Description
Horngrens Financial and Managerial Accounting 5th Edition Mattison Matsumura Test Bank
ISBN-13: 978-0133866292
ISBN-10: 0133866297
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Horngren’s Financial and Managerial Accounting, 5e (Miller-Nobles)
Chapter 20 Cost-Volume-Profit Analysis
Learning Objective 20-1
1) Total variable costs change in direct proportion to changes in the volume of production.
Answer: TRUE
Diff: 1
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Variable Costs
2) Variable cost per unit is constant throughout various relevant ranges.
Answer: FALSE
Diff: 2
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Variable Costs
3) If the volume of activity doubles in the relevant range, total variable costs will also double.
Answer: TRUE
Diff: 1
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Variable Costs
4) Which of the following is a variable cost?
- A) property taxes
- B) salary of plant manager
- C) direct materials cost
- D) straight-line depreciation expense
Answer: C
Diff: 1
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Variable Costs
5) Which of the following costs change in total in direct proportion to a change in volume?
- A) fixed costs
- B) variable costs
- C) mixed costs
- D) period costs
Answer: B
Diff: 1
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Variable Costs
6) North Shore Clothing Company provided the following manufacturing costs for the month of June.
| Direct labor cost | $138,000 |
| Direct materials cost | 85,000 |
| Equipment depreciation (straight-line) | 24,000 |
| Factory insurance | 19,000 |
| Factory manager’s salary | 11,000 |
| Janitor’s salary | 3,000 |
| Packaging costs | 19,200 |
| Property taxes | 14,000 |
From the above information, calculate North Shore’s total variable costs.
- A) $313,200
- B) $71,000
- C) $242,200
- D) $223,000
Answer: C
Explanation: C)
Direct materials cost $85,000
Direct labor cost 138,000
Packaging costs 19,200
Total variable costs $242,200
Diff: 2
LO: 20-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Variable Costs
7) Fixed costs per unit is inversely proportional to the volume of units produced.
Answer: TRUE
Diff: 1
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Fixed Costs
8) Fixed costs per unit decrease as production levels decrease.
Answer: FALSE
Diff: 1
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Fixed Costs
9) Fixed cost per unit is assumed to be constant within a particular relevant range of activity.
Answer: FALSE
Diff: 1
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Fixed Costs
10) The fixed costs per unit will ________.
- A) increase as production decreases
- B) decrease as production decreases
- C) remain the same as production levels change
- D) increase as production increases
Answer: A
Diff: 2
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Fixed Costs
11) Which of the following costs does not change in total despite changes in volume within the relevant range?
- A) fixed costs
- B) variable costs
- C) mixed costs
- D) total production costs
Answer: A
Diff: 1
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Fixed Costs
12) First Buy Television Antenna Company provided the following manufacturing costs for the month of June.
| Direct labor cost | $132,000 |
| Direct materials cost | 84,000 |
| Equipment depreciation (straight-line) | 24,000 |
| Factory insurance | 10,000 |
| Factory manager’s salary | 10,200 |
| Janitor’s salary | 4,000 |
| Packaging costs | 18,600 |
| Property taxes | 16,000 |
From the above information, calculate First Buy’s total fixed costs.
- A) $298,800
- B) $40,200
- C) $60,200
- D) $64,200
Answer: D
Explanation: D)
Janitor’s salary $4,000
Property taxes 16,000
Equipment depreciation (straight-line) 24,000
Factory insurance 10,000
Factory manager’s salary 10,200
Total fixed costs $64,200
Diff: 2
LO: 20-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Fixed Costs
13) During the current year, Simpson, Inc. incurred $9,000 in fixed costs and $13,000 in variable costs. If the number of units produced is halved next year, the company will incur $4,500 as fixed costs and $6,500 as variable costs.
Answer: FALSE
Diff: 1
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Mixed Costs
14) Within the relevant range, the total fixed costs and the variable cost per unit remain the same.
Answer: TRUE
Diff: 1
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Mixed Costs
15) Total fixed costs can change from one relevant range to another.
Answer: TRUE
Diff: 1
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Mixed Costs
16) The high-low method requires the identification of the lowest and highest levels of total costs, not activity, over a period of time.
Answer: FALSE
Diff: 2
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Mixed Costs
17) A 15% increase in production volume will result in a ________.
- A) 15% increase in the variable cost per unit
- B) 15% increase in total mixed costs
- C) 15% increase in total administration costs
- D) 15% increase in total variable costs
Answer: D
Diff: 1
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Mixed Costs
18) Variable cost per unit, within the relevant range, will ________.
- A) increase as production decreases
- B) decrease as production decreases
- C) remain the same as production levels change
- D) decrease as production increases
Answer: C
Diff: 1
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Mixed Costs
19) Which of the following statements is true of the behavior of total variable costs, within the relevant range?
- A) They will decrease as production increases.
- B) They will remain the same as production levels change.
- C) They will decrease as production decreases.
- D) They will increase as production decreases.
Answer: C
Diff: 1
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Mixed Costs
20) Which of the following statements is true of the behavior of total fixed costs, within the relevant range?
- A) They will remain the same as production levels change.
- B) They will increase as production decreases.
- C) They will decrease as production decreases.
- D) They will decrease as production increases.
Answer: A
Diff: 1
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Mixed Costs
21) A cellphone service provider charges $5.00 per month and $0.20 per minute per call. If a customer’s current bill is $55, how many minutes did the customer use? (Round any intermediate calculations and your final answer to the nearest whole minute.)
- A) 275 minutes
- B) 300 minutes
- C) 250 minutes
- D) 225 minutes
Answer: C
Explanation: C)
Current bill 55
Less monthly charges (5.00)
Call charges (A) 50.00
Charge per minute per call (B) 0.20
Number of minutes used (A) / (B) 250
Diff: 1
LO: 20-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Mixed Costs
22) Ron Moss, a manager of Waterworks, Inc., was reviewing the water bills of a dog daycare and spa. He determined that its highest and lowest bills of $3,600 and $2,800 were incurred in the months of May and November, respectively. If 500 dogs were washed in May and 200 dogs were washed in November, what was the variable cost per dog associated with the company’s water bill? (Round your answer to the nearest cent.)
- A) $4.00
- B) $14.00
- C) $7.20
- D) $2.67
Answer: D
Explanation: D) Variable cost per unit = Change in total cost / Change in volume of activity
Variable cost per unit = ($3,600 – $2,800) / (500 dogs – 200 dogs) = $800 / 300 dogs
Variable cost per unit = $2.67 per dog
Diff: 1
LO: 20-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Mixed Costs
23) Jose Foster, a manager of Prettiest Pooch, Inc., was reviewing the water bills of a dog daycare and spa. He determined that its highest and lowest bills of $3,800 and $2,000 were incurred in the months of May and November, respectively. If 600 dogs were washed in May and 200 dogs were washed in November, what was the fixed cost associated with the company’s water bill? (Round any intermediate calculations to the nearest cent and your final answer to the nearest dollar.)
- A) $2,000
- B) $3,800
- C) $1,100
- D) $1,800
Answer: C
Explanation: C) Variable cost per unit = Change in total cost / Change in volume of activity
Variable cost per unit = ($3,800 – $2,000) / (600 dogs – 200 dogs) = $1,800 / 400 dogs
Variable cost per unit = $4.50 per dog
Number of dogs washed in May 600
Variable costs incurred in May ($4.50 per dog × 600 dogs) $2,700.00
Fixed costs incurred in May ($3,800 – $2,700.00) $1,100
Diff: 2
LO: 20-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Mixed Costs
24) Costs that have both variable and fixed components are called ________.
- A) fixed costs
- B) variable costs
- C) mixed costs
- D) contribution costs
Answer: C
Diff: 1
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Mixed Costs
25) Jupiter, Inc. incurred fixed costs of $300,000. Total costs, both fixed and variable, are $500,000 when 59,000 units are produced. It sold 35,000 units during the year. Calculate the variable cost per unit. (Round your answer to the nearest cent.)
- A) $8.47
- B) $14.29
- C) $5.08
- D) $3.39
Answer: D
Explanation: D)
Total costs $500,000
Less: fixed costs (300,000)
Variable costs (A) 200,000
Number of units (B) 59,000
Variable cost per unit (A) / (B) $3.39
Diff: 1
LO: 20-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Mixed Costs
26) Left Hand, Inc. has fixed costs of $400,000. Total costs, both fixed and variable, are $550,000 when 40,000 units are produced. Calculate the total costs if the volume increases to 64,000 units. (Round any intermediate calculations to the nearest cent, and your final answer to the nearest dollar.)
- A) $950,000
- B) $150,000
- C) $640,000
- D) $550,000
Answer: C
Explanation: C)
Total costs $550,000
Less: fixed costs (400,000)
Variable costs (A) $150,000
Number of units (B) 40,000
Variable cost per unit (A) / (B) $3.75
Number of units after increase in production 64,000
Variable costs of production 240,000
Fixed costs 400,000
Total costs after increase in production $640,000
Diff: 2
LO: 20-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Mixed Costs
27) Anthony Chemicals, Inc. has fixed costs of $34,000 per month. The highest production volume during the year was in January when 120,000 units were produced, 72,000 units were sold, and total costs of $610,000 were incurred. In June, the company produced only 54,000 units. What was the total cost incurred in June? (Round any intermediate calculations to the nearest cent and your final answer to the nearest dollar.)
- A) $259,200
- B) $293,200
- C) $610,000
- D) $644,000
Answer: B
Explanation: B)
Total costs $610,000
Less: fixed costs (34,000)
Variable costs (A) $576,000
Number of units (B) 120,000
Variable cost per unit (A) / (B) $4.80
Number of units produced in June 54,000
Variable costs incurred in June $259,200
Fixed costs 34,000
Total cost in June $293,200
Diff: 3
LO: 20-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Mixed Costs
28) The highest value of total cost was $800,000 in June for Mantilla Beverages, Inc. Its lowest value of total cost was $510,000 in December. The company makes a single product. The production volume in June and December were 13,000 and 8,000 units, respectively. What is the fixed cost per month? (Round any intermediate calculations to the nearest cent, and your final answer to the nearest dollar.)
