percent increase in
A. $1,750.
B. $1,550.
C. $1,250.
D. $1,375.
3-178
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87. The Terrence Co. manufactures two products, Baubles and Trinkets. The following are
projections for the coming year:
Baubles Trinkets
Costs:
Income
taxes
How many Baubles will be sold at the break-even point, assuming that the facilities are jointly
A. 9,900
B. 8,800
C. 6,600
D. 5,000
3-179
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Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 03-04 Incorporate taxes, multiple products, and alternative cost structures into the CVP analysis.
Topic: Extensions of the CVP Model
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.
Proof-2017:
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Learning Objective: 03-04 Incorporate taxes, multiple products, and alternative cost structures into the CVP analysis.
Topic: Extensions of the CVP Model
per
Fixed manufacturing cost $250,000
month
A. $822,222.
B. $833,333.
C. $900,000.
D. $1,233,333.
3-181
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90. Honeysuckle Manufacturing has the following data:
per
Fixed manufacturing cost $250,000
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.
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91. Honeysuckle Manufacturing has the following data:
per
Fixed manufacturing cost $250,000
month
If Honeysuckle has actual monthly sales of $1,500,000 and desires an operating profit of
A. $100,000.
B. $266,667.
C. $50,000.
D. $1,130,000.
3-183
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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.
3-184
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93. Market Sales had $1,200,000 in sales last month. The variable cost ratio was 60% and
operating profits 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.
$1,500,000.
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94. 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 margin of safety in sales dollars?
A. $200,000.
B. $300,000.
C. $500,000.
3-186
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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.
3-187
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96. 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%. What is the break-even sales volume for Store B?
A. $666,667.
B. $325,000.
C. $285,714.
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97. 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%. What is the break-even sales volume for Store A?
A. $208,333.
B. $312,500.
C. $325,000.
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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.
Income taxes do not affect the break-even point; taxes are based on before tax profit.
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AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 03-04 Incorporate taxes, multiple products, and alternative cost structures into the CVP analysis.
Topic: Cost-Volume-Profit Analysis
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.
3-191
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101. Lake Sales had $2,200,000 in sales last month. The contribution margin ratio was 30% and
operating 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.
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102. 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 margin of safety in sales dollars?
A. $480,000.
B. $600,000.
C. $2,020,000.
3-193
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103. Eastwick produces and sells three products. Last month's results are as follows:
P1 P2 P3
Fixed costs total $200,000. What is Eastwick's break-even sales volume? (Assume the
A. $500,000.
B. $416,667.
C. $384,615.
D. $460,000.
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104. Eastwick produces and sells three products. Last month's results are as follows:
P1 P2 P3
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.
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105. Eastwick produces and sells three products. Last month's results are as follows:
P1 P2 P3
Fixed costs total $200,000. What sales volume would generate an operating profit of
A. $650,000.
B. $610,000.
C. $729,167.
D. $850,000.
3-196
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106. A company has provided the following data:
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.
Current v. Changes
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AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 03-04 Incorporate taxes, multiple products, and alternative cost structures into the CVP analysis.
Topic: Extensions of the CVP Model
3-198
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107. Winters Company sells three products. Sales and contribution margin ratios for the three
products follow:
A B C
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%.
Sales in
$20,000 $40,000 $100,000 $160,000
dollars (a)
Contribution
(b)
Contribution
(b)
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Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 03-04 Incorporate taxes, multiple products, and alternative cost structures into the CVP analysis.
Topic: Extensions of the CVP Model
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109. Break-even analysis assumes that over the relevant range: (CPA adapted)
The assumption is that over the relevant range unit variable costs remain unchanged or linear.
Essay Questions
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110. You have been provided with the following information regarding the Omaha Manufacturing
Company:
Variable manufacturing
24
cost per unit
Fixed manufacturing
360,000
costs
Fixed administrative
80,000
costs
Required:
(a) What is the expected operating profit for the upcoming year?
(c) If $180,000 of operating profit is desired, how many units must be sold?
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111. Lincoln, Inc. is considering the introduction of a new music player with the following price and
cost characteristics:
Required:
(c) What is the net income if variable costs per unit increase by 15% and Lincoln has a 38%
tax rate?
3-203
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112. You have been provided with the following information regarding the Closure Manufacturing
Company:
Required:
(a) What is the expected operating profit for the upcoming year?
(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?
3-204
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McGraw-Hill Education.
113. You have been provided with the following information regarding the Pharma Manufacturing
Company:
Required:
(a) What are the expected operating profits for the upcoming year?
(b) What is the break-even point in units?
(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?
3-205
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114. Chita Corporation produces and sells a single product. The company's contribution format
income statement for January appears below:
Required:
Redo the company's contribution format income statement assuming that the company sells
5,700 units.
