CVP

Question 1

1. Which formula gives unit sales required to earn a target profit? (P = selling price, V = variable cost per unit, F = total fixed costs, T = target profit) a. F/(P - V) c. (F + T)/(P - V) b. (F + T)/P d. (F + T)/V

Answer 1

c. (F + T)/(P - V)

Question 2

2. Which formula gives the sales Pesos required to earn a target profit? (P = selling price, V = variable cost per unit, F = total fixed costs, T = target profit) a. F/[(P - V)/P] c. (F + T)/[(P - V)/P] b. (F + T)/(P) d. F + T/V

Answer 2

c. (F + T)/[(P - V)/P]

Question 3

3. Over the relevant range, total revenues and total costs a. increase, but at a decreasing rate. b. decrease. c. remain constant. d. can be graphed as straight lines.

Answer 3

d. can be graphed as straight lines.

Question 4

4. At the break-even point, total contribution margin is a. zero. c. equal to total costs. b. equal to total fixed costs. d. equal to total variable costs.

Answer 4

b. equal to total fixed costs

Question 5

5. If a company is operating at a loss, a. fixed costs are greater than sales. b. selling price is lower than variable cost per unit. c. selling price is less than average total cost per unit. d. fixed cost per unit is greater than variable cost per unit.

Answer 5

c. selling price is less than average total cost per unit.

Question 6

6. As volume increases, average cost per unit a. increases. b. decreases. c. remains constant. d. increases in proportion to the change in volume.

Answer 6

b. decreases.

Question 7

7. All else constant, if the selling price falls, a. total variable costs will be lower than expected. b. contribution margin percentage will be higher than expected. c. total contribution margin will be higher than expected. d. per-unit contribution margin will be lower than expected.

Answer 7

d. per-unit contribution margin will be lower than expected.

Question 8

8. If all goes according to plan except that unit variable cost falls, a. total contribution margin will be lower than expected. b. the contribution margin percentage will be lower than expected. c. profit will be higher than expected. d. per-unit contribution margin will be lower than expected.

Answer 8

c. profit will be higher than expected.

Question 9

9. If all goes according to plan except that total fixed costs rise, a. income will be lower than expected. b. total contribution margin will be lower than expected. c. total sales will be lower than expected. d. income will be higher than expected.

Answer 9

a. income will be lower than expected.

Question 10

10. Which of the following decreases per-unit contribution margin the most for a company currently earning a profit? a. A 10% decrease in selling price. b. A 10% increase in variable cost per unit. c. A 10% increase in fixed costs. d. A 10% increase in fixed cost per unit.

Answer 10

a. A 10% decrease in selling price.

Question 11

11. 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 11

d. decreases the contribution margin percentage

Question 12

12. The margin of safety is a. the profit currently earned in excess of the target profit. b. the difference between current sales and sales at break-even. c. the ratio of contribution margin to variable cost. d. the difference between contribution margin currently earned and contribution margin at break even.

Answer 12

b. the difference between current sales and sales at break-even.

Question 13

13. The indifference point is the level of volume at which a company a. earns the same profit under different operating schemes. b. earns no profit. c. earns its target profit. d. any of the above.

Answer 13

a. earns the same profit under different operating schemes.

Question 14

14. As projected net income increases the a. degree of operating leverage declines. c. breakeven point goes down b. margin of safety stays constant. d. contribution margin ratio goes up

Answer 14

a. degree of operating leverage declines

Question 15

15. A managerial preference for a very low degree of operating leverage might indicate that a. an increase in sales volume is expected. c. the firm is very profitable b. a decrease in sales volume is expected. d. the firm has very high fixed costs

Answer 15

b. a decrease in sales volume is expected.

Question 16

16. Target Costing is a. a substitute for CVP analysis b. used for companies that cannot classify their costs by behavior c. inappropriate if a company has already established a target profit d. used in decisions to offer a new product or enter a new market.

Answer 16

d. used in decisions to offer a new product or enter a new market.

Question 17

17. If the sales mix shifts toward higher contribution margin products, what would happen to the break-even point? a. decreases b. increases c. remains constant d. it is impossible to tell without additional information

Answer 17

a. decreases

Question 18

18. Spreadsheets are used in financial modeling. Once you have set up the basic formula, it is easy to determine the effect of changing price, costs, volume amounts, or any other variable deemed important to the analysis. This analysis is called a. variable analysis b. fixed analysis c. mixed analysis d. “what-if” analysis

Answer 18

d. “what-if” analysis

Question 19

19. Operating leverage measures how sensitive the profit is to change in a. fixed costs b. sales volume c. sales price per unit d. in tax rates

Answer 19

b. sales volume

Question 20

20. To which function of management is CVP analysis most applicable? a. Planning b. Organizing c. Directing d. Controlling

Answer 20

a. Planning