- A) $510,000
- B) $290,000
- C) $46,000
- D) $8,000
Answer: C
Explanation: C)
Variable cost per unit = Change in total cost / Change in volume of activity
Variable cost per unit = (Highest cost – Lowest cost) / (Highest volume – Lowest volume)
Change in total cost (A) $290,000
Change in volume of activity (B) 5,000
Variable cost per unit (A / B) $58.00
Total costs for June
Total variable costs for June (58.00 × 13,000) 754,000
Fixed costs for June ($800,000 – 754,000) $46,000
Diff: 2
LO: 20-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Mixed Costs
29) The highest value of total cost was $70,000 in June for Fargo Beverages, Inc. Its lowest value of total cost was $52,000 in December. The company makes a single product. The production volume in June and December were 13,000 and 7,000 units, respectively. What is the variable cost per month? (Round your answer to the nearest cent.)
- A) $1.38 per unit
- B) $2.57 per unit
- C) $3.00 per unit
- D) $11.67 per unit
Answer: C
Explanation: C) Variable cost per unit = Change in total cost / Change in volume of activity
Variable cost per unit = (Highest cost – Lowest cost) / (Highest volume – Lowest volume)
Variable cost per unit = $3.00 per unit
Diff: 2
LO: 20-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Mixed Costs
30) The relevant production range for Orleans Trailers, Inc. is between 130,000 units and 180,000 units per month. If the company produces beyond 180,000 units per month, ________.
- A) the fixed costs will remain the same, but the variable cost per unit may change
- B) the fixed costs may change, but the variable cost per unit will remain the same
- C) the fixed costs and the variable cost per unit will not change
- D) both the fixed costs and the variable cost per unit may change
Answer: D
Diff: 2
LO: 20-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Mixed Costs
31) The phone bill for a company consists of both fixed and variable costs. Refer to the four-month data below and apply the high-low method to answer the question. (Round any intermediate calculations to the nearest cent, and your final answer to the nearest dollar.)
| Minutes | Total Bill | |
| January | 460 | $3,000 |
| February | 200 | $2,675 |
| March | 180 | $2,630 |
| April | 320 | $2,840 |
What is the fixed portion of the total cost?
- A) $607
- B) $370
- C) $2,393
- D) $2,630
Answer: C
Explanation: C) Variable cost per unit = Change in total cost / Change in volume of activity
Variable cost per unit = (Highest cost – Lowest cost) / (Highest volume – Lowest volume)
Change in total cost ($3,000 – $2,630) $370
Change in minutes (460 – 180) 280
Variable cost per minute ($370 / 280) $1.32
Variable cost for January = 460 minutes × $1.32 per minute = $607
Total fixed costs = Total mixed cost – Total variable cost
Total fixed costs = $3,000 – $607 = $2,393
Diff: 2
LO: 20-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Mixed Costs
32) The phone bill for a company consists of both fixed and variable costs. Refer to the four-month data below and apply the high-low method to answer the question.
| Minutes | Total Bill | |
| January | 460 | $3,000 |
| February | 200 | $2,675 |
| March | 170 | $2,660 |
| April | 310 | $2,825 |
What is the variable cost per minute? (Round your answer to the nearest cent.)
- A) $1.17
- B) $6.52
- C) $0.85
- D) $0.11
Answer: A
Explanation: A) Variable cost per unit = Change in total cost / Change in volume of activity
Variable cost per unit = (Highest cost – Lowest cost) / (Highest volume – Lowest volume)
Change in total cost ($3,000 – $2,660) $340
Change in minutes (460 – 170) 290
Variable cost per minute ($340 / 290) 1.17
Diff: 2
LO: 20-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Mixed Costs
33) The phone bill for a corporation consists of both fixed and variable costs. Refer to the four-month data below and apply the high-low method to answer the question.
| Minutes | Total Bill | |
| January | 460 | $4,000 |
| February | 210 | $2,695 |
| March | 170 | $2,640 |
| April | 300 | $2,835 |
If the company uses 390 minutes in May, how much will the total bill be? (Round any intermediate calculations to the nearest cent and your final answer to the nearest dollar.)
- A) $1,842.60
- B) $1,829.10
- C) $3,672
- D) $6,157
Answer: C
Explanation: C)
Change in total cost ($4,000 – $2,640) $1,360
Change in minutes (460 – 170) 290
Variable cost per minute ($1,360 / 290) 4.69
Variable cost for January = 460 minutes × $4.69 per minute = $2,157.40
Total fixed costs = Total mixed cost – Total variable cost
Total fixed costs = $4,000 – $2,157.40 = $1,842.60
For 390 minutes:
Total cost = (390 minutes × 4.69) + $1,842.60
Total cost = $1,829.10 + $1,842.60 = $3,672
Diff: 2
LO: 20-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Mixed Costs
34) Porterhouse Company incurs both fixed and variable production costs. Assuming that production is within the relevant range, if volume goes up by 28%, then the total variable costs would ________.
- A) increase by 28%
- B) remain the same
- C) increase by an amount less than 28%
- D) decrease by 28%
Answer: A
Diff: 2
LO: 20-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Mixed Costs
35) Prudence Company incurs both fixed and variable production costs. Assuming that production is within the relevant range, if volume goes up by 28%, then the total fixed costs would ________.
- A) increase by 28%
- B) remain the same
- C) increase by an amount less than 28%
- D) decrease by 28%
Answer: B
Diff: 1
LO: 20-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Mixed Costs
36) The high-low method is used to ________.
- A) determine the highest price that can be charged for a product
- B) separate mixed costs into their variable and fixed components
- C) identify the relevant and irrelevant costs of a business
- D) determine the sales level at highest capacity
Answer: B
Diff: 2
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Mixed Costs
37) Kamal Company incurs both fixed and variable production costs. Assuming that production is within the relevant range, if volume goes up by 20%, then the total costs would ________.
- A) increase by 20%
- B) remain the same
- C) increase by an amount less than 20%
- D) decrease by 20%
Answer: C
Diff: 2
LO: 20-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Mixed Costs
38) Winslow, Inc., a tennis equipment manufacturer, has variable costs of $0.60 per unit of product. In August, the volume of production was 27,000 units, and units sold were 21,800. The total production costs incurred were $30,600. What are the fixed costs per month?
- A) $14,400
- B) $17,520
- C) $3,600
- D) $16,200
Answer: A
Explanation: A)
Total production costs incurred in Aug. $30,600
Variable cost per unit $0.60
Number of units produced in Aug. 27,000
Total variable costs incurred in Aug.
($27,000 × 0.60) $16,200
Total fixed costs ($30,600 – $16,200) $14,400
Diff: 1
LO: 20-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Mixed Costs
39) Within the relevant range, which of the following costs remains the same irrespective of the changes in production?
- A) total mixed costs
- B) total operating costs
- C) total variable costs
- D) total fixed costs
Answer: D
Diff: 1
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Mixed Costs
40) When the total variable costs are deducted from total mixed costs, we obtain ________.
- A) mixed cost per unit
- B) variable cost per unit
- C) total high-low costs
- D) total fixed costs
Answer: D
Diff: 1
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Mixed Costs
41) Which of the following is the correct formula for calculating total mixed cost?
- A) Total mixed cost = (Variable cost per unit / Number of units) + Total fixed cost
- B) Total mixed cost = (Variable cost per unit × Number of units) – Total fixed cost
- C) Total mixed cost = (Variable cost per unit × Number of units) + Total fixed cost
- D) Total mixed cost = (Variable cost per unit / Number of units) – Total fixed cost
Answer: C
Diff: 1
LO: 20-1
AICPA Functional: Measurement
PE Question Type: Concept
H2: Mixed Costs
42) Identify each cost below as variable (V), fixed (F), or mixed (M), relative to units sold. Explain the reason for your answer.
| Units Produced and Sold | 100 | 500 | 1,000 |
| Total electric cost | $1,500 | $1,650 | $1,700 |
| Supervisor’s monthly salary | $4,500 | $4,500 | $4,500 |
| Assembly line workers’ per hour wage rate | $30 | $30 | $30 |
| Total materials cost | $800 | $4,000 | $8,000 |
| Depreciation on factory equipment | $5,000 | $5,000 | $5,000 |
| Total delivery costs | $1,400 | $1,800 | $2,250 |
Answer:
| Units Sold | Is this V, F, or M? Explain your reason. |
| Total electric cost
|
This cost has the characteristics of both a fixed cost and a variable cost making it a mixed cost. The total cost changes as volume changes, but not in direct proportion. |
| Supervisor’s monthly salary
|
This cost does not change in total over wide ranges of volume making it a fixed cost. |
| Assembly line workers’ per hour wage rate
|
This cost does not change per unit over wide ranges of volume making it a fixed cost. |
| Total materials cost
|
This cost is directly proportional to the number units produced making it a variable cost. The total cost changes as volume changes and in direct proportion. |
| Depreciation on factory equipment
|
This cost does not change in total over wide ranges of volume making it a fixed cost. |
| Total delivery costs
|
This cost has the characteristics of both a fixed cost and a variable cost making it a mixed cost. The total cost changes as volume changes, but not in direct proportion. |
Diff: 2
LO: 20-1
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Mixed Costs
Learning Objective 20-2
1) Contribution margin is the difference between net sales revenue and variable costs.
Answer: TRUE
Diff: 1
LO: 20-2
AICPA Functional: Measurement
PE Question Type: Concept
H2: Contribution Margin
2) Contribution margin is the amount that contributes to covering variable costs.
Answer: FALSE
Diff: 1
LO: 20-2
AICPA Functional: Measurement
PE Question Type: Concept
H2: Contribution Margin
3) Arturo Company sells two generators—Model A and Model B—for $454 and $396, respectively. The variable cost of Model A is $408 and of Model B is $314. If Arturo Company’s sales incentives reward sales of the goods with the highest contribution margin, the sales force will be motivated to push sales of Model A more aggressively than Model B.
