Chapter 9--Break-Even Point and Cost-Volume-Profit Analysis

LEARNIN !B"EC#IVE$
LO 1 Why is variable costing more useful than absorption costing in determining the
break-even point and doing cost-volume-profit analysis?
LO 2 How is the break-even point determined using the formula approach graph
approach and income statement approach?
LO ! How can a company use cost-volume-profit "#$%& analysis?
LO ' How do break-even and #$% analysis differ for single-product and multiproduct
firms?
LO ( How are margin of safety and operating leverage concepts used in business?
LO ) What are the underlying assumptions of #$% analysis?
%&E$#I!N RI'
True/False
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"o#$letion
Difficulty Level Learning Objectives
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Difficulty Level Learning Objectives
Easy Moderate Difficult LO 1 LO 2 LO 3 LO 4 LO LO !
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&%ort 'ns(er

Difficulty Level Learning Objectives
Easy Moderate Difficult LO 1 LO 2 LO 3 LO 4 LO LO !
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)roble#
Difficulty Level Learning Objectives
Easy Moderate Difficult LO 1 LO 2 LO 3 LO 4 LO LO !
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*,
#R&E()AL$E
1- . company/s break-even point is the level where total revenues e0ual total costs-
.123 4 5673 8asy O9:3 ,-1
2- .bsorption costing is more useful than variable costing in determining a company/s break-even point-
.123 7 5673 8asy O9:3 ,-1
!- $ariable costing is more useful than absorption costing in determining a company/s break-even point-
.123 4 5673 8asy O9:3 ,-1
'- 4otal variable costs vary directly with levels of production-
.123 4 5673 8asy O9:3 ,-1
(- $ariable costs per unit vary directly with levels of production-
.123 7 5673 8asy O9:3 ,-1
)- $ariable costs per unit remain unchanged with levels of production-
.123 4 5673 8asy O9:3 ,-1
+- 4otal fi;ed costs remain unchanged with levels of production-
.123 4 5673 8asy O9:3 ,-1
*- 4otal fi;ed costs vary inversely with levels of production-
.123 7 5673 8asy O9:3 ,-1
,- 7i;ed costs per unit vary inversely with levels of production-
.123 4 5673 8asy O9:3 ,-1
1<- 7i;ed costs per unit remain constant with levels of production-
.123 7 5673 8asy O9:3 ,-1
11- 9reak-even point may be e;pressed in terms of units or dollars-
.123 4 5673 8asy O9:3 ,-1
12- 5ividing total fi;ed costs by the contribution margin ratio yields break-even point in sales dollars-
.123 4 5673 8asy O9:3 ,-2
,<
1!- 5ividing total fi;ed costs by the contribution margin ratio yields break-even point in units-
.123 7 5673 8asy O9:3 ,-2
1'- .fter the break-even point is reached each dollar of contribution margin is a dollar of before-ta;
profit-
.123 4 5673 8asy O9:3 ,-!
1(- .fter the break-even point is reached each dollar of contribution margin is a dollar of after-ta; profit-
.123 7 5673 8asy O9:3 ,-!
1)- When using #$% analysis to determine sales level for a desired amount of profit the profit is treated
as an additional cost to be covered-
.123 4 5673 =oderate O9:3 ,-!
1+- When computing profit on an after-ta; basis it is necessary to divide the preta; profit by the effective
ta; rate-
.123 7 5673 =oderate O9:3 ,-!
1*- When computing profit on an after-ta; basis it is necessary to divide the preta; profit by "1 - effective
ta; rate&-
.123 4 5673 =oderate O9:3 ,-!
1,- On a #$% graph the total cost line intersects the y-a;is at >ero-
.123 7 5673 =oderate O9:3 ,-!
2<- On a #$% graph the total variable cost line intersects the y-a;is at >ero-
.123 4 5673 =oderate O9:3 ,-!
21- On a #$% graph the total revenue line intersects the y-a;is at >ero-
.123 4 5673 =oderate O9:3 ,-!
22- On a #$% graph the total fi;ed cost line parallels the ;-a;is-
.123 4 5673 =oderate O9:3 ,-!
2!- 6ncremental analysis focuses on factors that change from one decision to another-
.123 4 5673 8asy O9:3 ,-!
2'- 6n a multi-product environment #$% analysis makes the assumption that a company/s sales mi; is
constant-
.123 4 5673 =oderate O9:3 ,-'
,1
2(- 4he margin of safety is an effective measure of risk for a company-
.123 4 5673 =oderate O9:3 ,-(
2)- 4here is an inverse relationship between degree of operating leverage and the margin of safety-
.123 4 5673 =oderate O9:3 ,-(
2+- 4he margin of safety is computed by dividing 1 by the degree of operating leverage-
.123 4 5673 =oderate O9:3 ,-(
2*- 6n #$% analysis sales and production are assumed to be e0ual-
.123 4 5673 =oderate O9:3 ,-)
C!*PLE#I!N
1- 4he level of activity where a company/s total revenues e0ual total costs is referred to as the
??????????????????????????????-
.123 break-even point
5673 8asy O9:3 ,-1
2- #ontribution margin divided by revenue is referred to as the ???????????????????????-
.123 contribution margin ratio
5673 8asy O9:3 ,-2
!- . process that focuses only on factors that change from one course of action to another is referred to as
??????????????????????????????????-
.123 incremental analysis
5673 8asy O9:3 ,-!
