Fundamental Managerial Accounting Concepts Thomas Edmonds 9th Edition-Test Bank
To Purchase this Complete Test Bank with Answers Click the link Below
If face any problem or
Further information contact us At tbzuiqe@gmail.com
Sample Test
Fundamental Managerial Accounting Concepts,9e (Edmonds)
Chapter 3 Analysis of Cost, Volume, and Pricing to
Increase Profitability
1) Martin Company currently produces and sells 40,000 units of
product at a selling price of $12. The product has variable costs of $6 per
unit and fixed costs of $150,000. The company currently earns a total
contribution margin of:
1. A)
$280,000
2. B)
$200,000
3. C)
$240,000
4. D)
$90,000
Answer: C
Explanation: Total contribution margin = [Selling price
per unit − Variable costs per unit] × Units sold
Total contribution margin = ($12 per unit − $6 per unit) ×
40,000 units = $240,000
Difficulty: 3 Hard
Topic: Contribution Margin per Unit Method
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
2) Jarvis Company produces a product that has a selling price of
$20.00 and a variable cost of $15.00 per unit. The company’s fixed costs are
$50,000. What is the break-even point measured in sales dollars?
1. A)
$150,000
2. B)
$200,000
3. C)
$62,500
4. D)
$100,000
Answer: B
Explanation: Break-even point in dollars = Fixed costs ÷
Contribution margin ratio
Contribution margin ratio = (Selling price per unit − Variable
costs per unit) ÷ Selling price per unit
Break-even point in dollars = $50,000 ÷ [($20 per unit − $15 per
unit) ÷ $20 per unit] = $50,000 ÷ 0.25 = $200,000
Difficulty: 3 Hard
Topic: Contribution Margin Ratio Method
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
3) Select the incorrect break-even equation from the following:
1. A)
Total contribution margin = total variable costs
2. B)
Total contribution margin = total fixed costs
3. C)
Total fixed costs ÷ contribution margin ratio = break-even sales in dollars
4. D)
Total revenue = total costs
Answer: A
Explanation: The contribution margin income statement is
formatted as:
Sales − Variable costs = Contribution Margin
Contribution Margin − Fixed costs = Net income
At the break-even point, net income equals zero. Therefore, at
the break-even point, the total contribution margin must be equal to total
fixed costs. And, at the break-even point, total revenue must equal total
costs. However, total contribution margin does not equal total variable costs
at the break-even point.
Difficulty: 1 Easy
Topic: Contribution Margin per Unit Method; Contribution
Margin Ratio Method; Equation Method
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
4) Pierce Company’s break-even point is 12,000 units. Its
product sells for $25 and has a $10 variable cost per unit. What is the
company’s total fixed cost amount?
1. A)
$250,000
2. B)
$180,000
3. C)
$120,000
4. D)
Fixed costs cannot be computed with the information provided.
Answer: B
Explanation: Sales − Variable costs − Fixed costs = Profit
($25 per unit × 12,000 units) − ($10 per unit × 12,000 units) −
Fixed costs = $0
Fixed costs = $300,000 − $120,000 = $180,000
Difficulty: 3 Hard
Topic: Equation Method
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
5) At its $60 selling price, Atlantic Company has sales of
$15,000, variable manufacturing costs of $4,000, fixed manufacturing costs of
$1,000, variable selling and administrative costs of $2,000, and fixed selling
and administrative costs of $1,000. What is the company’s contribution margin
per unit?
1. A)
$26
2. B)
$28
3. C)
$44
4. D)
$36
Answer: D
Explanation: First, determine the number of units sold:
Number of units sold = Sales ÷ Selling price per unit
Number of units sold = $15,000 ÷ $60 per unit = 250 units
Then, determine the variable cost per unit:
Variable cost per unit = (Variable manufacturing costs of $4,000
+ Variable selling and administrative costs of $2,000) ÷ 250 units = $24 per
unit
Finally, determine the contribution margin per unit:
Contribution margin per unit = Selling price per unit − Variable
costs per unit
Contribution margin per unit = $60 per unit − $24 per unit = $36
per unit
Difficulty: 3 Hard
Topic: Contribution Margin Ratio Method
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
6) Rocky Mountain Bottling Company produces a soft drink that is
sold for a dollar. At production and sales of 800,000 units, the company pays
$600,000 in production costs, half of which are fixed costs. At that volume,
general, selling, and administrative costs amount to $250,000, of which $70,000
are fixed costs. What is the amount of contribution margin per unit?
1. A)
$0.40
2. B)
$0.5375
3. C)
$0.25
4. D)
None of these is correct.
Answer: A
Explanation: Variable cost per unit = [(Production costs
of $600,000 × 1/2) + (Selling and administrative costs of $250,000 − $70,000)]
÷ 800,000 = $0.60 per unit
Contribution margin per unit = Selling price per unit − Variable
costs per unit = $1 per unit − $0.60 per unit = $0.40 per unit
Difficulty: 3 Hard
Topic: Contribution Margin Ratio Method
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
7) Bates Company currently produces and sells 4,000 units of a
product that has a contribution margin of $5 per unit. The company sells the
product for a sales price of $20 per unit. Fixed costs are $20,000. The company
has recently invested in new technology and expects the variable cost per unit
to fall to $12 per unit. The investment is expected to increase fixed costs by
$15,000. After the new investment is made, how many units must be sold to break
even?
1. A)
2,917 units
2. B)
4,375 units
3. C)
7,000 units
4. D)
4,000 units
Answer: B
Explanation: Contribution margin per unit = Selling price
per unit − Variable costs per unit
Contribution margin per unit = $20 per unit − $12 per unit = $8
per unit
Break-even point in units = Fixed costs ÷ Contribution margin
per unit
Break-even point in units = ($20,000 + $15,000) ÷ $8 per unit =
4,375 units
Difficulty: 3 Hard
Topic: Contribution Margin per Unit Method; Assessing the
Effects of Changes in Variable Costs; Assessing the Effects of Changes in Fixed
Costs
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.; 03-02 Explain how a
change in sales price, sales volume, variable cost, or fixed cost affects
profitability.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
8) M and M, Inc. produces a product that has a variable cost of
$3.00 per unit. The company’s fixed costs are $30,000. The product is sold for
$5.00 per unit and the company desires to earn a target profit of $20,000. What
is the amount of sales that will be necessary to earn the desired profit?
1. A)
$75,000
2. B)
$50,000
3. C)
$83,333
4. D)
$125,000
Answer: D
Explanation: Contribution margin ratio = (Selling price
per unit − Variable costs per unit) ÷ Selling price per unit
Contribution margin ratio = ($5 per unit − $3 per unit) ÷ $5 per
unit = 40%
Sales volume in dollars = (Fixed costs + Desired profit) ÷
Contribution margin ratio
Sales volume in dollars = ($30,000 + $20,000) ÷ 0.40 = $125,000
Difficulty: 3 Hard
Topic: Determining the Sales Volume Necessary to Reach a
Desired Profit
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
9) Once sales reach the break-even point, each additional unit
sold will:
1. A)
increase fixed cost by a proportionate amount.
2. B)
reduce the margin of safety.
3. C)
increase the company’s operating leverage.
4. D)
increase profit by an amount equal to the per unit contribution margin.
Answer: D
Explanation: Recall that each additional unit sold will
increase profit by the contribution margin per unit. Once the fixed costs are
covered at the break-even point, the sales of each additional unit will
increase profit by an amount equal to the contribution margin per unit.
Difficulty: 2 Medium
Topic: Determining the Break-Even Point
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
10) Mitchell Company sells its product for $100 per unit. The
company’s accountant provided the following cost information:
Manufacturing costs
$
25,000
+
45
% of sales
Selling costs
$
15,000
+
20
% of sales
Administrative costs
$
25,000
+
10
% of sales
What is the company’s break-even point in units?
