CHAPTER 18

COST-VOLUME-PROFIT

CHAPTER LEARNING OBJECTIVES

1. Explain variable, fixed, and mixed costs and the relevant range. Variable costs are costs that vary in total directly and proportionately with changes in the activity index. Fixed costs are costs that remain the same in total regardless of changes in the activity index.

The relevant range is the range of activity in which a company expects to operate during a year. It is important in CVP analysis because the behavior of costs is assumed to be linear throughout the relevant range.

Mixed costs change in total but not proportionately with changes in the activity level. For purposes of CVP analysis, mixed costs must be classified into their fixed and variable components.

2. Apply the high-low method to determine the components of mixed costs. Determine the variable costs per unit by dividing the change in total costs at the highest and lowest levels of activity by the difference in activity at those levels. Then, determine fixed costs by subtracting total variable costs from the amount of total costs at either the highest or lowest level of activity.

3. Prepare a CVP income statement to determine contribution margin. The five components of CVP analysis are (1) volume or level of activity, (2) unit selling prices, (3) variable costs per unit, (4) total fixed costs, and (5) sales mix. Contribution margin is the amount of revenue remaining after deducting variable costs. It is identified in a CVP income statement, which classifies costs as variable or fixed. It can be expressed as a total amount, as a per unit amount, or as a ratio.

4. Compute the break-even point using three approaches. The break-even point can be (a) computed from a mathematical equation, (b) computed by using a contribution margin technique, and (c) derived from a CVP graph.

5. Determine the sales required to earn target net income and determine margin of safety. The general equation for required sales is: Sales - Variable costs - Fixed costs = Target net income. Two other equations are (1) Sales in units = (Fixed costs + Target net income) ÷ Unit contribution margin, and (2) Sales in dollars = (Fixed costs + Target net income) ÷ Contribution margin ratio.

Margin of safety is the difference between actual or expected sales and sales at the break-even point. The equations for margin of safety are (1) Actual (expected) sales – Break-even sales = Margin of safety in dollars, and (2) Margin of safety in dollars ÷ Actual (expected) sales = Margin of safety ratio.

TRUE-FALSE STATEMENTS

1. An activity index identifies the activity that has a causal relationship with a particular cost.

2. Unit variable cost remains constant at various levels of activity.

3. Fixed costs remain constant in total and on a per unit basis at various levels of activity.

4. If the volume of activity increases, all costs will increase.

5. If the activity index decreases, total variable costs will decrease proportionately.

6. Changes in the level of activity will cause unit variable costs and unit fixed costs to change in opposite directions.

7. In CVP analysis, both variable and fixed costs are assumed to have a linear relationship within the relevant range of activity.

8. The relevant range of activity is the activity level where the firm will earn a net income.

9. Total costs do not change within the relevant range of activity.

10. The high-low method is used to classify mixed costs into variable and fixed components.

11. A mixed cost has both selling and administrative cost components.

12. The fixed cost component of a mixed cost is the cost of having a service available.

13. For planning purposes, mixed costs are generally grouped with fixed costs.

14. The difference between the costs at the high and low levels of activity represents the fixed cost component of a mixed cost.

15. When applying the high-low method, the unit variable cost of a mixed cost is calculated before the fixed cost component.

16. One assumption of CVP analysis is that all costs can be classified as either variable or fixed.

17. In CVP analysis, the term “cost” includes manufacturing costs as well as selling and administrative expenses.

18. The contribution margin is the amount of revenue remaining after deducting cost of goods sold.

19. The unit contribution margin is the amount that each unit sold contributes to the recovery of fixed costs and profit.

20. The contribution margin ratio is calculated by multiplying the unit contribution margin by the unit selling price.

21. Both variable and fixed costs are included in calculating the contribution margin.

22. A CVP income statement reports the contribution margin instead of gross profit.

23. Break-even point in sales dollars is the point at which total sales revenue equals total variable costs.

24. Break-even point in sales dollars is the point at which total sales revenue equals total fixed costs.

25. The break-even point in sales dollars is equal to the fixed costs plus net income.

26. If the unit contribution margin is $1 and sales are 10,000 units above the break-even point, then net income will be $10,000.

27. A target net income is calculated by taking actual sales minus the margin of safety.

28. Target net income is the income objective for a company or an individual product line.

29. The margin of safety in dollars is the difference between sales revenue at the break-even point and sales revenue at a determined activity level.

30. The margin of safety in dollars is the difference between the total contribution margin and total fixed costs.

31. The activity level is represented by an activity index such as direct labor hours, units of output, or sales dollars.

32. The trend in most companies is toward more variable costs and fewer fixed costs.

33. For purposes of CVP analysis, mixed costs must be classified into their fixed and variable components.

34. A contribution margin ratio of 40% means that 60 cents of each sales dollar is available to cover fixed costs and to produce a profit.

35. A cost-volume-profit graph shows the amount of net income or loss at each level of sales.

36. If unit variable costs are 70% of the unit selling price, fixed costs are $290,000 and target net income is $70,000, required sales are $1,200,000.

37. The margin of safety ratio is equal to the margin of safety in dollars divided by the actual or expected sales.

MULTIPLE CHOICE QUESTIONS

38. For an activity base to be useful in cost behavior analysis,

a. the activity should always be stated in dollars.

b. there should be a correlation between changes in the level of activity and changes in costs.

c. the activity should always be stated in terms of units.

d. the activity level should be constant over a period of time.

39. A variable cost is a cost that

a. varies per unit at every level of activity.

b. occurs at various times during the year.

c. varies in total in proportion to changes in the level of activity.

d. may or may not be incurred, depending on management's discretion.

40. A cost that remains constant per unit at various levels of activity is a

a. variable cost.

b. fixed cost.

c. mixed cost.

d. manufacturing cost.