Answer: FALSE
Explanation:
Model A Model B
Sales price $454 $396
Less: variable cost (408) (314)
Contribution margin $46 $82
The contribution margin of Model B ($82) is more than that of Model A ($46). The sales team will be motivated to push sales of Model B more aggressively than Model A.
Diff: 1
LO: 20-2
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Contribution Margin
4) Emara Company sells two generators—Model A and Model B—for $456 and $394, respectively. The variable cost of Model A is $406 and of Model B is $304. The company will generate lower revenues but a higher net income if it sells more of Model B than Model A.
Answer: TRUE
Explanation:
Model A Model B
Sales price $456 $394
Less: variable cost (406) (304)
Contribution margin $50 $90
Diff: 2
LO: 20-2
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Contribution Margin
5) Pluto Hand Blenders Company sold 3,000 units in October at a sales price of $45 per unit. The variable cost is $25 per unit. Calculate the total contribution margin.
- A) $135,000
- B) $60,000
- C) $75,000
- D) $37,500
Answer: B
Explanation: B)
Sales price per unit $45
Less variable cost per unit (25)
Contribution margin per unit (A) $20
Number of units sold (B) 3,000
Total contribution margin (A × B) $60,000
Diff: 1
LO: 20-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Contribution Margin
6) How is the contribution margin calculated?
Answer: Contribution Margin = Net sales revenue — Variable costs
Diff: 1
LO: 20-2
AICPA Functional: Measurement
PE Question Type: Concept
H2: Contribution Margin
7) If the sales price of Product X is $24.00 per unit and unit fixed cost is $7.50, its contribution margin per unit is $16.50.
Answer: FALSE
Diff: 1
LO: 20-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Unit Contribution Margin
8) Young Company has provided the following information:
| Sales price per unit | $52 |
| Variable cost per unit | 16 |
| Fixed costs per month | $14,000 |
Calculate the contribution margin per unit.
- A) $36.00
- B) $52.00
- C) $68.00
- D) $16.00
Answer: A
Explanation: A) Unit contribution margin = Net sales revenue per unit – Variable costs per unit
Sales price $52
Less: variable cost (16)
Contribution margin $36
Diff: 1
LO: 20-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Unit Contribution Margin
9) How is the unit contribution margin calculated?
Answer: Unit Contribution Margin = Net sales revenue per unit — Variable costs per unit
Diff: 1
LO: 20-2
AICPA Functional: Measurement
PE Question Type: Concept
H2: Unit Contribution Margin
10) Contribution margin ratio is the ratio of contribution margin to net income.
Answer: FALSE
Explanation: Contribution margin ratio is the contribution margin to net sales revenue.
Diff: 1
LO: 20-2
AICPA Functional: Measurement
PE Question Type: Concept
H2: Contribution Margin Ratio
11) Because contribution margin is based on sales price and variable costs, the ratio can be calculated using either the total amounts or the unit amounts.
Answer: TRUE
Explanation: Because contribution margin is based on sales price and variable costs, which do not change per unit, the ratio can be calculated using either the total amounts or the unit amounts.
Diff: 1
LO: 20-2
AICPA Functional: Measurement
PE Question Type: Concept
H2: Contribution Margin Ratio
12) Contribution margin ratio is the ratio of contribution margin to ________.
- A) net sales revenue
- B) cost of goods sold
- C) total variable costs
- D) total fixed costs
Answer: A
Diff: 1
LO: 20-2
AICPA Functional: Measurement
PE Question Type: Concept
H2: Contribution Margin Ratio
13) Contribution margin ratio is equal to ________.
- A) fixed costs divided by contribution margin per unit
- B) net sales revenue per unit minus variable costs per unit
- C) net sales revenue minus variable costs
- D) contribution margin divided by net sales revenue
Answer: D
Diff: 1
LO: 20-2
AICPA Functional: Measurement
PE Question Type: Concept
H2: Contribution Margin Ratio
14) Gainesville Company has provided the following information:
| Sales price per unit | $56 |
| Variable cost per unit | 12 |
| Fixed costs per month | $12,000 |
Calculate the contribution margin ratio. (Round your answer to two decimal places.)
- A) 21.43%
- B) 82.35%
- C) 64.71%
- D) 78.57%
Answer: D
Explanation: D) Contribution margin ratio = Contribution margin / Net sales revenue
Sales price $56
Less: variable cost (12)
Contribution margin $44
Contribution margin ratio = ($44 / $56) × 100 = 78.57%
Diff: 2
LO: 20-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Contribution Margin Ratio
15) Garcia’s, a company that sells fishing nets, provides the following information about its product:
| Targeted operating income | $54,000 |
| Sales price per unit | 10.00 |
| Variable cost per unit | 1.50 |
| Total fixed costs | 120,000 |
What is the contribution margin ratio? (Round any intermediate calculations and your final answer to two decimal places.)
- A) 85.00%
- B) 100%
- C) 75.00%
- D) 15.00%
Answer: A
Explanation: A) Unit contribution margin = Net sales revenue per unit – Variable costs per unit
Net sales revenue per unit $10.00
Less: Variable costs per unit (1.50)
Unit contribution margin $8.50
Contribution margin ratio = Contribution margin / Net sales revenue
Unit contribution margin $8.50
Divided by net sales revenue per unit 10.00
Contribution margin ratio 85.00%
Diff: 2
LO: 20-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Contribution Margin Ratio
16) The Perfect Fit Company sells hand sewn shirts at $58.00 per shirt. It incurs monthly fixed costs of $8,000. The contribution margin ratio is calculated to be 30%. What is the variable cost per shirt? (Round any intermediate calculations and your final answer to two decimal places.)
- A) $40.60 per shirt
- B) $75.40 per shirt
- C) $58.00 per shirt
- D) $17.40 per shirt
Answer: A
Explanation: A)
Contribution margin ratio 30%
Sales price per shirt $58.00
Contribution margin = $58.00 × 30% 17.40
Variable cost per shirt $40.60
Diff: 2
LO: 20-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Contribution Margin Ratio
17) Which of the following formulas is the right formula for calculating contribution margin ratio?
- A) Contribution margin ratio = Contribution margin + Net sales revenue
- B) Contribution margin ratio = Contribution margin / Net sales revenue
- C) Contribution margin ratio = Contribution margin × Net sales revenue
- D) Contribution margin ratio = Contribution margin – Net sales revenue
Answer: B
Diff: 1
LO: 20-2
AICPA Functional: Measurement
PE Question Type: Concept
H2: Contribution Margin Ratio
18) How is the contribution margin ratio calculated?
Answer: Contribution Margin Ratio = Contribution margin + Net sales revenue
Diff: 1
LO: 20-2
AICPA Functional: Measurement
PE Question Type: Concept
H2: Contribution Margin Ratio
19) A contribution margin income statement classifies costs by function; that is, costs are classified as either product costs or period costs.
Answer: FALSE
Diff: 1
LO: 20-2
AICPA Functional: Measurement
PE Question Type: Concept
H2: Contribution Margin Income Statement
20) Contribution margin is the amount that contributes to covering the fixed costs and then to providing operating income.
Answer: TRUE
Diff: 1
LO: 20-2
AICPA Functional: Measurement
PE Question Type: Concept
H2: Contribution Margin Income Statement
21) The dollar amount that provides for covering fixed costs and then provides for operating income is called ________.
- A) variable cost
- B) total cost
- C) contribution margin
- D) margin of safety
Answer: C
Diff: 1
LO: 20-2
AICPA Functional: Measurement
PE Question Type: Concept
H2: Contribution Margin Income Statement
22) Which of the following is a period cost?
- A) manufacturing overhead
- B) direct labor cost
- C) direct materials cost
- D) administrative cost
Answer: D
Diff: 1
LO: 20-2
AICPA Functional: Measurement
PE Question Type: Concept
H2: Contribution Margin Income Statement
23) A ________ groups cost by behavior; costs are classified as either variable costs or fixed costs.
- A) balance sheet
- B) contribution margin income statement
- C) traditional income statement
- D) absorption costing income statement
Answer: B
Diff: 1
LO: 20-2
AICPA Functional: Measurement
PE Question Type: Concept
H2: Contribution Margin Income Statement
24) Which of the following appears as a line item in a contribution margin income statement?
- A) Gross profit
- B) Total cost of goods sold
- C) Operating income
- D) Total selling and administrative expenses
Answer: C
Diff: 1
LO: 20-2
AICPA Functional: Measurement
PE Question Type: Concept
H2: Contribution Margin Income Statement
25) Galose Coffee Company sold 7,000 units in October at a sales price of $45 per unit. The variable cost is $20 per unit. The monthly fixed costs are $8,000. What is the operating income earned in October?
- A) $175,000
- B) $315,000
- C) $167,000
- D) $140,000
Answer: C
Explanation: C)
Sales Revenue ($45 × 7,000) $315,000
Less: Variable Costs ($20 × 7,000) (140,000)
Contribution margin 175,000
Less: Fixed costs (8,000)
Operating income $167,000
Diff: 1
LO: 20-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Contribution Margin Income Statement
26) Andres Napkin Company sells a product for $80 per unit. Variable costs are $25 per unit, and fixed costs are $4,000 per month. Andres sold 2,000 units in October. Prepare an income statement for October using the contribution margin format.
Answer:
Andres Napkin Company
Contribution Margin Income Statement
Month ended October 31, 20XX
Sales revenue ($80 × 2,000) $160,000
Variable costs ($25 × 2,000) (50,000)
Contribution margin 110,000
Fixed costs (4,000)
Operating income $106,000
Diff: 1
LO: 20-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Contribution Margin Income Statement
27) Complete the following statements:
A traditional income statement classifies costs by ________; that is, costs are classified as either ________ costs or ________ costs.
A contribution margin income statement classifies costs by ________; that is, costs are classified as either ________ costs or ________ costs.
Answer: A traditional income statement classifies costs by function; that is, costs are classified as either product costs or period costs.
A contribution margin income statement classifies costs by behavior; that is, costs are classified as either variable costs or fixed costs.