1. A)
1,000
2. B)
750
3. C) 2,600
4. D)
4,000
Answer: C
Explanation: Contribution margin per unit = Selling price
per unit − Variable costs per unit
Contribution margin per unit = $100 per unit − [(45%
+ 20% + 10%) × $100 per unit] = $25 per unit
Break-even point in units = Fixed costs ÷ Contribution margin
per unit
Break-even point in units = ($25,000 + $15,000
+ $25,000) ÷ $25 per unit = 2,600 units
Difficulty: 3 Hard
Topic: Contribution Margin per Unit Method
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
11) Kingston Company sells its product for $200 per unit. The
company’s accountant provided the following cost information:
Manufacturing costs
$
25,000
+
40
% of sales
Selling costs
$
10,000
+
20
% of sales
Administrative costs
$
15,000 +
10
% of sales
What is Kingston Company’s contribution margin ratio?
1. A)
30%
2. B)
15%
3. C)
35%
4. D)
20%
Answer: A
Explanation: Contribution margin ratio = (Selling price
per unit − Variable costs per unit) ÷ Selling price per unit
Contribution margin ratio = {$200 per unit − [(40% +
20% + 10%) × $200 per unit]} ÷ $200 per unit = ($200 per unit −
$140 per unit) ÷ $200 per unit = 30%
Difficulty: 3 Hard
Topic: Contribution Margin Ratio Method
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
12) Zeus, Inc. produces a product that has a variable cost of
$9.50 per unit. The company’s fixed costs are $40,000. The product sells for
$12.00 a unit and the company desires to earn a $20,000 profit. What is the
volume of sales in units required to achieve the target profit? (Do not round
intermediate calculations.)
1. A)
24,000 units
2. B) 16,000
units
3. C)
17,000 units
4. D)
4,000 units
Answer: A
Explanation: Sales volume in units = (Fixed costs +
Desired profit) ÷ Contribution margin per unit
Sales volume in units = ($40,000 + $20,000) ÷ ($12 per unit −
$9.50 per unit) = 24,000 units
Difficulty: 3 Hard
Topic: Determining the Sales Volume Necessary to Reach a
Desired Profit
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
13) Phan Company has not reported a profit in five years. This
year the company would like to narrow its loss to $7,500. Assuming its selling
price is $36.50 per unit and its variable costs per unit are $24, how many
units must be sold to achieve its target given that total fixed costs are
$60,000? (Do not round intermediate calculations.)
1. A)
2,188
2. B)
1,439
3. C)
4,200
4. D)
1,600
Answer: C
Explanation: Sales volume in units = (Fixed costs +
Desired profit) ÷ Contribution margin per unit
Sales volume in units = [$60,000 + ($7,500)] ÷ ($36.50 per unit
− $24.00 per unit) = $52,500 ÷ $12.50 per unit = 4,200 units
Difficulty: 1 Easy
Topic: Determining the Sales Volume Necessary to Reach a
Desired Profit
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
14) Cooper Company sells a product at $50 per unit that has unit
variable costs of $20. The company’s break-even sales point in sales dollars is
$150,000. How much profit will the company make if it sells 4,000 units?
1. A)
$210,000
2. B)
$120,000
3. C)
$60,000
4. D)
$30,000
Answer: D
Explanation: First, determine fixed costs as follows:
Contribution margin ratio = (Selling price per unit − Variable
costs per unit) ÷ Selling price per unit
Contribution margin ratio = ($50 per unit − $20) ÷ $50 per unit
= 60%
Break-even point in dollars = Fixed costs ÷ Contribution margin
ratio
$150,000 = Fixed costs ÷ 0.60
Fixed costs = $150,000 × 0.60 = $90,000
Then, determine profit:
Sales − Variable costs − Fixed costs = Profit
[($50 per unit − $20 per unit) × 4,000 units] − $90,000 =
$30,000
Difficulty: 3 Hard
Topic: Contribution Margin Ratio Method; Equation Method
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
15) The records of Gemini Company show a contribution margin
ratio of 40%. The company desires to earn a profit of $35,000 and has fixed
costs of $70,000. What sales revenue would have to be generated in order to
earn the desired profit?
1. A)
$87,500
2. B)
$262,500
3. C)
$175,000
4. D)
$42,000
Answer: B
Explanation: Sales volume in dollars = (Fixed costs +
Desired profit) ÷ Contribution margin ratio
Sales volume in dollars = ($70,000 + $35,000) ÷ 0.40 = $262,500
Difficulty: 3 Hard
Topic: Determining the Sales Volume Necessary to Reach a
Desired Profit
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
16) During the current year, Winchester Company sold 80,000 units
at a selling price of $20 per unit. Variable cost per unit was $15, and
Winchester’s net income for the year was $40,000. What was the amount of
Winchester’s fixed costs?
1. A)
$360,000
2. B)
$440,000
3. C)
$1,160,000
4. D)
$400,000
Answer: A
Explanation: Sales − Variable costs − Fixed costs = Profit
($20 per unit × 80,000 units) − ($15 per unit × 80,000 units) −
Fixed costs = $40,000
$1,600,000 − $1,200,000 − Fixed costs = $40,000
Fixed costs = $400,000 − $40,000 = $360,000
Difficulty: 3 Hard
Topic: Equation Method
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
17) Newton Company currently produces and sells 4,000 units of a
product that has a contribution margin of $6 per unit. The company sells the
product for a sales price of $20 per unit. Fixed costs are $18,000. The company
is considering investing in new technology that would decrease the variable
cost per unit to $8 per unit and double total fixed costs. The company expects
the new technology to increase production and sales to 9,000 units of product.
What sales price would have to be charged to earn a $99,000 target profit
assuming the investment in technology is made?
1. A)
$22
2. B)
$23
3. C)
$15
4. D)
$13
Answer: B
Explanation: Sales − Variable costs − Fixed costs =
Desired profit
(Selling price per unit × 9,000 units) − ($8 per unit × 9,000
units) − ($18,000 + $18,000) = $99,000
(Selling price per unit × 9,000 units) − $72,000 − $36,000 =
$99,000
Selling price per unit × 9,000 units = $99,000 + $108,000
Selling price per unit = $207,000 ÷ 9,000 units = $23 per unit
Difficulty: 3 Hard
Topic: Perform Sensitivity Analysis Using the Equation
Method
Learning Objective: 03-05 Conduct sensitivity analysis
using spreadsheet software and the equation method.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
18) Harris Company produces a product whose cost is $10.
Assuming the company uses a cost-plus pricing system, what selling price would
the company set to earn a profit margin of 20% of cost?
2. A)
$2.00
3. B)
$12.50
4. C)
$50.00
5. D)
$12.00
Answer: D
Explanation: Selling price per unit = Cost per unit +
Markup
Selling price per unit = $10 per unit + ($10 per unit × 0.20) =
$12.00 per unit
Difficulty: 3 Hard
Topic: Assessing the Effects of Changes in Sales Price or
Volume
Learning Objective: 03-02 Explain how a change in sales
price, sales volume, variable cost, or fixed cost affects profitability.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
19) Camden Company sets the selling price for its product by
adding a markup to the product’s variable manufacturing costs. This approach to
pricing is referred to as:
1. A)
cost-plus pricing
2. B)
target pricing
3. C)
target costing
4. D)
contribution margin-based pricing
Answer: A
Difficulty: 1 Easy
Topic: Assessing the Effects of Changes in Sales Price or
Volume
Learning Objective: 03-02 Explain how a change in sales
price, sales volume, variable cost, or fixed cost affects profitability.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
20) The pricing strategy that begins with the determination of a
price at which a product will sell and then focuses on developing a cost
structure for the product that will yield a profit is known as:
1. A)
cost-plus pricing.
2. B)
prestige pricing.
3. C)
developmental pricing.
4. D)
target costing.
Answer: D
Difficulty: 1 Easy
Topic: Assessing the Effects of Changes in Sales Price or
Volume
Learning Objective: 03-02 Explain how a change in sales
price, sales volume, variable cost, or fixed cost affects profitability.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
21) A pricing strategy that sets the price at a premium under
the assumption that people will pay more for the product because of the
product’s brand name, media attention, or some other reason that has piqued the
interest of the public is known as:
1. A)
cost-plus pricing.