'- 4he e;cess of budgeted or actual sales over sales at break-even point is referred to as
?????????????????????????????????-
.123 margin of safety
5673 =oderate O9:3 ,-(
(- 4he relationship between a company/s variable costs and fi;ed costs is referred to as its
??????????????????????????????-
.123 operating leverage
5673 =oderate O9:3 ,-(
,2
)- 4he ?????????????????????????????????? is computed by dividing the contribution margin by
profit before ta;-
.123 degree of operating leverage
5673 =oderate O9:3 ,-(
+- 4he formula for margin of safety is ????????????????????????????????????????-
.123 1 @ 5egree of Operating Leverage
5673 =oderate O9:3 ,-(
*&L#IPLE C+!ICE
1- #$% analysis re0uires costs to be categori>ed as
a- either fi;ed or variable-
b- fi;ed mi;ed or variable-
c- product or period-
d- standard or actual-
.123 . 5673 8asy O9:3 ,-1,-)
2- With respect to fi;ed costs #$% analysis assumes total fi;ed costs
a- per unit remain constant as volume changes-
b- remain constant from one period to the ne;t-
c- vary directly with volume-
d- remain constant across changes in volume-
.123 5 5673 8asy O9:3 ,-2,-)
!- #$% analysis relies on the assumptions that costs are either strictly fi;ed or strictly variable-
#onsistent with these assumptions as volume decreases total
a- fi;ed costs decrease-
b- variable costs remain constant-
c- costs decrease-
d- costs remain constant-
.123 # 5673 8asy O9:3 ,-2,-)
'- .ccording to #$% analysis a company could never incur a loss that e;ceeded its total
a- variable costs-
b- fi;ed costs-
c- costs-
d- contribution margin-
.123 # 5673 8asy O9:3 ,-2,-)
(- #$% analysis is based on concepts from
a- standard costing-
b- variable costing-
c- Aob order costing-
d- process costing-
.123 9 5673 8asy O9:3 ,-2
,!
)- #ost-volume-profit analysis is a techni0ue available to management to understand better the
interrelationships of several factors that affect a firmBs profit- .s with many such techni0ues the
accountant oversimplifies the real world by making assumptions- Which of the following is not a
maAor assumption underlying #$% analysis?
a- .ll costs incurred by a firm can be separated into their fi;ed and variable components-
b- 4he product selling price per unit is constant at all volume levels-
c- Operating efficiency and employee productivity are constant at all volume levels-
d- 7or multi-product situations the sales mi; can vary at all volume levels-
.123 5 5673 8asy O9:3 ,-2
+- 6n #$% analysis linear functions are assumed for
a- contribution margin per unit-
b- fi;ed cost per unit-
c- total costs per unit-
d- all of the above-
.123 . 5673 8asy O9:3 ,-2,-)
*- Which of the following factors is involved in studying cost-volume-profit relationships?
a- product mi;
b- variable costs
c- fi;ed costs
d- all of the above
.123 5 5673 8asy O9:3 ,-2
,- #ost-volume-profit relationships that are curvilinear may be analy>ed linearly by considering only
a- fi;ed and mi;ed costs-
b- relevant fi;ed costs-
c- relevant variable costs-
d- a relevant range of volume-
.123 5 5673 8asy O9:3 ,-2
1<- .fter the level of volume e;ceeds the break-even point
a- the contribution margin ratio increases-
b- the total contribution margin e;ceeds the total fi;ed costs-
c- total fi;ed costs per unit will remain constant-
d- the total contribution margin will turn from negative to positive-
.123 9 5673 8asy O9:3 ,-2
11- Which of the following will de,rease the break-even point?
5ecrease in
fi;ed cost
6ncrease in direct
labor cost
6ncrease in
selling price
a-
yes yes yes
b-
yes no yes
c-
yes no no
d-
no yes no
.123 9 5673 8asy O9:3 ,-2
,'
12- .t the break-even point fi;ed costs are always
a- less than the contribution margin-
b- e0ual to the contribution margin-
c- more than the contribution margin-
d- more than the variable cost-
.123 9 5673 8asy O9:3 ,-2
1!- 4he method of cost accounting that lends itself to break-even analysis is
a- variable-
b- standard-
c- absolute-
d- absorption-
.123 . 5673 8asy O9:3 ,-2
1'- Civen the following notation what is the break-even sales level in units?
2% D selling price per unit 7# D total fi;ed cost $# D variable cost per unit
a- 2%E"7#E$#&
b- 7#E"$#E2%&
c- $#E"2% - 7#&
d- 7#E"2% - $#&
.123 5 5673 8asy O9:3 ,-2
1(- #onsider the e0uation F D 2ales - G"#=E2ales& "2ales&H- What is F?
a- net income
b- fi;ed costs
c- contribution margin
d- variable costs
.123 5 5673 =oderate O9:3 ,-2
1)- 6f a firmBs net income does not change as its volume changes the firm"Bs&
a- must be in the service industry-
b- must have no fi;ed costs-
c- sales price must e0ual I<-
d- sales price must e0ual its variable costs-
.123 5 5673 =oderate O9:3 ,-2
1+- 9reak-even analysis assumes over the relevant range that
a- total variable costs are linear-
b- fi;ed costs per unit are constant-
c- total variable costs are nonlinear-
d- total revenue is nonlinear-
.123 . 5673 8asy O9:3 ,-2,-)
,(
1*- 4o compute the break-even point in units which of the following formulas is used?
a- 7#E#= per unit
b- 7#E#= ratio
c- #=E#= ratio
d- "7#J$#&E#= ratio
.123 . 5673 8asy O9:3 ,-2
1,- . firmBs break-even point in dollars can be found in one calculation using which of the following
formulas?
a- 7#E#= per unit
b- $#E#=
c- 7#E#= ratio
d- $#E#= ratio
.123 # 5673 8asy O9:3 ,-2
2<- 4he contribution margin ratio al-ays increases when the
a- variable costs as a percentage of net sales increase-
b- variable costs as a percentage of net sales decrease-
c- break-even point increases-
d- break-even point decreases-
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21- 6n a multiple-product firm the product that has the highest contribution margin per unit will
a- generate more profit for each I1 of sales than the other products-
b- have the highest contribution margin ratio-
c- generate the most profit for each unit sold-
d- have the lowest variable costs per unit-
.123 # 5673 8asy O9:3 ,-',-)
22- ????????????? focuses only on factors that change from one course of action to another-
a- 6ncremental analysis
b- =argin of safety
c- Operating leverage
d- . break-even chart
.123 . 5673 8asy O9:3 ,-!
