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Cost -volume- profit Part 1

True or False Questions

1. On a cost-volume-profit graph, the revenue line will be shown above the total
expense line for any activity level above the break-even point.
2. The contribution margin ratio measures the effect on the total contribution
margin of a given change in total sales.
3. All other things are the same, in periods of increasing sales, net operating income
will tend to increase more rapidly in a company with high variable costs and low
fixed costs than in a company with high fixed costs and low variable costs.
4. If sales volume increases, and all other factors remain unchanged, the
contribution margin ratio will decrease.
5. The overall contribution margin ratio for a company producing three products
may be obtained by adding the contribution margin ratios for the three products
and dividing the total by three.
6. In two companies making the same product and with the same total sales and
total expenses, the contribution margin ratio will tend to be lower in the company
with a higher proportion of fixed expenses in its cost structure.
7. For a given level of sales, a low contribution margin ratio will produce less net
income than a high contribution margin ratio.
8. At the break-even point: Sales - Variable expenses = Fixed expenses.

Multiple Choice Questions

9. On a cost-volume-profit graph, the break-even point is located:

A. at the origin.

B. where the total revenue line intersects the volume axis.

C. where the total expenses line intersects the dollars axis.

D. where the total revenue line intersects the total expenses line.

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10- Select the correct statement concerning the cost-volume-profit graph below:
a. The point identified by "B" is the breakeven point.

b. Line F is the variable cost line.

c. At point B, profits equal total costs.

d. Line E is the total cost line.

11- Which of the following is true regarding the contribution margin ratio of a
single product company?

A. As fixed expenses decrease, the contribution margin ratio increases.

B. The contribution margin ratio multiplied by the variable expense per unit
equals the contribution margin per unit.
B. If sales increase, the dollar increase in net operating income can be computed
by multiplying the contribution margin ratio by the dollar increase in sales.
D. The contribution margin ratio increases as the number of units sold increases.

12- Which of the following is correct? The break-even point occurs on the CVP
graph where:

A) total profit equals total expenses.

B) total profit equals total fixed expenses.

C) total contribution margin equals total fixed expenses.

D) total variable expenses equal total contribution margin

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13- The contribution margin ratio is equal to:

A) Total manufacturing expenses/Sales.

B) (Sales - Variable expenses)/Sales.

C) 1 - (Gross Margin/Sales). D) 1 - (Contribution Margin/Sales).

14- The contribution margin ratio always increases when the:

A) break-even point increases.

B) break-even point decreases.

C) variable expenses as a percentage of net sales decrease.

D) variable expenses as a percentage of net sales increase.

15- A $2.00 increase in a product's variable expense per unit accompanied by a

$2.00 increase in its selling price per unit will:

A) decrease the degree of operating leverage.

B) decrease the contribution margin.

C) have no effect on the break-even volume.

D) have no effect on the contribution margin ratio.

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 16- Barnes Corporation expected to sell 150,000 games during the month of
November. The following budgeted data are based on that level of sales:
Revenue (150,000 games) ..................................... $2,400,000
Variable expenses .................................................. 1,425,000
Fixed manufacturing overhead expenses ............. 250,000
Fixed selling & administrative expenses ............... 500,000
Net operating income ........................................... 225,000
Barnes' actual sales during November were 180,000 games. What should the
actual net operating income during November have been?
A) $450,000

B) $270,000

C) $420,000 D) $510,000
17- Tice Company is a medium-sized manufacturer of lamps. During the year a new
line called “Horolin” was made available to Tice's customers. The breakeven
point for sales of Horolin is $200,000 with a contribution margin of 40%.
Assuming that the profit for the Horolin line during the year amounted to
$100,000, total sales during the year would have amounted to:

A) $300,000

B) $420,000

C) $450,000

D) $475,000

18- . Variable expenses for Alpha Company are 40% of sales. What are sales at
the breakeven point, assuming that fixed expenses total $150,000 per year:

A) $250,000
B) $375,000
C) $600,000
D) $150,000

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19- . Cindy, Inc. sells a product for $10 per unit. The variable expenses are $6 per
unit, and the fixed expenses total $35,000 per period. By how much will net
operating income change if sales are expected to increase by $40,000?
A) $16,000 increase

B) $5,000 increase

C) $24,000 increase

D) $11,000 decrease
20- . A product sells for $20 per unit, and has a contribution margin ratio of 40%.
Fixed expenses total $120,000 annually. How many units must be sold to
yield a profit of $30,000?
a) 18,750

b) 20,000

c) 25,000

d) 12,500
21- The following is Addison Corporation's contribution format income
statement for last month:

Sales ............................. $1,000,000

Less variable expenses .............. 700,000

Contribution margin ................ 300,000

Less fixed expenses ................. 180,000

Net income ......................... $ 120,000

The company has no beginning or ending inventories. A total of 20,000 units

were produced and sold last month. What is the company's contribution margin
ratio?