2. B)
contribution margin-based pricing.
3. C)
target pricing.
4. D)
prestige pricing.
Answer: D
Difficulty: 1 Easy
Topic: Assessing the Effects of Changes in Sales Price or
Volume
Learning Objective: 03-02 Explain how a change in sales
price, sales volume, variable cost, or fixed cost affects profitability.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
22) Chester Company plans to introduce a new product. A market
research specialist claims that 20,000 units can be sold at a $100 selling
price. Assuming the company desires a profit margin of 22% of sales, what is
the target cost per unit?
128.
A) $128.21
129.
B) $78
130.
C) $80
131.
D) $20
Answer: B
Explanation: Selling price per unit = Target cost per unit
+ Markup
Target cost per unit = Selling price per unit − Markup
Target cost per unit = $100 per unit − ($100 per unit × 0.22) =
$100 per unit − $22 per unit = $78 per unit
Difficulty: 3 Hard
Topic: Assessing the Effects of Changes in Sales Price or
Volume
Learning Objective: 03-02 Explain how a change in sales
price, sales volume, variable cost, or fixed cost affects profitability.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
23) A market research specialist told Peachtree Company that it
could expect to sell 500,000 units of its new high-capacity computer disk at a
price of $5. Assuming the company desires a profit margin equal to 20% of
sales, what target cost per unit is necessary?
1. A)
$1.00
2. B)
$4.00
3. C)
$3.00
4. D)
None of these answers is correct
Answer: B
Explanation: Selling price per unit = Target cost per unit
+ Markup
$5 = Target cost per unit + ($5 per unit × 0.20)
Target cost per unit = $5 − ($5 × 0.20) = $4 per unit
Difficulty: 3 Hard
Topic: Assessing the Effects of Changes in Sales Price or
Volume
Learning Objective: 03-02 Explain how a change in sales
price, sales volume, variable cost, or fixed cost affects profitability.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
24) Acme Company has variable costs equal to 30% of sales. The
company is considering a proposal that will increase sales by $10,000 and total
fixed costs by $7,000. By what amount will net income increase?
1. A) $0
2. B)
$3,000
3. C)
$7,000
4. D)
$4,000
Answer: A
Explanation: Profit = Sales − Variable costs − Fixed costs
Profit = $10,000 − ($10,000 × 0.30) − $7,000 = $0
Difficulty: 3 Hard
Topic: Perform Sensitivity Analysis Using the Equation
Method
Learning Objective: 03-05 Conduct sensitivity analysis
using spreadsheet software and the equation method.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
25) Which of the following is not an assumption made when
performing cost-volume-profit analysis?
1. A)
Number of units produced is greater than the number of units sold.
2. B)
Worker efficiency is held constant.
3. C)
The company produces within the relevant range of activity.
4. D)
There is a linear relationship between cost and volume for both fixed and
variable cost.
Answer: A
Difficulty: 1 Easy
Topic: Cost-Volume-Profit Limitations
Learning Objective: 03-06 Perform multiproduct
cost-volume-profit analysis.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
26) How does the cost-volume-profit model accommodate non-linear
costs and revenues?
1. A)
Non-linear costs and revenues are ignored by the model.
2. B)
Inventory levels are segregated into distinct ranges within which a linear
relationship is expected to approximate the actual cost or revenue behavior.
3. C) It
is not a problem since non-linear costs and revenues do not exist in practice.
4. D)
None of these is correct.
Answer: B
Explanation: CVP is limited by a number of underlying
assumptions. These assumptions include, but are not limited to, the following.
Costs are linear. The variable cost per unit is constant and moves in direct
proportion with changes in sales volume. Total fixed costs do not change with
changes in sales volume. Efficiency and productivity are constant. Inventory
levels in manufacturing companies are constant.
Difficulty: 2 Medium
Topic: Cost-Volume-Profit Limitations
Learning Objective: 03-06 Perform multiproduct
cost-volume-profit analysis.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
27) Which of the following is not one of the assumptions
underlying cost-volume-profit analysis?
1. A)
Costs are linear.
2. B)
Production equals sales.
3. C)
All costs can be segregated into fixed and variable components.
4. D)
The selling price increases or decreases with changes in sales volume.
Answer: D
Difficulty: 1 Easy
Topic: Cost-Volume-Profit Limitations
Learning Objective: 03-06 Perform multiproduct
cost-volume-profit analysis.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
28) Markham Company has a contribution margin ratio of 25%. The
company is considering a proposal that will increase sales by $150,000. What
increase in profit can be expected assuming total fixed costs increase by
$25,000? (Do not round intermediate calculations.)
1. A)
$6,250
2. B)
$31,250
3. C)
$37,500
4. D)
$12,500
Answer: D
Explanation: Sales − Variable costs − Fixed costs = Profit
Contribution margin − Fixed costs = Profit
($150,000 × 0.25) − $25,000 = $12,500
Difficulty: 3 Hard
Topic: Perform Sensitivity Analysis Using the Equation
Method
Learning Objective: 03-05 Conduct sensitivity analysis
using spreadsheet software and the equation method.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
29) Billings Company has developed the following budgeted income
statement:
Sales Revenue (2,300 units × $14 sales
price)
$
32,200
Total Variable Expenses (2,300 × $6 per
unit)
(13,800 )
Contribution Margin
18,400
Fixed Expenses
(10,000 )
Net Income
$
8,400
The Company is experimenting with new engineering techniques and
believes it can reduce variable cost to $4.50 per unit and significantly
improve the product. The innovations would double fixed costs but the company
expects to be able to increase sales to 3,500 units. If this strategy is
pursued the company’s budgeted net income will:
250.
A) decrease by $4,250.
251.
B) increase by $4,850.
252.
C) increase by $13,250.
253.
D) decrease by $4,150.
Answer: B
Explanation: Sales − Variable costs − Fixed costs = Profit
($14 per unit × 3,500 units) − ($4.50 per unit × 3,500 units) −
($10,000 × 2) = $13,250
New profit − Old profit = Change in profit
$13,250 − $8,400 = $4,850
Difficulty: 3 Hard
Topic: Perform Sensitivity Analysis Using the Equation
Method
Learning Objective: 03-05 Conduct sensitivity analysis
using spreadsheet software and the equation method.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
30) A product has a contribution margin of $2.50 per unit and a
selling price of $25 per unit. Fixed costs are $20,000. Assuming new technology
increases the unit contribution margin by 50 percent but increases total fixed
costs by $13,750, what is the new break-even point in units?
1. A)
3,667 units
2. B)
3,333 units
3. C)
13,500 units
4. D)
9,000 units
Answer: D
Explanation: Break-even point in units with new technology
= Fixed costs ÷ Contribution margin per unit
Break-even point in units with new technology = ($20,000 +
$13,750) ÷ ($2.50 per unit × 1.5) = 9,000 units
Difficulty: 3 Hard
Topic: Perform Sensitivity Analysis Using the Equation
Method
Learning Objective: 03-05 Conduct sensitivity analysis
using spreadsheet software and the equation method.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
31) If a company experiences an increase in rent expense, the total
cost line on the cost-volume-profit graph will:
1. A)
shift upward, and the break-even point will shift downward.
2. B)
shift upward, and the break-even point will also shift upward.
3. C)
shift upward and have a steeper slope, and the break-even point will also shift
upward.
4. D)
shift upward and have a flatter slope, and the break-even point will be
unchanged.
Answer: B
Explanation: If fixed costs, such as rent, increase, the
total cost line will shift upward. Recall that the break-even point equals fixed
costs divided by the contribution margin per unit. If fixed costs increase, the
break-even point increases.
