Fundamentals of Cost-Volume-Profit Analysis Exam Prep Ch.3

Fundamentals of Cost Accounting, 6e (Lanen)

Chapter 3 Fundamentals of Cost-Volume-Profit Analysis

1) Both total revenues (TR) and total costs (TC) are likely to be affected by changes in the output.

2) Cost-volume-profit (CVP) analysis assumes that the production volume equals sales volume so that any changes in unit prices can be ignored.

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).

4) Profit is the unit contribution margin multiplied by the number of units minus the fixed component of the total costs (TC).

5) If the average selling price is $0.60 per unit, the average variable cost is $0.36 per unit, and the total fixed costs are $1,500, then sales of 15,000 units will result in operating profits of $3,600.

6) The average selling price is $0.60 per unit, the average variable cost is $0.36 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.

7) The contribution margin ratio is the contribution margin per unit divided by the selling price per unit.

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.

9) The break-even point in sales dollars is fixed costs divided by the contribution margin ratio.

10) An organization's operating leverage is high when it has a low proportion of variable costs in its total costs.

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.

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.

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.

14) Microsoft Excel® is ideally suited for analyzing alternative CVP scenarios using its "What-If Analysis" function.

15) Microsoft Excel® cannot be used to find break-even points.

16) An increase in an organization's tax rate will cause an increase in its break-even point.

17) Before-tax operating profits are equal to the after-tax operating profits divided by (1 - tax rate). 

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.

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.

20) Cost-volume-profit (CVP) analysis is more complicated for organizations with multiple products because typically each product has a different contribution margin ratio.

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.

22) In multi-product cost-volume-profit (CVP) analysis, the fixed product mix method and the weighted-average contribution margin method yield different break-even points.

23) The more important the decision, the more the manager will want to ensure that the assumptions made for CVP analysis are applicable.

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.

25) The difference between total sales in dollars and total variable costs is called:

A) operating profit.

B) net profit.

C) the gross margin.

D) the contribution margin.

26) The following information pertains to Tiller Co.:

What is Tiller's break-even point in sales dollars? (CPA adapted)

A) $200,000

B) $160,000

C) $50,000

D) $40,000

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?

A) Ability to compute the break-even point.

B) Ability to determine optimal sales volumes.

C) Aids in evaluating tax planning alternatives.

D) Aids in determining optimal pricing policies.

28) Which of the following would not cause the break-even point to change?

A) Sales price increases.

B) Fixed cost decreases.

C) Sales volume decreases.

D) Variable costs per unit increases.

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) 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.

D) Cannot determine with the information given.

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:

A) cost A has remained unchanged.

B) cost B has decreased.

C) cost A has decreased.

D) cost B has remained unchanged.

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.

D) Cannot determine with the information given.

33) A company's break-even point will not be increased by:

A) an increase in total fixed costs.

B) a decrease in the selling price per unit.

C) an increase in the variable cost per unit.

D) an increase in the number of units produced and sold.

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 increases by 10%.

B) Sales price decreases by 5%.

C) Variable costs increase by 10% and fixed costs decrease by 5%.

D) Variable costs decrease by 5% and fixed costs increase by 10%.

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

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.

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.

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.

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.

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 direct materials, 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.

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 sales price of the T-shirts will be $9.

∙ Variable cost to manufacture will increase by one-third.

∙ Fixed costs will increase by 10%.

∙ The income tax rate of 40% will be unchanged.

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.

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)

∙ The sales price of the T-shirts will be $10.

∙ Variable cost to manufacture will increase by one-third.

∙ Fixed costs will increase by 10%.

∙ The income tax rate of 40% will be unchanged.

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.

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) 

∙ The sales price of the T-shirts will be $9.

∙ Variable cost to manufacture will increase by one-third.

∙ Fixed costs will increase by 10%.

∙ The income tax rate of 40% will be unchanged.

Sales for the coming year are expected to exceed last year's by 1,000 units. If this occurs, Dorcan's sales volume in the coming year will be:

A) 22,600 units.

B) 21,960 units.

C) 23,400 units.

D) 21,000 units.

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) 

∙ The sales price of the T-shirts will be $10.