2!- 4he margin of safety would be negative if a company"Bs&
a- was presently operating at a volume that is below the break-even point-
b- present fi;ed costs were less than its contribution margin-
c- variable costs e;ceeded its fi;ed costs-
d- degree of operating leverage is greater than 1<<-
.123 . 5673 8asy O9:3 ,-(
,)
2'- 4he margin of safety is a key concept of #$% analysis- 4he margin of safety is the
a- contribution margin rate-
b- difference between budgeted contribution margin and actual contribution margin-
c- difference between budgeted contribution margin and break-even contribution margin-
d- difference between budgeted sales and break-even sales-
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2(- =anagement is considering replacing an e;isting sales commission compensation plan with a fi;ed
salary plan- 6f the change is adopted the companyBs
a- break-even point must increase-
b- margin of safety must decrease-
c- operating leverage must increase-
d- profit must increase-
.123 # 5673 =oderate O9:3 ,-(
2)- .s proAected net income increases the
a- degree of operating leverage declines-
b- margin of safety stays constant-
c- break-even point goes down-
d- contribution margin ratio goes up-
.123 . 5673 =oderate O9:3 ,-(
2+- . managerial preference for a very low degree of operating leverage might indicate that
a- an increase in sales volume is e;pected-
b- a decrease in sales volume is e;pected-
c- the firm is very unprofitable-
d- the firm has very high fi;ed costs-
.123 9 5673 =oderate O9:3 ,-(
#hompson Company
9elow is an income statement for 4hompson #ompany3
2ales
$400,000
$ariable costs
(125,000)
#ontribution margin
$275,000
7i;ed costs
(200,000)
%rofit before ta;es
$ 75,000
2*- Kefer to 4hompson #ompany- What is 4hompson/s degree of operating leverage?
a- !-)+
b- (-!!
c- 1-'(
d- 2-)+
.123 .
I"2+(<<<E+(<<<& D !-)+
5673 =oderate O9:3 ,-(
,+
2,- Kefer to 4hompson #ompany- 9ased on the cost and revenue structure on the income statement what
was 4hompson/s break-even point in dollars?
a- I2<<<<<
b- I!2(<<<
c- I!<<<<<
d- I2,<,<,
.123 5
#= %ercentage D I"2+(E'<<& D -)*+(
-)*+(; - I*<<<<< D <
; D I2,<,<,
5673 =oderate O9:3 ,-!
!<- Kefer to 4hompson #ompany- What was 4hompson/s margin of safety?
a- I2<<<<<
b- I+(<<<
c- I1<<<<<
d- I1<,<,1
.123 5

=argin of 2afety D I"'<<<<< - 2,<,<,&
D I1<,<,1
5673 8asy O9:3 ,-(
!1- Kefer to 4hompson #ompany- .ssuming that the fi;ed costs are e;pected to remain at I2<<<<< for the
coming year and the sales price per unit and variable costs per unit are also e;pected to remain
constant how much profit before ta;es will be produced if the company anticipates sales for the
coming year rising to 1!< percent of the current year/s level?
a- I,+(<<
b- I1,(<<<
c- I1(+(<<
d- . prediction cannot be made from the information given-
.123 #
#ontribution =argin L 1-2< D 1ew #ontribution =argin
I2+(<<< L 1-2< D I!(+(<<
#ontribution =argin - 7i;ed #osts D %rofit
I"!(+(<< - 2<<<<<& D I1(+(<<
5673 =oderate O9:3 ,-!
,*
Value Pro
$alue %ro produces and sells a single product- 6nformation on its costs follow3
$ariable costs3
2CM. I2 per unit
%roduction I' per unit
7i;ed costs3
2CM. I12<<< per year
%roduction I1(<<< per year
!2- Kefer to $alue %ro- .ssume $alue %ro produced and sold (<<< units- .t this level of activity it
produced a profit of I1*<<<- What was $alue %roBs sales price per unit?
a- I1(-<<
b- I11-'<
c- I,-)<
d- I1<-<<
.123 .
%rofit J 7i;ed #osts D #ontribution =argin
I1*<<< J I2+<<< D I'(<<<
I'(<<< E (<<< units D I, contribution margin per unit
#ontribution =argin J $ariable #osts D 2ales %riceENnit
I", J "' J 2&& D I1(ENnit
5673 =oderate O9:3 ,-!
