COST-VOLUME-PROFIT ANALYSIS

Question 1

is the study of the effects of changes in costs and volume on a company’s profits.

Answer 1

Cost-volume-profit (CVP) analysis

Question 2

is important in profit planning. It is useful in setting selling prices, determining product mix, and maximizing use of production facilities

Answer 2

CVP analysis

Question 3

considers the interrelationships among the following components:
✓ Volume or level of activity
✓ Unit selling prices
✓ Variable cost per unit
✓ Total fixed costs
✓ Sales mix

Answer 3

CVP analysis

Question 4

is the amount of revenue remaining after deducting variable costs. It can be expressed as a per unit amount or as a ratio.

Answer 4

Contribution margin

Question 5

the company will realize no income but will suffer no loss.

Answer 5

break-even point

Question 6

is useful to management when it decides whether to introduce new product lines, change sales prices on established products, or enter new market areas.

Answer 6

break-even point

Question 7

In the profit area of the CVP graph, the distance between the sales line and the total cost line at any point equals net income. A company can find required sales by analyzing the differences between the two lines until the desired net income is found.

Answer 7

Graphic presentation

Question 8

• The difference between actual sales and break-even sales.
• It indicates the maximum amount by which sales could decline without incurring a loss.

Answer 8

Margin of Safety

Question 9

is the amount of revenue remaining after deducting variable costs and is stated as both a total amount and on a per unit basis.

Answer 9

Contribution margin

Question 10

is the relative proportion in which each product the impact of changes on any variables. For example, changes in prices, variable costs, and fixed costs on expected profits.

Answer 10

Sales mix

Question 11

is computed by dividing fixed costs by the weighted-average contribution margin ratio.

Answer 11

break-even point in peso

Question 12

is computed by adding the products of Division A’s contribution margin ratio X its percentage of sales and Division B’s contribution margin ratio X its percentage of sales

Answer 12

weighted-average contribution margin ratio

Question 13

provides a measure of a company’s earnings volatility and can be used to compare companies. Degree of operating leverage is computed by dividing total contribution margin by net income.

Answer 13

degree of operating leverage (DOL

Question 14

Cost-volume-profit analysis can be used to study the effect of
a. Changes in selling prices on a company’s profitability
b. Changes in fixed and variable costs on a company’s profitability
c. Changes in product sales mix on a company’s profitability
d. All of the above

Answer 14

d. All of the above

Question 15

CVP analysis requires costs to be categorized as
a. Either fixed or variable
b. Fixed, mixed, or variable
c. Product or period
d. Standard or actual

Answer 15

a. Either fixed or variable

Question 16

Which of the following is not a major assumption underlying CVP analysis?
a. All costs incurred by a firm can be separated into their fixed and variable components
b. The product selling price per unit is constant at all volume levels
c. Operating efficiency and employee productivity are constant at all volume levels
d. For multi-product situations, the sales mix can vary at all volume levels

Answer 16

d. For multi-product situations, the sales mix can vary at all volume levels

Question 17

Contribution margin can be defined as
a. The amount of sales revenue necessary to cover variable expenses
b. Sales revenue minus fixed expenses
c. The amount of sales revenue necessary to cover fixed and variable expenses
d. Sales revenue minus variable expenses

Answer 17

d. Sales revenue minus variable expenses

Question 18

After the level of volume exceeds the break-even point
a. The contribution margin ratio increases
b. The total contribution margin exceeds the total fixed costs
c. Total fixed costs per unit will remain constant
d. The total contribution margin will turn from negative to positive

Answer 18

b. The total contribution margin exceeds the total fixed costs

Question 19

At the break-even point
a. Sales would be equal to contribution margin
b. Contribution margin would be equal to fixed expenses
c. Contribution margin would be equal to net operating income
d. Sales would be equal to fixed expenses

Answer 19

b. Contribution margin would be equal to fixed expenses

Question 20

The break-even point would be increased by
a. A decrease in total fixed expenses
b. A decrease in the ratio of variable expenses to sales
c. An increase in the contribution margin ratio
d. None of these

Answer 20

d. None of these

Question 21

Which of the following strategies could be used to reduce the break-even point?
Fixed expenses
Contribution margin
a.
Increase
Increase
b.
Decrease
Decrease
c.
Decrease
Increase
d.
Increase
Decrease

Answer 21

c.
Decrease
Increase

Question 22

According to CVP analysis, a company could never incur a loss that exceeded its total
a. Variable costs
b. Fixed costs
c. Costs
d. Contribution margin

Answer 22

c. Costs

Question 23

Introducing income taxes into cost-volume-profit analysis
a. Raises the break-even point
b. Lowers the break-even point
c. Increases unit sales needed to earn a particular target profit
d. Decreases the contribution margin percentage