Difficulty: 2 Medium
Topic: Using the Cost-Volume-Profit Graph
Learning Objective: 03-03 Draw and interpret a
cost-volume-profit graph.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
32) Consider the following cost-volume-profit graph:
The line designated by the letter (B) represents which of the
following?
1. A)
Variable cost
2. B)
Break-even
3. C)
Total revenue
4. D)
Total cost
Answer: D
Difficulty: 1 Easy
Topic: Using the Cost-Volume-Profit Graph
Learning Objective: 03-03 Draw and interpret a
cost-volume-profit graph.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
33) Consider the following cost-volume-profit graph:
The line designated by the letter (A) represents which of the
following?
1. A)
Total revenue
2. B)
Total cost
3. C)
Total fixed cost
4. D)
None of these is correct.
Answer: A
Difficulty: 1 Easy
Topic: Using the Cost-Volume-Profit Graph
Learning Objective: 03-03 Draw and interpret a
cost-volume-profit graph.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
34) Consider the following cost-volume-profit graph:
The area designated by the letter (C) represents which of the
following?
1. A)
Profit area
2. B)
Loss area
3. C)
Break-even area
4. D)
Fixed cost area
Answer: B
Explanation: The intersection of the total sales line (A)
and the total cost line (B) represents the break-even point. The area below the
break-even point, in between the total sales line and total cost line, is the
area of loss.
Difficulty: 1 Easy
Topic: Using the Cost-Volume-Profit Graph
Learning Objective: 03-03 Draw and interpret a
cost-volume-profit graph.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
35) Consider the following cost-volume-profit graph:
What is the approximate amount of fixed costs in this
organization?
1. A) $0
2. B)
$25,000
3. C)
$60,000
4. D)
$30,000
Answer: D
Explanation: The point at which the total cost line (B)
intersects the vertical axis is the amount of fixed cost, which equals $30,000
in this situation.
Difficulty: 2 Medium
Topic: Using the Cost-Volume-Profit Graph
Learning Objective: 03-03 Draw and interpret a
cost-volume-profit graph.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
36) Consider the following cost-volume-profit graph:
Based on the information in the graph, the break-even point in
sales dollars is approximately equal to:
1. A)
$50,000.
2. B)
$30,000.
3. C)
$60,000.
4. D)
$20,000.
Answer: C
Explanation: The intersection of the total sales line (A)
and the total cost line (B) represents the break-even point, which is $60,000
in this situation.
Difficulty: 2 Medium
Topic: Using the Cost-Volume-Profit Graph
Learning Objective: 03-03 Draw and interpret a
cost-volume-profit graph.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
37) Columbus Industries makes a product that sells for $25 a
unit. The product has a $5 per unit variable cost and total fixed costs of
$9,000. At budgeted sales of 2,000 units, the margin of safety ratio is:
22.
A) 22.5%.
23.
B) 10%.
24.
C) 77.5%.
25.
D) None of these answers is correct.
Answer: C
Explanation: Break-even point in units = Fixed costs ÷
Contribution margin per unit
Break-even point in units = $9,000 ÷ ($25 − $5) = 450 units
Margin of safety = (Budgeted sales − Break-even sales) ÷
Budgeted sales
Margin of safety = (2,000 units − 450 units) ÷ 2,000 units =
77.5%
Difficulty: 3 Hard
Topic: Contribution Margin Ratio Method; Calculating the
Margin of Safety
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.; 03-04 Calculate and
interpret the margin of safety measure.
Bloom’s: Apply
AACSB: Knowledge Application; Communication
AICPA: FN Decision Making; BB Industry
38) The margin of safety ratio can be defined as the:
1. A)
Excess of budgeted sales over break-even sales divided by break-even sales.
2. B)
Excess of budgeted sales over break-even sales divided by budgeted sales.
3. C)
Excess of budgeted sales over fixed costs divided by budgeted sales.
4. D)
Excess of budgeted sales over variable costs divided by budgeted sales.
Answer: B
Difficulty: 1 Easy
Topic: Calculating the Margin of Safety
Learning Objective: 03-04 Calculate and interpret the
margin of safety measure.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
39) During the current year, Fairview Corporation sold 100,000
units of its product for $20 each. The variable cost per unit was $14, and
Fairview’s margin of safety was 40,000 units. What was the amount of Fairview’s
total fixed costs?
1. A)
$240,000
2. B)
$560,000
3. C)
$840,000
4. D)
$360,000
Answer: D
Explanation: First, determine break-even sales:
Margin of safety in units = Budgeted sales − Break-even sales
Margin of safety in units = 100,000 units − Break-even sales =
40,000
Break-even sales = 100,000 units − 40,000 units = 60,000 units
Then, determine fixed costs:
Break-even point in units = Fixed costs ÷ Contribution margin
per unit
60,000 units = Fixed costs ÷ ($20 per unit − $14 per unit)
Fixed costs = 60,000 units × $6 per unit = $360,000
Difficulty: 3 Hard
Topic: Calculating the Margin of Safety
Learning Objective: 03-04 Calculate and interpret the
margin of safety measure.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
40) Bruce Company recently reduced its advertising budget. All
other costs and revenues were unchanged. Select the response that indicates the
impact of the advertising cuts on the company’s break-even point and margin of safety.
Break-even
Point
Margin of Safety
1. A)
Increase Increase
2. B)
Decrease Decrease
3. C)
Increase Decrease
4. D)
Decrease Increase
5. A) A.
6. B) B.
7. C) C.
8. D) D.
Answer: D
Explanation: Recall that the break-even point equals fixed
costs divided by the contribution margin per unit. If fixed costs, such as
advertising, decrease, the break-even point decreases. The margin of safety
equals the excess of budgeted sales over break-even sales. If the break-even
point decreases, the margin of safety increases.
Difficulty: 2 Medium
Topic: Calculating the Margin of Safety; The Effect of
Cost Structure on the Break-Even Point
Learning Objective: 03-02 Explain how a change in sales
price, sales volume, variable cost, or fixed cost affects profitability.; 03-04
Calculate and interpret the margin of safety measure.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
41) Burke Company has a break-even of $600,000 in total sales.
Assuming the company sells its product for $50 per unit, what is its margin of
safety in units if sales total $850,000?
1. A)
5,000 units
2. B)
250,000 units
3. C)
12,000 units
4. D)
17,000 units
Answer: A
Explanation: Margin of safety = (Budgeted sales −
Break-even sales)
Margin of safety = ($850,000 − $600,000) = $250,000
Margin of safety in units = Margin of safety in dollars ÷
Selling price per unit
Margin of safety in units = $250,000 ÷ $50 per unit = 5,000
units
Difficulty: 3 Hard
Topic: Calculating the Margin of Safety
Learning Objective: 03-04 Calculate and interpret the
margin of safety measure.
Bloom’s: Apply
AACSB: Knowledge Application; Communication
AICPA: FN Decision Making; BB Industry
42) Which of the following software applications is most useful
for performing cost-volume-profit sensitivity analysis?
1. A)
Database software
2. B)
Spreadsheet software
3. C)
Presentation software
4. D)
Word processing software
Answer: B
Difficulty: 1 Easy
Topic: Perform Sensitivity Analysis Using Spreadsheet
Software
Learning Objective: 03-05 Conduct sensitivity analysis
using spreadsheet software and the equation method.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
43) When sales price, fixed cost, variable cost, and production
volume are changing simultaneously, the best approach to determining
profitability is:
1. A)
contribution margin.
2. B)
contribution ratio.
3. C)
sensitivity analysis.
4. D)
equation.
Answer: C
Difficulty: 1 Easy
Topic: Perform Sensitivity Analysis Using Spreadsheet
Software
Learning Objective: 03-05 Conduct sensitivity analysis
using spreadsheet software and the equation method.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
44) To get a feel for the impact on profits of various changes
in costs and volume levels, management should perform:
1. A)
cost benefit analysis
2. B)
sensitivity analysis
3. C)
cost analysis
4. D)
profitability analysis
Answer: B
Difficulty: 1 Easy
Topic: Perform Sensitivity Analysis Using Spreadsheet
Software
Learning Objective: 03-05 Conduct sensitivity analysis
using spreadsheet software and the equation method.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
45) The Victor Company sells two products. The following information
is provided:
Unit selling
price
$
100
$
150
Unit variable
cost
$
30
$
70
Number of units produced and
sold
20,000
60,000
What is the weighted average contribution margin per unit?
