Chapter 6: Cost-Volume-Profit (CVP) Analysis

Question 1

helps managers make many important decisions such as what products and services to offer, what prices to charge, what marketing strategy to use, and what cost structure to maintain.

Answer 1

Cost Volume Profit

Question 2

is the amount remaining from sales revenue after variable expenses
have been deducted.

Answer 2

Contribution Margin

Question 3

is the level of sales at which profit is zero.

Answer 3

Break-even point

Question 4

1. Which of the following statements is a common assumption underlying cost-volume-
   profit analysis? (You may select more than one answer.)

a. The variable cost per unit remains constant.

b. The selling price per unit remains constant.

c. Total fixed costs are constant within the relevant range.

d. The total variable costs remain constant as the level of sales fluctuates.

Answer 4

A, B, C

Question 5

2. Once a company hits its break-even point, net operating income will

a. Increase by an amount equal to the selling price per unit multiplied by the number of units sold above the break-even point.

b. Increase by an amount equal to the contribution margin ratio multiplied by the number of units sold above the break-even point.

c. Increase by an amount equal to the contribution margin per unit multiplied by the number of units sold above the break-even point.

d. Increase by an amount equal to the variable cost per unit multiplied by the number of units sold above the break-even point.

Answer 5

C

Question 6

highlights CVP relationships over wide ranges of activity.

Answer 6

CVP Graph

Question 7

In a CVP graph (sometimes called a break-even chart), ________ is represented on the horizontal (X) axis and _______ on the vertical (Y) axis.

Answer 7

Unit volume; Dollars

Question 8

A ratio computed by dividing contribution margin by sales.

Answer 8

Contribution Margin Ratio

Question 9

A graphical representation of the relationships between an organization’s revenues, costs, and profits on the one hand and its sales volume on the other hand.

Answer 9

Cost Volume Profit (CVP) Graph

Question 10

A measure, at a given level of sales, of how a percentage change in sales
will affect profits.

Answer 10

Degree of Operating Leverage

Question 11

The ______________ is computed by dividing contribution margin by net operating income.

Answer 11

Degree of operating leverage

Question 12

An analytical approach that focuses only on those costs and revenues that change as a result of a decision.

Answer 12

Incremental Analysis

Question 13

The excess of budgeted or actual dollar sales over the break-even dollar sales.

Answer 13

Margin of Safety

Question 14

A measure of how sensitive net operating income is to a given percentage change
in dollar sales.

Answer 14

Operating Leverage

Question 15

The relative proportions in which a company’s products are sold.

Answer 15

Sales Mix

Question 16

________ is computed by
expressing the sales of each product as a percentage of total sales.

Answer 16

Sales Mix

Question 17

Estimating what sales volume is needed to achieve a specific target profit.

Answer 17

Target Profit Analysis

Question 18

A ratio computed by dividing variable expenses by sales.

Answer 18

Variable Expense Ratio

Question 19

5. Assume a company produces one product that sells for $55, has a variable cost per unit of $35, and has fixed costs of $100,000.

How many units must the company sell to earn a target profit of $50,000?

a. 7,500 units
b. 10,000 units
c. 12,500 units
d. 15,000 units

Question 20

6. Given the same facts as in question 5 above, if the company exactly meets its target profit, what will be its margin of safety in sales dollars?

a. $110,000
b. $127,500
c. $137,500
d. $150,000

Question 21

7. Which of the following statements is false with respect to the margin of safety? (You may select more than one answer.)

a. The total budgeted (or actual) sales minus sales at the break-even point equals the margin of safety in dollars.

b. The margin of safety in dollars divided by the total budgeted (or actual) sales in dollars equals the margin of safety percentage.

c. In a single product company, the margin of safety in dollars divided by the variable cost per unit equals the margin of safety in units.

d. The margin of safety in dollars can be a negative number.

Question 22

8. Which of the following statements is true? (You may select more than one answer.)

a. One minus the contribution margin ratio equals the variable expense ratio.

b. Incremental analysis focuses only on the costs and revenues that change as a result of a decision.

c. Sales commissions based on sales dollars can lead to lower profits than commissions based on contribution margin.

d. If a company’s total sales remain constant, then its net operating income must remain constant even if the sales mix fluctuates.

Question 23

4. Assume the selling price per unit is $30, the contribution margin ratio is 40%, and the total fixed cost is $60,000. What is the break-even point in unit sales?

a. 2,000
b. 3,000
c. 4,000
d. 5,000

Question 24

3. The contribution margin ratio always increases when (you may select more than one answer):

a. Sales increase.
b. Fixed costs decrease.
c. Total variable costs decrease.
d. Variable costs as a percent of sales decrease.