CVP Analysis [THEORY]

Question 1

To which function of management is CVP analysis most applicable?

A. Planning C. Directing
B. Organizing D. Controlling

Answer 1

A. Planning

Question 2

The systematic examination of the relationships among selling prices, volume of sales and production, costs, and profits is termed:

A. contribution margin analysis C. budgetary analysis
B. cost-volume-profit analysis D. gross profit analysis

Answer 2

B. cost-volume-profit analysis

Question 3

The term contribution margin is best defined as the:

A. difference between fixed costs and variable costs.
B. difference between revenue and fixed costs.
C. amount available to cover fixed costs and profit.
D. amount available to cover variable costs.

Answer 3

C. amount available to cover fixed costs and profit.

Question 4

Cost-volume-profit analysis allows management to determine the relative profitability of a product by

A. Highlighting potential bottlenecks in the production process.
B. Determining the contribution margin per unit and projected profits at various levels of production.
C. Assigning costs to a product in a manner that maximizes the contribution margin.
D. Keeping fixed costs to an absolute minimum.

Answer 4

B. Determining the contribution margin per unit and projected profits at various levels of production.

Question 5

Cost-volume-profit analysis cannot be used if which of the following occurs?

A. Costs cannot be properly classified into fixed and variable costs.
B. The per unit variable costs change.
C. The total fixed costs change.
D. Per unit sales prices change.

Answer 5

A. Costs cannot be properly classified into fixed and variable costs.

Question 5

The most useful information derived from a breakeven chart is the

A. Amount of sales revenue needed to cover enterprise variable costs.
B. Amount of sales revenue needed to cover enterprise fixed costs.
C. Relationship among revenues, variable costs, and fixed costs at various levels of activity.
D. Volume or output level at which the enterprise breaks even.

Answer 5

C. Relationship among revenues, variable costs, and fixed costs at various levels of activity.

Question 6

Which of the factors is (are) involved in studying cost-volume-profit relationships?

A. Levels of production C. Fixed costs
B. Variable costs D. All of these

Answer 6

D. All of these

Question 7

At the breakeven point, fixed cost is always

A. Less than the contribution margin C. More than the contribution margin
B. Equal to the contribution margin. D. More than the variable cost

Answer 7

B. Equal to the contribution margin.

Question 8

At the break-even point:

A. net income will increase by the unit contribution margin for each additional item sold above break-even.
B. the total contribution margin changes from negative to positive
C. fixed costs are greater than contribution margin
D. the contribution margin ratio begins to increase

Answer 8

A. net income will increase by the unit contribution margin for each additional item sold above break-even.

Question 9

In cost-volume-profit analysis, the greatest profit will be earned at

A. One hundred percent at normal productive capacity.
B. The production point with the lowest marginal cost.
C. The production point at which average total revenue exceeds average marginal cost.
D. The point at which marginal cost and marginal revenue are equal.

Answer 9

D. The point at which marginal cost and marginal revenue are equal.

Question 10

Which of the following is not an assumption underlying C-V-P analysis?

A. The behavior of total revenue is linear.
B. Unit variable expenses remain unchanged as activity varies.
C. Inventory levels at the beginning and end of the period are the same.
D. The number of units produced exceeds the number of units sold.

Answer 10

D. The number of units produced exceeds the number of units sold.

Question 11

Which of the following assumptions is inherent to C-V-P analysis?

A. In manufacturing firms, the beginning and ending inventory levels are the same.
B. In a multi-product organization, the sales mix varies over time.
C. The behavior of total revenue is curvilinear.
D. he relevant range is not a consideration.

Answer 11

A. In manufacturing firms, the beginning and ending inventory levels are the same.

Question 12

Which of the following assumptions is closely relevant to cost-volume-profit analysis?