77.
A) $77.50
78.
B) $80.00
79.
C) $75.00
80.
D) $72.50
Answer: A
Explanation: Contribution margin per unit = Selling price
per unit − Variable costs per unit
Product A Contribution margin per unit = $100 per unit − $30 per
unit = $70 per unit
Product B Contribution margin per unit = $150 per unit − $70 per
unit = $80 per unit
Weighted average contribution margin per unit = [($70 per unit ×
20,000 units) + ($80 per unit × 60,000 units)] ÷ (20,000 units + 60,000 units)
= $77.50
Difficulty: 3 Hard
Topic: Determining the Break-Even Point
Learning Objective: 03-06 Perform multiproduct
cost-volume-profit analysis.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
46) The Travel Pro Company sells two kinds of luggage. The
company projected the following cost information for the two products:
Rolling
Bag
Carry-on Bag
Unit selling
price
$
250
$
120
Unit variable
cost
$
110
$
80
Number of units produced and
sold
4,000
6,000
The company’s total fixed costs are expected to be $280,000.
Based on this information, what is the combined number of units
of the two products that would be required to break even with the projected
sales mix? (Round your answer to the nearest whole unit.)
1. A)
3,500 units
2. B)
3,111 units
3. C)
1,556 units
4. D)
None of these is correct.
Answer: A
Explanation: Contribution margin per unit = Selling price
per unit − Variable costs per unit
Product A Contribution margin per unit = $250 per unit − $110
per unit = $140 per unit
Product B Contribution margin per unit = $120 per unit − $80 per
unit = $40 per unit
Weighted average contribution margin per unit = [($140 per unit
× 4,000 units) + ($40 per unit × 6,000 units)] ÷ (4,000 units + 6,000 units) =
$80
Break-even point in units = Fixed costs ÷ Contribution margin
per unit
Break-even point in units = $280,000 ÷ $80 per unit = 3,500
units
Difficulty: 3 Hard
Topic: Determining the Break-Even Point
Learning Objective: 03-06 Perform multiproduct
cost-volume-profit analysis.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
47) Zed Company sells two kinds of mainframe computer power
supplies. The company projected the following cost information for the two
products:
Standard
Supply
Heavy-Duty Supply
Unit selling
price
$
250
$
120
Unit variable
cost
$
110
$
50
Number of units produced and
sold
7,000
3,000
Assume that total fixed costs are $428,400. How many units of
the standard supply unit would be included in the total number of units
required to break even with the projected sales mix? (Round your answer to the
nearest whole unit)
1. A)
3,600 units
2. B)
2,520 units
3. C)
1,080 units
4. D)
2,040 units
Answer: B
Explanation: Contribution margin per unit = Selling price
per unit − Variable costs per unit
Standard Contribution margin per unit = $250 per unit − $110 per
unit = $140 per unit
Heavy-Duty Contribution margin per unit = $120 per unit − $50
per unit = $70 per unit
Weighted average contribution margin per unit = [($140 per unit
× 7,000 units) + ($70 per unit × 3,000 units)] ÷ (7,000 units + 3,000 units) =
$119
Break-even point in units = Fixed costs ÷ Contribution margin
per unit
Break-even point in units = $428,400 ÷ $119 per unit = 3,600
units
Break-even point for Standard = Total units × Proportionate
share of sales mix
Break-even point for Standard = 3,600 units × [7,000 ÷ (7,000 +
3,000)] = 2,520 units
Difficulty: 3 Hard
Topic: Determining the Break-Even Point; Managing the
Sales Mix
Learning Objective: 03-06 Perform multiproduct
cost-volume-profit analysis.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
48) Broadway Company produces and sells two models of
calculators. The following monthly data are provided:
Standard
Premium
Unit selling
price
$
100
$
150
Unit variable manufacturing
cost
$
60
$
90
Unit variable selling and administrative
cost
$
15
$
30
Number of units produced and
sold
3,000
1,000
Total monthly fixed costs are expected to be $15,000. What is
the break-even point in sales dollars at the expected sales mix? (Do not round
intermediate calculations.)
1. A)
$19,231
2. B)
$43,478
3. C)
$68,182
4. D)
$64,286
Answer: D
Explanation: Contribution margin per unit = Selling price
per unit − Variable costs per unit
Standard Contribution margin per unit = $100 − ($60 + $15) = $25
per unit
Premium Contribution margin per unit = $150 − ($90 + $30) = $30
per unit
Weighted average contribution margin per unit = [($25 per unit ×
3,000 units) + ($30 per unit × 1,000 units)] ÷ (3,000 units + 1,000 units) =
$26.25 per unit
Break-even point in units = Fixed costs ÷ Weighted average
contribution margin per unit
Break-even point in units = $15,000 ÷ $26.25 per unit =
571.42857 units (displayed here to 5th decimal point)
Break-even point = Total units × Proportionate share of sales
mix
Break-even point for Standard = 571.42857 units × [3,000 ÷
(3,000 + 1,000)] = 428.57143 units (displayed here to 5th decimal point)
Break-even point for Premium = 571.42857 units × [1,000 ÷ (3,000
+ 1,000)] = 142.85714 units (displayed here to 5th decimal point)
Sales at break-even point = ($100 per unit × 428.57143 units ) +
($150 per unit × 142.85714 units) = $42,857 + $21,429 = $64,286 (rounded)
Difficulty: 3 Hard
Topic: Determining the Break-Even Point
Learning Objective: 03-06 Perform multiproduct cost-volume-profit
analysis.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
49) Crown Company produces and sells two products. The following
monthly data are provided:
Slicer
Chopper
Unit selling price
$
10
$
15
Variable manufacturing costs
6
9
Variable selling and administrative
costs
1
1
Estimated unit sales per month
280
420
The break-even point for the current sales mix is 360 units (144
Slicer models and 216 Chopper models). What would be the impact on profit if
360 units are sold but 145 Slicer models are sold instead of 144?
1. A) $3
decrease
2. B) $5
increase
3. C) $2
decrease
4. D) $2
increase
Answer: C
Explanation: If the total units sold does not change but
one additional Slicer is sold, then one less Chopper is sold. The impact on
profit equals the change in the total contribution margin.
[1 × ($10 − $6 − $1)] − [1 × ($15 − $9 − $1)] = ($2)
Difficulty: 3 Hard
Topic: Managing the Sales Mix
Learning Objective: 03-06 Perform multiproduct
cost-volume-profit analysis.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
50) Company A has break-even sales of 90,000 units and budgeted
sales of 99,000 units. What is the margin of safety as expressed as a
percentage?
9. A)
9.00%
10.
B) 10.0%
11.
C) 9.09%
12.
D) None of these answers is correct.
Answer: C
Explanation: Margin of safety = (Budgeted sales −
Break-even sales) ÷ Budgeted sales
Margin of safety = (99,000 units − 90,000 units) ÷ 99,000 units
= 9.09%
Difficulty: 3 Hard
Topic: Calculating the Margin of Safety
Learning Objective: 03-04 Calculate and interpret the
margin of safety measure.
Bloom’s: Apply
AACSB: Knowledge Application; Communication
AICPA: FN Decision Making; BB Industry
51) If total fixed costs increase while variable costs and sales
price are unchanged, what happens to the break-even point?
1. A)
The break-even point increases, and therefore more units must be sold to break
even.
2. B)
The break-even point decreases, and therefore fewer units must be sold to break
even.
3. C)
The break-even point remains the same.
4. D)
The break-even point decreases and therefore more units must be sold to break
even.