Diff: 2
LO: 20-2
AICPA Functional: Measurement
PE Question Type: Concept
H2: Contribution Margin Income Statement
Learning Objective 20-3
1) CVP analysis assumes that the sales price per unit does not change as volume changes.
Answer: TRUE
Diff: 1
LO: 20-3
AICPA Functional: Measurement
PE Question Type: Concept
H2: Assumptions
2) The breakeven point is the point where the sales revenues are equal to the fixed costs.
Answer: FALSE
Diff: 1
LO: 20-3
AICPA Functional: Measurement
PE Question Type: Concept
H2: Assumptions
3) A CVP graph shows how changes in the level of sales will affect profits.
Answer: TRUE
Diff: 1
LO: 20-3
AICPA Functional: Measurement
PE Question Type: Concept
H2: Assumptions
4) The fundamental assumption of cost-volume-profit (CVP) analysis is that, in the long run, fixed costs become variable costs.
Answer: FALSE
Diff: 1
LO: 20-3
AICPA Functional: Measurement
PE Question Type: Concept
H2: Assumptions
5) Which of the following is not an assumption of cost-volume-profit (CVP) analysis?
- A) The only factor that affects total costs is a change in volume, which increases or decreases variable and mixed costs.
- B) The price per unit does not change as volume changes.
- C) Fixed costs do not change.
- D) The price per unit changes as volume changes.
Answer: D
Explanation: D) The price per unit does not change as volume changes.
Diff: 1
LO: 20-3
AICPA Functional: Measurement
PE Question Type: Concept
H2: Assumptions
6) List the cost-volume-profit (CVP) assumptions.
Answer: The CVP assumptions are:
- The price per unit does not change as volume changes.
- Managers can classify costs as variable, fixed, or mixed.
- The only factor that affects total costs is change in volume, which increases or decreases variable and mixed costs.
- Fixed costs do not change.
- There are no changes in inventory levels
Diff: 1
LO: 20-3
AICPA Functional: Measurement
PE Question Type: Concept
H2: Assumptions
7) Savannah Company sells glass vases at a wholesale price of $5 per unit. The variable cost of manufacture is $2.50 per unit. The fixed costs are $6,200 per month. It sold 5,700 units during this month. Calculate Savannah’s operating income (loss) for this month.
- A) $22,300
- B) $8,050
- C) ($8,050)
- D) ($6,200)
Answer: B
Explanation: B)
Net sales revenue ($5 × 5,700) $28,500
Variable costs ($2.50 × 5,700) (14,250)
Contribution margin 14,250
Fixed costs (6,200)
Operating income (loss) $8,050
Diff: 2
LO: 20-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Target Profit – Three Approaches
8) Target profit is the operating income that results when sales revenue minus variable and fixed costs equals management’s profit goal.
Answer: TRUE
Diff: 1
LO: 20-3
AICPA Functional: Measurement
PE Question Type: Concept
H2: Target Profit – Three Approaches
9) Companies can use the contribution margin ratio approach to compute required sales in terms of units rather than in sales dollars.
Answer: FALSE
Explanation: Companies can use the contribution margin ratio approach to compute required sales in terms of sales dollars rather than in units.
Diff: 1
LO: 20-3
AICPA Functional: Measurement
PE Question Type: Concept
H2: Target Profit – Three Approaches
10) Target profit can be determined by using the contribution margin, contribution margin ratio, or break even approach.
Answer: FALSE
Explanation: Target profit can be determined by using the equation, contribution margin or contribution margin ratio approach.
Diff: 1
LO: 20-3
AICPA Functional: Measurement
PE Question Type: Concept
H2: Target Profit – Three Approaches
11) Darwin Company sells glass vases at a wholesale price of $4.50 per unit. The variable cost to manufacture is $1.75 per unit. The monthly fixed costs are $8,500. Its current sales are 29,000 units per month. If the company wants to increase its operating income by 20%, how many additional units must it sell? (Round any intermediate calculations to two decimal places and your final answer to the nearest whole number.)
- A) 130,500 glass vases
- B) 8,500 glass vases
- C) 34,182 glass vases
- D) 5,182 glass vases
Answer: D
Explanation: D)
Net sales revenue ($4.50 × 29,000) $130,500
Less: Variable costs ($1.75 × 29,000) (50,750)
Contribution margin 79,750
Less: Fixed costs (8,500)
Operating income $71,250
Target profit = $71,250 × (1 + 20%) = $85,500
Required sales in units = (Fixed costs + Target profit) / Contribution margin per unit = = 94,000 / $1.75 = 34,182 units
Sales prior to change 29,000 units
Additional sales needed (34,182 – 29,000) 5,182
Diff: 3
LO: 20-3
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Target Profit – Three Approaches
12) Hisham was a professional classical guitar player until a motorcycle accident left him disabled. After long months of therapy, he hired an experienced luthier and started a small shop to make and sell Spanish guitars. The guitars sell for $900, and the fixed monthly operating costs are as follows:
| Rent and utilities | $800 |
| Wages and benefits to luthier | 2,000 |
| Other expenses | 474 |
Hisham’s accountant told him about contribution margin ratios, and Hisham understood clearly that for every dollar of sales, $0.65 went to cover his fixed costs, and anything above that point was profit.
Hisham wishes to earn $4,000 of operating profit each month. Calculate the number of guitars Hisham will need to sell to achieve the target profit. (Round your answer up to the nearest whole guitar.)
- A) 3 guitars
- B) 12 guitars
- C) 4 guitars
- D) 13 guitars
Answer: D
Explanation: D) Required sales in units = (Fixed costs + Target profit) / Contribution margin per unit
Contribution margin per unit = $900 × 0.65 = $585
Total fixed costs = $800 + $2,000 + $474 = $3,274
Target profit = $4,000
Required sales in units = ($3,274 + $4,000) / $585 = 13 guitars
Diff: 3
LO: 20-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Target Profit – Three Approaches
13) Ethan was a professional classical guitar player until a motorcycle accident left him disabled. After long months of therapy, he hired an experienced luthier and started a small shop to make and sell Spanish guitars. The guitars sell for $600, and the fixed monthly operating costs are as follows:
| Rent and utilities | $600 |
| Wages and benefits to luthier | 2,200 |
| Other expenses | 470 |
Ethan’s accountant told him about contribution margin ratios, and Ethan understood clearly that for every dollar of sales, $0.60 went to cover his fixed costs, and anything above that point was profit.
Ethan wishes to earn $5,000 of operating profit each month. Calculate the amount of sales revenue required to achieve the target profit. (Round your answer to the nearest dollar.)
- A) $5,450
- B) $8,175
- C) $13,784
- D) $20,675
Answer: C
Explanation: C) Required sales in dollars = (Fixed costs + Target profit) / Contribution margin ratio
Contribution margin ratio = 60%
Total fixed costs = $600 + $2,200 + $470 = $3,270
Target profit = $5,000
Required sales in dollars = ($3,270 + $5,000) / 60% = $13,784
Diff: 3
LO: 20-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Target Profit – Three Approaches
14) Brevard Manufacturer produces flooring material. The monthly fixed costs are $10,000 per month. The unit sales price is $75, and variable cost per unit is $35. How many units should Brevard sell in order to earn $10,000 as operating income?
Answer: Required sales in units = (Fixed costs + Target profit) / Contribution margin per unit
Unit contribution margin = Net sales revenue per unit – Variable costs per unit
Unit contribution margin = $75 – $35 = $40
Required sales in units = ($10,000 + $10,000) / $40 = 500 units
Diff: 2
LO: 20-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Target Profit – Three Approaches
15) Daytona Manufacturer produces flooring material. The monthly fixed costs are $10,000 per month. The unit sales price is $75, and variable cost per unit is $35. Daytona wishes to earn an operating income of $25,000. Using the contribution margin ratio, calculate the total sales revenue that is needed. (Round intermediate calculations to five decimal places.)
Answer: Required sales in dollars = (Fixed costs + Target profit) / Contribution margin ratio
Unit contribution margin = Net sales revenue per unit – Variable costs per unit
Contribution margin ratio = Contribution margin / Net sales revenue
Unit contribution margin = $75 – $35 = $40
Unit contribution ratio = $40 / $75 = 53.33%
Required sales in dollars = ($10,000 + $25,000) / 53.33% = $65,629
Diff: 2
LO: 20-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Target Profit – Three Approaches
16) The sales level at which operating income is zero is called the breakeven point.
Answer: TRUE
Diff: 1
LO: 20-3
AICPA Functional: Measurement
PE Question Type: Concept
H2: Breakeven Point – A Variation of Target Profit
17) The breakeven point represents the sales level at which the company’s operating income is zero.
Answer: TRUE
Diff: 1
LO: 20-3
AICPA Functional: Measurement
PE Question Type: Concept
H2: Breakeven Point – A Variation of Target Profit
18) If all other factors remain constant, an increase in fixed costs will increase the breakeven point.
Answer: TRUE
Diff: 1
LO: 20-3
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Breakeven Point – A Variation of Target Profit
19) Fixed costs divided by contribution margin per unit equals the breakeven point in unit sales.
Answer: TRUE
Diff: 1
LO: 20-3
AICPA Functional: Measurement
PE Question Type: Concept
H2: Breakeven Point – A Variation of Target Profit
20) Fixed costs divided by the contribution margin ratio equals the breakeven point in sales dollars.
Answer: TRUE
Diff: 1
LO: 20-3
AICPA Functional: Measurement
PE Question Type: Concept
H2: Breakeven Point – A Variation of Target Profit
21) One of the assumptions of cost-volume-profit (CVP) analysis is that there are no changes in the ________.
- A) accounts payable
- B) cash balance
- C) inventory levels
- D) account receivables
Answer: C
Diff: 1
LO: 20-3
AICPA Functional: Measurement
PE Question Type: Concept
H2: Breakeven Point – A Variation of Target Profit
22) Maywood Company sells hand-knit scarves. Each scarf sells for $40. The company pays $60 to rent vending space for one day. The variable costs are $15 per scarf. How many scarves should the company sell each day in order to break even? (Round your answer up to the nearest whole scarf.)
