Managerial Accounting 11th Canadian Edition By Garrison – Test Bank

 

 

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Sample Questions 

 

Chapter 04

Cost-Volume-Profit Relationships

 

 

Multiple Choice Questions

1.    Which of the following is defined as the difference between total sales in dollars and total variable expenses?
A.Margin of safety.
B. Operating income.
C. The gross margin.
D. The contribution margin.

 

Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Topic: 04-03 Contribution Margin

2.    Brasher Company manufactures and sells a single product that has a positive contribution margin. If the selling price and variable expenses both decrease by 5% and fixed expenses do not change, then what would be the effect on the contribution margin per unit and the contribution margin ratio?

	Contribution margin per unit	Contribution margin ratio
A)	Decrease	Decrease
B)	Decrease	No change
C)	No change	Decrease
D)	No change	No change

 

1.    Option A
B.Option B
C. Option C
D. Option D

 

Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting from changes in sales volume.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio

 

 

3.    Once the break-even point is reached, which of the following statements is true?
A.The total contribution margin changes from negative to positive.
B. Operating income will increase by the unit contribution margin for each additional item sold.
C. Variable expenses will remain constant in total.
D. The contribution margin ratio begins to decrease.

 

Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-02 Prepare and interpret a cost-volume-profit graph.
Topic: 04-03 Contribution Margin
Topic: 04-05 Preparing the Cost-Volume-Profit Graph

4.    The contribution margin ratio always increases when which of the following occurs?
A.Variable expenses as a percentage of sales increase.
B. Variable expenses as a percentage of sales decrease.
C. Break-even point increases.
D. Fixed Costs increase.

 

Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations

 

 

5.    If the fixed expenses of a product increase while variable expenses and the selling price remain constant, what will happen to the total contribution margin and the break-even point?

	Contribution margin	Break-even point
A)	Increase	Decrease
B)	Decrease	Increase
C)	No change	Increase
D)	No change	No change

1.    Option A
B.Option B
C. Option C
D. Option D

 

Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-08 Change in Fixed Cost and Sales Volume
Topic: 04-14 Break-Even Computations

6.    The total contribution margin decreases if sales volume remains the same and which of the following occurs?
A.Fixed expenses increase.
B. Fixed expenses decrease.
C. Variable expense per unit increases.
D. Variable expense per unit decreases.

 

Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Topic: 04-03 Contribution Margin
Topic: 04-09 Change in Variable Costs and Sales Volume
Topic: 04-12 Importance of the Contribution Margin

 

 

7.    The break-even in units sold will decrease if there is an increase in which of the following?
A.Unit sales volume.
B. Total fixed expenses.
C. Unit variable expenses.
D. Selling price.

 

Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-02 Prepare and interpret a cost-volume-profit graph.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-05 Preparing the Cost-Volume-Profit Graph
Topic: 04-11 Change in Variable Cost, Fixed Cost, and Sales Volume
Topic: 04-14 Break-Even Computations

8.    A company has sales of $87,500 at the break-even point and fixed costs are $35,000. Assuming cost behaviour does not change if sales increase by $20,000 how much will operating income will increase by?
A.$20,000.00.
B. $12,000.00.
C. $8,000.00.
D. $4,000.00.

At breakeven point CM = FC. CM ratio = 35,000/87,500 = 40%. Incremental operating income = $20,000 *.40 = $8,000.

 

Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting from changes in sales volume.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Topic: 04-03 Contribution Margin
Topic: 04-12 Importance of the Contribution Margin

 

 

9.    A company increased the selling price for its product from $1.00 to $1.10 a unit when total fixed expenses increased from $400,000 to $480,000 and the variable expense per unit remained unchanged at $0.50. How would these changes affect the break-even point?
A.The break-even point in units would increase.
B. The break-even point in units would decrease.
C. The break-even point in units would remain unchanged.
D. The effect cannot be determined from the information given.

B/E = 400,000/.50 = 800,000; 480,000/.60 = 800,000.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-10 Change in Fixed Costs, Selling Price, and Sales Volume
Topic: 04-14 Break-Even Computations

10.  Which of the following is defined as the ratio of fixed expenses to the unit contribution margin?
A.Break-even point in unit sales.
B. Profit margin.
C. Contribution margin ratio.
D. Margin of safety.