3-206
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115. Folsom Inc., which produces and sells a single product, has provided the following contribution
format income statement for August:
Required:
Redo the company’s contribution format income statement assuming that the company sells
4,500 units.
3-207
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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.
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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.
3-209
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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%
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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%
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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%
3-212
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121. Rudy Corporation produces and sells a single product. Data concerning that product appear
below:
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
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122. Alden Corporation produces and sells a single product. Data concerning that product appear
below:
Fixed costs are $110,000 per month. The company is currently selling 1,000 units per month.
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?
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Since fixed costs are not affected by this change, the change in operating profit will be equal
to the change in total contribution margin.
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:
3-215
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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
Cleaning
$0.15 per haircut
Supplies
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
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(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%
3-217
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125. You have been provided with the following information regarding the Fremont Manufacturing
Company:
Variable manufacturing
24
cost per unit
Fixed manufacturing
360,000
costs
Fixed administrative
80,000
costs
Required:
(a) What is the expected operating profit for the upcoming year?
(c) How much in sales dollars is required to generate an operating profit of $275,000?
3-218
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126. Xi-Tech, Inc. is considering the introduction of a new music player with the following price and
cost characteristics:
Required:
(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?
3-219
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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.
Other costs are incurred as follows:
Cleaning
$.15 per haircut
Supplies
Required:
(a) John wants to earn $2,160 in after-tax operating profits. Compute the number of haircuts
(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
3-220
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AACSB: Analytical Thinking
AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Learning Objective: 03-04 Incorporate taxes, multiple products, and alternative cost structures into the CVP analysis.
Topic: Cost-Volume-Profit Analysis
3-221
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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.
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.
3-222
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McGraw-Hill Education.
Gradable: manual
Learning Objective: 03-04 Incorporate taxes, multiple products, and alternative cost structures into the CVP analysis.
Topic: Extensions of the CVP Model
3-223
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McGraw-Hill Education.
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
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
(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
(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
operating profit objective. Be sure to support your selection with appropriate computations.
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(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.
3-225
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130. You have been provided with the following information regarding the Ralston Manufacturing
Company:
Variable manufacturing
24
cost per unit
Fixed manufacturing
12
costs per unit
Fixed administrative
3
costs per unit
Required:
(a) What is the expected operating profit for the upcoming year?
(c) If $160,000 of operating profit is desired, how many units must be sold?
3-226
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131. Nation Inc. sells three products. Last month's results are as follows:
P1 P2 P3
Required:
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132. Carrie sells three products. Last month's results are as follows:
P1 P2 P3
Required:
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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:
3-229
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134. Bokay Creations has budgeted annual fixed costs of $240,000 and an estimated variable cost
ratio of 60%.
Required:
3-230
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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.
The following information has been assembled by the sales department and the production
department.
The fixed costs associated with the manufacture of these three products are $175,000 per
year.
Required:
Determine the number of units of each product that would be sold at the break-even point.
3-231
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McGraw-Hill Education.
Gradable: manual
Learning Objective: 03-04 Incorporate taxes, multiple products, and alternative cost structures into the CVP analysis.
Topic: Extensions of the CVP Model
3-232
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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 department feels that 70% of units sold will be the original
product, 20% will be new model #1 and the remainder will be new model #2.
The following information has been assembled by the sales department and the production
department.
The fixed costs associated with the manufacture of these three products are $250,000 per
year.
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,
3-233
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Original = 28,653 × 50% = 14,327 units
Model #1 = 28,653 × 30% = 8,596 units
Model #2 = 28,653 × 20% = 5,730 units
3-234
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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,
Required:
Teri Aki will break-even with 2 or 3 lines. Teri Aki will not break-even operating just one line.
3-235
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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:
Required:
(b)
(c)
(d)
(e)
(f)
(g)
Beach Party will break even at any shift level
3-236
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AICPA: FN Decision Making
Blooms: Create
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 03-04 Incorporate taxes, multiple products, and alternative cost structures into the CVP analysis.
Topic: Extensions of the CVP Model
3-237
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McGraw-Hill Education.
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
Product Product
a. Total
DQ393 BA999
Contribution
$19,250 $30,150 49,400
margin
Operating
$1,090
profit
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
Contribution margin
$19,250 $30,150
(b)
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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.
3-239
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140. Fortune Tools produces and sells two products. Data concerning these products for the most
recent month appear below:
Required:
b. If the sales mix shifts toward Product XYZ, with no change in total sales, what will happen
to the break-even point for the company? Explain.
Product Product
a. Total
XYZ VAR
Contribution
$7,280 $14,450 21,730
margin
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
b. Product Product
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XYZ VAR
Contribution margin
$7,280 $14,450
(b)
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.
