TRUE/FALSE

No statement T/F
1 A company’s break-even point is the level where total revenues equal total costs. T
2 Variable costs per unit remain unchanged with levels of production. T
3 Total fixed costs remain unchanged with levels of production T
4 Total fixed costs vary inversely with levels of production F
5 Fixed costs per unit vary inversely with levels of production T
6 Fixed costs per unit remain constant with levels of production F
7 Break-even point may be expressed in terms of units or dollars T
8 Dividing total fixed costs by the contribution margin ratio yields break-even point in sales T
dollars
9 Dividing total fixed costs by the contribution margin ratio yields break-even point in units. F
10 After the break-even point is reached, each dollar of contribution margin is a dollar of before- F
tax profit.
11
25. The margin of safety is an effective measure of risk for a company. T
12
28. In CVP analysis, sales and production are assumed to be equal. T
Multiple Choice Questions

1. Which income statement format better facilitates the determination of a company’s

break-even point?
a. Absorption costing income statement
b. Full costing income statement
c. Variable costing income statement
d. None of the above

2. Select the incorrect equation for computing the breakeven point.

a. Total Fixed Costs = Total Contribution Margin
b. Total Revenue = Total Costs
c. Total Profit = $0
d. Total Variable Costs = Total Fixed Costs

3. A Company sells a product for $7.50 whose variable cost is $2. 50 per unit. The
company needed to sell 20,000 shirts to break even. What was the company’s total
fixed costs?
a. $100,000 20000 = FX ÷ (7.5 – 2.25 ) so FX = 20000×5 = 105000
b. $150,000
c. $45,000
d. $3,810

4. Ayman Company manufactures a product that sells for $800 per unit. The unit
variable costs are $600 and total fixed costs are $6,600,000. The annual sales volume
required for W Company to break even is:
a. $26,400,000. ( 6600000 ÷ ( 800 – 600 ÷ 800))
b. $8,800,000.
c. $6,600,000.
d. None of the above.

1
 5. CVP analysis requires costs to be categorized as
a. either fixed or variable.
b. fixed, mixed, or variable.
c. product or period.
6.
d. standard or actual.

6. With respect to fixed costs, CVP analysis assumes total fixed costs
a. per unit remain constant as volume changes.
b. remain constant from one period to the next.
c. vary directly with volume.
d. remain constant across changes in volume.
7.

8. At the break-even point, fixed costs are always

a. less than the contribution margin.
b. equal to the contribution margin.
c. more than the contribution margin.
d. more than the variable cost.

To To 9. To compute the break-even point in units, which of the following formulas is

used?
a. FC/CM per unit
b. FC/CM ratio
c. CM/CM ratio
d. (FC+VC)/CM ratio

23. 10. The margin of safety would be negative if a company('s):

a. was presently operating at a volume that is below the break-even point.
b. present fixed costs were less than its contribution margin.
c. variable costs exceeded its fixed costs.
d. degree of operating leverage is greater than 100.
11. The margin of safety is a key concept of CVP analysis. The margin of safety is the
a. contribution margin rate.
b. difference between budgeted contribution margin and actual contribution margin.
c. difference between budgeted contribution margin and break-even contribution margin.
d. difference between budgeted sales and break-even sales.

COMPLETION

NO Statement Answer
The level of activity where a company’s total revenues equal total costs is break-even point
1 referred to as the ______________________________.
Contribution margin divided by revenue is referred to as the contribution
2 _______________________. margin ratio
The excess of budgeted or actual sales over sales at break-even point is margin of safety
3 referred to as _________________________________.

2
(1) During 2018, ayman company produced and sold 6,000 at $3 each (Sales $18,000).
Variable costs for the year totaled $10,800. Fixed costs 13,200. Determine the sales and
units sold that were needed to break-even ?.
Solution
 Contribution margin = Sales $18,000 - Variable costs $10,800 = $7,200,
 Contribution margin Per unit = $7,200 ÷ 6,000 = = $1.20
 Break-even point (units) = $13,200 ÷ $1.20 = 11,000 units
 Contribution margin ratio = $7,200 ÷ $18,000 = 40%
Break-even point (sales) = $13,200 ÷ 40% = $33,000 or 11000 × 3

(2) Azazy Cellular sells phones for $100. The unit variable cost per phone is $50 plus a selling
commission of 10%. Fixed manufacturing costs total $1,250 per month, while fixed selling
and administrative costs total $2,750.

A. What is the contribution margin per phone?

CM per phone = $100 - $50 - 0.1($100) = $40
B. What is the breakeven point in phones?
Fixed cost = $1,250 + $2,750 = $4,000
Break-even point (units) = $4,000 ÷ $40 = 100 phones
C. How many phones must be sold to earn a targeted profit of $8,000?
Number of phones required to earn target net profit= $12,000 ÷ $40 = 300
phones
(3) Use this information to answer questions:

A. What is the company's contribution margin?

contribution margin per unit= $17 – (4+3) = $10
B. What is the break-even point in units?
Break-even point (units) = $140,000 ÷ $10 = 14000 Unites
C. If the company wants to earn a profit of $42,000 instead of breaking even, what is the
number of units the company must sell?
Number of unites required to earn target net profit=( $140,000 + 42,000 )÷
$10 = 18200 unites.