 

Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-14 Break-Even Computations

 

 

11.  The break-even point in unit sales increases when variable expenses do which of the following?
A.Increase, and the selling price remains unchanged.
B. Decrease, and the selling price, remains unchanged.
C. Decrease, and the selling price increases.
D. Remain unchanged, and the selling price increases.

 

Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-12 Importance of the Contribution Margin
Topic: 04-14 Break-Even Computations

12.  How is the margin of safety percentage computed?
A.Break-even sales divided by Total sales.
B. Total sales minus Break-even sales.
C. (Total sales – Break-even sales) divided by Break-even sales.
D. (Total sales – Break-even sales) divided by Total sales.

 

Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Topic: 04-17 The Margin of Safety

13.  When interpreting a CVP graph which of the following is NOT correct?
A.When sales are below the breakeven intersection the company incurs a loss.
B. The breakeven point is where the total revenue line meets the fixed cost line.
C. The anticipated profit or loss at any given level of sales is measured by the vertical distance between the total revenue line and the total expense line.
D. The total revenue line starts at the origin.

 

Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-02 Prepare and interpret a cost-volume-profit graph.
Topic: 04-05 Preparing the Cost-Volume-Profit Graph

 

 

14.  Which of the following is defined as the amount by which a company’s sales can decline before operating losses are incurred?
A.Contribution margin.
B. Degree of operating leverage.
C. Margin of safety.
D. Contribution margin ratio.

 

Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Topic: 04-17 The Margin of Safety

15.  How is the degree of operating leverage calculated?
A.Contribution margin divided by sales.
B. Gross margin divided by operating income.
C. Operating income divided by sales.
D. Contribution margin divided by operating income.

 

Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how operating leverage can be used to predict changes in operating income.
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage

16.  If company A has a higher degree of operating leverage than company B, then which of the following statements is true?
A.Company A has higher variable expenses.
B. Company A’s profits are more sensitive to percentage changes in sales.
C. Company A is more profitable.
D. Company A is less risky.

 

Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how operating leverage can be used to predict changes in operating income.
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage

 

 

17.  Marston Enterprises sells three chemicals: petrol, septine, and tridol. Petrol’s unit contribution margin is higher than septine’s, which is higher than tridol’s. Which one of the following events is most likely to increase the company’s overall break-even point?
A.The installation of new computer-controlled equipment and subsequent lay-off of assembly-line workers.
B. A decrease in tridol’s selling price.
C. An increase in the overall market demand for septine.
D. A change in the relative market demand for the products, with the increase favouring petrol relative to septine and tridol.

 

Blooms: Evaluate
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-09 Compute the break-even point for a multi-product company and explain the effects of changes in the sales mix on the contribution margin and the break-even point.
Topic: 04-23 The Definition of Sales Mix
Topic: 04-24 Sales Mix and Break-Even Analysis

18.  A company has provided the following data:

Sales	3,000 units
Sales price	$70 per unit
Variable cost	$50 per unit
Fixed cost	$25,000

 

If the dollar contribution margin per unit is increased by 10%, total fixed cost is decreased by 20%, and all other factors remain the same, what will the outcome be for operating income?
A. Increase by $61,000.
B. Increase by $20,000.
C. Increase by $3,500.
D. Increase by $11,000.

($20 *.10) * 3,000 + (25,000 *.2) = $11,000.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Topic: 04-03 Contribution Margin
Topic: 04-10 Change in Fixed Costs, Selling Price, and Sales Volume

 

 

19.  A company has provided the following data:

Sales	3,000 units
Sales price	$70 per unit
Variable cost	$50 per unit
Fixed cost	$25,000

If the sales volume decreases by 25%, the variable cost per unit increases by 15%, and all other factors remain the same, what will the outcome be for operating income?
A. Decrease by $31,875.
B. Decrease by $15,000.
C. Increase by $20,625.
D. Decrease by $3,125.