- A) 2 scarves
- B) 3 scarves
- C) 20 scarves
- D) 4 scarves
Answer: B
Explanation: B) Required sales in units = (Fixed costs + Target profit) / Contribution margin per unit
Unit contribution margin = Net sales revenue per unit – Variable costs per unit
Unit contribution margin = $40 – $15 = $25 per scarf
Required sales in units = ($60 + $0) / $25 = 3 scarves (rounded)
Diff: 1
LO: 20-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Breakeven Point – A Variation of Target Profit
23) Winter Wonderland sells hand-knit scarves. Each scarf sells for $50. The company pays $30 to rent a vending space for one day. The variable costs are $10 per scarf. What total revenue amount does the company need to earn to break even? (Round any percentages to two decimal places and your final answer to the nearest cent.)
- A) $66.67
- B) $37.50
- C) $12.50
- D) $50.00
Answer: B
Explanation: B) Required sales in dollars = (Fixed costs + Target profit) / Contribution margin ratio
Contribution margin ratio = Contribution margin / Net sales revenue
Unit contribution margin = $50 – $10 = $40 per scarf
Contribution margin ratio = ($40 / $50) × 100 = 80.00%
Required sales in dollars = ($30 + $0) / 80.00% = $37.50
Diff: 1
LO: 20-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Breakeven Point – A Variation of Target Profit
24) Young Guns Company, which sells tents, has provided the following information:
| Sales price per unit | $45 |
| Variable cost per unit | 11 |
| Fixed costs per month | $12,700 |
What are the required sales in units for Young to break even? (Round your answer up to the nearest whole unit.)
- A) 227 units
- B) 1,155 units
- C) 283 units
- D) 374 units
Answer: D
Explanation: D) Required sales in units = (Fixed costs + Target profit) / Contribution margin per unit
Unit contribution margin = Net sales revenue per unit – Variable costs per unit
Sales price $45
Less: variable cost (11)
Contribution margin $34
Required sales in units = ($12,700 + $0) / $34 = 374 units
Diff: 2
LO: 20-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Breakeven Point – A Variation of Target Profit
25) Madison Company has provided the following information:
| Sales price per unit | $40 |
| Variable cost per unit | 18 |
| Fixed costs per month | $12,800 |
What is the amount of sales in dollars required for Madison to break even? (Round any percentages to two decimal places and your final answer to the nearest dollar.)
- A) $711
- B) $23,273
- C) $582
- D) $12,800
Answer: B
Explanation: B) Required sales in dollars = (Fixed costs + Target profit) / Contribution margin ratio
Contribution margin ratio = Contribution margin / Net sales revenue
Sales price $40
Less: variable cost (18)
Contribution margin $22
Contribution margin ratio = ($22 / $40) × 100 = 55.00%
Required sales in dollars = ($12,800 + 0) / 55.00% = $23,273
Diff: 2
LO: 20-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Breakeven Point – A Variation of Target Profit
26) Roberts Produce Company has fixed costs of $14,000. The company’s contribution margin ratio is 46%, and the ratio of selling revenue to sales is 20%. What is the breakeven point in sales dollars? (Round your answer to the nearest dollar.)
- A) $70,000
- B) $30,435
- C) $6,440
- D) $2,800
Answer: B
Explanation: B) Required sales in dollars = (Fixed costs + Target profit) / Contribution margin ratio
Required sales in dollars = ($14,000 + 0) / 46% = $30,435
Diff: 2
LO: 20-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Breakeven Point – A Variation of Target Profit
27) Hurst Company sells hand-sewn shirts for $40 per shirt. It incurs monthly fixed costs of $7,000. The contribution margin ratio is calculated to be 50%. What is the breakeven point in units? (Round your answer up to the nearest whole unit.)
- A) 175 units
- B) 3,500 units
- C) 80 units
- D) 350 units
Answer: D
Explanation: D) Required sales in dollars = (Fixed costs + Target profit) / Contribution margin ratio
Required sales in dollars = ($7,000 + 0) / 50% = $14,000.00
Number of units to be sold to break even = $14,000.00 / $40 = 350 units
Diff: 3
LO: 20-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Breakeven Point – A Variation of Target Profit
28) Joshua was a professional classical guitarist until a motorcycle accident left him disabled. After long months of therapy, he hired an experienced luthier and started a small shop to make and sell Spanish guitars. The guitars sell for $800, and the fixed monthly operating costs are as follows:
| Rent and utilities | $600 |
| Wages and benefits to luthier | 2,300 |
| Other expenses | 479 |
Joshua’s accountant told him about contribution margin ratios, and Joshua understood clearly that for every dollar of sales, $0.60 went to cover his fixed costs, and anything above that point was profit.
How many guitars does Joshua need to sell each month to break even? (Round your answer up to the nearest whole guitar.)
- A) 5 guitars
- B) 3 guitars
- C) 7 guitars
- D) 8 guitars
Answer: D
Explanation: D) Required sales in units = (Fixed costs + Target profit) / Contribution margin per unit
Contribution margin per unit = $800 × 0.60 = $480
Total fixed costs = $600 + $2,300 + $479 = $3,379
Required sales in units = ($3,379 + $0) / $480 = 8 guitars
Diff: 2
LO: 20-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Breakeven Point – A Variation of Target Profit
29) Colin was a professional classical guitarist until a motorcycle accident left him disabled. After long months of therapy, he hired an experienced luthier and started a small shop to make and sell Spanish guitars. The guitars sell for $900, and the fixed monthly operating costs are as follows:
| Rent and utilities | $700 |
| Wages and benefits to luthier | 2,000 |
| Other expenses | 475 |
Colin’s accountant told him about contribution margin ratios, and Colin understood clearly that for every dollar of sales, $0.60 went to cover his fixed costs, and anything above that point was profit.
What is the amount of revenue Colin should earn each month to break even? (Round your answer to the nearest dollar.)
- A) $7,938
- B) $5,292
- C) $4,500
- D) $4,125
Answer: B
Explanation: B) Required sales in dollars = (Fixed costs + Target profit) / Contribution margin ratio
Contribution margin ratio = 60%
Total fixed costs = $700 + $2,000 + $475 = $3,175
Required sales in dollars = ($3,175 + 0) / 60% = $5,292
Diff: 2
LO: 20-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Breakeven Point – A Variation of Target Profit
30) From the graph given below, identify the sales revenue line.
- A) OB
- B) AC
- C) AD
- D) AE
Answer: A
Diff: 1
LO: 20-3
AICPA Functional: Measurement
PE Question Type: Concept
H2: Breakeven Point – A Variation of Target Profit
31) Identify the breakeven point in the graph given below.
- A) O
- B) B
- C) E
- D) D
Answer: C
Diff: 1
LO: 20-3
AICPA Functional: Measurement
PE Question Type: Concept
H2: Breakeven Point – A Variation of Target Profit
32) In the graph below, the area between the lines AC and OB to the right of point E represents ________.
- A) fixed costs
- B) breakeven point
- C) operating loss
- D) operating income
Answer: D
Diff: 1
LO: 20-3
AICPA Functional: Measurement
PE Question Type: Concept
H2: Breakeven Point – A Variation of Target Profit
33) The breakeven point is the point where the sales revenues are equal to the total variable costs plus the total fixed costs.
Answer: TRUE
Diff: 1
LO: 20-3
AICPA Functional: Measurement
PE Question Type: Concept
H2: CVP Graph – A Graphic Portrayal
34) Jenna Manufacturers produces flooring material. The monthly fixed costs are $16,000 per month. The sales price per unit is $95 and variable cost per unit is $35. If Jenna’s managers create a CVP graph from volume levels of zero to 800 units, at what sales level (in units) will the revenue and total cost lines intersect? (Round your answer up to the nearest whole unit.)
- A) 267 units
- B) 169 units
- C) 458 units
- D) 124 units
Answer: A
Explanation: A) Required sales in units = (Fixed costs + Target profit) / Contribution margin per unit
Unit contribution margin = Net sales revenue per unit – Variable costs per unit
Sales price $95
Less: variable cost (35)
Contribution margin 60
Fixed costs 16,000
Required sales in units ($16,000 / $60) $267
Diff: 2
LO: 20-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: CVP Graph – A Graphic Portrayal
35) From the graph given below, identify the fixed costs line.
- A) OB
- B) AC
- C) AD
- D) AE
Answer: C
Diff: 1
LO: 20-3
AICPA Functional: Measurement
PE Question Type: Concept
H2: CVP Graph – A Graphic Portrayal
Learning Objective 20-4
1) Sensitivity analysis allows managers to see how various business strategies will affect profit levels.
Answer: TRUE
Diff: 1
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Is CVP Analysis Used for Sensitivity Analysis? (H1)
2) Sensitivity analysis empowers managers with better information for decision making by analyzing how various business strategies will affect profits earned by the company.
Answer: TRUE
Diff: 1
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Is CVP Analysis Used for Sensitivity Analysis? (H1)
3) Managers can use CVP relationships to conduct sensitivity analysis.
Answer: TRUE
Diff: 1
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Is CVP Analysis Used for Sensitivity Analysis? (H1)
4) ________ is a “what if” technique that estimates profit or loss results if sales price, costs, volume, or underlying assumptions change.
- A) High-low method of analysis
- B) Sensitivity analysis
- C) Contribution margin
- D) Operating leverage
Answer: B
Diff: 1
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Is CVP Analysis Used for Sensitivity Analysis? (H1)
5) An increase in sales price per unit decreases the contribution margin per unit.
Answer: FALSE
Diff: 1
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: Changes in the Sales Price
6) An increase in sales price per unit increases the number of units required to break even.
Answer: FALSE
Diff: 1
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: Changes in the Sales Price
7) When the sales price per unit decreases, the breakeven point ________.
- A) increases
- B) decreases
- C) remains the same
- D) decreases proportionately
Answer: A
Diff: 1
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: Changes in the Sales Price
8) When the sales price per unit decreases, the contribution margin per unit ________.