Answer 23

c. Increases unit sales needed to earn a particular target profit

Question 24

If the sales mix shifts toward higher contribution margin products, the break-even point
a. Decreases
b. Increases
c. Remains constant
d. It is impossible to tell without more information

Answer 24

a. Decreases

Question 25

The break-even point is that level of activity where: a. Total revenue equals total cost b. Total contribution margin equals the sum of variable cost-plus fixed cost c. Sales revenue equals total variable cost d. Profit is greater than zero

Answer 25

a. Total revenue equals total cost

Question 26

A company that desires to lower its break-even point should strive to a. Decrease selling prices b. Reduce variable costs c. Increase fixed costs d. Sell more units

Answer 26

b. Reduce variable costs

Question 27

If a firm's net income does not change as its volume changes, the firm('s) a. Must be in the service industry b. Must have no fixed costs c. Sales price must equal zero d. Sales price must equal its variable costs

Answer 27

d. Sales price must equal its variable costs

Question 28

The contribution margin ratio always increases when the a. Variable costs as a percentage of net sales increase b. Variable costs as a percentage of net sales decrease c. Break-even point increases d. Break-even point decreases

Answer 28

b. Variable costs as a percentage of net sales decrease

Question 29

A company’s break-even point in pesos of revenue may be affected by equal percentage increase in both selling price and variable cost per unit. The equal percentage changes in selling price and variable cost per unit will cause the break-even point in pesos to a. Decrease by less than the percentage increase in selling price b. Decrease by more than the percentage increase in the selling price c. Increase by the percentage change in variable cost per unit d. Remain unchanged

Answer 29

d. Remain unchanged

Question 30

In a multiple-product firm, the product that has the highest contribution margin per unit will a. Generate more profit for each P1 of sales than the other products b. Have the highest contribution margin ratio c. Generate the most profit for each unit sold d. Have the lowest variable costs per unit

Answer 30

c. Generate the most profit for each unit sold

Question 31

The margin of safety would be negative if a company('s) a. Was presently operating at a volume that is below the break-even point b. Present fixed costs were less than its contribution margin c. Variable costs exceeded its fixed costs d. Degree of operating leverage is greater than 100

Answer 31

a. Was presently operating at a volume that is below the break-even point

Question 32

The margin of safety is a key concept of CVP analysis. The margin of safety is the a. Contribution margin rate b. Difference between budgeted contribution margin and actual contribution margin c. Difference between budgeted contribution margin and break-even contribution margin d. Difference between budgeted sales and break-even sales

Answer 32

d. Difference between budgeted sales and break-even sales

Question 33

If a company is operating at the break-even point a. Its contribution margin will be equal to its variable expenses b. Its margin of safety will be equal to zero c. Its fixed expenses will be equal to its variable expenses d. Its selling price will be equal to its variable expense per unit

Answer 33

b. Its margin of safety will be equal to zero

Question 34

If the degree of operating leverage is 4, then a 1% change in quantity sold should result in a 4% change in a. Unit contribution margin b. Revenue c. Variable expense d. Net operating income

Answer 34

d. Net operating income

Question 35

Which of the following is the correct calculation for the degree of operating leverage? a. Net operating income divided by total expenses b. Net operating income divided by total contribution margin c. Total contribution margin divided by net operating income d. Variable expense divided by total contribution margin

Answer 35

c. Total contribution margin divided by net operating income

Question 36

All other things the same, a reduction in the variable expense per unit will cause the break-even point to rise.

Answer 36

FALSE -

Question 37

In CVP analysis, sales and production are assumed to be equal.

Answer 37

TRUE

Question 38

All other things the same, the margin of safety in pesos at a given level of sales will tend to be lower for a capital-intensive company than for a labor-intensive company with high variable expenses.

Answer 38

TRUE

Question 39

A company’s break-even point is the level where total revenues equal total costs.

Answer 39

TRUE

Question 40

After the break-even point is reached, each peso of contribution margin is a peso of after-tax profit.

Answer 40

FALSE - BEFORE TAX

Question 41

When using CVP analysis to determine sales level for a desired amount of profit, the profit is treated as an additional cost to be covered.

Answer 41

TRUE

Question 42

When computing profit on an after-tax basis, it is necessary to divide the pretax profit by the effective tax rate.

Answer 42

FALSE - (ONE MINUS THE EFFECTIVE TAX RATE)

Question 43

The margin of safety is an effective measure of risk for a company.

Answer 43

TRUE

Question 44

The margin of safety is computed by dividing 1 by the degree of operating leverage.

Answer 44

TRUE

Question 45

There is an inverse relationship between degree of operating leverage and the margin of safety.

Answer 45

TRUE