Current CM = 3,000 * (70 – 50) = $60,000
New CM = (3,000 – 750) * (70 – 50 * 1.15) = $28,125
Decrease in operating income by = $31,875.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Topic: 04-09 Change in Variable Costs and Sales Volume

20.  Last year, Twins Company reported $750,000 in sales (25,000 units) and an operating income of $25,000. At the break-even point, the company’s total contribution margin equals $500,000. Based on this information, which of the following statements is true?
A.The company’s contribution margin ratio is 40%.
B. The company’s break-even point is 24,000 units.
C. The company’s variable expense per unit is $9.
D. The company’s variable expenses are 60% of sales.

CM ratio = (25,000 + 500,000)/750,000 =.7 so VC ratio is.3. Selling Price = 750,000/25,000 = $30. Var. Cost = $30 *.3 = $9.

 

Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-12 Importance of the Contribution Margin
Topic: 04-14 Break-Even Computations

 

 

21.  Last year, Black Company reported sales of $640,000, a contribution margin of $160,000, and an operating loss of $40,000. Based on this information, what was the break-even point?
A.$640,000.
B. $480,000.
C. $800,000.
D. $960,000.

(160,000 + 40,000)/(160,000/640,000) = $800,000.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-12 Importance of the Contribution Margin
Topic: 04-14 Break-Even Computations

22.  The break-even point in sales for Rice Company is $360,000, and the company’s contribution margin ratio is 20%. Its income tax rate is 40%. If Rice Company desires an after-tax operating profit of $84,000, what would total sales have to be?
A.$1,050,360.
B. $1,060,000.
C. $780,000.
D. Cannot be determined without additional information.

Exp. Op income = 84,000/(1 -.4) = $140,000
Sales = (360,000 *.20 + 140,000)/.20 = $1,060,000.

 

Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-14 Break-Even Computations
Topic: 04-16 After-Tax Analysis

 

 

23.  The margin of safety in the Flaherty Company is $24,000. If the company’s sales are $120,000 and its variable expenses are $80,000, what must its fixed expenses be?
A.$8,000.
B. $32,000.
C. $24,000.
D. $16,000.

FC = (120,000 – 24,000) * (1 – 80/120) = $32,000.

 

Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Topic: 04-03 Contribution Margin
Topic: 04-12 Importance of the Contribution Margin

24.  Young Company has a margin of safety percentage of 20%. The break-even point is $400,000 and the variable costs are 40% of sales. Given this information, what is the operating income?
A.$48,000.
B. $80,000.
C. $60,000.
D. $0.

FC = 400,000 * (1 -.40) = $240,000. Sales = 400,000/(1 -.20) = $500,000. Op. Income = 500,000 *.6 – 240,000 = $60,000.

 

Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations

 

 

25.  Dodero Company produces a single product that sells for $100 per unit. Fixed expenses total $12,000 per month, and variable expenses are $60 per unit. The company’s sales average 500 units per month. Which of the following statements is correct?
A.The company’s break-even point is $12,000 per month.
B. The fixed expenses remain constant at $24 per unit for any activity level within the relevant range.
C. The company’s contribution margin ratio is 40%.
D. Responses A, B, and C are all correct.

CM ratio = 1 – 60/100 = 40%.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting from changes in sales volume.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
Topic: 04-08 Change in Fixed Cost and Sales Volume

26.  North Company sells a single product. The product has a selling price of $30 per unit and variable expenses are 70% of sales. If the company’s fixed expenses total $60,000 per year, then what will be its break-even?
A.$60,000.
B. $85,714.
C. $42,000.
D. $200,000.

60,000/(1 -.70) = $200,000.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
Topic: 04-14 Break-Even Computations

 

 

27.  Gerber Company is planning to sell 200,000 units for $2.00 a unit and will just break even at this level of sales. The contribution margin ratio is 25%. What are the company’s fixed expenses?
A.$100,000.
B. $160,000.
C. $200,000.
D. $300,000.

200,000 * 2 *.25 = $100,000.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations

28.  Marling Corporation has budgeted the following data:

Expected Sales $600,000
Variable Expenses $420,000
Fixed Expenses $120,000

What is the break-even in sales dollars?
A.$400,000.
B. $420,000.
C. $540,000.
D. $660,000.