!!- Kefer to $alue %ro- 6n the upcoming year $alue %ro estimates that it will produce and sell '<<< units-
4he variable costs per unit and the total fi;ed costs are e;pected to be the same as in the current year-
However it anticipates a sales price of I1) per unit- What is $alue %roBs proAected margin of safety for
the coming year?
a- I+<<<
b- I2<*<<
c- I1*'<<
d- I1!<<<
.123 9
%rofit at '<<< units
Cross 2ales D I1) L '<<< units D I)'<<<
#ontribution =argin D I"1) - )& D I1<Eunit
"I1<L'<<<& - I2+<<< D I"'<<<< - 2+<<<& D I1!<<<
9reakeven
<-)2(; - I2+<<< D I<
; D I'!2<<
I")'<<< - '!2<<& D I2<*<<
5673 =oderate O9:3 ,-(
,,
!'- Harris =anufacturing incurs annual fi;ed costs of I2(<<<< in producing and selling a single product-
8stimated unit sales are 12(<<<- .n after-ta; income of I+(<<< is desired by management- 4he
company proAects its income ta; rate at '< percent- What is the ma;imum amount that Harris can
e;pend for variable costs per unit and still meet its profit obAective if the sales price per unit is
estimated at I)?
a- I!-!+
b- I!-(,
c- I!-<<
d- I!-+<
.123 #
9efore 4a; 6ncome3 I+(<<< E <-)< D I12(<<<
7i;ed #osts3 2(<<<<
#ontribution =argin3 I!+(<<<
%roAected 2ales I+(<<<<
less3 #ontribution =argin !+(<<<
$ariable #osts I!+(<<<
I!+(<<< E 12(<<< units I!Eunit
5673 =oderate O9:3 ,-!
)olk Company
4he following information relates to financial proAections of 7olk #ompany3
%roAected sales )<<<< units
%roAected variable costs I2-<< per unit
%roAected fi;ed costs I(<<<< per year
%roAected unit sales price I+-<<
!(- Kefer to 7olk #ompany- How many units would 7olk #ompany need to sell to earn a profit before
ta;es of I1<<<<?
a- 2(+1'
b- 1<<<<
c- *(+1
d- 12<<<
.123 5
#ontribution =argin per Nnit3 I(
I(; - I(<<<< - I1<<<<
I(; D I)<<<<
; D 12<<< units
5673 =oderate O9:3 ,-!
1<<
!)- Kefer to 7olk #ompany- 6f 7olk #ompany achieves its proAections what will be its degree of operating
leverage?
a- )-<<
b- 1-2<
c- 1-)*
d- 2-'<
.123 9
1et profit D ")<<<< units L I(Eunit& - I(<<<<
D I!<<<<< - I(<<<<
D I2(<<<<
5OL D I"!<<<<<E12<<<<& D 1-2<
5673 =oderate O9:3 ,-(
!+- Nni0ue #ompany manufactures a single product- 6n the prior year the company had sales of I,<<<<
variable costs of I(<<<< and fi;ed costs of I!<<<<- Nni0ue e;pects its cost structure and sales price
per unit to remain the same in the current year however total sales are e;pected to increase by 2<
percent- 6f the current year proAections are reali>ed net income should e;ceed the prior year/s net
income by3
a- 1<< percent-
b- *< percent-
c- 2< percent-
d- (< percent-
.123 9
#ontribution margin3 I'<<<<
1et profit3 I"'<<<< - !<<<<& D I1<<<<
2<O #= increase3 I'<<<< L 1-2< D I'*<<<
1et profit3 I"'*<<< - !<<<<& D I1*<<<
6ncrease in profit I*<<<
I*<<<EI1<<<< D *<O
5673 =oderate O9:3 ,-!
E,le,ti, Corporation
8clectic #orporation manufactures and sells two products3 . and 9- 4he operating results of the
company are as follows3
%roduct . %roduct 9
2ales in units
2,000 3,000
2ales price per unit
$10 $5
$ariable costs per unit
7 3
6n addition the company incurred total fi;ed costs in the amount of I,<<<-
1<1
!*- Kefer to 8clectic #orporation-- How many total units would the company have needed to sell to break
even?
a- !+(<
b- +(<
c- !)<<
d- 1*<<
.123 .
Let 9 D 1-(.
!. J 2"1-(.& - I,<<< D I<
). - I,<<< D I<
. D 1(<<
9 D 22(<
4otal units D !+(<
5673 =oderate O9:3 ,-'
!,- Kefer to 8clectic #orporation- 6f the company would have sold a total of )<<< units consistent with
#$% assumptions how many of those units would you e;pect to be %roduct 9?
a- !<<<
b- '<<<
c- !)<<
d- !(<<
.123 #
. J 1-(. D )<<< units
2-(. D )<<< units
. D 2'<< units
9 D !)<< units
5673 =oderate O9:3 ,-'
'<- Kefer to 8clectic #orporation- How many units would the company have needed to sell to produce a
profit of I12<<<?
a- *+(<
b- 2<<<<
c- 1<<<<
d- *'<<
.123 .
!. J 2"1-(.& - I,<<< D I12<<<
). D I21<<<
. D !(<< units
9 D (2(< units
4otal D *+(< units
5673 =oderate O9:3 ,-'
1<2
Brittany Company
9elow is an income statement for 9rittany #ompany3
2ales
$300,000
$ariable costs
(150,000)
#ontribution margin
$150,000
7i;ed costs
(100,000)
%rofit before ta;es
$ 50,000
'1- Kefer to 9rittany #ompany- What was the companyBs margin of safety?
a- I(<<<<
b- I1<<<<<
c- I1(<<<<
d- I2(<<<
.123 9
=argin of safety D 2ales - 98% 2ales
#= D -(<
98% 2ales D -(<; - I1<<<<< D <
D -(<; D I1<<<<<
; D I2<<<<<
I"!<<<<< - 2<<<<<& D I1<<<<<
5673 =oderate O9:3 ,-(
'2- Kefer to 9rittany #ompany- 6f the unit sales price for 9rittany/s sole product was I1< how many units
would it have needed to sell to produce a profit of I'<<<<?
a- 2+(<<
b- 2,<<<
c- 2*<<<
d- canBt be determined from the information given
.123 #
#ontribution =argin at I'<<<< profit3 I"'<<<< J 1<<<<<& D I1'<<<<
#ontribution =argin Katio3 <-(<
I1'<<<< E -(< D I2*<<<<
I2*<<<< E I1< D 2*<<< units
5673 =oderate O9:3 ,-!