∙ Variable cost to manufacture will increase by one-third.

∙ Fixed costs will increase by 10%.

∙ The income tax rate of 40% will be unchanged.

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.

45) Lamar has the following data:

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.

46) Lamar has the following data:

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.

47) Lamar has the following data:

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.

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.

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.

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.

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.

The break-even point for next year (rounded to the nearest dollar) would be:

A) $729,027.

B) $862,103.

C) $214,018.

D) $474,000.

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.

52) The following costs have been estimated based on sales of 30,000 units:

What selling price (rounded to two decimal places) will yield a contribution margin of 40%?

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) $0.90.

54) At the break-even point, the total contribution margin equals total: (CPA adapted)

A) Variable costs.

B) Sales.

C) Selling and administrative costs.

D) Fixed costs.

55) On January 1, 2020, 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)

A) Option A

B) Option B

C) Option C

D) Option D

56) A company's break-even point will not be changed by:

A) a change in total fixed costs.

B) a change in the number of units produced and sold.

C) a change in the variable cost ratio.

D) a change in the contribution margin ratio.

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.

D) Cannot determine with the information given.

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.

The contribution margin ratio for the current year is:

A) 53.6%.

B) 49.3%.

C) 46.4%.

D) 25%.

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.

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.

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.

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.

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.

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.

The break-even point for next year would be: 

A) $3,022,500.

B) $2,947,500.

C) $2,668,750.

D) $2,168,225.

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.

63) You have been provided with the following information:

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.

64) You have been provided with the following information:

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.

B) The CVP graph assumes that selling prices do not change.

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.

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?

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?

A) (Sales − Fixed costs) ÷ Sales.

B) (Sales − Cost of goods sold) ÷ Sales.

C) (Sales − Variable costs) ÷ Sales.

D) (Sales − Total costs) ÷ Sales.

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?

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)].

70) Which of the following would not cause the break-even point to change?

A) Sales price increases.

B) Sales volume increases.

C) Fixed cost increases.

D) Variable costs per unit decreases.

71) Which of the following would not cause the break-even point to change?

A) Variable costs per unit increases.

B) Fixed costs increases.

C) Product mix shifts towards the more expensive products.

D) Sales volume decreases.

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) Option A

B) Option B

C) Option C

D) Option D

73) A company's break-even point will not be increased by:

A) an increase in the number of units produced and sold.

B) a decrease in the selling price per unit.

C) an increase in the variable cost per unit.

D) an increase in the variable cost ratio.

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.

77) A decrease in the margin of safety would be caused by a(n):

A) increase in the total fixed costs.

B) increase in total revenue (sales).

C) decrease in the break-even point.

D) decrease in the variable cost per unit.

78) Given the following data:

If sales decrease by 500 units, by what percent would fixed costs have to be reduced by to maintain current operating profit?  

A) 50.0%.

B) 33.3%.

C) 25.0%.

D) 16.7%.

79) The following pertains to Upton Co. for the year ending December 31, 2019:

Upton's margin of safety is: (CPA adapted)

A) $300,000.

B) $400,000.

C) $500,000.

D) $800,000.

80) The margin of safety percentage is computed as:

A) Break-even sales ÷ Total sales.

B) Total sales – Break-even sales.

C) (Total sales – Break-even sales) ÷ Break-even sales.

D) (Total sales – Break-even sales) ÷ Total sales.

81) The amount by which a company's sales can decline before losses are incurred is called the:

A) contribution margin ratio.

B) degree of operating leverage.

C) margin of safety.

D) profit loss.

82) The degree of operating leverage can be calculated as:

A) contribution margin divided by sales.

B) gross margin divided by operating profit.

C) operating profit divided by sales.

D) contribution margin divided by operating profit.

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) Option A

B) Option B

C) Option C

D) Option D

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% commission is paid to the salesperson. Luxus, Inc. 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% of the sales made by that salesperson. The amount of total monthly car sales at which Luxus, Inc. would be indifferent as to which plan to select is:

A) $2,250,000.

B) $3,000,000.

C) $1,500,000.

D) $1,250,000.