A. for multiple product analysis, the sales mix is not important
B. inventory levels remain unchanged
C. total fixed costs and unit variable costs can be identified and remain constant over the relevant range
D. B and C

Answer 12

D. B and C

Question 13

Advocates of cost-volume-profit analysis argue that:

A. Fixed costs are irrelevant for decision making.
B. Fixed costs are mandatory for CVP decision making.
C. Differentiation between the patterns of variable costs and fixed costs is critical.
D. Fixed costs are necessary to calculate inventory valuations.

Answer 13

C. Differentiation between the patterns of variable costs and fixed costs is critical.

Question 14

With respect to fixed costs, C-V-P analysis assumes total fixed costs

A. per unit remains constant as volume changes
B. remain constant from one period to the next
C. vary directly with volume
D. remain constant across changes in volume

Answer 14

D. remain constant across changes in volume

Question 15

The CVP model assumes that over the relevant range of activity:

A. only revenues are linear. C. unit variable cost is not constant.
B. total fixed cost changes. D. revenues and total costs are linear.

Answer 15

D. revenues and total costs are linear.

Question 16

Which of the following is not a limiting factor of Cost-Volume-Profit analysis?

A. The process assumes a linear relationship among the variables.
B. The process assumes variable costs per unit are available.
C. Efficiency is assumed to be constant.
D. Inventory levels are assumed to not change.

Answer 16

B. The process assumes variable costs per unit are available.

Question 17

Cost-volume-profit analysis is a technique available to management to understand better the interrelationships of several factors that affect a firm’s profit. As with many such techniques, the accountant oversimplifies the real world by making assumptions. 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’s selling price per unit is constant at all volume levels within a relevant range.
C. Operating efficiency and employee productivity is constant at all volume levels.
D. For multi-product situations, the sales mix can vary at different volume levels.

Answer 17

D. For multi-product situations, the sales mix can vary at different volume levels.

Question 18

Pines Company has a higher degree of operating leverage than Tagaytay Company. Which of the following is true?

A. Pines has higher variable expense.
B. Pines is more profitable than Tagaytay Company’s.
C. Pines is more risky than Tagaytay is.
D. Pines’ profits are less sensitive to percentage changes in sales.

Answer 18

C. Pines is more risky than Tagaytay is.

Question 19

As projected net income increases the

A. degree of operating leverage declines. C. break-even point goes down.
B. margin of safety stays constant. D. contribution margin ratio goes up.

Answer 19

A. degree of operating leverage declines.

Question 20

Given the following notations, what is the breakeven sales level in units?
SP = selling price per unit
FC = total fixed cost
VC = variable cost per unit

A. SP / (FC/VC) C. VC/(SP – FC)
B. FC/(VC/SP) D. FC/(SP – VC)

Answer 20

D. FC/(SP – VC)

Question 21

A company increased the selling price for its product from P1.00 to P1.10 a unit when total fixed costs increased from P400,000 to P480,000 and variable cost per unit remained unchanged. How would these changes affect the breakeven point?

A. The breakeven point in units would be increased.
B. The breakeven point in units would be decreased.
C. The breakeven point in units would remain unchanged.
D. The effect cannot be determined from the information given.

Answer 21

D. The effect cannot be determined from the information given.

Question 22

On January 1, 2007, Incremental Company increased its direct labor wage rates. All other budgeted costs and revenues were unchanged. How did this increase affect Incremental Company’s budgeted break-even point and budgeted margin of safety?

Budgeted Break-even Point | Expected Margin of Safety
A. Increase Increase C. Decrease Decrease
B. Increase Decrease D. Decrease Increase

Answer 22

B. Increase Decrease

Question 23

As the variable cost increases but the selling price remains constant, 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 23

A. Degree of operating leverage declines

Question 24

A very high degree of operating leverage (DOL) indicates that a firm:

A. has high fixed costs. C. has high variable costs.
B. has a high net income. D. is operating close to its breakeven point.