1<!
'!- . firm estimates that it will sell 1<<<<< units of its sole product in the coming period- 6t proAects the
sales price at I'< per unit the #= ratio at )< percent and profit at I(<<<<<- What is the firm
budgeting for fi;ed costs in the coming period?
a- I1)<<<<<
b- I2'<<<<<
c- I11<<<<<
d- I1,<<<<<
.123 5
%rofit J 7i;ed #ost D "1<<<<< units L I)<Eunit #=&
7i;ed #ost D "1<<<<< units L I2'Eunit #=& - %rofit
D I2'<<<<< - I(<<<<<
D I1,<<<<<
5673 =oderate O9:3 ,-!
''- 2ombrero #ompany manufactures a western-style hat that sells for I1< per unit- 4his is its sole product
and it has proAected the break-even point at (<<<< units in the coming period- 6f fi;ed costs are
proAected at I1<<<<< what is the proAected contribution margin ratio?
a- *< percent
b- 2< percent
c- '< percent
d- )< percent
.123 9
7i;ed #ostsD#ontribution =argin at 9reakeven %oint
D I1<<<<<
9reakeven 2ales3 I(<<<<<
#= Katio3 I"1<<<<<E(<<<<<& D 2<O
5673 =oderate O9:3 ,-!
Brandon Company
9randon #ompany manufactures a single product- 8ach unit sells for I1(- 4he firmBs proAected costs
are listed below3
$ariable costs per unit3
%roduction I(
2CM. I1
7i;ed costs3
%roduction I'<<<<
2CM. I)<<<<
8stimated volume 2<<<< units
1<'
'(- Kefer to 9randon #ompany- What is 9randonBs proAected margin of safety for the current year?
a- I1!!!!!
b- I1(<<<<
c- I*<<<<
d- I1<<<<<
.123 .
#ontribution =argin D I,Eunit
#ontribution =argin Katio D )<O
9reakeven %oint D I1<<<<<E-)< D I1))))+
2ales $olume D 2<<<< units L I1(Eunit D I!<<<<<
=argin of 2afety D I"!<<<<< - 1))))+& D I1!!!!!
5673 =oderate O9:3 ,-(
')- Kefer to 9randon #ompany- What is 9randonBs proAected degree of operating leverage for the current
year?
a- 2-2(
b- 1-*<
c- !-+(
d- 1-)+
.123 .
#ontribution =argin D I1*<<<<
1et 6ncome D *<<<<
5egree of Operating Leverage D I1*<<<<E*<<<< D 2-((
5673 =oderate O9:3 ,-(
Alpha. Beta. and Epsilon Companies
9elow are income statements that apply to three companies3 .lpha 9eta and 8psilon3
.lpha #o- 9eta #o- 8psilon #o-
2ales
$100 $100 $100
$ariable costs
(10) (20) (30)
#ontribution margin
$ 90 $ 80 $ 70
7i;ed costs
(30) (20) (10)
%rofit before ta;es
$ 60 $ 60 $ 60
'+- Kefer to .lpha 9eta and 8psilon #ompanies- Within the relevant range if sales go up by I1 for each
firm which firm will e;perience the greatest increase in profit?
a- .lpha #ompany
b- 9eta #ompany
c- 8psilon #ompany
d- canBt be determined from the information given
.123 .
.lpha #ompany will have the greatest increase in profit because it has the
greatest contribution margin per unit-
5673 8asy O9:3 ,-!
1<(
'*- Kefer to .lpha 9eta and 8psilon #ompanies- Within the relevant range if sales go up by one unit for
each firm which firm will e;perience the greatest increase in net income?
a- .lpha #ompany
b- 9eta #ompany
c- 8psilon #ompany
d- canBt be determined from the information given
.123 5
%rice per unit is not given-
5673 8asy O9:3 ,-!
',- Kefer to .lpha 9eta and 8psilon #ompanies- .t sales of I1<< which firm has the highest margin of
safety?
a- .lpha #ompany
b- 9eta #ompany
c- 8psilon #ompany
d- 4hey all have the same margin of safety-
.123 #
8psilon #ompany has the lowest amount of fi;ed costs to be
covered-
5673 =oderate O9:3 ,-!
(<- =ike is interested in entering the catfish farming business- He estimates if he enters this business his
fi;ed costs would be I(<<<< per year and his variable costs would e0ual !< percent of sales- 6f each
catfish sells for I2 how many catfish would =ike need to sell to generate a profit that is e0ual to 1<
percent of sales?
a- '<<<<
b- '1))+
c- !(<<<
d- 1o level of sales can generate a 1< percent net return on sales-
.123 9
Let ; D sales in dollars
; - -!<; - I(<<<< D -1<;
-)<; D I(<<<<
; D I*!!!! Nnits D I*!!!!EI2 per unit D '1))+ units
5673 5ifficult O9:3 ,-!