86) Given the following information:

What would expected operating profit be if the company experienced a 10% increase in fixed costs and a 10% increase in sales volume?

A) $1,750.

B) $1,550.

C) $1,250.

D) $1,375.

87) The Terrence Co. manufactures two products, Baubles and Trinkets. The following are projections for the coming year:

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

88) During 2020, 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 2021 liability insurance increased by $1,200,000 over 2020. Assuming the volume and other costs are unchanged, what should the 2021 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.

89) Honeysuckle Manufacturing has the following data:

What dollar sales volume does Honeysuckle need to break even?

A) $822,222.

B) $833,333.

C) $900,000.

D) $1,233,333.

90) Honeysuckle Manufacturing has the following data:

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.

91) Honeysuckle Manufacturing has the following data:

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.

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.

D) Cannot determine with the information given.

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.

D) Cannot determine with the information given.

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.

D) Cannot determine with the information given.

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.

D) Cannot determine with the information given.

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.

D) Cannot determine with the information given.

99) A company's break-even point will not be changed by:

A) a change in total fixed costs.

B) a change in the selling price per unit.

C) a change in the variable cost per unit.

D) a change in the income tax rate.

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.

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.

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.

D) Cannot determine with the information given.

103) Eastwick produces and sells three products. Last month's results are as follows:

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.

104) Eastwick produces and sells three products. Last month's results are as follows:

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:

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.

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:

Given these data, the contribution margin ratio for the company as a whole would be:

A) 25%.

B) 75%.

C) 33.3%.

D) Cannot determine with the information given.

108) Break-even analysis assumes that:

A) total costs are constant.

B) the average fixed cost per unit is constant.

C) the average variable cost per unit is constant.

D) variable costs are nonlinear.

109) Break-even analysis assumes that over the relevant range: (CPA adapted)

A) Total Fixed Costs are nonlinear.

B) Total Costs are unchanged.

C) Unit Variable Costs are unchanged.

D) Unit Revenues are nonlinear.

110) You have been provided with the following information regarding the Omaha Manufacturing Company:

This information is based on forecasted sales of 30,000 units.

Required:

(a) What is the expected operating profit for the upcoming year?

(b) What is the break-even point in units?

(c) If $180,000 of operating profit is desired, how many units must be sold?

111) Lincoln, Inc. is considering the introduction of a new music player with the following price and cost characteristics:

Projected sales are 7,500 units per year.

Required:

(consider each question independent of each other):

(a) What will the operating profit be?

(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?

112) You have been provided with the following information regarding the Closure Manufacturing Company:

This information is based on forecasted sales of 33,000 units.

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?

113) You have been provided with the following information regarding the Pharma Manufacturing Company:

This information is based on forecasted sales of 25,000 units.

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?

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.

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.

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.

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.

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.

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?

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?

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 2021.

Required:

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

(b) Compute the margin of safety for 2021.

(c) Compute the expected operating profit for 2021.

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:

Renee currently charges $8 per haircut.

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 profit 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.

125) You have been provided with the following information regarding the Fremont Manufacturing Company:

This information is based on forecasted sales of 33,000 units.

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?

126) Xi-Tech, Inc. is considering the introduction of a new music player with the following price and cost characteristics:

Required:

(a) How many units must Xi-Tech sell to break even?

(b) How many units must Xi-Tech sell 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?

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:

John currently charges $8 per haircut.

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 charged in June to earn $2,160 in after-tax operating profits.

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.

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 2021 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 increase during the second quarter, the May financial statements reported that sales were not meeting expectations. For the first five months of 2021, only 350 units had been sold at the established price, with variable costs as planned. It was clear that the 2021 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.

The following mutually exclusive alternatives were presented to the president:

(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 2021. 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 changes can be expected to yield sales of 2,200 for the remainder of 2021.

(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 2021.

Required:

(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.

130) You have been provided with the following information regarding the Ralston Manufacturing Company:

This information is based on forecasted sales of 30,000 units.

Required:

(a) What is the expected operating profit for the upcoming year?

(b) What is the break-even point in units?

(c) If $160,000 of operating profit is desired, how many units must be sold?