Answer 24

D. is operating close to its breakeven point.

Question 25

With the aid of computer software, managers can vary assumptions regarding selling prices, costs, and volume and can immediately see the effects of each change on the break-even point and profit. Such an analysis is called

A. “What if” or sensitivity analysis. C. Computer aided analysis.
B. Vary the data analysis. D. Data gathering.

Answer 25

A. “What if” or sensitivity analysis

Question 26

If a company raises its target peso profit, its

A. break-even point rises.
B. fixed costs increase.
C. required total contribution margin increases.
D. selling price rises.

Answer 26

C. required total contribution margin increases.

Question 27

Broadway Company sells three products: A, B and C. Product A’s unit contribution margin is higher than Product B’s which is higher than Products C’s. Which one of the following events is most likely to increase the company’s overall break-even point?

A. The installation of new automated equipment and subsequent lay-off of factory workers.
B. A decrease in Product C’s selling price.
C. An increase in the overall market demand for Product B.
D. A change in the relative market demand for the products, with the increase favoring
Product A relative to Product B and Product C.

Answer 27

C. An increase in the overall market demand for Product B.

Question 28

Which of the following is not a benefit of using sensitivity analysis?

A. More people can see the impact of their ideas on the project.
B. The use of a spreadsheet program increases the accuracy of the projections.
C. What will happen is not known in advance so a variety of options can be explored prior to making a decision.
D. A well-written spreadsheet will allow for a variety of questions to be answered in a minimal amount of time.

Answer 28

B. The use of a spreadsheet program increases the accuracy of the projections.

Question 29

A Cost-Volume-Profit graph contains an “Area of Loss” and an “Area of Profitability”. Which of the following best explains the difference between the two points on the graph?

A. The area of loss represents the difference between Sales and Variable Cost.
B. The area of loss begins with the concept that fixed costs have to be recovered prior to sales contributing to profit.
C. The area of profit represents the difference between Sales and Variable Cost.
D. The area of profit begins with the concept that no company would have any level of sales below the break-even point.

Answer 29

B. The area of loss begins with the concept that fixed costs have to be recovered prior to sales contributing to profit.

Question 30

Which of the following best describes the impact of selling more units?
A. The increase in sales volume increases total variable cost.
B. The increase in sales volume means an increase in total fixed cost.
C. The increase in sales increases contribution margin, causing net income to decrease.
D. The increase in sales increases contribution margin per unit causing the break-even point to decrease.

Answer 30

A. The increase in sales volume increases total variable cost.

Question 31

On a cost-volume-profit chart (break-even graph), where are the total fixed costs shown?

A. As the point where the sales line intersects the vertical axis (pesos)
B. As the point where the sales line crosses the total cost line
C. As the point where the sales line crosses the horizontal axis (volume)
D. As the point where the total cost line intersects the vertical axis (pesos)

Answer 31

D. As the point where the total cost line intersects the vertical axis (pesos)

Question 32

When using conventional cost-volume-profit analysis, some assumptions about costs and sales prices are made. Which of the following is one of those assumptions?

A. The contribution margin will change as volume increases
B. The variable cost per unit will decrease as volume increases
C. The sales price per unit will remain constant as volume increases
D. Fixed cost per unit will remain the same as volume increases

Answer 32

C. The sales price per unit will remain constant as volume increases

Question 33

Classifying a cost as fixed or variable depends on how it behaves

A. per unit, as the volume of activity changes.
B. in total, as the volume of activity changes.
C. both A and B are correct.
D. none of the above.

Answer 33

C. both A and B are correct.

Question 34

A fixed cost is the same percentage of sales in three different months. Which of the following is true?

A. The company had the same sales in each of those months.
B. The cost is both fixed and variable.
C. The company is operating at its break-even point.
D. The company is achieving its target level of profit.

Answer 34

A. The company had the same sales in each of those months.

Question 35

Per-unit variable cost

A. remains constant within the relevant range.
B. increases as volume increases within the relevant range.
C. decreases as volume increases within the relevant range.
D. decreases if volume increases beyond the relevant range.