120,000/[(600,000 – 420,000)/600,000] = $400,000.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
Topic: 04-14 Break-Even Computations

 

 

29.  Wallace, Inc., prepared the following budgeted data based on a sales forecast of $6,000,000:

	Variable	Fixed
Direct materials	$1,600,000
Direct labour	1,400,000
Factory overhead	600,000	$900,000
Selling expenses	240,000	360,000
Administrative expenses	60,000	140,000
Total	$3,900,000	$1,400,000

What would be the amount of sales dollars at the break-even point?
A. $2,250,000.
B. $3,500,000.
C. $4,000,000.
D. $5,300,000.

1,400,000/[(6,000,000 – 3,900,000)/6,000,000] = $4,000,000.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations

30.  Koby Co. has sales of $200,000 with variable expenses of $150,000, fixed expenses of $60,000, and a net loss of $10,000. How much would Koby have to sell in order to achieve an operating income of 10% of sales?
A.$375,000.
B. $451,000.
C. $431,000.
D. $400,000.

CM ratio = (200,000 – 150,000)/200,000 =.25
Sales = 60,000/(.25 -.10) = $400,000.

 

Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting from changes in sales volume.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
Topic: 04-14 Break-Even Computations

 

 

31.  Green Company’s variable expenses are 75% of sales. At a sales level of $400,000, the company’s degree of operating leverage is 8. At this sales level, fixed expenses equal which of the following?
A.$87,500.
B. $100,000.
C. $50,000.
D. $75,000.

CM ratio = 25% CM = 400,000 *.25 = $100,000. Op. Income = 100,000/8 = 12,500. FC = $100,000 – 12,500 = $87,500.

 

Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting from changes in sales volume.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how operating leverage can be used to predict changes in operating income.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage

32.  Scott Company’s variable expenses are 72% of sales. The company’s break-even point in sales is $2,450,000. If sales are $60,000 below the break-even point, what operating loss would the company report?
A.$43,200.
B. $60,000.
C. $16,800.
D. Cannot be determined from the data given.

CM ratio = 1 -.72 =.28. Op. Loss = 60,000 *.28 = $16,800.

 

Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting from changes in sales volume.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-12 Importance of the Contribution Margin
Topic: 04-14 Break-Even Computations

 

 

33.  Last year, Perry Company reported profits of $4,200. Its total variable expenses were $66,000, or $6 per unit. The unit contribution margin was $3.00. What is the break-even point in units for Perry Company?
A.11,000 units.
B. 9,600 units.
C. 22,000 units.
D. 12,400 units.

Sales unit = $66,000/$6 per unit = 11,000 units. FC = 11,000 * $3 – 4,200 = $28,800.
B/E = $28,800/3 = 9,600 units.

 

Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations

34.  At a break-even point of 800 units sold, White Company’s variable expenses are $8,000 and its fixed expenses are $4,000. What will the company’s operating income be at a volume of 801 units?
A.$15.
B. $10.
C. $5.
D. $20.

CM/unit = 4,000/800 = $5 for one additional unit.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations

 

 

35.  The following information pertains to Rica Company:

Sales (50,000 units)	$1,000,000
Manufacturing costs:
Variable	340,000
Fixed	70,000
Selling and admin. Expenses:
Variable	10,000
Fixed	60,000

How much is Rica’s break-even point?
A. 9,848 units.
B. 10,000 units.
C. 18,571 units.
D. 26,000 units.

CM/unit = (1,000,000 – 340,000 – 10,000)/50,000 = $13.
B/E = (70,000 + 60,000)/13 = 10,000 units.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations

36.  Curtis Company anticipates selling 10,000 units next year. The company wants to earn an operating income equal to 10% of sales. If variable expenses are $12 per unit, and fixed expenses total $78,000 per year, what selling price must be established to achieve the desired level of operating income?
A.$19.80 per unit.
B. $18.00 per unit.
C. $21.78 per unit.
D. $22.00 per unit.

Sales = (120,000 + 78,000)/(1 -.10) = $220,000.
Selling Price = 220,000/10,000 = $22 per unit.