131) Nation Inc. sells three products. Last month's results are as follows:

Total fixed costs are $100,000 marketing and $125,000 administrative.

Required:

(a) What was the operating profit last month?

(b) What is Nation's break-even sales volume (at the given mix)?

(c) What is Nation's margin of safety?

132) Carrie sells three products. Last month's results are as follows:

Total fixed costs are $100,000 marketing and $125,000 administrative.

Required:

(a) What was the contribution margin ratio?

(b) What sales volume does Carrie need to achieve a $100,000 monthly profit?

(c) What will profit be if Carrie increases sales by 20%?

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 2021.

Required:

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

(b) Compute the margin of safety in units for 2021.

(c) Compute the expected operating profit for 2021.

134) Bokay Creations has budgeted annual fixed costs of $240,000 and an estimated variable cost ratio of 60%.

Required:

(a) Compute Bokay's break-even point in sales dollars.

(b) Compute Bokay's margin of safety if the company expects to earn revenues of $800,000.

(c) Compute Bokay's expected operating profit at the $800,000 revenue.

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.

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% model #1, and the remainder model #2.

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 estimated costs as follows:

Required:

Determine the break-even point(s).

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:

(a) Determine the break-even point(s).

(b) If Beach Party can sell all it can produce, how many shifts should be operated?

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:

a. Determine the overall break-even point for the company.

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.

140) Fortune Tools produces and sells two products. Data concerning these products for the most recent month appear below:

Fixed costs for the entire company were $17,570.

Required:

a. Determine the overall break-even point for the company.

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.

141) In the most recent month, Faulkner Corporation's total contribution margin was $208,000 and its operating profit $39,400.

Required:

a. Compute the degree of operating leverage to two decimal places.

b. Using the degree of operating leverage, estimate the percentage change in operating profit that should result from a 1% increase in sales.

142) Drum Co. has provided the following data concerning its only product:

Required:

Compute the margin of safety in both dollars and as a percentage of sales.

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:

Determine the dollar sales to attain the company's target profit.

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.

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.

146) Morrel Co. produces and sells a single product. The company's income statement for the most recent month is given below:

There are no beginning or ending inventories.

Required:

a. Compute the company's monthly break-even point in units of product.

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.

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 operating profit of these changes?

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?

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 $500 each. The variable costs for each window were forecasted to be $250 and the annual fixed costs were forecasted to be $130,000. Clifford had targeted a profit of $450,000.

While Clifford's sales usually increase during the second quarter, the May financial statements reported that sales were not meeting expectations. For the first five months of the year, only 400 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, only one of which can be selected.

∙ Reduce the selling price by $50. The marketing department forecasts that with the lower price, 3,200 units could be sold during the remainder of the year.

∙ Lower variable costs per unit by $30 through the use of less expensive materials. Because of the difference in materials, the selling price would have to be lowered by $40 and sales of 2,600 units for the remainder of the year are forecast.

∙ Cut fixed costs by $15,000 and lower the selling price by 5 percent. Sales of 2,200 units would be expected for the remainder of the year.

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 $450,000.

c. Determine which of the alternatives Clifford's president should select to maximize profit.

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:

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:

a. Calculate the break-even point in units if Volare, Inc. uses the:

1. capital-intensive manufacturing method.

2. labor-intensive manufacturing method.

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:

1. capital-intensive manufacturing method.

2. labor-intensive manufacturing method.

d. What is your recommendation to management concerning which manufacturing method to use?

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 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?

152) Morgan Designs manufactures decorative iron railings. In preparing for next year's operations, management has developed the following estimates:

Required:

Compute the following items:

a. Unit contribution margin.

b. Contribution margin ratio.

c. Break-even in dollar sales.

d. Margin of safety percentage.

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?

153) Maryland Company offers two products. At present, the following represents the usual results of a month's operations:

Required:

a. Find the combined break-even point in dollars.

b. Find the margin of safety in dollars.

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.

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?

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?

158) Why is the time period so important for the definition of fixed costs?

159) Present the profit equation and define all of the terms.

160) Why and how do managers simplify analyses for achieving a given level of profit with two products or services?

161) Discuss the role of assumptions that decision makers must consider when relying on CVP analysis.