9.1 Cost-Volume-Profit (CVP) Analysis

Question 1

A company uses cost-volume-profit analysis to evaluate a new project. The total fixed costs of production per year are $160,000. The unit variable cost is $50. Which one of the following combinations of unit selling price and breakeven number of units sold per year is correct?

A. $50 selling price and 3,200 breakeven number of units.
B. $25 selling price and 6,400 breakeven number of units.
C. $70 selling price and 8,000 breakeven number of units.
D. $100 selling price and 1,600 breakeven number of units.

Answer 1

C. $70 selling price and 8,000 breakeven number of units.

If the selling price is $70, the unit contribution margin is $20 ($70 - $50). The breakeven point in units equals 8,000 ($160,000 ÷ $20).

Question 2

Formula for breakeven point in units

Answer 2

Fixed Costs / Unit contribution margin

Fixed Costs / UCM

Question 3

Kim is thinking of organizing a fundraiser to support a local charity. She has planned to rent a banquet hall and provide the guests with food, entertainment, and various party favors. She has decided to charge $500 a person. After researching around town, Kim has discovered the following costs:
Fixed Costs
Rental fee of banquet hall $150,000
Advertising 50,000
Entertainment 4,000

Variable Costs Per Guest
Food $12
Other miscellaneous costs 8
How many guests must attend in order for Kim to break even?

A. 425
B. 443
C. 417
D. 408

Answer 3

A. 425

The breakeven point in units equals total fixed costs ($150,000 + $50,000 + $4,000 = $204,000) divided by the unit contribution margin ($500 selling price – $12 food – $8 other = $480). Kim’s breakeven number of guests is thus 425 ($204,000 ÷ $480).

Question 4

Formula for Contribution margin, Contribution margin ratio

Answer 4

Contribution margin = selling price - total variable costs

Contribution margin ratio = contribution margin ÷ selling price

Question 5

Donnelly 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 net income last year was $5,040. Donnelly’s expectations for the coming year include the following:
* 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 allow Donnelly to maintain the same contribution margin ratio as last year is
A. $9.75
B. $9.00
C. $10.00
D. $8.25

Answer 5

C. $10.00

Last year, unit variable cost was $2.25, so the unit contribution margin (UCM) was $5.25 ($7.50 price – $2.25), and the contribution margin ratio (CMR) was 70% ($5.25 ÷ $7.50). If variable costs increase by one-third, the new variable cost is $3 [$2.25 × (4 ÷ 3)]. If a 70% CMR is desired, the $3 variable cost is 30% of sales, and the unit sales price is $10 ($3 ÷ 30%).

Question 6

One of the major assumptions limiting the reliability of breakeven analysis is that

A. Efficiency and productivity will continually increase.
B. Total variable costs will remain unchanged over the relevant range.
C. Total fixed costs will remain unchanged over the relevant range.
D. The cost of production factors varies with changes in technology.

Answer 6

C. Total fixed costs will remain unchanged over the relevant range.

One of the inherent simplifying assumptions used in CVP analysis is that fixed costs remain constant over the relevant range of activity.

Question 7

Which one of the following is true regarding a relevant range?

A. Total variable costs will not change.
B. Total fixed costs will not change.
C. Actual fixed costs usually fall outside the relevant range.
D. The relevant range cannot be changed after being established.

Answer 7

B. Total fixed costs will not change.

The relevant range is the range of activity over which unit variable costs and total fixed costs are constant. The incremental cost of one additional unit of production will be equal to the variable cost.

Question 8

Cost-volume-profit (CVP) analysis is a key factor in many decisions, including choice of product lines, pricing of products, marketing strategy, and use of productive facilities. A calculation used in a CVP analysis is the breakeven point. Once the breakeven point has been reached, operating income will increase by the

A. Gross margin per unit for each additional unit sold.
B. Contribution margin per unit for each additional unit sold.
C. Fixed costs per unit for each additional unit sold.
D. Variable costs per unit for each additional unit sold.

Answer 8

B. Contribution margin per unit for each additional unit sold.

At the breakeven point, total revenue equals total fixed costs plus the variable costs incurred at that level of production. Beyond the breakeven point, each unit sale will increase operating income by the unit contribution margin (Unit sales price – Unit variable cost) because fixed cost will already have been recovered.

Question 9

Delphi Company has developed a new product that will be marketed for the first time during the next fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at $36 per unit, Delphi’s management has allocated only enough manufacturing capacity to produce a maximum of 25,000 units of the new product annually. The fixed costs associated with the new product are budgeted at $450,000 for the year, which includes $60,000 for depreciation on new manufacturing equipment.