 

Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-03 Contribution Margin
Topic: 04-10 Change in Fixed Costs, Selling Price, and Sales Volume
Topic: 04-15 Target Operating Profit Analysis

 

 

37.  Carver Company produces a product that sells for $30. Variable manufacturing costs are $15 per unit. Fixed manufacturing costs are $5 per unit based on the current level of activity, and fixed selling and administrative costs are $4 per unit. A selling commission of 10% of the selling price is paid on each unit sold. What is the contribution margin per unit?
A.$3.
B. $15.
C. $8.
D. $12.

CM per unit = $30 – 15 – 30 *.10 = $12.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Topic: 04-03 Contribution Margin
Topic: 04-12 Importance of the Contribution Margin

38.  At a break-even point of 400 units sold, variable expenses were $4,000 and fixed expenses were $2,000. What will the 401^st unit sold contribute to operating income?
A.$0.
B. $5.
C. $10.
D. $15.

CM/unit = $2,000/400 units = $5 for an additional unit.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations

 

 

39.  The following information relates to Clyde Corporation, which produced and sold 50,000 units last month.

Sales	$850,000
Manufacturing costs:
Fixed	210,000
Variable	140,000
Selling and admin. Expenses:
Fixed	300,000
Variable	45,000

There were no beginning or ending inventories. Production and sales next month are expected to be 40,000 units. In the next month, what should the company’s unit contribution margin be?
A. $16.63.
B. $3.10.
C. $7.98.
D. $13.30.

CM per unit = (850,000 – 140,000 – 45,000)/50,000 = $13.30.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Topic: 04-03 Contribution Margin

40.  The following is last month’s contribution format income statement:

Sales (12,000 units)	$1,200,000
Less: variable expenses	700,000
Contribution margin	500,000
Less: fixed expenses	300,000
Operating income	$200,000

 

What is the company’s margin of safety percentage, rounded to the nearest whole percent?
A. 42%.
B. 40%.
C. 17%.
D. 20%.

MOS percentage = $1,200,000 – 300,000/(500,000/1,200,000) = $480,000 then $480,000/$1,200,000 = 40% of sales.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
Topic: 04-17 The Margin of Safety

 

 

41.  The following is last month’s contribution format income statement:

Sales (15,000 units)	$1,500,000
Less: variable expenses	900,000
Contribution margin	600,000
Less: fixed expenses	500,000
Operating income	$100,000

What is the company’s margin of safety in dollars?
A. $100,000.
B. $600,000.
C. $1,500,000.
D. $250,000.

1,500,000 – 500,000/(600,000/1,500,000) = $250,000.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
Topic: 04-17 The Margin of Safety

42.  The following data pertain to Wistron Company’s two products:

	Product X	Product Y
Sales in dollars	$100,000	$80,000
Contribution margin ratio	48%	30%

 

If fixed expenses for the company as a whole are $60,000 and the product mix is constant, what would be the overall break-even point in sales dollar for the company?
A. $150,000.
B. $153,846.
C. $100,000.
D. $132,000.

CM ratio = (100,000 *.48 + 80,000 *.30)/(100,000 + 80,000) = 40%.
B/E sales dollars = 60,000/.40 = $150,000.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-09 Compute the break-even point for a multi-product company and explain the effects of changes in the sales mix on the contribution margin and the break-even point.
Topic: 04-03 Contribution Margin
Topic: 04-23 The Definition of Sales Mix
Topic: 04-24 Sales Mix and Break-Even Analysis

 

 

43.  The following monthly data are available for the Phelps Company:

	Product A	Product B	Product C	Total
Sales	$150,000	$130,000	$90,000	$370,000
Variable expenses	91,000	104,000	27,000	222,000
Contribution margin	$59,000	$26,000	$63,000	148,000
Fixed expenses				55,000
				$93,000

What are the break-even sales for the month for the company?
A. $91,667.
B. $203,000.
C. $148,000.
D. $137,500.