3-241
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141. In the most recent month, Faulkner Corporation's total contribution margin was $208,000 and
its operating profit $39,400.
Required:
b. Using the degree of operating leverage, estimate the percentage change in operating profit
that should result from a 1% increase in sales.
= 1% × 5.28 = 5.28%
3-242
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142. Drum Co. has provided the following data concerning its only product:
Required:
3-243
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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:
Dollar sales to attain target profit = (Target profit + Fixed costs) ÷ CM ratio
= ($667,920 + $72,600) ÷ 0.66 = $1,122,000
3-244
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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.
Percent of
Per Unit
Sales
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
3-245
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145. Grayson Corporation produces and sells a single product. Data concerning that product
appear below:
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
Percent of
Per Unit
Sales
a. Unit sales to attain target profit = (Target profit + Fixed costs) ÷ Unit CM
b. Dollar sales to attain target profit = (Target profit + Fixed costs) ÷ CM ratio
= ($621,000 + $41,400) ÷ 0.60 = $1,104,000
3-246
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McGraw-Hill Education.
Gradable: manual
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis
3-247
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McGraw-Hill Education.
146. Morrel Co. produces and sells a single product. The company's income statement for the most
recent month is given below:
Required:
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.
3-248
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a. The company's income statement in contribution format would be:
Sales $240,000
Variable costs:
Fixed costs:
The break-even point in units would be: $72,000 ÷ $16 per unit = 4,500 units
d. Direct labor costs are presently $10 per unit ($60,000 ÷ 6,000 units) and will decrease by
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$4 per unit ($10 × 40%). Therefore, the company's new cost structure will be:
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147. Broken Arrow Inc. produces and sells a single product. Data concerning that product appear
below:
Fixed costs are $226,000 per month. The company is currently selling 2,000 units per month.
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
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Change in operating profit ($12,800)
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148. Fairmount Corporation produces and sells a single product. Data concerning that product
appear below:
Fixed costs are $516,000 per month. The company is currently selling 7,000 units per month.
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?
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Change in operating profit $7,000
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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
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
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.
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= $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
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:
Sales = ($400 per unit × 350 units) + ($370 per unit × 2,200 units) = $954,000
Variable costs = ($200 per unit × 350 units) + ($175 per unit × 2,200 units) = $455,000
Fixed costs = $100,000
Alternative 3:
Sales = ($400 per unit × 350 units) + ($380 per unit × 2,000 units) = $900,000
Variable costs = ($200 per unit × 350 units) + ($200 per unit × 2,200 units) = $510,000
Fixed costs = $90,000
Profit = Sales - Variable costs - Fixed costs = $900,000 - $510,000 - $90,000
= $300,000
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Difficulty: 3 Hard
Gradable: manual
Learning Objective: 03-01 Use cost-volume-profit (CVP) analysis to analyze decisions.
Topic: Cost-Volume-Profit Analysis
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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
unit
Fixed manufacturing
$2,440,000 $1,320,000
cost 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
Required:
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:
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use?
a. 1. Capital-intensive:
= 210,000 units
2. Labor-intensive:
= ($1,320,000 + $500,000) ÷ ($30 per unit - $17.60 per unit - $2 per unit)
Labor-intensive:
Q = 311,111 units
c. 1. Capital-intensive:
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units × $16 per unit)
2. Labor-intensive:
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.
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Topic: Cost-Volume-Profit Analysis
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151. The following monthly data in contribution format are available for the Feta Company and its
only product, Product Gamma:
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
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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.
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
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Reduction in operating profit ($4,400)
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.
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152. Morgan Designs manufactures decorative iron railings. In preparing for next year's operations,
management has developed the following estimates:
Manufacturing overhead:
Required:
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?
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a. Variable cost per unit:
Unit CM $29.00
b. CM ratio = Unit CM ÷ Selling price = $29.00 per unit ÷ $50.00 per unit = 58%
Dollar sales to break-even = Fixed costs ÷ CM ratio = $110,000 ÷ 0.58 = $189,655 (rounded)
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Less: Fixed costs 110,000
increase:
Alternate solution:
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unit:
Production $18.40
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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
Combined
Unit Unit
Variable
60,000 0.60 60,000 0.60 120,000
costs
Contribution
$60,000 $0.60 $20,000 $0.20 80,000
margin
Operating
$30,000
profit
Required:
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.
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Product Product
c. Total
XX ZZ
Contribution
$48,000 $36,000 84,000
margin
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154. Data concerning Fowler Corporation's single product appear below:
Fixed costs are $444,000 per month. The company is currently selling 7,000 units per month.
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?
Since fixed costs are not affected by this change, the change in operating profit will be equal
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to the change in total contribution margin.
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.
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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.
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.
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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.
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
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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.
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.
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Topic: Extensions of the CVP Model
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