Data associated with each unit of product are presented as follows. Delphi is subject to a 40% income tax rate.
Direct material: $ 7.00
Direct labor: 3.50
Manufacturing overhead: 4.00
Variable manufacturing cost: $14.50
Selling expenses: 1.50
Total variable cost: $16.00

The number of units of the new product that Delphi Company must sell during the next fiscal year in order to break even is

A. 20,930
B. 18,140
C. 22,500
D. 25,500

Answer 9

C. 22,500

The breakeven point in units equals total fixed costs divided by the unit contribution margin. The unit contribution margin is $20 ($36 selling price - $16 unit variable cost). Hence, the breakeven point is 22,500 units ($450,000 ÷ $20).

Question 10

A manufacturer contemplates a change in technology that would reduce fixed costs from $800,000 to $700,000. However, the ratio of variable costs to sales will increase from 68% to 80%. What will happen to the breakeven level of revenues?

A. Decrease by $301,470.50.
B. Decrease by $500,000.
C. Decrease by $1,812,500.
D. Increase by $1,000,000.

Answer 10

D. Increase by $1,000,000.

The original breakeven level was:
Breakeven point = Fixed costs ÷ Contribution margin ratio
= $800,000 ÷ (1.0 – .68)
= $2,500,000

The new level is:
Breakeven point = Fixed costs ÷ Contribution margin ratio
= $700,000 ÷ (1.0 – .80)
= $3,500,000

Thus, there is an increase of $1,000,000 ($3,500,000 – $2,500,000).

Question 11

The breakeven point in units increases when unit costs

A. Increase and sales price remains unchanged.
B. Decrease and sales price remains unchanged.
C. Remain unchanged and sales price increases.
D. Decrease and sales price increases.

Answer 11

A. Increase and sales price remains unchanged.

A BEP ratio can be increased either by raising the numerator or lowering the denominator. The breakeven point in units is calculated by dividing fixed costs by the unit contribution margin. If selling price is constant and costs increase, the unit contribution margin decreases. The effect is to decrease the denominator and increase the ratio.

Question 12

Which of the following would decrease unit contribution margin (UCM) the most?

A. A 15% decrease in selling price.
B. A 15% increase in variable expenses.
C. A 15% decrease in variable expenses.
D. A 15% decrease in fixed expenses.

Answer 12

A. A 15% decrease in selling price.

UCM equals unit selling price minus unit variable costs. It can be decreased by either lowering the price or raising the variable costs. As long as UCM is positive, a given percentage change in selling price must have a greater effect than an equal but opposite percentage change in variable cost. The example below demonstrates this point.

Original: UCM = SP – UVC
= $100 – $50
= $50

Lower Selling Price: UCM = (SP × .85) – UVC
= $85 – $50
= $35

Higher Variable Cost:
UCM = SP – (UVC × 1.15)
= $100 – $57.50
= $42.50

Since $35 < $42.50, the lower selling price has the greater effect.

Question 13

The breakeven point in units sold for a corporation is 44,000. If fixed costs are equal to $880,000 annually and variable costs are $10 per unit, what is the contribution margin per unit?

A. $0.05
B. $20.00
C. $44.00
D. $88.00

Answer 13

B. $20.00

The breakeven point in units is equal to the fixed costs divided by the unit contribution margin (UCM).
Fixed costs ÷ UCM = Breakeven point in units
$880,000 ÷ UCM = 44,000 units
UCM = $20

Question 14

Bruell Electronics Co. is developing a new product, surge protectors for high-voltage electrical flows. The cost information below relates to the product:

Unit Costs
Direct materials $3.25
Direct labor 4.00
Distribution .75

The company will also be absorbing $120,000 of additional fixed costs associated with this new product. A corporate fixed charge of $20,000 currently absorbed by other products will be allocated to this new product. If the selling price is $14 per unit, the breakeven point in units (rounded to the nearest hundred) for surge protectors is

A. 8,500 units.
B. 10,000 units.
C. 15,000 units.
D. 20,000 units.

Answer 14

D. 20,000 units.

The breakeven point in units for a new product equals total additional fixed costs divided by the unit contribution margin. Unit variable costs total $8 ($3.25 + $4.00 + $.75). Thus, UCM is $6 ($14 unit selling price – $8 unit variable cost), and the breakeven point is 20,000 units ($120,000 ÷ $6).

Question 15

Barnes Corporation manufactures skateboards and is in the process of preparing next year’s budget. The pro forma income statement for the current year is presented below.