BE sales dollars = 55,000/(148,000/370,000) = $137,500.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-09 Compute the break-even point for a multi-product company and explain the effects of changes in the sales mix on the contribution margin and the break-even point.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
Topic: 04-23 The Definition of Sales Mix
Topic: 04-24 Sales Mix and Break-Even Analysis

44.  The following data pertain to last month’s operations:

 

Selling price	$20 per unit
Variable production cost	$12 per unit
Fixed production cost	$3,000
Variable selling & administrative expenses	$3 per unit
Fixed selling & administrative expenses	$1,500

What is the break-even point in dollars?
A. $18,000.
B. $6,000.
C. $11,250.
D. $7,500.

BEP in dollar = $4,500/(20 – 12 – 3) * $20/unit = $18,000.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations

 

 

45.  The following data pertain to last month’s operations:

Selling price	$30 per unit
Variable production cost	$15 per unit
Fixed production cost	$80,000
Variable selling & administrative expenses	$3 per unit
Fixed selling & administrative expenses	$40,500

What is the break-even point in dollars?
A. $300,000.
B. $240,000.
C. $200,000.
D. $160,000.

BEP in dollar = (80,000 + 40,000)/(30 – 15 – 3) ´ 30 = $300,000.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations

46.  The following is last month’s contribution format income statement:

Sales (10,000 units)	$1,200,000
Less: variable expenses	800,000
Contribution margin	400,000
Less: fixed expenses	240,000
Operating income	$160,000

 

What is the company’s break-even sales in units?
A. 0 units.
B. 12,000 units.
C. 6,000 units.
D. 8,000 units.

BE units = 240,000/(400,000/10,000) = 6,000 units.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations

 

 

47.  The following is last month’s contribution format income statement(Do not round intermediate computations):

Sales (20,000 units)	$1,800,000
Less: variable expenses	1,200,000
Contribution margin	600,000
Less: fixed expenses	400,000
Operating income	$200,000

What is the company’s break-even in sales dollars?
A. $1,200,000.
B. $0.
C. $1,800,000.
D. $1,600,000.

BE sales dollars = 400,000/(600,000/1,800,000) = $1,200,000.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations

48.  Roberts Company sells a single product at a selling price of $55 per unit. Variable costs are $30.25 per unit, and fixed costs are $113,850. What is Roberts Company’s break-even point?
A.$207,000.
B. 3,764 units.
C. $253,000.
D. 2,070 units.

BEP = [113,850/(55 – 30.25)] * 55 = $253,000.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations

 

 

49.  A product sells for $20 per unit, and has a contribution margin ratio of 40%. Fixed expenses total $120,000 annually. The company that makes and sells the product has an income tax rate of 40%. How many units must be sold to yield an after-tax operating profit of $30,000?
A.21,250 units.
B. 18,750 units.
C. 24,375 units.
D. 14,167 units.

Op. Income = 30,000/(1 -.40) = $50,000.
Units required = (120,000 + 50,000)/(20 *.40) = 21,250 units.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
Topic: 04-16 After-Tax Analysis

50.  A total of 30,000 units were sold last year. The contribution margin per unit was $2, and total fixed expenses were $20,000 for the year. This year, fixed expenses are expected to increase to $26,000, but the contribution margin per unit will remain unchanged at $2. How many units must be sold this year to earn the same operating income as was earned last year?
A.23,000 units.
B. 33,000 units.
C. 30,000 units.
D. 13,000 units.

Op. Income last year = 30,000 * $2 – 20,000 = $40,000.
Units required = (26,000 + 40,000)/2 = 33,000 units.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-08 Change in Fixed Cost and Sales Volume
Topic: 04-14 Break-Even Computations
Topic: 04-15 Target Operating Profit Analysis

 

 

51.  A product sells for $20 per unit and has a contribution margin ratio of 40%. Fixed expenses total $240,000 annually. How many units of the product must be sold to yield an operating income of $60,000?
A.37,500 units.
B. 40,000 units.
C. 65,000 units.
D. 30,000 units.