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a) 250%

b) 150%

c) 70%

d) 30%

22- Paxton Corp has provided the following data concerning its operations last
month:
Sales .... $400,000 / Variable expenses .... 250,000/ Fixed expenses ...100,000

The contribution margin ratio is:

a) 12.5%.

b) 33.0%.

c) 25.0%.

d) 37.5%.
23- Boswell company reported the following information for the current year:
Sales (50,000units) $1,000,000, direct materials and direct labor $500,000, other
variable cost $50,000, and fixed costs $270,000. What is Boswell’s break-even
point in units?
a. 24,546.
b. 30,000.
c. 38,334.
d. 42,188.
24- Kaplan Inc. produces flash drives for computers, which it sells for $20 each. The
variable cost to make each flash drive is $13. During April, 700 drives were sold.
Fixed costs for April were $2 per unit for a total of $1,400 for the month. How
much is the monthly break-even level of sales in dollars for Kaplan?
a. $200
b. $4,000
c. $14,000
d. $8,400

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25- Vintage Wines has fixed costs of $15,000 per year. Its warehouse sells wine
with variable costs of 80% of its unit selling price. How much in sales does Vintage
need to break even per year?
a. $12,000
b. $3,000
c. $18,750
d. $75,000
26- At the break-even point of 2,000 units, variable costs are $55,000, and fixed
costs are$32,000. How much is the selling price per unit?
a. $43.50
b. $11.50
c. $16.00
d. $27.50
27- Which one of the following is not an assumption of CVP analysis?
a. All units produced are sold.
b. All costs are variable costs.
c. Sales remain constant.
d. The behavior of costs and revenues are linear within the relevant range.
28- CVP analysis does not consider
a. level of activity.
b. fixed cost per unit.
c. variable cost per unit.
d. sales mix.
29- Contribution margin
a. is always the same as the gross profit margin.
b. excludes variable selling costs from its calculation.
c. is calculated by subtracting total manufacturing costs per unit from sales revenue
per unit.
d. equals sales revenue minus variable costs.
30- Which of the following is not an underlying assumption of CVP analysis?
a. Changes in activity are the only factors that affect costs.
b. Cost classifications are reasonably accurate.
c. Beginning inventory is larger than ending inventory.
d. Sales mix is constant.

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 Solutions

Item Ans Item Ans Item Ans Item An Ite An

s m s

1 T 7 T 13 B 19 A 25 D

2 T 8 T 14 C 20 A 26 A

3 F 9 D 15 C 21 D 27 B

4 F 10 D 16 C 22 D 28 B

5 F 11 C 17 C 23 B 29 D

6 F 12 C 18 A 24 B 30 C

key solution

16- Profit= (selling price- variables expenses) × Quantity - Fixed cost

= (16 – 9 ) * 180000 – 750000 = 420000

𝐶𝑀
17- CM ratio = = 40%= cm\ 200000 = CM= 80000
𝑆𝑎𝑙𝑒𝑠

break even Contribution margin = Fixed cost = 80000

Profit = CM ratio × Sales − Fixed expenses
100000 = 40% * Sales – 800000
Sales = 4500000

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18- CM ratio = 1 − Variable expense ratio

= CM ratio= 60%

At break even Contribution margin = Fixed cost = 150000

CM ratio = CM/Sales = 60%= 150000/Sales
Sales= 250000

𝐶𝑀 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
19- CM ratio = = 4/10 = 40%.
𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

Change in profit = CM ratio × Change in sales

= 40% * 40000 = 16000

20- Profit = CM ratio × Sales − Fixed expenses

30000 = 40% * Sales – 120000
Sales = 375000

Units sold = 375000/20 = 18750

21- CM ratio = CM/ sales

= 300000/1000000= 30%

22- CM ratio = CM/ sales

CM = 400000 – 250000 = 150000

= 150000/400000 = 37.5%