Sales $1,500,000

Cost of sales:
Direct materials $250,000
Direct labor 150,000
Variable overhead 75,000
Fixed overhead 100,000
= (575,000)

Gross profit $ 925,000

Selling and G&A:
Variable $200,000
Fixed 250,000
= (450,000)

Operating income
$ 475,000

The breakeven point (rounded to the nearest dollar) for Barnes Corporation for the current year is

A. $146,341
B. $636,364
C. $729,730
D. $181,818

Answer 15

B. $636,364

Fixed costs total $350,000 ($100,000 overhead + $250,000 SG&A). Variable costs total $675,000. Given sales of $1,500,000, the contribution margin is $825,000 ($1,500,000 – $675,000). Thus, the contribution margin percentage is 55% ($825,000 ÷ $1,500,000). Dividing the $350,000 of fixed costs by 55% produces a breakeven point of $636,363.64

Question 16

Barnes Corporation manufactures skateboards and is in the process of preparing next year’s budget. The pro forma income statement for the current year is presented below.

Sales $1,500,000

Cost of sales:
Direct materials $250,000
Direct labor 150,000
Variable overhead 75,000
Fixed overhead 100,000
= (575,000)

Gross profit
$ 925,000

Selling and G&A:
Variable $200,000
Fixed 250,000
= (450,000)

Operating income
$ 475,000

For the coming year, the management of Barnes Corporation anticipates a 10% increase in sales, a 12% increase in variable costs, and a $45,000 increase in fixed expenses. The breakeven point for next year will be

A. $729,027
B. $862,103
C. $214,018
D. $474,000

Answer 16

A. $729,027

Sales are expected to be $1,650,000 ($1,500,000 × 1.10), variable costs $756,000 ($675,000 × 1.12), and fixed expenses $395,000 ($350,000 + $45,000). Thus, the contribution margin will be $894,000 ($1,650,000 – $756,000), and the contribution margin percentage is 54.1818%. The breakeven point is therefore $729,027 ($395,000 fixed expenses ÷ .541818).

Question 17

All of the following are assumptions of cost-volume profit analysis except

A. Total fixed costs do not change with a change in volume.
B. Revenues change proportionately with volume.
C. Variable costs per unit change proportionately with volume.
D. Sales mix for multi-product situations do not vary with volume changes.

Answer 17

C. Variable costs per unit change proportionately with volume.

They remain constant within the relevant range

Question 18

Formula for breakeven point in sales dollars

Answer 18

Fixed Costs / CM Ratio

Question 19

The Company had the following operating results for the current period: 22,000 sales units, $924,000 sales, $594,000 variable expenses, and $324,000 fixed expenses. If the company expects variable expenses to increase by $2 per unit and fixed expenses to increase by $29,600 next year, what will be the increase in the number of units need to sell to break even?

A. 1,973 units
B. 3,323 units
C. 4,907 units
D. 5,600 units

Answer 19

D. 5,600 units

Question 20

A company has a contribution margin of $4,000 and fixed costs of $1,000. If the total contribution margin increases by $1,000, operating profit would

A. Decrease by $1,000.
B. Increase by more than $1,000.
C. Increase by $1,000.
D. Remain unchanged.

Answer 20

C. Increase by $1,000.

Since fixed costs remain unchanged, a change in contribution margin results in an identical change in operating profit within the relevant range.

Question 21

A company currently sells 46,000 units of its product annually at a sales price of $38 per unit. Variable costs per unit total $21 and the total fixed costs each year are $749,000. Fixed costs include the annual salary of three sales staff, which is $55,000 each. Management is considering changing the sales staff’s compensation. Under this proposal, sales staff salaries would decrease to $25,000, but sales staff would also receive a commission of $2 per unit for each unit sold. Management estimates this option will increase sales 10%. Should management change to the commission-based plan, and why?

A. No, because it will decrease net income by $23,000.
B. No, because it will decrease operating income by $23,000.
C. Yes, because it will increase operating income by $67,000.
D. Yes, because it will increase net income by $67,000.

Answer 21

C. Yes, because it will increase operating income by $67,000.

Currently, the company has a contribution margin of $782,000 [46,000 units × ($38 sales price – $21 variable cost per unit)]. If the company changes the staff’s compensation, the contribution margin will be $759,000 [(46,000 × 1.1) × ($38 sales price – $21 variable cost per unit – $2 commission per unit)]. Thus, the contribution margin will decrease by $23,000. The change will save $90,000 in staff salaries [($55,000 – $25,000) × 3 staff members]. Therefore, the change will increase operating income by $67,000 ($90,000 – $23,000) and the company should adopt the commission-based plan.