1<)
(1- 4he following information pertains to 2aturn #ompany/s cost-volume-profit relationships3
9reak-even point in units sold
1,000
$ariable costs per unit
$500
4otal fi;ed costs
$150,000
How much will be contributed to profit before ta;es by the 1<<1st unit sold?
a- I)(<
b- I(<<
c- I1(<
d- I<
.123 #
7i;ed #ost D #ontribution =argin
D I1(<<<<
#ontribution =arginENnit D #ontribution =arginENnits
I1(<<<<E1<<< units D I1(<Eunit
5673 =oderate O9:3 ,-!
(2- 6nformation concerning .verie #orporationBs %roduct . follows3
2ales
$300,000
$ariable costs
240,000
7i;ed costs
40,000
.ssuming that .verie increased sales of %roduct . by 2< percent what should the profit from %roduct
. be?
a- I2<<<<
b- I2'<<<
c- I!2<<<
d- I*<<<<
.123 #
#ontribution margin at I!<<<<< in sales D I)<<<<
6ncrease contribution margin by 2<O D I)<<<< L 1-2< D I+2<<<
#ontribution margin - fi;ed costs D %rofit
I"+2<<< - '<<<<& D I!2<<<
5673 =oderate O9:3 ,-!
1<+
(!- Ledbetter #ompany reported the following results from sales of (<<< units of %roduct . for :une3
2ales
$200,000
$ariable costs
(120,000)
7i;ed costs
(60,000)
Operating income
$ 20,000
.ssume that Ledbetter increases the selling price of %roduct . by 1< percent in :uly- How many units
of %roduct . would have to be sold in :uly to generate an operating income of I2<<<<?
a- '<<<
b- '!<<
c- '('(
d- (<<<
.123 .
6f sales price per unit is increased by 1< percent less units will have to be sold to generate
gross revenues of I2<<<<<-
2ales price per unit D I2<<<<<E(<<< units D I'<Eunit
I'<Eunit L 1-1< D I''Eunit
I"2<<<<< E ''Eunit& D '('( units
5673 =oderate O9:3 ,-!
('- On a break-even chart the break-even point is located at the point where the total
a- revenue line crosses the total fi;ed cost line-
b- revenue line crosses the total contribution margin line-
c- fi;ed cost line intersects the total variable cost line-
d- revenue line crosses the total cost line-
.123 5 5673 8asy O9:3 ,-!
((- 6n a #$% graph the slope of the total revenue line indicates the
a- rate at which profit changes as volume changes-
b- rate at which the contribution margin changes as volume changes-
c- ratio of increase of total fi;ed costs-
d- total costs per unit-
.123 9 5673 =oderate O9:3 ,-!
()- 6n a #$% graph the area between the total cost line and the total revenue line represents total
a- contribution margin-
b- variable costs-
c- fi;ed costs-
d- profit-
.123 5 5673 8asy O9:3 ,-!
(+- 6n a #$% graph the area between the total cost line and the total fi;ed cost line yields the
a- fi;ed costs per unit-
b- total variable costs-
c- profit-
d- contribution margin-
.123 9 5673 8asy O9:3 ,-!
1<*
(*- 6f a companyBs fi;ed costs were to increase the effect on a profit-volume graph would be that the
a- contribution margin line would shift upward parallel to the present line-
b- contribution margin line would shift downward parallel to the present line-
c- slope of the contribution margin line would be more pronounced "steeper&-
d- slope of the contribution margin line would be less pronounced "flatter&-
.123 9 5673 =oderate O9:3 ,-!
(,- 6f a companyBs variable costs per unit were to increase but its unit selling price stays constant the
effect on a profit-volume graph would be that the
a- contribution margin line would shift upward parallel to the present line-
b- contribution margin line would shift downward parallel to the present line-
c- slope of the contribution margin line would be pronounced "steeper&-
d- slope of the contribution margin line would be less pronounced "flatter&-
.123 5 5673 8asy O9:3 ,-!
)<- 4he most useful information derived from a cost-volume-profit chart is the
a- amount of sales revenue needed to cover enterprise variable costs-
b- amount of sales revenue needed to cover enterprise fi;ed costs-
c- relationship among revenues variable costs and fi;ed costs at various levels of activity-
d- volume or output level at which the enterprise breaks even-
.123 # 5673 8asy O9:3 ,-!
$+!R# AN$/ER
1- How do changes in volume affect the break-even point?
.123
Within the relevant range the break-even point does not change- 4his is due to the linearity
assumptions that apply to total revenues fi;ed costs and variable costs-
5673 =oderate O9:3 ,-2,-)
2- What maAor assumption do multi-product firms need to make in using #$% analysis that single-
product firms need not make?
.123
4he assumption that must be imposed is a constant sales mi;- . multi-product firm assumes that
"within the relevant range& the sales mi; is constant- 4his permits #$% analysis to be performed using
a unit of the constant sales mi;-
5673 =oderate O9:3 ,-'
!- What important information is conveyed by the margin of safety calculation in #$% analysis?
.123
4he break-even point in #$% analysis is critical because it divides profitable levels of operation from
unprofitable levels of operation- 4he margin of safety gives managers an idea of the e;tent to which
sales can fall before operations will become unprofitable-
5673 =oderate O9:3 ,-(
1<,
'- What are the maAor assumptions of #$% analysis?