Answer 35

A. remains constant within the relevant range.

Question 36

In planning product mix for maximum profit, CVP analysis would stimulate sales of the product by increasing the:

A. sales price C. contribution margin
B. variable cost per unit D. emphasis on customer priority

Answer 36

C. contribution margin

Question 37

A relatively low margin of safety ratio for a product is usually an indication that the product:

A. is losing money
B. has a high contribution margin
C. is riskier than higher margin of safety products
D. is less risky than higher margin of safety products

Answer 37

C. is riskier than higher margin of safety products

Question 38

Within the relevant range, total revenues and total costs

A. increase, but at a decreasing rate. C. remain constant.
B. decrease. D. can be graphed as straight lines.

Answer 38

D. can be graphed as straight lines.

Question 39

An assumption in a CVP analysis is that a change in costs is caused by a change in

A. unit direct material cost C. sales commission per unit
B. the number of units D. efficiency due to learning curve effect

Answer 39

B. the number of units

Question 40

In CVP analysis, when the number of units changes, which one of the following will remain the same?

A. Total sales revenues C. Total fixed costs
B. Total variable costs D. Total contribution margin

Answer 40

C. Total fixed costs

Question 41

As fixed costs for a firm rise, all other things held constant, the breakeven point will

A. be unchanged C. increase
B. not be affected by fixed costs D. decrease

Answer 41

C. increase

Question 42

Which of the following would not affect the breakeven point?

A. Number of units sold. C. Total fixed costs.
B. Variable cost per unit. D. Sales price per unit.

Answer 42

A. Number of units sold.

Question 43

The margin of safety is a key concept of CVP analysis. The margin of safety is

A. The contribution margin rate.
B. The difference between budgeted contribution margin and actual contribution margin.
C. The difference between budgeted contribution margin and breakeven contribution margin
D. The difference between budgeted sales and breakeven sales.

Answer 43

D. The difference between budgeted sales and breakeven sales.

Question 44

A technique for determining what would happen in a decision analysis if a key prediction or assumption proves to be wrong is called:

A. CVP analysis. C. Post-audit analysis.
B. Sensitivity analysis. D. Contribution-margin variation analysis.

Answer 44

B. Sensitivity analysis.

Question 45

An increase in the unit variable cost will generally cause an increase in all of the following except

A. the break-even point. C. total variable costs.
B. contribution margin. D. unit selling price.

Answer 45

B. contribution margin

Question 46

The most likely strategy to reduce the breakeven point would be to

A. Increase both the fixed costs and the contribution margin.
B. Decrease both the fixed costs and the contribution margin.
C. Decrease the fixed costs and increase the contribution margin.
D. Increase the fixed costs and decrease the contribution margin.

Answer 46

C. Decrease the fixed costs and increase the contribution margin.

Question 47

The break-even point in total sales decreases when:

A. variable cost increases and sales remain unchanged
B. variable cost increases and sales increase
C. fixed cost increases
D. fixed cost decreases

Answer 47

D. fixed cost decreases

Question 48

Which of the following best describes the impact of an increase in fixed cost?

A. The increase in fixed cost will result in an increase in selling more units.
B. The increase in fixed cost will cause an increase in variable cost.
C. The increase in fixed cost causes net income to decrease and the break-even point to decrease.
D. The increase in fixed cost causes net income to decrease and the break-even point to increase.

Answer 48

D. The increase in fixed cost causes net income to decrease and the break-even point to increase.

Question 49

A company’s breakeven point in peso sales may be affected by equal percentage increases in both selling price and variable cost per unit (assume all other factors are equal within the relevant range). The equal percentage changes in selling price and variable cost per unit will cause the breakeven point in peso sales 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 less than the percentage increase in selling price.
D. Remain unchanged.

Answer 49

D. Remain unchanged.

Question 50

If the fixed costs attendant to a product increase while variable costs and sales price remains constant, what will happen to contribution margin (CM) and breakeven point (BEP)?

CM || BEP
A. Increase Decrease
B. Decrease Increase
C. Unchanged Increase
D. Unchanged Unchanged

Which of the following will decrease the breakeven point?