Question 22

A company sells its single product for $30 per unit. The contribution margin ratio is 45%, and fixed costs are $10,000 per month. The company has an effective income tax rate of 40%. If the company sells 1,000 units in the current month, the company’s variable expenses would be

A. $12,000
B. $16,500
C. $9,900
D. $13.50

Answer 22

B. $16,500

The company’s contribution margin ratio reveals that 45% of the sales price of each product is contribution margin. Thus, 55% of the sales price goes to variable costs (100% – 45%), making the per-unit variable cost $16.50 ($30 × 55%). Since the company sold 1,000 units in the current month, total variable costs were $16,500 (1,000 × $16.50).

Question 23

The following information pertains to Syl Co.:

Sales: $800,000
Variable costs: 160,000
Fixed costs: 40,000

What is Syl’s breakeven point in sales dollars?

A. $50,000
B. $40,000
C. $160,000
D. $200,000

Answer 23

A. $50,000

The breakeven point in sales dollars is the fixed costs divided by the contribution margin ratio. Variable costs equal 20% of sales ($160,000 ÷ $800,000). Thus, the contribution margin ratio is 80%, and the breakeven point in dollars is $50,000 ($40,000 FC ÷ 80%)

Question 24

A company is contemplating marketing a new product. Fixed costs will be $800,000 for production of 75,000 units or less and $1,200,000 if production exceeds 75,000 units. The variable cost ratio is 60% for the first 75,000 units. Variable costs will decrease to 50% of sales for units in excess of 75,000. If the product is expected to sell for $25 per unit, how many units must the company sell to break even?

A. 80,000
B. 120,000
C. 111,000
D. 96,000

Answer 24

C. 111,000

The BEP in units is equal to fixed cost divided by the difference between unit selling price and unit variable cost (the unit contribution margin). At less than 75,000 units, fixed costs are $800,000 and UCM is $10 [$25 - ($25 x 60%)]. At this UCM, 80,000 units ($800,000 ÷ $10) must be sold, but this volume is not within the relevant range. At any production level greater than 75,000 units, total fixed costs are $1,200,000 but there are two UCM layers. The first 75,000 units sold will produce a contribution margin of $750,000 (75,000 x $10). Hence, another $450,000 ($1,200,000 - $750,000) must be contributed. The UCM is $12.50 [$25 - ($25 x 50%)] for units in excess of 75,000 and 36,000 ($450,000 ÷ $12.50) additional units must be sold. Total unit sales at BEP are 111,000 (75,000 + 36,000).

Question 25

A company operates several retail stores. To support the company's long-term goals, operating income should be at least 10% of sales. The company's abbreviated pro forma income statement for next year is shown below. Revenues $7,500,000 Cost of goods sold 3,750,000 Operating fixed costs 3,125,000 = Operating income $625,000 The best action for the company to take in order to meet its income goal is to A. Increase the advertising budget by $25,000 which would increase sales units by 5%. B. Raise the selling price by 2%, which would reduce sales units by 2% but save $50,000 in operating costs. C. Wait until the end of next year's first quarter to re-evaluate its situation. D. Require all managers to reduce their budgeted operating fixed costs by 3%.

Answer 25

A. Increase the advertising budget by $25,000 which would increase sales units by 5%. If sales units increased by 5%, sales revenue would increase by $375,000. Cost of goods sold would also increase by 5% (an increase of $187,500). The net increase in operating income is $162,500 ($375,000 increase in revenue - $187,500 increase in cost of goods sold - $25,000 increase in advertising expense). The new sales amount is $7,875,000 ($7,500,000 + $375,000), and the new operating income is $787,500 ($625,000 + $162,500). Operating income as a percentage of sales revenue is 10%, which meets the company's long-term goal.

Question 26

After becoming profitable, Company K has become more concerned with its margin of safety as a performance metric. The following represents select financial information for K for the current year: Total Revenues $750,000, per unit $50 Total Variable costs $375,000, per unit $25 Total Fixed costs $150,000, per unit $10 Prior to the period's operations, budgeted revenue was $800,000. Assuming that budgeted per-unit figures equal actual per-unit figures and actual fixed costs equal budgeted fixed costs, what is Company K's margin of safety in units? A. 10,000 units. B. 6,000 units. C. 16,000 units. D. 7,000 units.

Answer 26

A. 10,000 units. The margin of safety is the excess of budgeted sales over breakeven sales. The breakeven point therefore must be determined. The breakeven point can be calculated by dividing the total fixed costs of $150,000 by the unit contribution margin of $25 ($50 - $25) to result in 6,000 units. Furthermore, the budgeted sales volume is calculated by dividing the budgeted revenue of $800,000 by the per-unit sales price of $50 to result in a budgeted sales level of 16,000 units. Thus, the margin of safety is 10,000 units (16,000 - 6,000).

Question 27

A company breaks even at an annual sales volume of 75,000 units. Actual annual sales volume was 100,000 units, and the company reported operating income of $200,000. The annual fixed costs are A. $75,000 B. Insufficient information to determine amount of fixed costs. C. $600,000 D. $800,00

Answer 27

C. $600,000 Operating income increased by $200,000 when the sales volume exceeded the BEP by 25,000 units. This increase in profit is a result of an increase in the contribution margin (sales - variable costs). Unit contribution margin is $8 ($200,000 ÷ 25,000 units). The BEP in units is equal to fixed costs divided by the UCM. Fixed costs ÷ UCM = BEP Fixed costs ÷ $8 = 75,000 units Fixed costs = $600,000

Question 28

A steel company manufactures heavy-duty brackets for the shelving industry. The company has budgeted for the production and sale of 1,000,000 brackets and has no beginning or ending inventory. Relevant operational, revenue, and cost data is as follows: Unit selling price of a bracket $22.50 Direct material required per unit 4 pounds Direct labor required per unit 0.15 hours Cost of material per pound $1.75 Direct labor cost per hour $9.00 Total variable selling costs $2,250,000 Total fixed costs $1,500,000 Based on the data provided, what is the unit contribution margin per bracket? A. $11.90 B. $14.15 C. $10.60 D. $10.40

Answer 28

A. $11.90 Unit contribution margin is the net of sales revenue per unit minus all variable costs per unit. The revenues will be $22.50 per unit. Variable material costs will be $7.00 per unit (4 pounds at $1.75 per pound), and variable direct labor will be $1.35 per unit (.15 hours at $9.00 per hour). In addition, variable selling costs are $2.25 per unit ($2,250,000 ÷ 1,000,000 units). Therefore, total variable costs are $10.60 ($7.00 + $1.35 + $2.25). Subtracting the $10.60 of variable costs from the $22.50 of revenue results in a contribution margin of $11.90 per unit.

Question 29

A company manufactures clocks and sells each clock for $30. Variable manufacturing expense for each clock is $18. The company plans to sell 400 clocks this month and anticipates incurring $2,600 of fixed expenses. What will be the company’s total contribution margin this month? A. $4,800 B. $2,200 C. $7,200 D. $12,000

Answer 29

A. $4,800 Contribution margin is the net sales revenue minus all variable costs. Thus, the contribution margin is equal to $4,800 [($30 Selling price × 400 Clocks) – ($18 Variable manufacturing expense × 400 Clocks)].

Question 30

A company currently has a four-stage manufacturing process in the following order: Processing, Smoothing, Shaping, and Painting. There is a market for the output of each stage. A newly appointed management accountant has been examining the company’s operations, and has prepared the following information below. Stage / Total Selling Price / Incremental Variable Cost Processing / $10 / $8 Smoothing / 12 / 1 Shaping / 18 / 5 Painting / 20 / 3 Given the above information, selling the output after which one of the following stages will yield the greatest contribution margin? A. Processing. B. Shaping. C. Smoothing. D. Painting.

Answer 30

B. Shaping. Selling immediately after the Shaping stage results in a contribution margin of $4 [$18 – ($8 + $1 + $5)]. Relative to sales after the other stages, selling after the Shaping stage results in the greatest contribution margin.

Question 31

Pontotoc Industries manufactures a product that is used as a subcomponent by other manufacturers. It has the following price and cost structure: Selling price $300 Costs Direct materials $40 Direct labor 30 Variable manufacturing overhead 24 Fixed manufacturing overhead 60 Variable shipping 6 Fixed selling and administrative 20 (180) Operating margin $120 What will the contribution margin per unit be if the company sells 10,000 units? A. $200 B. $120 C. $206 D. $140

Answer 31

A. $200 Contribution margin is the excess of sales over variable costs. Sales will be at $300 per unit. Variable costs are $100, consisting of $40 of direct materials, $30 of direct labor, $24 of variable overhead, and $6 of variable selling costs. Thus, the contribution margin will be $200 per unit ($300 – $100).

Question 32

Madengrad Company manufactures a single electronic product called Precisionmix. This unit is a batch-density monitoring device attached to large industrial mixing machines used in flour, rubber, petroleum, and chemical manufacturing. Precisionmix sells for $900 per unit. The following variable costs are incurred to produce each Precisionmix device: Direct labor $180 Direct materials 240 Factory overhead 105 Variable production costs $525 Marketing costs 75 Total variable costs $600 Madengrad’s income tax rate is 40%, and annual fixed costs are $6,600,000. Except for an operating loss incurred in the year of incorporation, the firm has been profitable over the last 5 years. Assume a 10% increase in annual fixed costs, a 20% unit cost increase for direct labor, and a reduction in unit material costs of 25%, with no change in selling price. Madengrad Company’s breakeven point would increase (decrease) (rounded to the nearest whole unit) by A. 1,604 units. B. (1,620) units. C. 407 units. D. 3,960 units.