.123
1- .ll revenue and variable cost behavior patterns are constant per unit
and linear within the relevant range-
2- 4otal contribution margin "total revenue divided by total variable cost& is linear
within the relevant range and increases proportionally with output-
!- 4otal fi;ed cost is constant within the relevant range- 4his assumption
in part indicates that no capacity additions will be made during
the period under consideration-
'- =i;ed costs can be accurately separated into their fi;ed and variable elements-
(- 2ales and production are e0ualP thus there is no material fluctuation in inventory
levels- 4his assumption is necessary because fi;ed cost can be allocated
to inventory at a different rate each year- 4hus variable costing
information must be available- 9ecause #$% and variable costing both focus
on cost behavior they are distinctly compatible with one another-
)- 6n a multi-product firm the sales mi; remains constant- 4his assumption is necessary
so that a weighted average contribution margin can be computed-
+- Labor productivity production technology and market conditions will not
change- 6f any of these changes were to occur costs would change correspondingly
and selling prices might change
5673 =oderate O9:3 ,-)
PR!BLE*
1- 4he #oont> #ompany sells two products . and 9 with contribution margin ratios of '< and !<
percent and selling prices of I( and I2-(< a unit- 7i;ed costs amount to I+2<<< a month- =onthly
sales average !<<<< units of product . and '<<<< units of product 9-
Re0uired1
a- .ssuming that three units of product . are sold for every four units of product 9
calculate the dollar sales volume necessary to break even-
b- .s part of its cost accounting routine #oont> #ompany assigns I!)<<< in fi;ed
costs to each product each month- #alculate the break-even dollar sales volume for
each product-
c- #oont> #ompany is considering spending an additional I,+<< a month on
advertising giving more emphasis to product . and less emphasis to product 9- 6f its
analysis is correct sales of product . will increase to '<<<< units a month but sales
of product 9 will fall to !2<<< units a month- Kecalculate the break-even sales
volume in dollars at this new product mi;- 2hould the proposal to spend the
additional I,+<< a month be accepted?
.123
a- #= D "! I2& J "' I-+(& D I,
2% D "! I(& D "' I2-(<& D I2(
98 D I+2<<< D I'<<<<<
I,EI2(
b- . D I!)<<< D I,<<<< 9 D I!)<<< D I12<<<<
11<
-' -!
c- #= D "( I2& J "' I-+(& D I1!
2% D "( I(& J "' I2-(<& D I!(
98 D I+2<<< J I,+<< D I21,,)2
I1!E!(
OL5 18W
#= . D !<<<< I2 D
$60,000 CM
. D '<<<< I2 D
$ 80,000
9 D '<<<< I-+( D
30,000
9 D !2<<< I-+(
24,000
$90,000 $104,000
- 7#
(72,000)
- 7#
(81,700)
O6
$18,000
O6
$ 22,300
.t current sales levels increase advertising-
5673 =oderate O9:3 ,-'
2- 4he Craves #ompany makes three products- 4he cost data for these three products is as follows3
%roduct . %roduct 9 %roduct #
2elling price
$10 $20 $40
$ariable costs
7 12 16
4otal annual fi;ed costs are I*'<<<<- 4he firmBs e;perience has been that about 2< percent of dollar
sales come from product . )< percent from 9 and 2< percent from #-
Re0uired1
a- #ompute break-even in sales dollars-
b- 5etermine the number of units to be sold at the break-even point-
.123
. 9 #
a- 2%
$10 $20 $40
- $#
(7) (12) (16)
D #=
$ 3 $ 8 $24
#=K
30% 40% 60%
#=K D "-2 !<O& J "-) '<O& J "-2 )<O& D '2O
98 D I*'<<<<E-'2 D I2<<<<<<
b- . "I2<<<<<< -2<&EI1< D '<<<< units
9 "I2<<<<<< -)<&EI2< D )<<<< units
# "I2<<<<<< -2<&EI'< D 1<<<< units
5673 =oderate O9:3 ,-'
111
!- .nderson #ompany produces and sells two products3 . and 9 in the ratio of !. to (9- 2elling prices
for . and 9 are respectively I12<< and I2'<P respective variable costs are I'*< and I1)<- 4he
companyBs fi;ed costs are I1*<<<<< per year-
#ompute the volume of sales in units of each product needed to3
Re0uired1
a- break even-
b- earn I*<<<<< of income before income ta;es-
c- earn I*<<<<< of income after income ta;es assuming a !< percent ta; rate-
d- earn 12 percent on sales revenue in before-ta; income-
e- earn 12 percent on sales revenue in after-ta; income assuming a !< percent ta; rate-
.123
. 2%
$1,200
9 2%
$240
- $#
(480)
- $#
(160)
#=
$ 720
#=
$ 80
Weighted #= D "! I+2<& J "( I*<& D I2()<
a- $1,800,000 = 703.125 A = 704 3 = 2,112 units
$2,560 B = 704 5 = 3,520
b-
$1,800,000 + $800,000 = 1015.625 A = 1,016 3 = 3,048 units
$2,560 B = 1,016 5 = 5,080
c-
$800,0001 ! .3 = $1,142,857
$1,800,000 + $1,142,857 = 1,149.55 A = 1,150 3 = 3,450 units
$2,560 B = 1,150 5 = 5,750
d- "# = (3 $1,200) + (5 $240) = $4,800
$ = $1,800,000 + $.12$ = $4,354,839
$2,560$4,800
A = ($4,354,839 .75)$1200 = 2,722 units
B = ($4,354,839 .25$240 = 4,537
e-
$ = $1,800,000 + $.12$
1 ! .3 = $4,973,684
$2,560$4,800
A = ($4,973,684 .75)$1,200 = 3,109 units
B = ($4,973,684 .25$240 = 5,181
5673 =oderate O9:3 ,-'
112
Bradley Corporation
6nformation relating to the current operations of 9radley #orporation follows3
2ales
$120,000
$ariable costs
(36,000)
#ontribution margin
$ 84,000
7i;ed costs
(70,000)
%rofit before ta;es
$ 14,000
'- Kefer to 9radley #orporation- 9radleyBs break-even point was 1<<< units- #ompute 9radleyBs sales
price per unit-
.123
4he break-even point is found by dividing the fi;ed costs by the #= ratio-
4he #= ratio is3
I*'<<<EI12<<<< D +<O- 9reakeven would then be3
I+<<<<E-+< D I1<<<<<- 2ince we also know that the break-even point is defined as 1<<< units it
must follow that the unit sales price is I1<<<<<E1<<< D I1<<-
5673 =oderate O9:3 ,-!