(240,000 + 60,000)/(20 *.40) = 37,500 units.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-15 Target Operating Profit Analysis

52.  Lindsay Company reported the following results from sales of 5,000 units for the month of June:

Sales	$200,000
Variable expenses	$120,000
Fixed expenses	$60,000

 

Assume that Lindsay increases the selling price of the product by 10% on July 1. How many units would have to be sold in July in order to generate an operating income of $20,000?
A. 4,000 units.
B. 4,300 units.
C. 4,500 units.
D. 5,000 units.

new CM = (200,000/5,000 * 1.10 – 120,000/5,000 = $20/unit.
Units required = (60,000 + 20,000)/20 = 4,000 units.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-10 Change in Fixed Costs, Selling Price, and Sales Volume
Topic: 04-15 Target Operating Profit Analysis

 

 

53.  Austin Manufacturing had the following operating data for the year just ended:

Selling price per unit	$60 per unit
Variable expense per unit	$22 per unit
Fixed expenses	$504,000

Management plans to improve the quality of its only product by replacing a component that costs $3.50 with a higher-grade component that costs $5.50, and renting a packing machine for $18,000 a year. If the desired target operating profit is $288,000, how many units must the company sell?
A. 19,300 units.
B. 21,316 units.
C. 22,500 units.
D. 20,842 units.

(504,000 + 18,000 + 288,000)/(60 – 22 – 2) = 22,500 units.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-11 Change in Variable Cost, Fixed Cost, and Sales Volume
Topic: 04-15 Target Operating Profit Analysis

 

 

54.  Kern Company prepared the following tentative budget for next year:

Sales	$500,000
Selling price	$5 per unit
Variable expenses	$300,000
Fixed expenses	$150,000

The sales manager argues that the unit selling price could be increased by 20%, with an expected volume decrease of only 10%. If Kern incorporates these changes in its budget, what should be the budgeted operating income?
A. $66,000.
B. $90,000.
C. $120,000.
D. $145,000.

New CM = $5 * 1.20 – 300,000/100,000 = $3/unit.
Budgeted operating income = 90,000 * $3 – 150,000 = $120,000.

 

Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-03 Contribution Margin
Topic: 04-10 Change in Fixed Costs, Selling Price, and Sales Volume
Topic: 04-15 Target Operating Profit Analysis

 

 

55.  Wilson Company prepared the following preliminary budget assuming no advertising expenditures:

Selling price	$10 per unit
Unit sales	100,000
Variable expenses	$600,000
Fixed expenses	$300,000

Based on a market study, the company estimated that it could increase the unit selling price by 15% and increase the unit sales volume by 10%, if $100,000 were spent on advertising. Assuming that these changes are incorporated in its budget, what should be the budgeted operating income?
A. $175,000.
B. $190,000.
C. $205,000.
D. $365,000.

New CM = 10 * 1.15 – 600,000/100,000 = $5.50/unit.
Budgeted Operating Income = 100,000 * 1.10 * $5.50 – 300,000 – 100,000 = $205,000.

 

Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Topic: 04-03 Contribution Margin
Topic: 04-10 Change in Fixed Costs, Selling Price, and Sales Volume

 

 

56.  Loren Company’s single product has a selling price of $15 per unit. Last year, the company reported total variable expenses of $180,000, fixed expenses of $90,000, and an operating income of $30,000. A study by the sales manager discloses that a 15% increase in the selling price would reduce unit sales by 10%. If her proposal is adopted, what would the outcome be for operating income?
A.Increase by $45,000.
B. Increase by $37,500.
C. Increase by $7,500.
D. Increase by $28,500.

Total sales = 30,000 + 90,000 + 180,000 = $300,000. Units sold = 300,000/15 = 20,000 units. New CM = 15 * 1.15 – 180,000/20,000 = $8.25/unit.
New Op. Income = (20,000 *.90 * $8.25) – 90,000 = $58,500.
Therefore operating income will increase by 58,500 – 30,000 = $28,500.

 

Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Topic: 04-03 Contribution Margin
Topic: 04-10 Change in Fixed Costs, Selling Price, and Sales Volume

 

 

57.  The following monthly data are available for the Eager Company and its only product:

Unit sales price	$75
Unit variable expenses	$30
Total fixed expenses	$180,000
Actual sales for the month of March	7,000 units

What was the margin of safety for the company for March?
A. $315,000.
B. $225,000.
C. $135,000.
D. $495,000.