- A) increases proportionately
- B) increases
- C) remains the same
- D) decreases
Answer: D
Diff: 1
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: Changes in the Sales Price
9) Luca was a professional classical guitar player until a motorcycle accident left him disabled. After long months of therapy, he hired an experienced luthier and started a small shop to make and sell Spanish guitars. The guitars sell for $700, and the fixed monthly operating costs are as follows:
| Rent and utilities | $810 |
| Wages and benefits to luthier | 2,500 |
| Other expenses | 480 |
Luca’s accountant told him about contribution margin ratios, and Luca understood clearly that for every dollar of sales, $0.60 went to cover his fixed costs, and anything above that point was profit.
Luca is planning to increase the sales price to $750. What impact will the increase in sales price have on the contribution margin ratio?
- A) It will stay the same.
- B) It will increase to 53.33%.
- C) It will increase to approximately 62.67%.
- D) It will decrease to approximately 49.33%.
Answer: C
Explanation: C) Contribution margin per unit = $700 × 0.60 = $420
Contribution margin ratio = ($470 / $750) × 100 = 0.6267
Diff: 3
LO: 20-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Changes in the Sales Price
10) Brad was a professional classical guitar player until a motorcycle accident at left him disabled. After long months of therapy, he hired an experienced luthier and started a small shop to make and sell Spanish guitars. The guitars sell for $700 each, and the fixed monthly operating costs are as follows:
| Rent and utilities | $810 |
| Wages and benefits to luthier | 2,520 |
| Other expenses | 480 |
Brad’s accountant told him about contribution margin ratios, and Brad understood clearly that for every dollar of sales, $0.60 went to cover his fixed costs, and anything above that point was profit.
Brad is planning to increase the sales price to $820. What impact will the increase in sales price have on the breakeven point in units? (Round your answer up to the nearest whole guitar.)
- A) It will stay the same.
- B) It will go down from 12 to 8 units.
- C) It will go up from 8 to 12 units.
- D) It will go down from 10 to 8 units.
Answer: D
Explanation: D) Contribution margin per unit = $700 × 0.60 = $420
Total fixed costs = $810 + $2,520 + $480 = $3,810
Required sales in units = (Fixed costs + Target profit) / Contribution margin per unit
Required sales in units = ($3,810 + 0) / $420 = 10 units
Revised contribution margin = $420 + ($820 – $700) = $420 + $120 = $540
Required sales in units (Revised) = ($3,810 + 0) / $540 = 8 units
Diff: 3
LO: 20-4
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Changes in the Sales Price
11) Which of the following will lower the breakeven point?
- A) a decrease in the sales price per unit
- B) an increase in total fixed costs
- C) an increase in the variable cost per unit
- D) an increase in the sales price per unit
Answer: D
Diff: 1
LO: 20-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Changes in the Sales Price
12) A small business produces a single product and reports the following data:
| Sales price | $8.50 | per unit |
| Variable cost | $5.25 | per unit |
| Fixed cost | $22,000 | per month |
| Volume | 10,000 | units per month |
The company believes that the volume will go up to 12,000 units if the company reduces its sales price to $7.50. How would this change affect operating income?
- A) It will increase by $5,500.
- B) It will increase by $10,500.
- C) It will decrease by $5,500.
- D) It will decrease by $10,500.
Answer: C
Explanation: C) Contribution margin (before reduction in sales price) = $8.50 – $5.25 = $3.25
Operating income (before reduction in sales price) = (10,000 × $3.25) – $22,000 = $10,500
Contribution margin (after reduction in sales price) = $7.50 – $5.25 = $2.25
Operating income (after reduction in sales price) = (12,000 × $2.25) – $22,000 = $5,000
Decrease in operating income due to reduction in selling price = $10,500 – $5,000 = $5,500
Diff: 2
LO: 20-4
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Changes in the Sales Price
13) Complete the statement, using the following terms: increase, decrease, or have no effect on.
Increases in sales price per unit ________ contribution margin per unit and ________ the breakeven point.
Answer: Increases in sales price per unit increase contribution margin per unit and decrease the breakeven point.
Diff: 2
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: Changes in the Sales Price
14) Complete the statement, using the following terms: increase, decrease, or have no effect on.
Decreases in sales price per unit_______ contribution margin per unit and ________ the breakeven point.
Answer: Decreases in sales price per unit decrease contribution margin per unit and increase the breakeven point.
Diff: 2
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: Changes in the Sales Price
15) When the variable cost per unit decreases, the contribution margin on each unit sold also decreases.
Answer: FALSE
Diff: 1
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: Changes in Variable Costs
16) When the variable cost per unit increases, the total number of units required to break even also increases.
Answer: TRUE
Diff: 1
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: Changes in Variable Costs
17) When the variable cost per unit increases, the contribution margin on each unit decreases.
Answer: TRUE
Diff: 1
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: Changes in Variable Costs
18) If the variable cost per unit decreases, the total number of units required to break even will increase.
Answer: FALSE
Diff: 1
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: Changes in Variable Costs
19) Which of the following statements is true if the variable cost per unit increases while the sales price per unit and total fixed costs remain constant?
- A) The breakeven point decreases.
- B) The contribution margin increases.
- C) The breakeven point remains the same.
- D) The breakeven point increases.
Answer: D
Diff: 2
LO: 20-4
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Changes in Variable Costs
20) Lightfoot Company sells its product for $55 and has variable cost of $30 per unit. The total fixed costs are $25,000. What will be the effect on the breakeven point in units if variable cost increases by $10 due to an increase in the cost of direct materials?
- A) It will increase by 667 units.
- B) It will decrease by 667 units.
- C) It will decrease by 175 units.
- D) It will increase by 175 units.
Answer: A
Explanation: A) Breakeven point (before increase in cost of direct materials) = $25,000 / ($55 – $30) = 1,000 units
Breakeven point (after increase in cost of direct materials) = $25,000 / ($55 – $40) = 1,667 units
Increase in breakeven point = 1,667 – 1,000 = 667 units
Diff: 3
LO: 20-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Changes in Variable Costs
21) Moylan Roofing Company has provided the following information:
| Sales revenue | $779,000 |
| Variable costs | 506,000 |
| Fixed costs | 216,000 |
Which of the following statements is true, if the sales volume increases by 10%?
- A) Operating income will increase by $50,600.
- B) Operating income will increase by $27,300.
- C) Fixed expenses will increase by $21,600.
- D) Contribution margin will increase by $77,900.
Answer: B
Explanation: B) Contribution margin = $779,000 – $506,000 = $273,000
Revised sales:
Sales Revenue $779,000
Add: 10% of sales 77,900
Total sales $856,900
Revised variable costs:
Variable costs $506,000
Add: 10% of variable costs 50,600
Total variable costs $556,600
Revised contribution margin:
Sales Revenue $856,900
Less variable costs (556,600)
Contribution margin $300,300
Effect on contribution margin:
Revised contribution margin $300,300
Less: Variable costs (273,000)
Increase in contribution margin $27,300
Diff: 3
LO: 20-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Changes in Variable Costs
22) Complete the statement, using the following terms: increase, decrease, or have no effect on.
Decreases in variable cost per unit ________ contribution margin per unit and ________ the breakeven point.
Answer: Decreases in variable cost per unit increase contribution margin per unit and decrease the breakeven point.
Diff: 2
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: Changes in Variable Costs
23) Complete the statement, using the following terms: increase, decrease, or have no effect on.
Increases in variable cost per unit ________ contribution margin per unit and ________ the breakeven point.
Answer: Increases in variable cost decrease contribution margin per unit and increase the breakeven point.
Diff: 2
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: Changes in Variable Costs
24) Metro Arcade sells tickets at $25 per person as a one-day entrance fee. Variable costs are $11 per person, and fixed costs are $52,500 per month.
Assume that Metro increases variable costs from $11 to $14 per person. Compute the new breakeven point in tickets and in sales dollars.
Answer:
Unit contribution margin = Net sales revenue per unit – Variable costs per unit
= $25 = $14 = $11
Required sales in units = (Fixed costs + Target profit) / Contribution margin per unit
= ($52,500 + $0) / $11
= 4,773 tickets
Required sales dollars = Selling price per ticket × Required ticket sales
= $25 × 4,773 = $119,325
Diff: 2
LO: 20-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Changes in Variable Costs
25) Higher fixed costs decrease the total contribution margin required to break even.
Answer: FALSE
Diff: 1
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: Changes in Fixed Costs
26) Higher fixed costs increase the total number of units required to break even.
Answer: TRUE
Diff: 1
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: Changes in Fixed Costs
27) If a company reduces its fixed costs, the operating income will increase by the same amount as the cost reduction.
Answer: TRUE
Diff: 2
LO: 20-4
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Changes in Fixed Costs
28) When the total fixed costs increase, the contribution margin per unit ________.
- A) increases
- B) decreases
- C) increases proportionately
- D) remains the same
Answer: D
Diff: 1
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: Changes in Fixed Costs
29) When the total fixed costs increase, the breakeven point ________.
- A) increases
- B) decreases
- C) decreases proportionately
- D) remains the same
Answer: A
Diff: 1
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: Changes in Fixed Costs
30) When the total fixed costs decrease, the contribution margin per unit ________.
- A) increases
- B) decreases
- C) remains the same
- D) decreases proportionately
Answer: C
Diff: 1
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: Changes in Fixed Costs
31) When the total fixed costs decrease, the breakeven point ________.
- A) increases
- B) decreases
- C) remains the same
- D) increases proportionately
Answer: B
Diff: 1
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: Changes in Fixed Costs
32) Which of the following statements is true if total fixed costs decrease while the sales price per unit and variable cost per unit remain constant?
- A) The contribution margin increases.
- B) The breakeven point increases.
- C) The contribution margin decreases.
- D) The breakeven point decreases.
Answer: D
Diff: 2
LO: 20-4
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Changes in Fixed Costs
33) Evans Tiles Company has estimated the following amounts for its next fiscal year:
| Total fixed costs | $832,000 |
| Sales price per unit | 44 |
| Variable costs per unit | 20 |
What will happen to the breakeven point (in units) if Evans can reduce fixed costs by $22,000? (Round your answer up to the nearest whole unit.)