Answer 32

C. 407 units. The new contribution margin is $324. Dividing this amount into the fixed costs will determine the new unit breakeven point. Fixed costs have increased by 10% to $7,260,000 ($6,600,000 × 1.1), and the new breakeven point is 22,407 units ($7,260,000 ÷ $324). The original unit breakeven point was 22,000 units. Hence, the production changes increased the breakeven point by 407 units (22,407 – 22,000).

Question 33

A manufacturer of home furnishings produces an oak headboard. The manufacturer currently sells 4,000 headboards at an average price of $100 per unit. To manufacture the headboards, the variable costs are $55 per unit and the total fixed cost assigned to the oak headboards is $150,000. If the sale of headboards increases by 50% and all else remains constant, this would result in A. A 50% increase in earnings before interest and taxes. B. Fixed costs of $225,000. C. A gross margin of $380,000. D. Earnings before interest and taxes of $120,000.

Answer 33

D. Earnings before interest and taxes of $120,000. Earnings before interest and taxes (EBIT) = Revenue – COGS – Operating Expenses – Depreciation and Amortization. If the sale of headboards increases by 50%, the manufacturer will now sell 6,000 headboards (4,000 × 1.5). Given the sale of 6,000 headboards, EBIT is calculated as follows: ($100 × 6,000) – ($55 × 6,000) – $150,000 = $120,000

Question 34

Kator Co. is a manufacturer of industrial components. One of its products that is used as a subcomponent in auto manufacturing is KB-96. This product has the following financial structure per unit: Selling price $150 Direct materials $ 20 Direct labor 15 Variable manufacturing overhead 12 Fixed manufacturing overhead 30 Shipping and handling 3 Fixed selling and administrative 10 Total costs $ 90 During the next year, KB-96 sales are expected to be 10,000 units. All of the costs will remain the same except that fixed manufacturing overhead will increase by 20% and direct materials will increase by 10%. The selling price per unit for next year will be $160. Based on this data, the contribution margin from KB-96 for next year will be A. $1,080,000 B. $750,000 C. $620,000 D. $1,110,000

Answer 34

A. $1,080,000 Contribution margin equals sales minus variable costs. All variable costs will remain the same except that direct materials will increase to $22 per unit (1.1 × $20). Thus, total unit variable costs will be $52 ($22 + $15 + $12 + $3), and the contribution margin will be $1,080,000 [10,000 units ($160 unit selling price – $52)].

Question 35

A manufacturing concern sells its sole product for $10 per unit, with a unit contribution margin of $6. The fixed manufacturing cost rate per unit is $2 based on a denominator capacity of 1 million units, and fixed marketing costs are $1.5 million. If 900,000 units are produced, the breakeven point in units sold is A. 583,333 units. B. 900,000 units. C. 425,000 units. D. 1,000,000 units.

Answer 35

A. 583,333 units. This number of units is the BEP. Dividing the fixed costs of $3,500,000 ($2,000,000 manufacturing overhead + $1,500,000 marketing costs) by the $6 contribution margin results in a BEP of 583,333 units.

Question 36

Breakeven quantity is defined as the volume of output at which revenues are equal to A. Variable costs. B. Marginal costs. C. Total costs. D. Fixed costs.

Answer 36

C. Total costs. Breakeven quantity is defined as the volume of output at which revenues are equal to total costs.

Question 37

For a profitable company, the amount by which sales can decline before losses occur is known as the A. Margin of safety. B. Sales volume variance. C. Variable sales ratio. D. Hurdle rate.

Answer 37

A. Margin of safety. The margin of safety measures the amount by which sales may decline before losses occur. It equals budgeted or actual sales minus sales at the BEP. It may be stated in either units sold or sales revenue.

Question 38

For one of its divisions, Buona Fortuna Company has fixed costs of $300,000 and a variable-cost percentage equal to 60% of its $10 per unit selling price. It would like to earn a pre-tax income of $90,000 per year from the division. What is the breakeven point in dollars? A. $300,000 B. $1,050,000 C. $750,000 D. $500,000

Answer 38

C. $750,000 The breakeven point in dollars equals total fixed costs ($300,000) divided by the contribution margin percentage (40%), for a breakeven point of $750,000.

Question 39

The budget data for the Bidwell Company appear below. Sales (100,000 units) $1,000,000 Costs: Fixed / Variable Direct materials: $0 / $300,000 Direct labor: 0 / 200,000 Manufacturing overhead: 100,000 / 150,000 Selling and administrative costs: 110,000 / 50,000 Total costs: $210,000 / $700,000 --> 910,000 Budgeted operating income $ 90,000 If fixed costs increased $31,500 with no other cost or revenue factors changing, the breakeven sales in units is A. 69,000 units. B. 80,500 units. C. 94,150 units. D. 34,500 units.