41. Two costs at Bradshaw Company appear below for specific months of operation.

Month Amount Units Produced

Delivery costs September $40,000 40,000

October 55,000 60,000

Utilities September $84,000 40,000

October 126,000 60,000

Which type of costs are these?

a. Delivery costs and utilities are both variable costs.

b. Delivery costs and utilities are both mixed costs.

c. Utilities are a mixed cost and delivery costs are a variable cost.

d. Delivery costs are a mixed cost and utilities are a variable cost.

42. An increase in the level of activity will have the following effects on unit costs for variable and fixed costs:

Unit Variable Cost Unit Fixed Cost

a. Increases Decreases

b. Remains constant Remains constant

c. Decreases Remains constant

d. Remains constant Decreases

43. A fixed cost is a cost which

a. varies in total with changes in the level of activity.

b. remains constant per unit with changes in the level of activity.

c. varies inversely in total with changes in the level of activity.

d. remains constant in total with changes in the level of activity.

44. Fixed costs generally do not include

a. property taxes.

b. direct labor.

c. supervisory salaries.

d. depreciation on buildings and equipment.

45. The increased use of automation and decreased use of labor in companies has caused a trend towards an increase in

a. both variable and fixed costs.

b. fixed costs and a decrease in variable costs.

c. variable costs and a decrease in fixed costs.

d. variable costs and no change in fixed costs.

46. Cost behavior analysis is the determination of how a firm's costs

a. relate to competitors' costs.

b. relate to general price level changes.

c. respond to changes in the level of business activity.

d. respond to changes in the gross national product.

47. Cost behavior analysis applies to

a. retailers.

b. wholesalers.

c. manufacturers.

d. all entities.

48. If a firm increases its activity level,

a. costs should remain the same.

b. most costs will rise.

c. no costs will remain the same.

d. some costs will change while others will remain constant.

49. The activity that causes changes in the behavior of costs is referred to as the activity

a. index.

b. multiplier.

c. component.

d. correlation.

50. Cost activity indexes can help classify costs as

a. temporary.

b. permanent.

c. variable.

d. transient.

51. Which of the following is not a cost classification?

a. Mixed

b. Multiple

c. Variable

d. Fixed

52. If the activity level increases by 10%, total variable costs will

a. remain the same.

b. increase by more than 10%.

c. decrease by less than 10%.

d. increase by 10%.

53. Which of the following costs are variable?

Cost 10,000 Units 30,000 Units

1. $100,000 $300,000

2. 40,000 240,000

3. 90,000 90,000

4. 50,000 150,000

a. 1 and 2

b. 1 and 4

c. only 1

d. only 2

54. Changes in activity levels have a(n) _________ effect on fixed costs per unit.

a. positive

b. offsetting

c. inverse

d. neutral

55. Which of the following is not a fixed cost?

a. Direct materials

b. Depreciation

c. Lease charge

d. Property taxes

56. Why is identification of the relevant range important?

a. Identification of the relevant range is required under GAAP.

b. Cost behavior outside of the relevant range is not linear, which distorts CVP analysis.

c. The relevant range directly impacts the quantity of units of product a customer buys.

d. The relevant range is a cost that is incurred by a company that must be accounted for.

57. The relevant range of activity refers to the

a. geographical areas where the company plans to operate.

b. activity level where all costs are curvilinear.

c. levels of activity over which the company expects to operate.

d. level of activity where all costs are constant.

58. Which of the following is not a plausible explanation of why variable costs often behave in a curvilinear fashion?

a. Labor specialization

b. Overtime wages

c. Total variable costs are constant within the relevant range

d. Availability of quantity discounts

59. Firms operating at 100% capacity

a. are common.

b. are the exception rather than the rule.

c. have no fixed costs.

d. have no variable costs.

60. The relevant range is also known as the

a. practical range.

b. activity range.

c. activity index,

d. production index.

61. The range over which a company expects to operate is known as the

a. mixed range.

b. fixed range.

c. variable range.

d. relevant range.

62. When graphed, fixed costs that behave in a curvilinear fashion resemble a(n)

a. S-curve.

b. inverted S-curve.

c. straight line.

d. stair-step pattern.

63. A graph of variable costs that behave in a curvilinear fashion will

a. approximate a straight line within the relevant range.

b. be sharply kinked on both sides of the relevant range.

c. be downward sloping.

d. be a stair-step pattern.

64. Sunset & Vine Wine Bar, a seasonal business, collected the following information for specific months of operation.

Month Amount Hours Open

Server labor costs September $5,600 280

February 2,400 120

Cleaning costs September $2,640 280

February 1,360 120

Which type of cost behavior do the server labor and cleaning costs exhibit?

a. Server labor costs and cleaning costs are both variable costs.

b. Server labor costs and cleaning are both mixed costs.

c. Cleaning costs are a mixed cost and server labor costs are a variable cost.

d. Server labor costs are a mixed cost and cleaning costs are a variable cost.

65. Wimer’s Wine Bar is a popular happy hour spot. The business typically employs three or four servers per shift. Megan Wimer is considering purchasing automated wine dispensers that will dispense 1.5-ounce, 3-ounce, and 5-ounce pours of a variety of wines. Each dispenser can pour four types of wine. This move toward greater automation will likely

a. increase both variable and fixed costs.

b. increase fixed costs and decrease variable costs.

c. increase variable costs and decrease fixed costs.

d. increase variable costs with no change in fixed costs.

66. Because of a lack of global competition, Halyard Health is currently operating at 100% capacity. This suggests that

a. the company will likely not make a profit.

b. the company is operating outside of its relevant range.

c. the company’s total fixed costs will decline.

d. the company’s total variable costs will decline.