- A) The breakeven point will decrease by 917 units.
- B) The breakeven point will decrease by 1,100 units.
- C) The breakeven point will increase by 1,100 units.
- D) The breakeven point will increase by 500 units.
Answer: A
Explanation: A) Contribution margin (before reduction in fixed expenses) = $44 – $20 = $24
Decrease breakeven point due to reduction in fixed costs = $22,000 / $24 = 917 units
Diff: 3
LO: 20-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Changes in Fixed Costs
34) Complete the statement, using the following terms: increase, decrease, or have no effect on.
Increases in total fixed cost ________ contribution margin per unit and ________ the breakeven point.
Answer: Increases in total fixed cost have no effect on contribution margin per unit and increase the breakeven point.
Diff: 2
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: Changes in Fixed Costs
35) Complete the statement, using the following terms: increases, decreases, or have no effect on.
Decreases in fixed cost ________ contribution margin per unit and ________ the breakeven point.
Answer: Decreases in fixed cost have no effect on contribution margin per unit and decrease the breakeven point.
Diff: 2
LO: 20-4
AICPA Functional: Measurement
PE Question Type: Concept
H2: Changes in Fixed Costs
36) Fun Time Amusement Park provides a variety of attractions. Fun Time sells tickets at $50 per person as a one-day entrance fee. Variable costs are $28 per person, and fixed costs are $178,800 per month.
Assume that Fun Time reduces fixed costs from $178,800 per month to $166,500 per month. Compute the new breakeven point in tickets and in sales dollars.
Answer:
Unit contribution margin = Net sales revenue per unit – Variable costs per unit
= $50 = $28 = $22
Required sales in units = (Fixed costs + Target profit) / Contribution margin per unit
= ($166,500 + $0) / $22
= 7,569 tickets
Required sales dollars = Selling price per ticket × Required ticket sales
= $50 × 7,569 = $378,450
Diff: 2
LO: 20-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Changes in Fixed Costs
Learning Objective 20-5
1) The amount by which sales can decrease before the company incurs an operating loss is called breakeven point.
Answer: FALSE
Diff: 1
LO: 20-5
AICPA Functional: Measurement
PE Question Type: Concept
H2: Margin of Safety
2) The margin of safety can be used to evaluate a company’s plans for the future.
Answer: TRUE
Diff: 1
LO: 20-5
AICPA Functional: Measurement
PE Question Type: Concept
H2: Margin of Safety
3) If variable costs increase, and all other factors remain the same, the margin of safety will become smaller.
Answer: TRUE
Diff: 1
LO: 20-5
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Margin of Safety
4) If variable costs decrease, and all other factors remain the same, the margin of safety will become larger.
Answer: TRUE
Diff: 1
LO: 20-5
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Margin of Safety
5) If fixed costs increase, and all other factors remain the same, the margin of safety will become larger.
Answer: FALSE
Diff: 1
LO: 20-5
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Margin of Safety
6) Gould Enterprises sells computer disks for $3.16 per disk. Unit variable cost is $0.06. The breakeven point in units is 3,600, and expected sales in units are 4,300. What is the margin of safety in dollars?
- A) $2,170
- B) $2,212
- C) $42
- D) $11,376
Answer: B
Explanation: B) Margin of safety = (4,300 – 3,600) × $3.16 = $2,212
Diff: 2
LO: 20-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Margin of Safety
7) Divine Foods produces a gourmet condiment that sells for $24 per unit. Variable cost is $6 per unit, and fixed costs are $8,000 per month. If Divine expects to sell 1,500 units, compute the margin of safety in units. (Round any intermediate calculations and your final answer to the nearest whole unit.)
- A) 444 units
- B) 1,056 units
- C) 1,500 units
- D) 19 units
Answer: B
Explanation: B)
Sales price per unit $24
Less: Variable cost per unit (6)
Contribution margin per unit $18
Breakeven sales in units = (Fixed costs + Target profit) / Contribution margin per unit
Breakeven sales in units = ($8,000 + 0) / $18 = 444 units
Expected sales – Breakeven sales = Margin of safety in units
1,500 units – 444 units = 1,056 units
Diff: 2
LO: 20-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Margin of Safety
8) Gallup Foods produces a gourmet condiment that sells for $22 per unit. Variable cost is $8 per unit, and fixed costs are $6,000 per month. If Gallup expects to sell 2,000 units, compute the margin of safety in dollars. (Round any intermediate calculations to the nearest whole unit, and your final answer to the nearest dollar.)
- A) $34,571
- B) $1,571
- C) $6,000
- D) $12,571
Answer: A
Explanation: A)
Sales price per unit $22
Less: Variable cost per unit (8)
Contribution margin per unit $14
Breakeven sales in units = (Fixed costs + Target profit) / Contribution margin per unit
Breakeven sales in units = ($6,000 + 0) / $14 = 429 units
Margin of safety in units × Sales price per unit = Margin of safety in dollars
(2,000 units – 429 units) × $22 per unit = $34,571
Diff: 2
LO: 20-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Margin of Safety
9) Antique Works is owned and operated by a craftsman who makes replicas of historic firearms for museums, sportsmen, and collectors. The data are as follows:
| Sales price per unit | $800 |
| Variable cost per unit | 470 |
| Fixed costs per month | 8,580 |
If Antique expects to sell 40 units per month, what is his margin of safety expressed in units per month?
- A) 14 units
- B) 40 units
- C) 66 units
- D) 12 units
Answer: A
Explanation: A)
Sales price per unit $800
Less: Variable cost per unit (470)
Contribution margin per unit $330
Breakeven sales in units = (Fixed costs + Target profit) / Contribution margin per unit
Breakeven sales in units = ($8,580 + 0) / $330 = 26 units
Expected sales – Breakeven sales = Margin of safety in units
40 units – 26 units = 14 units
Diff: 2
LO: 20-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Margin of Safety
10) Portland Antique Weaponry is owned and operated by a craftsman who makes replicas of historic firearms for museums, sportsmen, and collectors. He is currently producing 40 flintlock muskets per month. Data are as follows:
| Sales price per unit | $800 |
| Variable cost per unit | 470 |
| Fixed costs per month | 10,230 |
If Portland expects to sell 60 units per month, how much is his margin of safety expressed in sales revenue?
- A) $13,630
- B) $24,800
- C) $23,200
- D) $48,000
Answer: C
Explanation: C)
Sales price per unit $800
Less: Variable cost per unit (470)
Contribution margin per unit $330
Breakeven sales in units = (Fixed costs + Target profit) / Contribution margin per unit
Breakeven sales in units = ($10,230 + 0) / $330 = 31 units
Expected sales – Breakeven sales = Margin of safety in units
60 units – 31 units = 29 units
Margin of safety in units × Sales price per unit = Margin of safety in dollars
29 units × $800 per unit = $23,200
Diff: 2
LO: 20-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Margin of Safety
11) Browning Company sells two products—X and Y. Product X is sold for $30 per unit and has a variable cost per unit of $15. Product Y is sold for $30 per unit and has a variable cost of $10 per unit. Total fixed costs for the company are $20,000. Browning Company typically sells three units of Product X for every unit of Product Y. What is the breakeven point in total units? (Round any intermediate calculations to two decimal places, and your answer to the nearest unit.)
- A) 1,231 units
- B) 923 units
- C) 308 units
- D) 1,333 units
Answer: A
Explanation: A)
Product X Product Y
Sales price per unit $30 $30
Less variable cost per unit (15) (10)
Contribution margin per unit $15 $20
Weighted contribution = ($15 × 3) + ($20 × 1) = $65
Weighted-average contribution margin per unit = $65 / 4 = $16.25
Breakeven sales in units = (Fixed costs + Target profit) / Contribution margin per unit
Breakeven sales in units = ($20,000 + 0) / $16.25 per unit = 1,231 units
Diff: 3
LO: 20-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Margin of Safety
12) What is the margin of safety? List three ways in which margin of safety can be expressed.
Answer: The margin of safety is the excess of expected sales over breakeven sales. The margin of safety can be expressed in units, in dollars, or as a ratio.
Diff: 2
LO: 20-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Margin of Safety
13) The degree of operating leverage is the ratio that measures the effects that variable costs have on changes in operating income when sales volume changes.
Answer: FALSE
Explanation: The degree of operating leverage is the ratio that measures the effects that fixed costs have on changes in operating income when sales volume changes.
Diff: 1
LO: 20-5
AICPA Functional: Measurement
PE Question Type: Concept
H2: Operating Leverage
14) Operating leverage predicts the effects fixed costs have on changes in operating income when sales volume changes.
Answer: TRUE
Diff: 1
LO: 20-5
AICPA Functional: Measurement
PE Question Type: Concept
H2: Operating Leverage
15) The degree of operating leverage for Williams Company is 2. The actual operating income is $14,000. If the company expects a 25% increase in sales, operating income should increase by $3,500.
Answer: FALSE
Explanation: The percentage change in operating income will be 2 times the percentage change in sales. Thus operating income will increase by $14,000 × 50% or $7,000.
Diff: 2
LO: 20-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Operating Leverage
16) Operating leverage predicts the effects that fixed costs have on changes in operating income when ________.
- A) production is discontinued
- B) there are no sales returns
- C) variable costs change
- D) sales volume changes
Answer: D
Diff: 1
LO: 20-5
AICPA Functional: Measurement
PE Question Type: Concept
H2: Operating Leverage
17) The degree of operating leverage can be measured by ________.
- A) dividing the contribution margin by operating income
- B) dividing the fixed costs by the sales price per unit
- C) multiplying the contribution margin by sales revenue
- D) dividing the fixed costs by contribution margin
Answer: A
Diff: 1
LO: 20-5
AICPA Functional: Measurement
PE Question Type: Concept
H2: Operating Leverage
18) A company’s proportion of fixed costs to variable costs is called its ________.
- A) target profit
- B) relevant range
- C) mixed cost
- D) cost structure
Answer: D
Diff: 1
LO: 20-5
AICPA Functional: Measurement
PE Question Type: Concept
H2: Operating Leverage
19) Knapp Roofing Company has estimated the following amounts for its next fiscal year:
| Total fixed costs | $840,000 |
| Sale price per unit | 80 |
| Variable cost per unit | 30 |
If the company spends an additional $35,000 on advertising, sales volume would increase by2,500 units. What effect will this decision have on the operating income of Evans?
- A) Operating income will decrease by $90,000.
- B) Operating income will increase by $90,000.
- C) Operating income will increase by $200,000.
- D) Operating income will increase by $125,000.
Answer: B
Explanation: B) Increase in total contribution margin = 2,500 units × ($80 – $30) = 2,500 units × $50 = $125,000
Increase in operating income = $125,000 – $35,000 (Advertising costs) = $90,000
Diff: 3
LO: 20-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Operating Leverage
20) McPherson Company is facing a $2 increase in the variable costs of producing one of its products for the upcoming year. As a result, the sales manager has made a proposal to increase the sales price of the product while increasing the advertising budget at the same time. The sales price increase will lower sales volume, but the other changes may help the company maintain its profit margin. McPherson has provided the following information regarding the current year results and the proposal made by the sales manager:
| Current Year | Proposal | |
| Unit sales | 28,000 | 20,000 |
| Sales price per unit | $48 | $56 |
| Variable cost per unit | $34 | $36 |
| Fixed cost | $76,000 | $98,000 |
Relative to the current year, the sales manager’s proposal will ________.
- A) decrease operating income by $8,000
- B) increase contribution margin by $14,000
- C) decrease the unit breakeven point
- D) decrease operating income by $14,000
Answer: D
Explanation: D)
Evaluation of current year data:
Sales price per unit $48
Less: Variable cost per unit (34)
Contribution margin per unit $14
Number of units sold 28,000
Total contribution margin ($14 × 28,000) $392,000
Less: Fixed costs (76,000)
Operating income $316,000
Evaluation of proposal made by the sales manager:
Sales price per unit $56
Less: Variable cost per unit (36)
Contribution margin per unit $20
Number of units sold 20,000
Total contribution margin ($20 × 20,000) $400,000
Less: Fixed cost (98,000)
Operating income $302,000
Increase or (decrease) in operating income = $302,000 – $316,000 = (14,000)
Diff: 3
LO: 20-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Operating Leverage
21) What is operating leverage? The degree of operating leverage is 2.75. What does this mean?
Answer: Operating leverage predicts the effects that fixed costs have on changes in operating income when sales volume changes. If a company has a degree of operating leverage of 2.75, then a percentage change in sales will have 2.75 times the percentage change in profits. For example, if sales increase by 10%, then profits will increase by 27.5% (2.75 × 10%).
Diff: 2
LO: 20-5
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Operating Leverage
22) The sales mix provides the weights that make up total product sales.
Answer: TRUE
Diff: 1
LO: 20-5
AICPA Functional: Measurement
PE Question Type: Concept
H2: Sales Mix
23) Sales mix, or product mix, is the combination of products that make up total sales.
Answer: TRUE
Diff: 1
LO: 20-5
AICPA Functional: Measurement
PE Question Type: Concept
H2: Sales Mix
24) Grantham Company sells two products, X and Y. For the coming year, Grantham predicts sales of 5,000 units of X and 10,000 units of Y. The contribution margins of the two products are $5 and $4, respectively. The weighted-average contribution margin is $6.50.
Answer: FALSE
Explanation: Sales mix = 5,000:10,000 = 1:2
Total contribution per unit of the X and Y = ($5 × 1) + ($4 × 2) = $13
Weighted-average contribution margin per unit = $13 per unit / 3 units = $4.33
Diff: 2
LO: 20-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Sales Mix
25) For the next year, Hall & Co. predicts sales of 15,000 units of a product with a contribution margin of $6 per unit and 30,000 units of another product with a contribution margin of $10 per unit. The weighted-average contribution margin per unit is $8.67.
Answer: TRUE
Explanation: Total contribution = ($6 × 15,000) + ($10 × 30,000) = $90,000 + $300,000 = $390,000
Weighted-average contribution margin per unit = $390,000 / 45,000 = $8.67
Diff: 2
LO: 20-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Sales Mix
26) A company that sells multiple products will always set sales prices such that all products have the same contribution margin.
Answer: FALSE
Diff: 1
LO: 20-5
AICPA Functional: Measurement
PE Question Type: Concept
H2: Sales Mix
27) The Purely Pizza Company sells pizzas in two different sizes—medium and large. The two products sell in equal numbers. The contribution margin of a medium pizza is $16, and the contribution margin of a large pizza is $18. The weighted average contribution margin is $17.
Answer: TRUE
Explanation: Total contribution = $16 + $18 = $34
Weighted-average contribution margin per unit = $34 / 2 = $17
Diff: 1
LO: 20-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Sales Mix
28) The Special Sauce Pizza Company sells pizzas in two different sizes—medium and large. The number of medium pizzas sold is twice the number of large pizzas sold. The contribution margin of a medium pizza is $10, and the contribution margin of a large pizza is $20. The weighted average contribution margin is $15.
Answer: FALSE
Explanation: Total contribution = ($10 × 2) + ($20 × 1) = $20 + $20 = $40
Weighted-average contribution margin per unit = $40 / 3 = $13.3333333
Diff: 1
LO: 20-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Sales Mix
29) Mist Beverages Company sells two products, A and B. Mist predicts that it will sell 2,500 units of A and 2,000 units of B during the next period. The unit contribution margins are $4.00 and $4.80 for products A and B, respectively. What is the weighted-average unit contribution margin? (Round your answer to the nearest cent.)
- A) $4.36
- B) $4.40
- C) $4.44
- D) $8.80
Answer: A
Explanation: A) Weighted contribution = ($4.00 × 2,500 units) + ($4.80 × 2,000 units) =
Weighted-average contribution margin per
Diff: 2
LO: 20-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Sales Mix
30) McDaniel Company sells two products—J and B. McDaniel predicts that it will sell 7,400 units of J and 6,500 units of B in the next period. The unit contribution margins are $2.90 and $6.30 for products J and B, respectively. What is the weighted-average unit contribution margin? (Round your answer to the nearest cent.)
- A) $4.60
- B) $1.54
- C) $2.95
- D) $4.49
Answer: D
Explanation: D) Weighted contribution = (7,400 × $2.90) + (6,500 × $6.30) = $62,410
Weights = 7,400 units + 6,500 units = 13,900 units
Weighted-average contribution margin per unit
Diff: 2
LO: 20-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Sales Mix
31) Jackson Manufacturers has provided the following information regarding the two products that it sells:
| Jet Boats | Ski Boats | |
| Sales price per unit | $10,000 | $24,000 |
| Variable cost per unit | $4,800 | $18,000 |
Annual fixed costs are $300,000.
How many units must be sold in order for Jackson to break even, assuming that Jackson sells five jet boats for every two ski boats sold? (Round any intermediate calculations to two decimal places, and your final answer to the nearest unit.)
- A) 7 jet boats and 8 ski boats
- B) 39 jet boats and 16 ski boats
- C) 16 jet boats and 39 ski boats
- D) 8 jet boats and 7 ski boats
Answer: B
Explanation: B)
| Jet Boats | Ski Boats | |
| Sales price per unit | $10,000 | $24,000 |
| Variable cost per unit | $4,800 | $18,000 |
| Contribution margin per unit | $5,200 | $6,000 |
Weighted contribution = ($5,200 × 5 jet boats) + ($6,000 × 2 ski boats) = $26,000 + $12,000 = $38,000
Weights = 5 jet boats + 2 ski boats = 7 boats
Weighted-average contribution margin per unit = $38,000 / 7 boats = $5,428.57 per boat
Required sales in units = (Fixed costs + Target profit) / Contribution margin per unit
Required sales in units = ($300,000 + 0) / $5,428.57 per boat = 55 boats
55 boats in the ratio of 5:2 are 39 jet boats and 16 ski boats.
Diff: 3
LO: 20-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Sales Mix
32) Becky’s Bakery sells three large muffins for every two small ones. A small muffin sells for $3.50 with a variable cost of $2.00. A large muffin sells for $6.00 with a variable cost of $3.00. What is the weighted-average contribution margin? (Round any intermediate calculations and your final answer to the nearest cent.)
- A) $4.75 per muffin
- B) $2.25 per muffin
- C) $4.50 per muffin
- D) $2.40 per muffin
Answer: D
Explanation: D)
Large Small
muffin muffin
Sales price per unit $6.00 $3.50
Less variable cost per unit (3.00) (2.00)
Contribution margin per unit $3.00 $1.50
Number of units × 3 × 2
Weighted contribution margin $9.00 $3.00
Total weighted contribution = $9.00 + $3.00 = $12.00
Weights = 3 large muffins + 2 small muffins = 5 muffins
Weighted-average contribution margin per unit = $12.00 / 5 muffins = $2.40 per muffin
Diff: 2
LO: 20-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Sales Mix
33) Popeye’s, a local convenience store, sells soft drinks. It sells two large drinks for every small drink. A large drink sells for $3.00 with a variable cost of $0.80. A small drink sells for $1.00 with a variable cost of $0.50. The weighted average contribution margin is ________. (Round any intermediate calculations and your final answer to the nearest cent.)
- A) $1.35 per drink
- B) $4.90 per drink
- C) $1.63 per drink
- D) $2.20 per drink
Answer: C
Explanation: C)
Large Small
drink drink
Sales price per unit $3.00 $1.00
Less variable cost per unit (0.80) (0.50)
Contribution margin per unit 2.20 0.50
Number of units × 2 × 1
Weighted contribution margin $4.40 $0.50
Total weighted contribution = $4.40 + $0.50 = $4.90
Weights = 2 large drinks + 1 small drink = 3 drinks
Weighted-average contribution margin per unit = $4.90 / 3 drinks = $1.63 per drink
Diff: 2
LO: 20-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Sales Mix