Answer: A
Explanation: Recall that the break-even point equals fixed
costs divided by the contribution margin per unit. If fixed costs increase, the
break-even point increases. As a result, more units must be sold to break even.
Difficulty: 2 Medium
Topic: The Effect of Cost Structure on the Break-Even
Point
Learning Objective: 03-02 Explain how a change in sales
price, sales volume, variable cost, or fixed cost affects profitability.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
52) When drawing a cost-volume-profit graph, how are the axes
labeled?
1. A)
The horizontal axis would be labeled with dollars (of cost or revenue), while
the vertical axis would be labeled with number of units (volume or activity).
2. B)
The horizontal axis would be labeled with dollars (of total fixed costs), while
the vertical axis would be labeled with dollars (of total variable costs).
3. C)
The horizontal axis would be labeled with number of units (volume or activity),
while the vertical axis would be labeled with dollars (of cost or revenue).
4. D)
None of these answers is correct.
Answer: C
Difficulty: 1 Easy
Topic: Using the Cost-Volume-Profit Graph
Learning Objective: 03-03 Draw and interpret a
cost-volume-profit graph.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
53) Chesterfield Corporation has been operating well above its
break-even point. What will happen to Chesterfield’s margin of safety if the
variable cost per unit increases?
1. A)
The break-even point would decrease, and the margin of safety would decrease.
2. B)
The break-even point would decrease, and the margin of safety would increase.
3. C)
The break-even point would increase, and the margin of safety would decrease.
4. D)
The break-even point would increase, and the margin of safety would increase.
Answer: C
Explanation: Recall that the break-even point equals fixed
costs divided by the contribution margin per unit. If variable costs per unit
increase, contribution margin per unit decreases, and the break-even point
increases. As a result, more units must be sold to break even, which decreases
the margin of safety.
Difficulty: 2 Medium
Topic: Calculating the Margin of Safety
Learning Objective: 03-04 Calculate and interpret the
margin of safety measure.
Bloom’s: Understand
AACSB: Knowledge Application; Communication
AICPA: FN Decision Making; BB Industry
54) When performing sensitivity analysis, which of the following
is an example of a variable that management may consider changing to answer
“what if” questions?
1. A)
Variable cost per unit
2. B)
Sales price per unit
3. C)
Fixed cost per unit
4. D)
Both Variable cost per unit and Sales price per unit are correct.
Answer: D
Difficulty: 1 Easy
Topic: Perform Sensitivity Analysis Using Spreadsheet Software
Learning Objective: 03-05 Conduct sensitivity analysis
using spreadsheet software and the equation method.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
55) What happens to the break-even point in sales dollars when
the contribution margin ratio increases?
1. A)
Break-even point increases.
2. B)
Break-even point decreases.
3. C)
Break-even point stays the same.
4. D)
Not enough information to answer the question.
Answer: B
Explanation: Recall that the break-even point in sales
dollars equals fixed costs divided by the contribution margin ratio. If the
contribution margin ratio increases, the break-even point in sales dollars
decreases.
Difficulty: 2 Medium
Topic: The Effect of Cost Structure on the Break-Even
Point
Learning Objective: 03-02 Explain how a change in sales
price, sales volume, variable cost, or fixed cost affects profitability.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
56) Jasper Company has variable costs per unit of $20, fixed
costs of $300,000, and a break-even point of 60,000 units. What will be the new
break-even point in units if variable costs decrease by $3 per unit and fixed
costs increase by $100,000?
1. A)
93,333 units
2. B)
33,333 units
3. C)
50,000 units
4. D)
200,000 units
Answer: C
Explanation: First, determine the contribution margin:
Break-even point in units before changes = Fixed costs ÷
Contribution margin per unit
Break-even point in units before changes = $300,000 ÷ Contribution
margin per unit = 60,000 units
Contribution margin per unit = $300,000 ÷ 60,000 units = $5 per
unit
Break-even point in units after changes = ($300,000 + $100,000)
÷ ($5 per unit + $3 per unit) = 50,000 units
Difficulty: 3 Hard
Topic: The Effect of Cost Structure on the Break-Even
Point
Learning Objective: 03-02 Explain how a change in sales
price, sales volume, variable cost, or fixed cost affects profitability.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
57) Company X has variable costs per unit of $20, fixed costs of
$300,000, and a break-even point in units of 60,000 units. If the sales price
per unit decreases by $2 and the variable cost per unit decreases by $2, what
would happen to the break-even point?
1. A)
Break-even point increases.
2. B)
Break-even point in dollars decreases.
3. C)
Break-even point stays the same.
4. D)
Break-even point in dollars decreases and break-even point in units stays the
same.
Answer: D
Explanation: First, determine the contribution margin per
unit:
Break-even point in units before changes = Fixed costs ÷
Contribution margin per unit
Break-even point in units after changes = $300,000 ÷
Contribution margin per unit = 60,000 units
Contribution margin per unit = $300,000 ÷ 60,000 units = $5 per
unit
Then, determine the break-even point in units after the changes:
Break-even point in units after changes = Fixed costs ÷
Contribution margin per unit
Break-even point in units after changes = $300,000 ÷ ($5 per
unit − $2 per unit + $2 per unit) = 60,000 units (which is the same as the
break-even point before the changes).
Next, determine the selling price per unit:
Sales − Variable costs = Contribution margin
Sales − $20 per unit = $5 per unit
Sales = $20 per unit + $5 per unit = $25 per unit
Finally, determine the break-even points in sales dollars:
Break-even point in dollars before changes = 60,000 units × $25
per unit = $1,500,000
Break-even point in dollars before changes = 60,000 units × ($25
per unit − $2 per unit) = $1,380,000 (which is less than amount before
break-even point before the changes)
Difficulty: 3 Hard
Topic: Determining the Break-Even Point
Learning Objective: 03-02 Explain how a change in sales
price, sales volume, variable cost, or fixed cost affects profitability.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
58) What happens to break-even point when the sales price per
unit decreases?
1. A)
Break-even point increases.
2. B)
Break-even point decreases.
3. C) Break-even
point stays the same.
4. D)
None of these answers is correct.
Answer: A
Explanation: Recall that the break-even point in units
equals fixed costs divided by the contribution margin per unit. If selling
price per unit decreases, the contribution margin per unit decreases and the
break-even point in units increases. In addition, recall that the break-even
point in sales dollars equals fixed costs divided by the contribution margin
ratio. If selling price per unit decreases, the contribution margin ratio
decreases and the break-even point in sales dollars also increases.
Difficulty: 2 Medium
Topic: The Effect of Cost Structure on the Break-Even
Point
Learning Objective: 03-02 Explain how a change in sales
price, sales volume, variable cost, or fixed cost affects profitability.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
59) Assume that the company sells two products, X and Y, with
contribution margins per unit of $12 and $10, respectively. What happens to the
break-even point if the sales mix shifts to favor product X? (In other words,
sales of product X will make up a higher percentage of the sales mix.)
1. A)
Break-even point increases.
2. B)
Break-even point decreases.
3. C)
Break-even point stays the same.
4. D)
None of these answers is correct.
Answer: B
Explanation: Since Product X has a higher contribution
margin, shifting customers from Product Y to Product X will increase the
weighted average contribution margin. Since the break-even point is calculated
by dividing fixed costs by the weighted average contribution margin, an
increase in the weighted average contribution margin decreases the total
break-even point.
Difficulty: 2 Medium
Topic: Managing the Sales Mix
Learning Objective: 03-06 Perform multiproduct
cost-volume-profit analysis.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
60) What is the formula for calculating contribution margin
ratio?
1. A)
Contribution margin ÷ Net income
2. B)
Contribution margin ÷ Fixed costs
3. C)
Contribution margin ÷ Desired profit
4. D)
Contribution margin ÷ Sales
Answer: D
Difficulty: 1 Easy
Topic: Contribution Margin Ratio Method
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
61) Falls Company has a contribution margin of $32 per unit and
fixed costs of $500,000, and it desires to earn a profit of $100,000. What is the
sales volume in units required to achieve this desired profit?