CM ratio = (75 – 30)/75 =.60.
Margin safety = 7,000 * $75 – 180,000/.60 = $225,000.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Topic: 04-03 Contribution Margin
Topic: 04-12 Importance of the Contribution Margin
Topic: 04-14 Break-Even Computations
Topic: 04-17 The Margin of Safety

58.  Ostler Company’s operating income last year was $10,000, and its contribution margin was $50,000. Using the operating leverage concept, if the company’s sales increase next year by 8%, by what percentage can its operating income expect to increase?
A.20%.
B. 16%.
C. 160%.
D. 40%.

(50,000/10,000) * 8% = 40%.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how operating leverage can be used to predict changes in operating income.
Topic: 04-01 Mobile Computations
Topic: 04-15 Target Operating Profit Analysis
Topic: 04-16 After-Tax Analysis

 

 

59.  If sales increase from $80,000 per year to $120,000 per year, and if the degree of operating leverage is 5, then by what percentage should operating income increase?
A.167%.
B. 250%.
C. 100%.
D. 334%.

(120,000 – 80,000)/80,000 * 5 = 250%.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how operating leverage can be used to predict changes in operating income.
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage

60.  The following is last month’s contribution format income statement:

Sales (8,000 units)	$800,000
Less: variable expenses	500,000
Contribution margin	300,000
Less: fixed expenses	200,000
Operating income	$100,000

 

What is the company’s degree of operating leverage?
A. 0.125.
B. 8.0.
C. 3.0.
D. 0.333.

DOL = 300,000/100,000 = 3.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how operating leverage can be used to predict changes in operating income.
Topic: 04-03 Contribution Margin
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage

 

 

61.  Goodman Company has sales of 3,000 units at $80 per unit. Variable costs are 35% of the sales price. If total fixed costs are $66,000, what is the degree of operating leverage rounded to 2 decimal places?
A.0.79.
B. 0.93.
C. 2.67.
D. 1.73.

CM = (80 – 80 *.35) * 3,000 units = $156,000
DOL = 156,000/(156,000 – 66,000) = 1.73.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how operating leverage can be used to predict changes in operating income.
Topic: 04-03 Contribution Margin
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage

The following is Addison Corporation’s contribution format income statement for last month:

Sales	$1,000,000
Less: variable expenses	700,000
Contribution margin	300,000
Less: fixed expenses	180,000
Operating income	$120,000

The company has no beginning or ending inventories. A total of 20,000 units were produced and sold last month.

 

 

 

62.  What is the company’s contribution margin ratio?
A.250%.
B. 150%.
C. 70%.
D. 30%.

CM ratio = 300,000/1,000,000 = 30%.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting from changes in sales volume.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio

63.  What is the company’s break-even in units?
A.20,000 units.
B. 0 units.
C. 18,000 units.
D. 12,000 units.

CM/unit = (300,000/20,000 = $15 used in 7,980 also. B/E = 180,000/15 = $12,000.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations

 

 

64.  If sales increase by 100 units, by how much should operating income increase?
A.$400.
B. $4,800.
C. $1,500.
D. $2,500.

100 * $15 = $1,500.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-02 Prepare and interpret a cost-volume-profit graph.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting from changes in sales volume.
Topic: 04-03 Contribution Margin
Topic: 04-05 Preparing the Cost-Volume-Profit Graph

65.  How many units would the company have to sell to attain target operating profits of $150,000?
A.22,000 units.
B. 37,500 units.
C. 25,000 units.
D. 26,667 units.

(180,000 + 150,000)/15 = 22,000 units.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-03 Contribution Margin
Topic: 04-15 Target Operating Profit Analysis

 

 

66.  What is the company’s margin of safety in dollars?
A.$400,000.
B. $600,000.
C. $120,000.
D. $880,000.

1,000,000 – 180,000/.30= $400,000.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
Topic: 04-17 The Margin of Safety

67.  What is the company’s degree of operating leverage?
A.0.12.
B. 2.5.
C. 0.4.
D. 3.3.

300,000/120,000 = 2.5.

 

Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how operating leverage can be used to predict changes in operating income.
Topic: 04-03 Contribution Margin
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage