[Chapter 1] CVP Analysis TB Flashcards
Managers use cost-volume-profit (CVP) analysis to:
A) forecast the cost of capital for a given period of time
B) to study the behavior of and relationship among the elements such as total revenues, total costs, and income
C) estimate the risks associated with a given job
D) analyse a firm’s profitability and help to decide wealth distribution among its stakeholders
to study the behavior of and relationship among the elements such as total revenues, total costs, and income
One of the first steps to take when using CVP analysis to help make decisions is:
A) calculating the break-even point
B) identifying the variable and fixed costs
C) calculation of the degree of operating leverage for the company
D) estimating the volume of sales to make a good profit
identifying the variable and fixed costs
Which of the following is true of cost-volume-profit analysis?
A) The theory assumes that all costs are variable.
B) The theory assumes that units manufactured equal units sold.
C) The theory states that total variable costs remain the same over a relevant range.
D) The theory states that total costs remain the same over the relevant range.
The theory assumes that units manufactured equal units sold.
The selling price per unit less the variable cost per unit is the:
A) fixed cost per unit
B) gross margin
C) margin of safety
D) contribution margin per unit
contribution margin per unit
Cost-volume-profit analysis focuses on the break-even point and the impact of changes in fixed costs and price.
TRUE
The break-even point is the point where total costs equal sales revenues.
TRUE
The term net income is used to mean operating income before income taxes.
FALSE
To earn a target profit, total costs plus the amount of target profit must equal total sales revenue.
TRUE
Units to earn target profit equal total fixed costs plus target profit divided by the contribution margin ratio.
FALSE
Units to earn target profit equal total fixed costs plus target profit divided by the contribution margin per unit
Sales revenue to earn target profits equals total fixed costs plus target profit divided by the contribution margin.
FALSE
Sales revenue to earn target profits equals total fixed costs plus target profit divided by the contribution margin ratio.
Income taxes are generally calculated as a percentage of income.
TRUE
When using either the equation or the contribution margin approach, the after-tax profit must be converted to a before-tax
profit target.
TRUE
In multiple-product analysis, the break-even units for each product will change as the sales mix changes.
TRUE
Increased sales of high contribution margin products increase the break-even point.
FALSE
Increases in sales of low contribution margin products decrease the break-even point.
FALSE
In a CVP graph, the intersection of the total costs line and the total sales revenue line is the break-even point in units.
TRUE
The profit-volume graph depicts the relationship among cost, volume, and profit.
FALSE
The cost-volume-profit graph portrays the relationship between profits and sales volume.
FALSE
CVP analysis is a short-run decision-making tool since some costs are fixed.
TRUE
Uncertainty regarding costs, prices, and sales mix affect the break-even point.
TRUE
The operating leverage shows how far the company’s actual sales or units are from the break-even point
FALSE
Sensitivity analysis is a what-if technique that examines the impact of changes in assumptions
TRUE
Under ABC, cost drivers are separated into unit-based and non-unit-based drivers.
TRUE
The __________ is where total revenues equal total costs.
BREAK-EVEN POINT
The __________ ratio expresses variable costs in terms of sales dollars.
VARIABLE COST RATIO
In cost-volume-profit analysis income taxes __________ the break even point.
RAISE
Target after-tax profit must be converted into __________ profit to calculate units or revenue needed.
BEFORE-TAX
In multiple-product analysis, direct fixed costs can be __________ to each segment.
TRACED
Increased sales of high contribution margin items __________ the break-even point.
DECREASE
On a profit-volume graph, the __________ line intersects the horizontal axis at the break-even point.
PROFIT
When a company sells more units than the break-even point, the __________ are positive.
PROFITS
If all else is the same, if the break-even point increases, then the variable cost per unit must have __________ .
INCREASED
The use of fixed costs to increase the percentage changes in profits as sales activities change is called the __________
leverage.
OPERATING
The point of zero profit is called the:
a. profit-volume point.
b. contribution-margin point.
c. break-even point.
d. target-profit point.
break-even point.
Which of the following formulas is used to calculate break-even point in units?
a. Break-even point in units = Total costs / Unit contribution margin
b. Break-even point in units = Sales / Fixed costs
c. Break-even point in units = Sales / Unit variable cost
d. Break-even point in units = Total fixed costs / (Price − Unit variable cost)
Break-even point in units = Total fixed costs / (Price − Unit variable cost)
Which of the following formulas is used to compute operating income?
a. Operating income = Sales revenues - Depreciation expenses - Fixed expenses
b. Operating income = Sales revenues - Variable expenses - Fixed expenses
c. Operating income = Sales revenues + Fixed expenses - Target profit
d. Operating income = Sales revenues - Tangible expenses - Target profit
Operating income = Sales revenues - Variable expenses - Fixed expenses
The variable cost ratio
a. expresses variable costs as a percentage of total costs.
b. expresses the proportion between fixed costs and variable costs.
c. expresses variable cost in terms of sales dollars.
d. expresses the proportion of sales dollars available to cover fixed costs and provide for a profit.
expresses variable cost in terms of sales dollars.
Sales × Contribution Margin is a short-cut of what formula?
a. Sales − (Variable cost ratio × Sales)
b. Sales − (Fixed Costs + Variable Costs)
c. Sales / Fixed Costs
d. Fixed Costs / Unit Contribution Margin
Sales − (Variable cost ratio × Sales)
Which of the following is NOT a use of CVP (Cost-Volume-Profit) analysis?
a. the ability to conduct sensitivity analysis of cost or price changes
b. the identification of price and efficiency variances
c. how many units must be sold to break even
d. what is the impact on the break-even point of an increase or decrease in fixed costs
the identification of price and efficiency variances
Total contribution margin is calculated by subtracting
a. cost of goods sold from total revenues.
b. fixed costs from total revenues.
c. total manufacturing costs from total revenues.
d. total variable costs from total revenues
total variable costs from total revenues
Which of the following items would NOT be considered in cost-volume-profit analysis?
a. units of production
b. fixed costs
c. product mix
d. gross profit margin
gross profit margin
The contribution margin at the break-even point
a. equals total fixed costs.
b. is zero.
c. plus total fixed costs equals total revenues.
d. is greater than variable costs.
equals total fixed costs.
Which of the following equations is TRUE?
a. Contribution margin = Sales revenue × Variable cost ratio
b. Contribution margin ratio = Contribution margin/Variable costs
c. Contribution margin = Fixed costs
d. Contribution margin ratio = 1 − Variable cost ratio
Contribution margin ratio = 1 − Variable cost ratio
In the cost-volume-profit analysis, income taxes
a. are treated as a fixed cost.
b. increase the sales volume required to break even.
c. increase the sales volume required to earn a desired profit.
d. are treated as a fixed cost.
increase the sales volume required to earn a desired profit.
Which of the following is a TRUE statement about sales mix?
a. Profits may decline with an increase in total dollars of sales if the sales mix shifts to sell more of the high contribution margin product.
b. Profits may decline with an increase in total dollars of sales if the sales mix shifts to sell more of the lower contribution margin product.
c. Profits will remain constant with an increase in total dollars of sales if the total sales in units remains constant.
d. Profits will remain constant with a decrease in total dollars of sales if the sales mix also remains constant.
Profits may decline with an increase in total dollars of sales if the sales mix shifts to sell more of the lower contribution margin product.
Which of the following refers to the relative combination of products being sold by a firm?
a. Contribution margin
b. Break-even sales
c. Sales mix
d. Margin of safety
Sales mix
In multiple-product analysis, direct fixed costs are
a. fixed costs that are not traceable to the segments and would remain even if one of the segments were eliminated.
b. fixed costs which can be traced to each segment and would remain even if one of the segments were eliminated.
c. fixed costs that are not traceable to the segments and would be avoided if the segment did not exist.
d. the fixed costs which can be traced to each segment and would be avoided if the segment did not exist.
the fixed costs which can be traced to each segment and would be avoided if the segment did not exist.
On a profit-volume graph, the profit line intersects the horizontal axis at
a. the origin.
b. the break-even point.
c. a volume of 1,000 units.
d. a point where profit is greater than zero.
the break-even point.
In a cost-volume-profit graph,
a. the total revenue line crosses the horizontal axis at the break-even point.
b. beyond the break-even sales volume, profits are maximized at the sales volume where total revenues equal
total costs.
c. an increase in unit variable costs would decrease the slope of the total cost line.
d. an increase in the unit selling price would shift the break-even point in units to the left.
an increase in the unit selling price would shift the break-even point in units to the left.
Which of the following statements is TRUE in a cost-volume-profit graph?
a. The slope of the total cost line is dependent on the variable cost per unit.
b. The total cost line normally begins at zero.
c. The total revenue line typically begins above zero.
d. The slope of the total revenue line is the contribution margin per unit.
The slope of the total cost line is dependent on the variable cost per unit.
In a cost-volume-profit graph, the total revenue line rises with a slope equal to
a. the selling price.
b. the contribution margin.
c. the variable cost per unit.
d. none of the above.
the selling price.
In a cost-volume-profit graph, the slope of the total revenue line represents
a. the selling price per unit.
b. the contribution margin per unit.
c. the variable cost per unit.
d. total contribution margin.
the selling price per unit.
When a company sells more units than the break-even point,
a. it moves above the relevant range.
b. profits are positive.
c. there are no new variable costs incurred.
d. profits are negative.
profits are positive.
In a cost-volume-profit graph, the slope of the total cost line represents
a. the selling price per unit.
b. the contribution margin per unit.
c. the variable cost per unit.
d. total contribution margin.
the variable cost per unit.
On a profit-volume graph, the intersection of the profit line with the VERTICAL AXIS provides
a. profit of $1,000.
b. profit equal to zero.
c. profit equal to fixed costs
d. loss equal to fixed costs
loss equal to fixed costs
Which of the following is true of a profit-volume graph?
a. It is a graph of the total income equation.
b. It is a graph of the real income equation.
c. It is a graph of the net income equation.
d. It is a graph of the operating income equation.
It is a graph of the operating income equation.
In a profit-volume graph, the slope of the profit line represents
a. the selling price per unit.
b. the contribution margin per unit.
c. the variable cost per unit.
d. total contribution margin.
the contribution margin per unit.
Which of the following is true of the assumptions made in a cost-volume-profit analysis?
a. The analysis assumes that the costs of products cannot be known with certainty.
b. The analysis assumes a linear revenue function.
c. The analysis assumes that what is produced is not sold entirely.
d. The analysis assumes a non-linear cost function.
The analysis assumes a linear revenue function.
Which of the following assumptions does NOT pertain to cost-profit-volume analysis?
a. Sales price per unit remains constant.
b. The sales mix is constant.
c. Inventories in a manufacturing entity may go up or down.
d. Fixed expenses are constant at all volumes of activities within the relevant range.
Inventories in a manufacturing entity may go up or down.
Which of the following assumptions does NOT pertain to cost-volume-profit analysis?
a. The units produced will equal the units sold.
b. Inventories are constant.
c. All costs are classified as fixed or variable.
d. Sales mix may vary during the related period.
Sales mix may vary during the related period.
Which of the following assumptions is NOT necessary for cost-volume-profit analysis?
a. total variable costs are linear
b. total revenues increase when total costs increase
c. inventories are constant
d. the product sales mix is constant
total revenues increase when total costs increase
Assuming all other things are the same, if there was a decrease in the break-even point, selling price per unit must have:
a. decreased
b. increased
c. remained the same
d. increased first, then decreased
increased
Assuming all other things are equal, if there was a decrease in the break-even point, fixed costs must have:
a. decreased
b. increased first, then decreased
c. increased
d. remained the same
decreased
Using cost-volume-profit analysis, we can conclude that a 20 percent reduction in variable costs will
a. reduce the break-even sales volume by 20 percent.
b. reduce total costs by 20 percent.
c. reduce the slope of the total cost line by 20 percent.
d. not affect the break-even sales volume if there is an offsetting 20 percent increase in fixed costs.
reduce the slope of the total cost line by 20 percent.
Assuming all other things are the same, if there was an increase in the break-even point variable cost per unit must
have:
a. increased first, then decreased
b. increased
c. remained the same
d. depends on the circumstances
increased
A decrease in the sales price in the basic cost-volume-profit model would
a. require a recomputation of the gross profit per unit.
b. be offset by an increase in unit costs.
c. decrease the break-even volume.
d. increase the break-even volume.
increase the break-even volume.
The margin of safety is
a. the number of units that need to be sold to achieve a profit target.
b. the amount of units expected to be sold above the break-even level.
c. the sales dollars needed to cover fixed costs.
d. the use of fixed costs to extract higher percentage changes in profits as sales volume changes.
the amount of units expected to be sold above the break-even level.
A very high degree of operating leverage indicates a firm
a. has high fixed costs.
b. has a high net income.
c. has high variable costs.
d. is operating close to its break-even point.
has high fixed costs.