1. A)
3,125 units
2. B)
18,750 units
3. C)
15,625 units
4. D)
12,500 units
Answer: B
Explanation: Sales volume in units = (Fixed costs +
Desired profit) ÷ Contribution margin per unit
Sales volume in units = ($500,000 + $100,000) ÷ $32 per unit =
18,750 units
Difficulty: 3 Hard
Topic: Determining the Sales Volume Necessary to Reach a
Desired Profit
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
62) At the break-even point:
1. A)
Sales would be equal to total costs.
2. B)
Contribution margin would be equal to total fixed costs.
3. C)
Sales would be equal to fixed costs.
4. D)
Both sales would be equal to total costs and contribution margin would be equal
to total fixed costs are correct.
Answer: D
Explanation: Since net income is zero at the break-even
point, sales would be equal to total costs and contribution margin would be
equal to total fixed costs. However, sales would not be equal to fixed costs.
Difficulty: 1 Easy
Topic: Determining the Break-Even Point
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
63) Which of the following statements regarding Company A is
incorrect?
1. A) If
Company A has fixed costs of $720,000, a selling price of $50 per unit, and contribution
margin of $30 per unit, its break-even point in units is 36,000 units.
2. B) If
Company A has fixed costs of $720,000, a selling price of $50 per unit, and
contribution margin of $30 per unit, its variable expenses must be $20 per
unit.
3. C) If
Company A has fixed costs of $720,000, a selling price of $50 per unit, and
contribution margin of $30 per unit, once it has covered its fixed costs, net
income will increase by $30 for each additional unit sold.
4. D)
Both if Company A has fixed costs of $720,000, a selling price of $50 per unit,
and contribution margin of $30 per unit, its break-even point in units is
36,000 units and if Company A has fixed costs of $720,000, a selling price of
$50 per unit, and contribution margin of $30 per unit, its variable expenses
must be $20 per unit are incorrect.
Answer: A
Explanation: Break-even point in units = Fixed costs ÷
Contribution margin per unit
Break-even point in units = $720,000 ÷ $30 per unit = 24,000
units (rather than 36,000 units)
Selling price per unit − Variable cost per unit = Contribution
margin per unit
$50 per unit − Variable costs per unit = $30 per unit (which is
the increase in profit for each additional unit sold)
Variable costs per unit = $50 per unit − $30 per unit = $20 per
unit
Difficulty: 3 Hard
Topic: Contribution Margin per Unit Method; Determining
the Break-Even Point
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
64) Which of the following statements about a cost-volume-profit
graph is correct?
1. A) A
cost-volume-profit graph is prepared with activity (number of units) on the
vertical axis.
2. B)
The intersection of the total sales line and the total cost line represents the
break-even point.
3. C)
The area above the break-even point represents the area of loss.
4. D)
The total cost line intersects the vertical axis at the dollar amount of total
variable costs.
Answer: B
Explanation: At the break-even point a company’s sales
equal its total costs resulting in zero net income. Therefore, the break-even
point on a CVP graph is at the intersection of the total sales line and the
total cost line.
Difficulty: 1 Easy
Topic: Using the Cost-Volume-Profit Graph
Learning Objective: 03-03 Draw and interpret a
cost-volume-profit graph.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
65) Bloom Company has variable cost per unit of $20 and a sales
price of $35 per unit. Its total fixed costs are $240,000. Which of the
following is a correct statement?
1. A)
Company D’s break-even point is 12,000 units.
2. B) If
budgeted sales are 25,000 units, D’s margin of safety is 10,000 units.
3. C) If
Company D’s variable cost per unit increases and nothing else changes, the
margin of safety will decrease.
4. D) If
Company D’s variable cost per unit decreases and nothing else changes, the
break-even point will stay the same.
Answer: C
Explanation: Recall that the break-even point equals fixed
costs divided by the contribution margin per unit. If variable costs per unit
increase, the contribution margin per unit decreases and the break-even point
increases. If the break-even point increases, the margin of safety will
decrease.
Difficulty: 2 Medium
Topic: Calculating the Margin of Safety; The Effect of
Cost Structure on the Break-Even Point
Learning Objective: 03-02 Explain how a change in sales
price, sales volume, variable cost, or fixed cost affects profitability.; 03-04
Calculate and interpret the margin of safety measure.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
66) Joseph Company has variable costs of $80 per unit, total
fixed costs of $200,000, and a break-even point of 5,000 units. If the variable
cost per unit decreases by $8, how many units must Joseph Company sell to break
even?
1. A)
2,778 units
2. B)
2,500 units
3. C)
6,250 units
4. D)
4,167 units
Answer: D
Explanation: First, calculate contribution margin before
the change:
Break-even point in units before change = Fixed costs ÷
Contribution margin per unit
5,000 units = $200,000 ÷ Contribution margin per unit
Contribution margin per unit = $200,000 ÷ 5,000 units = $40 per
unit
Then calculate the break-even point in units after change:
Break-even point in units after change = $200,000 ÷ ($40 per
unit + $8 per unit) = 4,167 units
Difficulty: 3 Hard
Topic: The Effect of Cost Structure on the Break-Even
Point
Learning Objective: 03-02 Explain how a change in sales
price, sales volume, variable cost, or fixed cost affects profitability.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
67) Sharon Company has variable costs of $80 per unit, total
fixed costs of $200,000, and a break-even point of 5,000 units. If the sales
price per unit is increased by $10, how many units must Sharon Company sell to
break even?
1. A)
4,000 units
2. B)
5,000 units
3. C)
6,000 units
4. D)
3,000 units
Answer: A
Explanation: First, calculate contribution margin before
the change:
Break-even point in units before change = Fixed costs ÷
Contribution margin per unit
5,000 units = $200,000 ÷ Contribution margin per unit
Contribution margin per unit = $200,000 ÷ 5,000 units = $40 per
unit
Then calculate the break-even point in units after change:
Break-even point in units after change = $200,000 ÷ ($40 per
unit + $10 per unit) = 4,000 units
Difficulty: 3 Hard
Topic: The Effect of Cost Structure on the Break-Even
Point
Learning Objective: 03-02 Explain how a change in sales
price, sales volume, variable cost, or fixed cost affects profitability.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
68) Select the incorrect statement regarding cost-volume-profit
relationships for multiple products.
1. A)
For a company that sells many different products, the level of the break-even
point is affected by the company’s sales mix.
2. B) An
increase in sales volume accompanied by a change in sales mix could cause a
company’s profits to decrease.
3. C)
For a multi-product company, cost-volume-profit analysis can be done using the
contribution margin ratio of the most profitable product.
4. D)
None of these answers is correct.
Answer: C
Difficulty: 2 Medium
Topic: Determining the Sales Volume Necessary to Reach a
Desired Profit; Managing the Sales Mix
Learning Objective: 03-06 Perform multiproduct
cost-volume-profit analysis.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
69) Select the correct statement regarding break-even point
analysis.
1. A)
The break-even point in sales dollars equals total fixed costs divided by
contribution margin per unit.
2. B) An
increase in fixed costs causes the break-even point to increase.
3. C) An
increase in contribution margin per unit causes the break-even point in units
to increase.
4. D) A
decrease in the variable cost per unit causes the break-even point in units to
increase.
Answer: B
Difficulty: 2 Medium
Topic: Determining the Break-Even Point; The Effect of
Cost Structure on the Break-Even Point
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.; 03-02 Explain how a
change in sales price, sales volume, variable cost, or fixed cost affects
profitability.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
70) Which of the following statements regarding
cost-volume-profit analysis is incorrect?
1. A)
Cost-volume-profit analysis assumes that fixed cost per unit is constant.
2. B)
Cost-volume-profit analysis assumes that the selling price cost per unit is
constant.
3. C) An
increase in inventory during a period will affect cost-volume-profit
relationships.
4. D)
Although cost-volume-profit analysis is based on assumptions that seldom will
be perfectly achieved, the technique is still useful to managers.