Answer 39

B. 80,500 units. The breakeven point equals fixed costs divided by the contribution margin per unit. The new total for fixed costs is $241,500 ($210,000 + $31,500), and the contribution margin per unit is still $3. The breakeven point is thus 80,500 units ($241,500 ÷ $3).

Question 40

The margin of safety is a key concept of CVP analysis. The margin of safety is the A. Difference between the breakeven point in sales and cash flow breakeven. B. Contribution margin rate. C. Difference between budgeted sales and breakeven sales. D. Difference between budgeted contribution margin and breakeven contribution margin.

Answer 40

C. Difference between budgeted sales and breakeven sales. The margin of safety measures the amount by which sales may decline before losses occur. It is the excess of budgeted or actual sales over sales at the BEP.

Question 41

The statement of income for Dimmell Co. presented below represents the operating results for the fiscal year just ended. Dimmell had sales of 1,800 tons of product during the current year. The manufacturing capacity of Dimmell’s facilities is 3,000 tons of product. Dimmell Co. Statement of Income For the Year Ended December 31, Year 2 Sales $ 900,000 Variable costs: Manufacturing $315,000 Selling costs 180,000 (495,000) Contribution margin $ 405,000 Fixed costs: Manufacturing $ 90,000 Selling 112,500 Administration 45,000 (247,500) Operating income $ 157,500 Income taxes (40%) (63,000) Net income $ 94,500 The breakeven volume in tons of product for Year 2 is A. 400 tons. B. 1,100 tons. C. 900 tons. D. 550 tons.

Answer 41

B. 1,100 tons. The breakeven point in units equals total fixed costs divided by the unit contribution margin. The UCM is $225 ($405,000 total contribution margin ÷ 1,800 tons sold), and the breakeven point is 1,100 tons ($247,500 ÷ $225).

Question 42

A company is setting up a new division to sell its products in Africa. An accountant has determined that the new African division will have to sell 250,000 units in order to cover the division’s fixed costs of $365,000. The company is estimating total sales of $475,000 for the new African division. What is the contribution margin per unit for the new African division? A. $0.44 B. $1.46 C. $0.68 D. $1.90

Answer 42

B. $1.46 Contribution margin per unit can be calculated by dividing total fixed costs by the sales in units ($365,000 ÷ 250,000 = $1.46).

Question 43

A company includes a margin of safety when it examines a new product with a cost-volume-profit analysis. The total fixed cost of production is $200,000. If the unit selling price is $80, the unit variable cost is $60, and budgeted revenue is $1,040,000, what is the margin of safety in units? A. 10,000 units. B. 5,500 units. C. 3,000 units. D. 13,000 units.

Answer 43

C. 3,000 units. The margin of safety is the excess of budgeted sales over breakeven sales. It is the amount by which sales can decline before losses occur. The first step is to determine the breakeven point. Dividing the $200,000 of fixed costs by the contribution margin of $20 per unit ($80 – $60) results in a breakeven point of 10,000 units. Dividing the $1,040,000 of budgeted sales by the $80 selling price produces a budgeted sales level of 13,000 units. Therefore, the margin of safety is 3,000 units (13,000 – 10,000).

Question 44

A company sells its single product for $30 per unit. The contribution margin ratio is 45%, and fixed costs are $10,000 per month. Sales were 3,000 units in April and 4,000 units in May. How much greater is the May income than the April income? A. $30,000 B. $13,500 C. $10,000 D. $16,500

Answer 44

B. $13,500 The contribution margin ratio reveals that 45% of the sales price of each product is contribution margin ($30 × 45% = $13.50). Thus, the excess of May income over April is $13,500 (1,000 × $13.50). Fixed costs do not vary between April and May.

Question 45

A company has sales of one of its products of $400,000 per year and a contribution margin ratio of 20%. Its margin of safety is $40,000. What are the company’s fixed costs? A. $80,000 B. $320,000 C. $72,000 D. $288,000

Answer 45

C. $72,000 The margin of safety equals sales above the breakeven point. Thus, if the margin of safety is $40,000, the breakeven point in sales dollars must be $360,000. If the contribution margin ratio is 20%, the contribution margin (sales – variable costs) at the breakeven point is $72,000 ($360,000 × 20%). This amount must equal fixed costs because sales equal the sum of fixed and variable costs at the breakeven point.