(- Kefer to 9radley #orporation- #ompute 9radleyBs degree of operating leverage-
.123
4he degree of operating leverage is computed as the contribution margin divided by profit before
ta;es3 I*'<<<EI1'<<< D )-
5673 =oderate O9:3 ,-(
*,2inney Corporation
=cQinney #orporation manufactures and sells two products3 . and 9- 4he proAected information on
these two products for the coming year is presented below3
%roduct . %roduct 9
2ales in units
4,000 1,000
2ales price per unit
$12 $8
$ariable costs per unit
8 4
4otal fi;ed costs for the company are proAected at I1<<<<-
)- Kefer to =cQinney #orporation- #ompute =cQinney #orporationBs proAected break-even point in total
units-
.123
4he company anticipates a sales mi; consisting of ' units of %roduct . and 1 unit of %roduct 9- 4he
total contribution margin for one unit of sales mi; would be I2<- 4his consists of I1) of contribution
margin from the ' units of %roduct . and I' of contribution margin from 1 unit of %roduct 9-
11!
4he overall company break-even point is found by dividing total fi;ed costs by the contribution
margin on one unit of sales mi;3 I1<<<<EI2< D (<< units- 4he (<< units of sales mi; contain (<< (
units of product for a total of 2(<<- Of the 2(<< total units 2<<< are units of %roduct . and (<< are
units of %roduct 9-
5673 =oderate O9:3 ,-'
+- Kefer to =cQinney #orporation- How many units would the company need to sell to produce an
income before income ta;es e0ual to 1( percent of sales?
.123
.gain using a unit of sales mi; as the unit of analysis one unit of sales mi; sells for I()- 2ince the
contribution margin is I2< on one unit of sales mi; the #= ratio on one unit of sales mi; is I2<EI() D
-!(+1- 4his implies that variable costs as a percentage of sales are e0ual to 1 - -!(+1 D -)'2,- 6ncome
before income ta;es e0ual to 1( percent of sales can be found by solving a formula of the following
type3
2ales - $# - 7# D 6ncome before income ta;es
6n this particular case we solve the following formula3
2ales - "-)'2, 2ales& - I1<<<< D "-1( 2ales&
2olving for 2ales we get I'*2*)- We can find out how many units of sales mi; are re0uired to
generate sales of I'*2*) by dividing I'*2*) by I() D *)!- 4hese *)! units of sales mi; each contain
( units of product so the correct answer would be *)! ( D '!1( units of product !'(2 of %roduct .
and *)! of %roduct 9-
5673 =oderate O9:3 ,-'
Perry Corporation
%erry #orporation predicts it will produce and sell '<<<< units of its sole product in the current year-
.t that level of volume it proAects a sales price of I!< per unit a contribution margin ratio of '<
percent and fi;ed costs of I( per unit-
*- Kefer to %erry #orporation- What is the companyBs proAected breakeven point in dollars and units?
.123
Civen the #= ratio of '< percent and the 2ales price per unit of I!< the #= per unit must be I!< -
'< D I12- 4he total fi;ed costs would be proAected at I( '<<<< D I2<<<<<- 9reakeven would be3
I2<<<<<EI12 D 1)))+ units- 4his would also e0uate to I(<<<<< of sales-
5673 =oderate O9:3 ,-!
,- Kefer to %erry #orporation- What would the companyBs proAected profit be if it produced and sold
!<<<< units?
.123
%roAected profit would be3
2ales "!<<<< I!<&
$900,000
$ariable costs "!<<<< I1*&
(540,000)
11'
#ontribution margin
$360,000
7i;ed costs
(200,000)
%rofit
$160,000
5673 =oderate O9:3 ,-!
Castle Corporation
4he following 0uestions are based on the following data pertaining to two types of products
manufactured by #astle #orporation3
%er unit
2ales price $ariable costs
%roduct R
$120 $ 70
%roduct S
$500 $200
7i;ed costs total I!<<<<< annually- 4he e;pected mi; in units is )< percent for %roduct R and '<
percent for %roduct S-
1<- Kefer to #astle #orporation- How much is #astle/s break-even point sales in units?
.123
98% units D 7#E"unit 2% - unit $#& or unit #="N=#&
7or multiple products use the weighted #= with weights based on units of sales weights-
98% D 7# E G)<O "I12< - I+<& J '<O "I(<< - I2<<&H
D I!<<<<<E "I!<Eu J I12<Eu& D 2<<< units
5673 =oderate O9:3 ,-'
11- Kefer to #astle #orporation- What is #astle/s break-even point in sales dollars?
.123
98% dollars D 7#E#=K
7or multiple products use weighted #=K with weights based on sales dollars as weights or sales mi;-
2ales mi; is )< percent and '< percent in units or in dollars-
Weighted average #=K D W.#=EW.2ale
W.#=K D G)<O "I12< - I+<& J '<O "I(<< - I2<<&H @ ")<O I12<& J "'<O I(<<&
W.#=K D GI!< J I12<H @ GI+2 J I2<<H D -((1
98% sales D 2<<< I2+2 D I(''<<<
5673 =oderate O9:3 ,-'
11(