Answer: A
Difficulty: 1 Easy
Topic: Cost-Volume-Profit Limitations
Learning Objective: 03-06 Perform multiproduct
cost-volume-profit analysis.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
71) Rose Corporation sells backpacks. Variable costs for this
product are $30 per unit, and the sales price per unit is $50 per unit. Total
fixed costs amount to $100,000. How many backpacks does Rose need to sell to
achieve a desired profit of $60,000?
1. A)
2,000 units
2. B)
5,000 units
3. C)
5,333 units
4. D)
8,000 units
Answer: D
Explanation: Sales volume in units = (Fixed costs +
Desired profit) ÷ Contribution margin per unit
Sales volume in units = ($100,000 + $60,000) ÷ ($50 per unit −
$30 per unit) = 8,000 units
Difficulty: 3 Hard
Topic: Determining the Sales Volume Necessary to Reach a
Desired Profit
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
72) Martinez Company sells one product that has a sales price of
$20 per unit, variable costs of $8 per unit, and total fixed costs of $200,000.
what is the contribution margin ratio?
1. A)
40%
2. B)
60%
3. C)
50%
4. D)
66%
Answer: B
Explanation: Contribution margin ratio = (Selling price
per unit − Variable costs per unit) ÷ Selling price per unit
Contribution margin ratio = ($20 per unit − $8) ÷ $20 per unit =
60%
Difficulty: 3 Hard
Topic: Contribution Margin Ratio Method
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
73) Ng Company sells one product that has a sales price of $20
per unit, variable costs of $12 per unit, and total fixed costs of $300,000.
What is the amount of sales volume in dollars necessary to attain a desired
profit of $100,000?
1. A)
$250,000
2. B) $750,000
3. C)
$1,000,000
4. D)
$666,667
Answer: C
Explanation: Contribution margin ratio = (Selling price
per unit − Variable costs per unit) ÷ Selling price per unit
Contribution margin ratio = ($20 per unit − $12 per unit) ÷ $20
per unit = 40%
Sales volume in dollars = (Fixed costs + Desired profit) ÷
Contribution margin ratio
Sales volume in dollars = ($300,000 + $100,000) ÷ 0.40 =
$1,000,000
Difficulty: 3 Hard
Topic: Determining the Sales Volume Necessary to Reach a
Desired Profit
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
74) Select the correct statement regarding the contribution
margin ratio.
1. A)
The contribution margin ratio can be calculated using either total amounts or
per unit amounts.
2. B)
The contribution margin ratio equals contribution margin per unit divided by
variable cost per unit.
3. C)
Total fixed costs divided by the contribution margin ratio equals the
break-even point in units.
4. D) An
increase in variable cost per unit will cause the contribution margin ratio to
increase.
Answer: A
Explanation: The contribution margin ratio is contribution
margin divided by sales. It can be calculated using per unit amounts such as
contribution margin per unit / sales price per unit. It can also be calculated
using total amounts such as total contribution margin / total sales.
Difficulty: 1 Easy
Topic: Contribution Margin Ratio Method
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
75) For a company using target costing, market price minus
profit equals target price.
Answer: FALSE
Explanation: Target costing begins by determining the
market price at which a product will sell. This becomes the target price.
Difficulty: 1 Easy
Topic: Assessing the Effects of Changes in Variable Costs;
Assessing the Effects of Changes in Fixed Costs; Assessing the Effects of
Changes in Sales Price or Volume; The Effect of Cost Structure on the
Break-Even Point
Learning Objective: 03-02 Explain how a change in sales
price, sales volume, variable cost, or fixed cost affects profitability.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
76) Adams Company sells a product whose contribution margin is
$10 and selling price is $25. If the company’s break-even point is 100 units, its
total fixed costs must be $500.
Answer: FALSE
Explanation: Break-even point in units = Fixed costs ÷
Contribution margin per unit
100 units = Fixed costs ÷ $10 per unit
Fixed costs = $10 per unit × 100 units = $1,000
Difficulty: 3 Hard
Topic: Contribution Margin per Unit Method
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
77) When computing the break-even point in units, a company
should round to the next whole unit because partial units ordinarily are not
sold.
Answer: TRUE
Difficulty: 1 Easy
Topic: Contribution Margin per Unit Method
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
78) Jensen Company has a contribution margin ratio of 45%. This
means that its variable costs are 55% of sales.
Answer: TRUE
Difficulty: 2 Medium
Topic: Contribution Margin Ratio Method
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
79) Wayans Company has a contribution margin ratio of 60%. This
means that its variable costs are 60% of sales.
Answer: FALSE
Explanation: At a contribution margin ratio of 60% it
indicates that variable costs are 40% of sales.
Difficulty: 2 Medium
Topic: Contribution Margin Ratio Method
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
80) Contribution margin ratio will remain the same at various
levels of sales even if total fixed costs are altered.
Answer: TRUE
Difficulty: 2 Medium
Topic: Assessing the Effects of Changes in Fixed Costs
Learning Objective: 03-02 Explain how a change in sales
price, sales volume, variable cost, or fixed cost affects profitability.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
81) To attain a target profit, the total gross margin generated
from sales must be sufficient to cover total fixed costs plus the target
profit.
Answer: FALSE
Explanation: To attain a target profit, the total
contribution margin from sales must be sufficient to cover total fixed costs
plus the target profit.
Difficulty: 2 Medium
Topic: Determining the Sales Volume Necessary to Reach a
Desired Profit
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
82) A company can use target profit analysis to determine the
level of sales required to earn a target loss.
Answer: TRUE
Difficulty: 1 Easy
Topic: Determining the Sales Volume Necessary to Reach a
Desired Profit
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
83) Assuming a company uses a markup equal to 25% of cost, the
cost of a product that sells for $100 is $75.
Answer: FALSE
Explanation: Selling price per unit = Cost per unit +
Markup
$100 = Cost per unit + (Cost per unit × 0.25)
$100 = 1.25 × Cost per unit
Cost per unit = $100 ÷ 1.25 = $80
Difficulty: 3 Hard
Topic: Assessing the Effects of Changes in Sales Price or
Volume
Learning Objective: 03-02 Explain how a change in sales
price, sales volume, variable cost, or fixed cost affects profitability.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
84) Target costing begins with determining the cost of the
product and then focusing on developing ways to sell the product at a price
that will enable the company to achieve its desired profit margin.
Answer: FALSE
Difficulty: 1 Easy
Topic: Assessing the Effects of Changes in Sales Price or
Volume
Learning Objective: 03-02 Explain how a change in sales
price, sales volume, variable cost, or fixed cost affects profitability.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
85) One of the advantages of target costing is that it
specifically considers the probable market price for the product.
Answer: TRUE
Difficulty: 1 Easy
Topic: Assessing the Effects of Changes in Sales Price or Volume
Learning Objective: 03-02 Explain how a change in sales
price, sales volume, variable cost, or fixed cost affects profitability.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
86) If a company is operating beyond its break-even point, sale
of one more unit of product increases the company’s profit by the amount of the
unit contribution margin.
Answer: TRUE
Explanation: Recall that each additional unit sold will
increase profit by the contribution margin per unit. Once the fixed costs are
covered at the break-even point, the sales of each additional unit will
increase profit by an amount equal to the contribution margin per unit.
Difficulty: 2 Medium
Topic: Determining the Break-Even Point
Learning Objective: 03-01 Determine the sales volume
necessary to break even or to earn a desired profit.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
87) An increase in total fixed costs increases the break-even
point.
Answer: TRUE
Explanation: Recall that the break-even point equals fixed
costs divided by the contribution margin per unit. If fixed costs increase, the
break-even point increases.
Difficulty: 2 Medium
Topic: Assessing the Effects of Changes in Fixed Costs
Learning Objective: 03-02 Explain how a change in sales
price, sales volume, variable cost, or fixed cost affects profitability.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Decision Making; BB Industry
Comments
Post a Comment