Decrease in Selling Price | Increase in Direct Labor | Increase in Fixed Cost
A. YES YES YES
B. YES NO YES
C. NO NO YES
D. NO NO NO

Answer 50

C. Unchanged Increase

D. NO NO NO

Question 51

Which of the following is an incorrect statement?

A. The contribution income statement that is prepared for internal users is better than the traditional income statement as a management tool to predict the results of increases or decreases in sales volume, variable costs, and fixed costs.
B. The greater the proportion of fixed costs in a firm’s cost structure, the smaller will be the impact on profit from a given percentage change in sales revenue.
C. In an economic recession, the highly automated company with high fixed costs will be less able to adapt to lower consumer demand than will a firm with a more labor-intensive production process.
D. A major difference between income statements prepared under the traditional format and those prepared under the contribution format is that expenses under the traditional format are shown by function, while the expenses shown under the contribution format are shown by function and cost behavior.

Answer 51

B. The greater the proportion of fixed costs in a firm’s cost structure, the smaller will be the impact on profit from a given percentage change in sales revenue.

Question 52

If a company is operating at a loss,

A. fixed costs are greater than sales.
B. selling price is lower than the variable cost per unit.
C. selling price is less than the average total cost per unit.
D. fixed cost per unit is greater than variable cost per unit.

Answer 52

C. selling price is less than the average total cost per unit.

Question 53

As volume increases, average cost per unit

A. increases.
B. decreases.
C. remains constant.
D. increases in proportion to the change in volume.

Answer 53

B. decreases.

Question 54

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 54

C. profit will be higher than expected.

Question 55

Which of the following decreases per-unit contribution margin the most for a company that is currently earning a profit?

A. A 10% decrease in selling price. C. A 10% increase in fixed costs.
B. A 10% increase in variable cost per unit. D. A 10% increase in fixed cost per unit.

Answer 55

A. A 10% decrease in selling price.

Question 56

If variable cost as a percentage of sales increases, the

A. contribution margin percentage increases.
B. selling price increases.
C. break-even point in pesos increases.
D. fixed costs decrease.

Answer 56

C. break-even point in pesos increases.

Question 57

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 57

C. increases unit sales needed to earn a particular target profit.

Question 58

If a company is earning a profit, its fixed costs

A. are less than total contribution margin.
B. are equal to total contribution margin.
C. are greater than total variable costs.
D. can be greater than or less than total contribution margin.

Answer 58

A. are less than total contribution margin.

Question 59

A cost-volume-profit graph reflects relationships

A. that are expected to hold over the relevant range.
B. of results over the past few years.
C. that the company’s managers would like to have happen.
D. likely to prevail for the industry.

Answer 59

A. that are expected to hold over the relevant range.

Question 60

In a cost-volume-profit graph

A. the total revenue line crosses the horizontal axis at the breakeven point.
B. beyond the breakeven 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 breakeven point in units to the left.

Answer 60

D. an increase in the unit selling price would shift the breakeven point in units to the left.

Question 61

An increase in the income tax rate

A. raises the break-even point.
B. lowers the break-even point.
C. decreases sales required to earn a particular after-tax profit.
D. increases sales required to earn a particular after-tax profit.

Answer 61

D. increases sales required to earn a particular after-tax profit.

Question 62

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 62

A. decreases.

Question 63

Target costing is

A. a substitute for CVP analysis.
B. used by 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 63

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

Question 64

In order for the break-even computation to be meaningful to management, sales mix should be computed using the

A. expected mix C. most desirable mix
B. least desirable mix D. traditional mix

Answer 64

A. expected mix

Question 65

Which of the following is a true statement about sales mix?

A. Profits may decline with an increase in total peso 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 peso 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 peso of sales if the total sales in units remains constant.
D. Profits will remain constant with a decrease in total peso of sales if the sales mix also remains constant.

Answer 65

B. Profits may decline with an increase in total peso of sales if the sales mix shifts to sell more of the lower contribution margin product.