67. Abita Juice Company collected the following production data for the past quarter:

Month Units Produced Total Cost

March 4,800 $198,000

April 3,900 171,000

May 3,300 148,500

If Abita uses the high-low method to project costs for the next quarter, what total cost equation will the company use?

1. Total cost = $49,500 + ($30/unit x Quantity)
2. Total cost = $39,600 + ($33/unit x Quantity)

c. Total cost = $0 + ($135/unit x Quantity)

d. Total cost = $29,700 + ($36/unit x Quantity)

68. Abita Juice Company collected the following production data for the past quarter:

Month Bottles Produced Total Cost

March 4,800 $198,000

April 3,900 171,000

May 3,300 148,500

If Abita uses the high-low method to project costs for the next quarter, what will total costs be if planned production is 13,200 bottles?

1. $425,700
2. $475,200
3. $569,250
4. $594,000

69. Valle Crucis Cabins has 7 units for rent. In July, all units were rented for all 31 days of the month. The July utility bill was $2,340. In February, 5 cabins were rented for 10 days each. The February utility bill was $670. In April, 6 cabins were rented for 14 days each and the monthly utility bill was $980. Use the high-low method to determine the estimated fixed cost component of the company’s utility bill.

a. $0

b. $134

c. $170

d. $670

70. Frazier Manufacturing Company collected the following production data for the past month:

Units Produced Total Cost

1,600 $66,000

1,300 57,000

1,500 67,500

1,100 49,500

If the high-low method is used, what is the monthly total cost equation?

a. Total cost = $13,200 + ($33/unit x Quantity)

b. Total cost = $16,500 + ($30/unit x Quantity)

c. Total cost = $0 + ($45/unit x Quantity)

d. Total cost = $9,900 + ($36/unit x Quantity)

71. A mixed cost contains

a. a variable component and a fixed component.

b. both selling and administrative costs.

c. both retailing and manufacturing costs.

d. both operating and nonoperating costs.

72. At the high level of activity in November, 7,000 machine hours were used and power costs were $18,000. In April, a month of low activity, 2,000 machine hours were used and power costs were $9,000. Using the high-low method, the estimated fixed cost component of power costs is

a. $18,000.

b. $9,000.

c. $5,400.

d. $12,600.

73. Gibble Company’s high and low levels of activity last year was 60,000 units of product produced in May and 20,000 units produced in November. Machine maintenance costs were $156,000 in May and $60,000 in November. Using the high-low method, determine an estimate of total maintenance cost for a month in which production is expected to be 45,000 units.

a. $135,000

b. $144,000

c. $117,000

d. $120,000

74. Which of the following is not true about a mixed cost?

a. It consists of both fixed and variable cost components.

b. It increases in proportion to increases in the level of activity.

c. A company will still incur some costs if the level of activity is zero.

d. A company will incur no costs if the level of activity is zero.

75. Which of the following is least likely to be a mixed cost?

a. Car rental fee

b. Electricity

c. Depreciation

d. Telephone expense

76. In using the high-low method, the fixed cost

a. is determined by subtracting the total cost at the high level of activity from the total cost at the low activity level.

b. is determined by adding the total variable cost to the total cost at the low activity level.

c. is determined before the unit variable cost.

d. may be determined by subtracting the total variable cost from the total cost at either the low or high activity level.

77. If Quality Airline cuts its domestic fares by 20%,

a. fixed costs will decrease.

b. profit will increase by 20%.

c. a profit can only be earned by decreasing the quantity of flights.

d. profits can be maintained either by increasing the quantity of passengers or by decreasing the unit variable costs.

78. In applying the high-low method to the following data set, which two months should be used in the calculation?

Month Miles Total Cost

January 80,000 $192,000

February 50,000 160,000

March 70,000 188,000

April 90,000 260,000

a. January and February

b. January and April

c. February and April

d. February and March

79. In applying the high-low method to the following data set, what is the unit variable cost?

Month Miles Total Cost

January 80,000 $192,000

February 50,000 160,000

March 70,000 188,000

April 90,000 260,000

a. $2.88

b. $2.50

c. $3.20

d. Cannot be determined from the information given.

80. In applying the high-low method to the following data set, what is the fixed cost component?

Month Miles Total Cost

January 80,000 $192,000

February 50,000 160,000

March 70,000 188,000

April 90,000 260,000

a. $35,000

b. $72,000

c. $28,000

d. $100,000

81. For analysis purposes, the high-low method of determining the fixed and variable components of a mixed cost usually produces a(n)

a. reasonable estimate.

b. precise estimate.

c. overstated estimate.

d. understated estimate.

82. The high-low method of determining the fixed and variable components of a mixed cost is criticized because it

a. is not a graphical method.

b. is a mathematical method.

c. ignores much of the available data by concentrating on only the most extreme points.

d. doesn't provide reasonable estimates.

83. The high-low method can be used to analyze

a. fixed costs.

b. mixed costs.

c. variable costs.

d. conversion costs.

84. Portman Company's activity for the first three months of 2022 are as follows:

Machine Hours Electrical Cost

January 2,100 $4,800

February 2,600 $5,800

March 2,900 $6,400

Using the high-low method, what is the variable cost per machine hour?

a. $2.00

b. $3.00

c. $2.26

d. $1.78

85. Ponszko Nursery used high and low data from June and July to determine its variable cost of $12 per unit. Additional information follows:

Month Units produced Total costs

June 2,000 $32,000

July 1,000 20,000

If the company produces 2,300 units in August, what is its expected total cost?

a. $8,000

b. $39,600

c. $27,600

d. $35,600

86. In CVP analysis, the term "cost"

a. includes only manufacturing costs.

b. refers to cost of goods sold.

c. includes manufacturing costs as well as selling and administrative expenses.

d. excludes all fixed manufacturing costs.

87. 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. The sales mix remains constant.

d. The behavior of costs and revenues is linear within the relevant range.

88. CVP analysis does not consider the

a. level of activity.

b. fixed cost per unit.

c. unit variable cost.

d. sales mix.

89. 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. The beginning inventory is larger than the ending inventory.

d. The sales mix is constant.

90. CVP analysis is not important in

a. calculating depreciation expense.

b. setting unit selling prices.

c. determining the product mix.

d. utilizing production facilities efficiently to maximize profitability.

91. To which management function is CVP analysis most applicable?

a. Planning

b. Motivating

c. Directing

d. Controlling

92. Hollis Industries produces flash drives for computers, which it sells for $20 each. Each flash drive costs $13 of variable costs to make. During April, 1,000 drives were sold. Fixed costs for March were $2 per unit for a total of $1,000 for the month. What is the contribution margin ratio?

a. 25%

b. 35%

c. 65%

d. 75%

93. Contribution margin

a. is always the same as 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.

94. If a company had a contribution margin of $1,000,000 and a contribution margin ratio of 40%, total variable costs must have been

a. $1,500,000.

b. $600,000.

c. $2,500,000.

d. $400,000.

95. Which of the following would not be an acceptable way to express the concept of contribution margin?

a. Sales minus variable costs

b. Sales minus unit costs

c. Unit selling price minus unit variable costs

d. Unit contribution margin divided by unit selling price

96. A company has a unit contribution margin of $120 and a contribution margin ratio of 40%. What is the unit selling price?

a. $200

b. $300

c. $48

d. Cannot be determined from the information provided.

97. Sales are $500,000 and variable costs are $330,000. What is the contribution margin ratio?

a. 52%

b. 34%

c. 66%

d. Cannot be determined because amounts are not expressed per unit.

98. Dunbar Manufacturing’s variable costs are 30% of sales revenue. The company is contemplating an advertising campaign that will cost $55,000. If sales are expected to increase $100,000, by how much will the company's net income increase?

a. $45,000

b. $70,000

c. $30,000

d. $15,000

99. Weatherspoon Company has a product with a unit selling price of $200, the unit variable cost is $110, and the total monthly fixed costs are $300,000. What is Coastal Carolina’s contribution margin ratio?

a. 45%

b. 55%

c. 150%

d. 182%

100. Armstrong Industries has a contribution margin of $240,000 and a contribution margin ratio of 30%. What are the company’s total variable costs?

a. $72,000

b. $560,000

c. $168,000

d. $800,000

101. If Zehms, Inc. has a unit contribution margin of $30 and a contribution margin ratio of 60%, what is the unit selling price?

a. $50

b. $75

c. $18

d. $48

102. A division of Borderland Enterprises sold 200,000 financial calculators during August, 2022. The division compiled the following information:

Sales $2,000,000

Variable costs:

Materials $380,000

Order processing 150,000

Billing labor 110,000

Selling expenses 60,000

Total variable costs 700,000

Fixed costs 1,000,000

What is the unit contribution margin?

a. $1.00

b. $3.50

c. $8.50

d. $6.50

103. At the break-even point of 2,000 units, variable costs are $165,000, and fixed costs are $96,000. What is the unit selling price?

a. $130.50

b. $82.50

c. $48.00

d. Not enough information

104. The following information is available for Wade Corp.:

Sales $580,000 Total fixed expenses $150,000

Cost of goods sold 390,000 Total variable expenses 360,000

A CVP income statement would report

a. gross profit of $190,000.

b. contribution margin of $430,000.

c. gross profit of $220,000.

d. contribution margin of $220,000.

105. Which of the following is the true statement?

a. In a CVP income statement, costs and expenses are classified only by function.

b. The CVP income statement is prepared for both internal and external use.

c. The CVP income statement reports the contribution margin instead of gross profit.

d. In a traditional income statement, costs and expenses are classified as either variable or fixed.

106. The equation which reflects the format of a CVP income statement is

a. Sales = Cost of goods sold + Operating expenses + Net income.

b. Sales + Fixed costs = Variable costs + Net income.

c. Sales – Variable costs + Fixed costs = Net income.

d. Sales – Variable costs – Fixed costs = Net income.

107. The CVP income statement

a. is distributed internally and externally.

b. classifies costs by functions.

c. discloses contribution margin in the body of the statement.

d. will reflect a different net income than the traditional income statement.

108. During March, O’Malley Company sold 100,000 units for $13 per unit. Fixed costs were $350,000 and net income was $250,000. What would be reported as variable expenses in the company’s CVP income statement for March?

a. $600,000.

b. $700,000.

c. $950,000.

d. $1,050,000.

109. Hope Cosmetics Company produces tinted SPF 100 moisturizer that it sells for $120 each. Each bottle costs $12 of variable costs to make. During the most recent quarter, 1,200 bottles of moisturizer were manufactured and sold. Fixed costs for the quarter were $21 per unit for a total of $25,200. What is the company’s contribution margin ratio?

a. 10%

b. 12%

c. 21%

d. 90%

110. Better Drinks Company sells insulated plastic tumblers with a unit contribution margin of $12 and a contribution margin ratio of 60%. During the past month, the company sold 4,500 units and total fixed costs were $27,500. What is the unit selling price?

a. $20.00

b. $19.20

c. $27.50

d. $30.00

111. Better Drinks Company sells insulated plastic tumblers with a unit contribution margin of $12 and a contribution margin ratio of 60%. During the past month, the company sold 4,500 units and total fixed costs were $27,500. How much sales revenue did the company generate during the month?

a. $60,000

b. $86,400

c. $90,000

d. $135,000

112. During the past year, Helios Lighting had a total contribution margin of $10,000,000. If the company’s contribution margin ratio was 32%, total variable costs for the period were

a. $10,000,000.

b. $21,250,000

c. $22,000,000.

d. $32,000,000.