Question 46

The following information pertains to a manufacturing company: Total sales $80,000 Total variable costs 20,000 Total fixed costs 30,000 What is the breakeven level in sales dollars? A. $50,000 B. $40,000 C. $80,000 D. $30,000

Answer 46

B. $40,000 The breakeven point in sales dollars equals fixed costs divided by the contribution margin ratio (CMR). The CMR equals .75 [($80,000 sales – $20,000 variable costs) ÷ $80,000 sales]. Thus, the breakeven level in sales dollars is $40,000 ($30,000 ÷ .75).

Question 47

Madengrad Company manufactures a single electronic product called Precisionmix. This unit is a batch-density monitoring device attached to large industrial mixing machines used in flour, rubber, petroleum, and chemical manufacturing. Precisionmix sells for $900 per unit. The following variable costs are incurred to produce each Precisionmix device: Direct labor $180 Direct materials 240 Factory overhead 105 Variable production costs $525 Marketing costs 75 Total variable costs $600 Madengrad’s income tax rate is 40%, and annual fixed costs are $6,600,000. Except for an operating loss incurred in the year of incorporation, the firm has been profitable over the last 5 years. If Madengrad Company achieves a sales and production volume of 8,000 units, the annual before-tax income (loss) will be A. $(420,000) B. $(4,200,000) C. $(2,520,000) D. $1,780,000

Answer 47

B. $(4,200,000) At a volume of 8,000 units, sales will be $7,200,000 (8,000 units × $900), and variable costs will be $4,800,000 (8,000 units × $600). Thus, the contribution margin is $2,400,000. Deducting the $6,600,000 of fixed costs from the contribution margin leaves a net loss of $4,200,000.

Question 48

In order to achieve its strategic goals, a company wants operating income to equal at least 10% of revenue. A portion of the company’s pro forma income statement for the upcoming year is shown below. Cost of goods sold moves proportionately with revenue activity. Revenue $5,000,000 Cost of goods sold $3,000,000 Operating costs $1,700,000 Operating income $ 300,000 If the company wishes to reach this goal in the upcoming year, it should A. Sell the same number of units but decrease cost of goods sold by 10%. B. Reevaluate its financial standing the following year. C. Reduce operating costs by 10%. D. Increase the marketing budget by $20,000, which would increase sales units by 10%.

Answer 48

A. Sell the same number of units but decrease cost of goods sold by 10%. While revenue remains at $5,000,000, the cost of goods sold would decrease to $2,700,000. The new operating income would be $600,000. This would result in operating income being 12% of revenue, which meets the company’s goal.

Question 49

Oradell Company sells its single product at a price of $60 per unit and incurs the following variable costs per unit of product: Direct material $16 Direct labor 12 Manufacturing overhead 7 Variable manufacturing costs $35 Selling expenses 5 Total variable costs $40 Oradell’s annual fixed costs are $880,000, and Oradell is subject to a 30% income tax rate. If prime costs increased by 20% and all other values remained the same, Oradell Company’s contribution margin (to the nearest whole percent) is A. .20 B. .24 C. .30 D. .76

Answer 49

B. .24 Prime costs are direct materials and direct labor. These two elements totaled $28 ($16 + $12) before the increase, so the new total is $33.60 ($28 × 1.2). In other words, prime costs increases by $5.60, and total variable costs increase to $45.60. Subtracting $45.60 from the $60 selling price leaves a contribution margin of $14.40. The contribution margin percentage thus becomes 24% ($14.40 ÷ $60).

Question 50

Projected sales for a tent manufacturer are $510,000. Each tent sells for $850 and requires $350 of variable costs to produce. The tent manufacturer’s total fixed costs are $145,000. The tent manufacturer’s margin of safety is A. 730 units. B. 1,310 units. C. 710 units. D. 310 units.

Answer 50

D. 310 units. The margin of safety is equal to the firm’s planned sales minus the number of sales required to break even. The planned sales on a unit basis are 600 units ($510,000 ÷ $850). The required unit sales to break even is 290 units ($145,000 fixed cost ÷ $500 unit contribution margin). Thus, the margin of safety is 310 units (600 – 290).

Question 51

A company plans to introduce a new product. The marketing manager forecasts a unit selling price of $500. The variable cost per unit is estimated to be $100. In addition, there is a total of $110,000 fixed indirect manufacturing costs, and $150,000 in fixed operating costs associated with these units. What quantity will the company have to sell to break even? A. 220 units. B. 520 units. C. 650 units. D. 275 units.

Answer 51

C. 650 units. The breakeven point in units equals total fixed costs divided by the unit contribution margin. The company’s breakeven quantity can therefore be derived thusly: Breakeven point = ($110,000 + $150,000) ÷ ($500 – $100) = $260,000 ÷ $400 = 650 units