113. Reveal Technologies sells indoor high-resolution security cameras with a unit selling price of $90, a unit contribution margin of $54, and a contribution margin ratio of 60%. The company projects total fixed costs for the next year to be $3,348,000. How many units must the company sell to break even?

a. 5,580

b. 54,000

c. 62,000

d. 37,200

114. Off-Road RK Ramblers Inc. produces small lightweight camping trailers with rear kitchen facilities. The company’s fixed costs are $900,000 per year and its variable costs are 55% of the unit selling price of $16,000.What is the company’s break-even point in sales dollars?

a. $900,000

b. $1,636,363

c. $2,000,000

d. $2,900,000

115. Off-Road RK Ramblers, Inc., produces small lightweight camping trailers with rear kitchen facilities. The company’s fixed costs are $900,000 per year and its variable costs are 55% of the unit selling price of $16,000.How many campers must the company sell to earn a net income of $180,000?

a. 123

b. 150

c. 164

d. 2,000

116. A company has total fixed costs of $240,000 and a contribution margin ratio of 20%. The total sales dollars necessary to break even are

a. $960,000.

b. $1,200,000.

c. $300,000.

d. $288,000.

117. A company sells a product that has a unit selling price of $5, unit variable cost of $3, and total fixed costs of $240,000. The quantity of units the company must sell to break even is

a. 120,000 units.

b. 48,000 units.

c. 480,000 units.

d. 80,000 units.

118. The break-even point in sales dollars is where

a. total sales equal total variable costs.

b. total contribution margin equals total fixed costs.

c. total variable costs equal total fixed costs.

d. total sales equal total fixed costs.

119. The break-even point in sales units cannot be determined by

a. computing it from a mathematical equation.

b. computing it using the contribution margin.

c. reading the prior year's financial statements.

d. deriving it from a CVP graph.

120. Select the correct statement concerning the cost-volume-profit graph at the right:

a. The point identified by "B" is the break-even point in sales dollars

b. Line F is the variable cost line.

c. At point B, profits equal total costs.

d. Line E is the total cost line.

121. Fixed costs are $900,000 and the unit variable costs are 75% of the unit selling price. What is the break-even point in sales dollars?

a. $2,100,000

b. $2,700,000

c. $3,600,000

d. $1,200,000

122. Fixed costs are $3,000,000 and the unit contribution margin is $150. What is the break-even point?

a. $7,500,000

b. $20,000,000

c. 7,500 units

d. 20,000 units

123. Nelson’s Manufacturing has the following data:

Unit variable costs are 60% of the unit selling price.

The contribution margin ratio is 40%.

The unit contribution margin is $500.

Total fixed costs are $500,000.

Which of the following does not express the break-even point in sales dollars?

a. $500,000 + .60X = X

b. $500,000 + .40X = X

c. $500,000 ÷ $500 = X

d. $500,000 ÷ .40 = X

124. A CVP graph does not include a

a. variable cost line.

b. fixed cost line.

c. sales line.

d. total cost line.

125. Boswell Company reported the following information for the current year: Sales (50,000 units) $1,000,000, direct materials and direct labor $500,000, other variable costs $50,000, and fixed costs $360,000. What is Boswell’s contribution margin ratio?

a. 68%

b. 45%

c. 32%

d. 55%

126. Boswell Company reported the following information for the current year: Sales (50,000 units) $1,000,000, direct materials and direct labor $500,000, other variable costs $50,000, and fixed costs $360,000. What is Boswell’s break-even point in units?

a. 32,728

b. 36,000

c. 51,112

d. 56,250

127. Watauga River Corporation manufactures entry-level fly rods for $50 per unit. The fixed costs are $525,000 and the unit variable costs are 60% of the unit selling price. As a result of new automated equipment, it is anticipated that fixed costs will increase by $125,000 and unit variable costs will be 50% of the unit selling price. The new break-even point in sales units is:

a. 26,250

b. 26,000

c. 25,750

d. 21,000

128. Sol, Inc. manufactures and sells solar chargers for $60 each. Variable costs are $40 per unit, and fixed costs total $120,000. What amount of sales revenue is needed by Sol to break even?

a. $160,000.

b. $300,000.

c. $360,000.

d. $480,000.

129. Sol, Inc. manufactures and sells solar chargers for $60 each. Variable costs are $40 per unit, and fixed costs total $120,000. How many solar chargers must Sol sell to earn a net income of $280,000?

a. 20,000

b. 7,000

c. 15,000

d. 26,000

130. Gal Manufacturing sells a product for $50 per unit. The fixed costs are $840,000 and the unit variable costs are 60% of the unit selling price. As a result of new automated equipment, it is anticipated that fixed costs will increase by $200,000 and unit variable costs will be 50% of the unit selling price. The new break-even point in sales units is

a. 42,000.

b. 41,600.

c. 41,200.

d. 33,600.

131. Pasca, Inc. is planning to sell 900,000 units for $1.50 per unit. The contribution margin ratio is 20%. If Pasca will break even at this sales volume, what are the company’s fixed costs?

a. $270,000.

b. $630,000.

c. $900,000.

d. $1,020,000.

132. April Industries sells a product with a unit contribution margin of $12, fixed costs of $223,200, and sales for the current year of $300,000. What is April’s break-even point?

a. 13,800 units

b. $76,800

c. 18,600 units

d. 6,400 units

133. Kaplan, Inc. produces flash drives for computers, which it sells for $27 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. What is the company’s monthly break-even point in sales dollars?

a. $1,908

b. $2,700

c. $14,000

d. $8,400

134. Vintage Wines has fixed costs of $20,000 per year. Its warehouse sells wine with unit variable costs of 80% of its unit selling price. How much in sales does Vintage need to break even per year?

a. $36,000

b. $24,000

c. $25,000

d. $100,000

135. Bruno & Court is a nonprofit organization that captures stray deer bewildered within residential communities. Fixed costs are $20,000. The variable cost of capturing each deer is $10. Bruno & Court is funded by a local philanthropic organization in the amount of $64,000 for 2022. How many deer can Bruno & Court capture during 2022?

a. 4,400

b. 6,400

c. 8,400

d. 4,000

136. At the break-even point of 2,000 unit sales, variable costs are $55,000, and fixed costs are $35,000. What is the unit selling price?

a. $45.00

b. $55.00

c. $17.50

d. $27.50

137. Variable costs for Abbey, Inc. are 25% of sales. Its unit selling price is $100. If Abbey sells one unit more than its break-even point, how much will profit increase?

a. $75

b. $25

c. $50

d. $400

138. A company requires $1,700,000 in sales to meet its net income target. Its contribution margin is 30% and fixed costs are $300,000. What is the company’s target net income?

a. $510,000

b. $390,000

c. $700,000

d. $210,000

139. Montoya Manufacturing has fixed costs of $3,000,000 and variable costs are 40% of sales. What are the required sales if Montoya desires net income of $300,000?

a. $5,500,000

b. $5,000,000

c. $8,250,000

d. $7,500,000

140. Aero, Inc. requires sales of $2,000,000 to cover its fixed costs of $600,000 and to earn net income of $500,000. What percentage is its variable costs of sales?

a. 25%

b. 45%

c. 30%

d. 55%

141. Julie Moon Manufacturing produces eco-friendly wooden hairbrushes. The unit selling price is $20 and the unit variable costs are $8 per brush. Fixed costs per month are $4,800. If Julie Moon sells 30 more units beyond its break-even point in July, how much does profit increase as a result?

a. $360

b. $600

c. $240

d. $1,200

142. Hayduke Corporation reported the following results from the sale of 5,000 units in May: sales $300,000, variable costs $180,000, fixed costs $90,000, and net income $30,000. Assume that Hayduke increases its unit selling price by 5% on June 1. How many units will have to be sold in June to maintain the same level of net income?

a. 4,444

b. 4,600

c. 4,750

d. 5,000

143. Kane, Inc. produces flash drives for computers, which it sells for $20 each. Each flash drive costs $6 of variable costs to make. During March, 1,000 drives were sold. Fixed costs for March were $5.60 per unit for a total of $5,600 for the month. If unit variable costs decrease by 10%, what will happen to the break-even point in units per month for Kane?

a. It is 10% higher than the original break-even point in sales units.

b. It decreases about 16 units.

c. It decreases about 40 units.

d. It depends on the quantity of units the company expects to produce and sell.

144. Reliable Manufacturing wants to sell a sufficient quantity of products to earn a profit of $100,000. If the unit selling price is $10, unit variable cost is $8, and total fixed costs are $200,000, how many units must be sold to earn income of $100,000?

a. 150,000 units

b. 100,000 units

c. 37,500 units

d. 1,500,000 units

145. What volume of sales dollars is required to earn a target income of $240,000 if total fixed costs are $300,000 and the contribution margin ratio is 40%?

a. $900,000

b. $600,000

c. $1,350,000

d. $990,000

146. Boyer Industries has fixed costs of $600,000 and variable costs are 60% of sales. How much sales revenue will Boyer report when its net income equals $60,000?

a. $1,650,000

b. $1,100,000

c. $1,560,000

d. $996,000

147. Murphy Cord Company produces replacement adapter power charger cords that it sells for $20 each. Each power charger cord costs $6 of variable costs to make. During April, 700 power charger cords were sold. Fixed costs for April were $4 per unit for a total of $2,800 for the month. How much will Murphy’s operating income increase for each $1,000 increase in monthly revenue?

a. $700

b. $500

c. $600

Ex. 182

Sandburg Manufacturing manufactures a single product. Annual production costs incurred in the manufacturing process are shown below for the production of 2,000 units. The company’s Utilities and Maintenance costs are mixed costs. The fixed portions of these costs are $300 and $200, respectively.

Costs Incurred

Production in Units 2,000 4,000

Production Costs

a. Direct Materials $6,000 ?

b. Direct Labor 16,000 ?

c. Utilities 1,000 ?

d. Rent 3,000 ?

e. Indirect Labor 4,200 ?

f. Supervisory Salaries 1,500 ?

g. Maintenance 1,000 ?

h. Depreciation 2,500 ?

Instructions

Calculate the expected costs to be incurred when production is 4,000 units. Use your knowledge of cost behavior to determine which of the other costs are fixed or variable.

Ex. 183

Bill Braddock is considering opening a Fast ‘n Clean Car Service Center. He estimates that the following costs will be incurred during his first year of operations: Rent $9,200, Depreciation on equipment $7,000, Salaries $16,400, Motor oil $2.00 per quart. He estimates that each oil change will require 5 quarts of oil. Oil filters will cost $3.00 each. He must also pay The Fast ‘n Clean Corporation a franchise fee of $1.10 per oil change since he will operate the business as a franchise. In addition, utility costs are expected to vary with the quantity of oil changes as follows:

Quantity of Oil Changes Utility Costs

4,000 $6,000

6,000 7,300

9,000 9,600

12,000 12,600

14,000 15,000

Bill Braddock anticipates that he can provide the oil change service with a filter at $25 each.

Instructions

(a) Using the high-low method, determine the unit variable costs and total fixed costs.

(b) Determine the break-even point in quantity of oil changes and sales dollars.

(c) Without regard to your answers in parts (a) and (b), determine the oil changes required to earn a net income of $20,000, assuming fixed costs are $32,000 and the unit contribution margin is $8.

Ex. 184

Jane Botosan operates a bed and breakfast hotel in a resort area near Lake Michigan. Depreciation on the hotel is $60,000 per year. Jane employs a maintenance person at an annual salary of $41,000 and a cleaning person at an annual salary of $24,000. Real estate taxes are $10,000 per year. The rooms rent at an average price of $60 per person per night including breakfast. Other costs are laundry and cleaning service at a cost of $10 per person per night and the cost of food, which is $5 per person per night.

Instructions

(a) Determine the quantity of rentals and the sales revenue Jane needs to break even using the contribution margin technique.

(b) If the current level of rentals is 4,000, by what percentage can rentals decrease before Jane has to worry about having a net loss?

(c) Jane is considering upgrading the breakfast service to attract more business and increase prices. This will cost an additional $3 for food costs per person per night. She feels she can increase the room rate to $68 per person per night. Determine the quantity of rentals and the sales revenue Jane needs to break even if the changes are made.

Ex. 185

Corris Co. accumulates the following data concerning a mixed cost, using miles as the activity level.

Miles Driven Total Cost

January 10,000 $17,000

February 8,000 13,500

March 9,000 14,400

April 7,000 12,500

Instructions

Compute the unit variable costs and fixed costs using the high-low method for this mixed cost.

Ex. 186

Moresan Co. gathered the following information on power costs and factory machine usage for the last six months:

Month Power Cost Factory Machine Hours

January $24,400 13,900

February 30,400 17,600

March 29,000 16,800

April 22,340 13,200

May 19,900 11,600

June 16,900 8,600

Instructions

(a) What is the estimated unit variable costs per factory machine hour?

(b) What is the estimated fixed power cost each month?

(c) If it is estimated that 10,000 factory machine hours will be run in July, what is the expected total power cost for July?

Ex. 187

The Bradshaw Law Office has the following monthly telephone records and costs:

Calls Costs

2,000 $2,400

1,500 2,000

2,200 2,600

2,500 2,800

2,300 2,700

1,700 2,200

Instructions

Identify the unit variable cost and the fixed cost using the high-low method.

Ex. 188

Determine the missing amounts.

Unit Contribution Contribution

Unit Selling Price Unit Variable Costs  Margin  Margin Ratio

1. $300 $210 A B

2. $600 C $210 D

3. E F $360 30%

Ex. 189

Henderson Farms reports the following results for the month of November:

Sales (10,000 units) $600,000

Variable costs 420,000

Contribution margin 180,000

Fixed costs 110,000

Net income $ 70,000

Management is considering the following independent courses of action to increase net income.

1. Increase unit selling price by 5% with no change in total variable costs.

2. Reduce variable costs to 66% of sales.

3. Reduce fixed costs by $10,000.

Instructions

If maximizing net income is the objective, which is the best course of action?

Ex. 190

Marvin Co. had a net loss of $150,000 in 2021 when the unit selling price was $20, the unit variable costs were $15, and the fixed costs were $600,000. Management expects per unit data and total fixed costs to be the same in 2022. Management has set a goal of earning a net income of $75,000 in 2022.

Instructions

(a) Compute the units sold in 2021.

(b) Compute the quantity of units that would have to be sold in 2022 to reach management's desired net income level.

(c) Assume that Marvin sells the same quantity of units in 2022 as it did in 2021. What would the unit selling price have to be in order to reach the target net income? Use the mathematical equation.

Ex. 191

In September, Matlock Industries sold 800 units of product. The average unit selling price was $30. During the month, fixed costs were $6,300 and variable costs were 70% of sales.

Instructions

(a) Determine the contribution margin in dollars, per unit, and as a ratio.

(b) Using the contribution margin technique, compute break-even point in sales dollars and sales units.

Ex. 192

In 2021, Stallman Co. had a break-even point in sales dollars of $800,000 based on a unit selling price of $10 and fixed costs of $200,000. In 2022, the unit selling price and unit variable costs did not change, but the break-even point in sales dollars increased to $840,000.

Instructions

(a) Compute the unit variable cost and the contribution margin ratio for 2021.

(b) Using the contribution margin ratio, compute the increase in fixed costs for 2022.

Ex. 193

The CVP income statement for Bradford Machine Company for 2021 appears below.

BRADFORD MACHINE COMPANY

Income Statement

For the Year Ended December 31, 2021

——————————————————————————————————————————

Sales (40,000 units) $1,000,000

Variable expenses 700,000

Contribution margin 300,000

Fixed expenses 360,000

Net income (loss) $ (60,000)

Instructions

1. What was the company's break-even point in sales dollars in 2021?

2. How many additional units would the company have had to sell in 2022 to earn a net income of $45,000?

3. If the company reduces variable costs by $2.50 per unit in 2022 while other costs and unit revenues remain unchanged, how many units will the company have to sell to earn a net income of $45,000?

Ex. 194

Webber, Inc. developed the following information for its product:

Per Unit

Sales price $90

Variable cost 63

Contribution margin $27

Total fixed costs $1,215,000

Instructions

1. How many units must be sold to break even?

2. What is the total sales that must be generated for the company to earn a profit of $60,000?

3. If the company is presently selling 50,000 units, but plans to spend an additional $108,000 on an advertising program, how many additional units must the company sell to earn the same net income it is now making?

4. Using the original data in the problem, compute the new break-even point in sales units if the unit selling price is increased by 20%, unit variable cost is increased by 10%, and total fixed costs are increased by $236,250.

Ex. 195

Werth & Garza Manufacturing's sales slumped badly in 2022 due to so many people purchasing gifts online. The company's income statement showed the following results from selling 500,000 units of product: net sales $2,125,000; total costs and expenses $2,500,000; and net loss $375,000. Costs and expenses consisted of the following:

Total Variable Fixed

Cost of goods sold $2,000,000 $1,300,000 $700,000

Selling expenses 200,000 50,000 150,000

Administrative expenses 300,000 150,000 150,000

$2,500,000 $1,500,000 $1,000,000

Management is considering modifications to the cost structure for 2023. The plan includes purchasing new automated equipment that will result in the following:

An increase in total fixed costs of $375,000.

A reduction in unit variable costs of $0.75.

Unit selling price would not change from 2022.

Instructions

(a) Compute the break-even point in sales dollars for 2022.

(b) Compute the break-even point in sales dollars under the alternative course of action.

Ex. 196

Henning Co. estimates that variable costs will be 70% of sales and fixed costs will total $2,160,000. The unit selling price of the product is $10, and 750,000 units will be sold.

Instructions

Using the mathematical equation,

(a) Compute the break-even point in units and sales dollars.

(b) Compute the margin of safety in dollars and as a ratio.

(c) Compute net income.

Ex. 197

Newport News Manufacturing, Inc. has the following information available for September 2022.

Unit selling price of navigational equipment $ 400

Unit variable costs $ 280

Total fixed costs $48,000

Units sold 500

Instructions

(a) Prepare a CVP income statement that shows both total and per unit amounts.

(b) Compute Newport News break-even point in units.

Ex. 198

In June, Avante Salon gave 2,500 haircuts, shampoos, and permanents at an average unit selling price of $40. During the month, fixed costs were $20,000 and variable costs were 75% of sales.

Instructions

(a) Determine the contribution margin in dollars, per unit, and as a ratio.

(b) Using the contribution margin technique, compute the break-even point in dollars and units.

(c) Compute the margin of safety in dollars and as a ratio.

Ex. 199

Taveras Industries developed the following information for the product it sells:

Sales price $50 per unit

Variable cost of goods sold $28 per unit

Fixed cost of goods sold $650,000

Variable selling expense 10% of sales price

Variable administrative expense $2.00 per unit

Fixed selling expense $400,000

Fixed administrative expense $300,000

For the year ended December 31, 2022, Taveras produced and sold 100,000 units of product.

Ex. 199 (Cont.)

Instructions

(a) Prepare a CVP income statement using the contribution margin format for Taveras Industries for 2022.

(b) What was the company's break-even point in units in 2022? Use the contribution margin technique.

(c) What was the company's margin of safety in dollars in 2022?

Ex. 200

Gordon Manufacturing earned net income of $100,000 during 2021. The company wants to earn net income of $40,000 more during 2022. The company's fixed costs are expected to be $147,000, and variable costs are expected to be 30% of sales

Instructions

(a) Determine the required sales to meet the target net income during 2022.

Ex. 201

Ferris, Inc. has a unit selling price of $500, unit variable cost of $300, and total fixed costs of $260,000.

Instructions

Compute the break-even point in units and sales dollars.

Ex. 202

Erickson, Inc. makes computer bags that sell for $20 each. For the coming year, management expects fixed costs to be $225,000. Variable costs are $14 per unit.

Instructions

(a) Compute the break-even point in sales dollars using the mathematical equation.

(b) Compute the break-even point in sales dollars using the contribution margin ratio technique.

(c) Compute margin of safety ratio assuming actual sales are $937,500.

(d) Compute the sales required to earn a net income of $150,000, using the mathematical equation.

Ex. 203

Melody Manufacturing produces a computer microphone that is sold for $20 per unit. The contribution margin ratio is 40%. Fixed expenses total $9,200.

Instructions

(a) Compute the unit variable cost.

(b) Compute how many microphones Melody Manufacturing will have to sell to break even.

(c) Compute how many microphones Melody Manufacturing will have to sell to earn a target net income of $16,200.

Ex. 204

Usher, Inc. has prepared the following cost-volume-profit graph:

Ex. 204 (Cont.)

Instructions

For the items listed below, enter to the left of the item, the letter in the graph which best corresponds to the item.

____ 1. Activity base

____ 2. Break-even point

____ 3. Dollars

____ 4. Fixed costs

____ 5. Loss

____ 6. Profit (Net income)

____ 7. Revenues

____ 8. Total costs

____ 9. Variable costs

Ex. 205

Holder Manufacturing had $125,000 of net income in 2021 when the unit selling price was $100, the unit variable costs were $70, and the fixed costs totaled $475,000. Management expects per unit data and total fixed costs to remain the same in 2022. The president of Holder Manufacturing is under pressure from stockholders to increase net income by $60,000 in 2022.

Instructions

(a) Compute the quantity of units sold in 2021.

(b) Compute the quantity of units that would have to be sold in 2022 to reach the stockholders' desired profit level.

(c) Assume that Holder Manufacturing sells the same quantity of units in 2022 as it did in 2021. What would the unit selling price have to be to reach the stockholders' desired profit level?

Ex. 206

Englehart, Inc. reports the following operating results for August: Sales $450,000 (units 5,000); variable costs $280,000; and fixed costs $115,000. Management is considering the following independent courses of action to increase net income.

1. Increase the unit selling price by 10%.

2. Reduce variable costs to 60% of sales.

3. Reduce fixed costs by $15,000.

Instructions

Compute the net income to be earned under each alternative. Which course of action will produce the highest net income?

Ex. 207

Keeter, Inc. earned a net income of $300,000 last year. This year it wants to earn a net income of $450,000. The company's fixed costs are expected to be $300,000, and variable costs are expected to be 70% of sales.

Instructions

(a) Determine the required sales to meet the target net income of $450,000 using the mathematical equation.

Ex. 208

Cunningham Industries reported actual sales of $2,000,000 and fixed costs of $540,000. The contribution margin ratio is 30%.

Instructions

Compute the margin of safety in dollars and the margin of safety ratio.