Chapter 5 - CVP Analysis

Basic Concepts 1. Cost-volume-profit analysis assumes that over the relevant range A. Variable costs are nonlinear B. Fixed costs are nonlinear D. Total costs are unchanged 2. Cost-volume-profit analysis assumes that over the relevant range over A. C. Variable costs are nonlinear B. Costs are unchanged D. Fixed costs are nonlinear 3. Breakeven analysis assumes linearity over the relevant range with respect to Total costs Total revenue Total costs Total revenue A. Yes No C. No Yes B. D. No No 4. Break-even analysis assumes that over the relevant rel evant range A. C. Total costs are unchanged B. Variable costs are nonlinear D. Fixed costs are nonlinear 5. The amount of variable cost per unit and total fixed cost within a relevant rel evant range behave this way in relation to production level: A. Production increases, unit variable cost increases, total fixed cost increases B. Production decreases, unit variable cost decreases, total fixed cost decreases

D. Production increases, unit variable cost decreases, total fixed cost remains the same 6. Assuming that a flexible budget is in use, production levels are expected to increase within a relevant ranged, that expected effect on fixed cost per unit(FCU) and variable costs per unit (VCU) would be A. FCU to decrease and VCU to decrease decr ease B. C. FCU no change and VCU no change D. FCU no change and VCU to decrease 7. One of the major assumptions limiting the reliability of break-even analysis is that A. The cost of productivity will continually increase B. The cost of production factors varies with changes in technology C. Total variable cost will remain unchanged over the relevant range

8. At the breakeven point, the contribution margin equals total A. Variable costs C. Selling and administrative costs B. Sales revenue D. 9. At the breakeven point, fixed cost is always A. Less than contribution margin C. More than variable costs B. D. More than the contribution margin 10.An 10. An assembly plant accumulates its variable and fixed manufacturing overhead costs in a single cost pool, which is then applied to work-in-process using a single application base. The assembly plant management wants to estimate the magnitude of the total manufacturing overhead costs for different volume levels of the application activity base using a flexible budget formula. If there is an increase in the application activity base that is within the relevant range of activity for the assembly plant, which one of the following relationship regarding variable and fixed costs is correct? A. The variable cost per unit is constant, and the total fixed costs decrease B. The variable cost per unit is constant, and the total fixed costs increase D. The variable cost per unit increases, and the total fixed costs remain constant 11.Contribution 11. Contribution margin is the excess of revenues over

A. Direct cost B. Manufacturing cost

C. Cost of good sold

12.Cost-volume-profit analysis is a key factor in many decisions, including choice of product lines, pricing of products, marketing strategy, and use of productive facilities: A calculation used in a CVP analysis is the breakeven point. Once the breakeven point has been reached, operating income will increase by the A. Gross margin per unit for each additional unit sold B. C. Variable cost per unit for each additional unit sold D. Sales price unit for each additional unit sold 13.Cost-volume-profit relationships that are curvilinear may be analyzed linearly by considering only A. Fixed and semi-variable costs C. Relevant variable costs B. Relevant fixed costs 14.When an organization is operating above the breakeven point, the degree or amount that revenues may decline before losses are incurred is the A. Residual income rate B. Marginal rate of return D. Target(hurdle) rate of return 15.The rate of amount that sales may decline before losses are incurred is called A. Sensitive level of income B. Variable sales ration D. Residual income rates 16.Total unit costs are A. Relevant for cost-volume0profit analysis B. Independent of the cost system used to generate them C. D. Needed for determining product contribution

17. Given the following notations, what is the breakeven sales level in units? SP = selling price FC = total fixed costs VC = variable cost per unit A. SP÷ (FC ÷ VC) ÷

18.A company’s breakeven point (BEP) in pesos of revenue may be affected by equal percentage increase in both selling price and variable cost per unit (assume all other factors are constant within the relevant range). The equal percentage changes in selling price and variable cost per unit will cause the breakeven point in peso to A. Decrease by less than the percentage increases in selling price B. Decrease by more than the percentage increases in the selling price C. Increase by the percentage change in variable cost per unit D. Question 19 and 20 are based on the following selected budgeted data of Russel Gil Company for the coming year: Selling price per unit P 12.00 Budgeted sales 600,000 Fixed expenses 150,000 Variable cost per unit 8.00 19.What is the breakeven sale in units? A. 35,000 C. 40,000 B. D. 45,000 20.What is the margin of safety ratio in percent? A. 15% C. 30% B. 20%

21.A company is concerned about its operating performance, as summarized below: Revenues (P 12.50 per unit) P300,000 Variable Costs 180,000 Operating loss (40,000) How many additional units should have been sold in order for the company to break even in 2004? A. 32,000 C. 16,000 B. 24,000 22.Kent Co.’s operating percentages were as follows: Revenues Cost of good sold Variable 50% Fixed 10 Gross profit Other operating expenses Variable 20 Fixed 15 Operating income

100%

60 40%

35 5%

Kent’s sales totaled to P2 million. At what revenue level would Kent break even? A. P1,900,00 C. P1,250,000 D. 883,333 23. For the period just ended Chanda, Inc., generated the following operating results in percentages Sales 100% Cost of sales Variable 50% Fixed 10 60 Gross profit 40% Operating expenses Variable 20 Fixed 15 35 Operating income 5% Total sales amounted P3.0 million at what level is a break-even sale? A. P3,750,000 C. P1,875,000 B. P1,850,000 24.A company produced 500 units of a product and incurred the following costs. Direct materials, P8,000; direct labor, P 10,000 overhead (20% fixed) P45,000. If the sales value of 500 units is P102,000, what is the contribution margin percentage? A. 44% C. 53% B. D. 74% 25.Given the selling price at P120 per unit; contribution margin ratio at 25% and fixed cost at P250,000, the total variable expenses at the break even point would be: A. P350,000 C. P450,000 B. D. P250,000 26.Which of the following formulas is used to determine the break-even point when using the contribution margin method? A. Revenues less operating income equal variable costs plus fixed costs B. C. Selling price less unit fixed costs equals contribution margin D. Total fixed costs equal total revenues 27.Which of the following will result in raising the breakeven point? A. A decrease in the variable cost per unit C. An increase in the contribution margin per unit D. A decrease in income tax rates

28.To reduce the break-even point, the company may A. Decrease both the fixed costs and contribution margin B. Increase both the fixed costs and the contribution margin C. D. Increase the fixed costs and decrease the contribution margin 29.NTQ Inc’s net sales in 2011 were 15% below the 2010 level. NTQ’s semi-variable costs would A. Increase in total and increase as a percentage of net sales B. Decrease in total and decrease as a percentage of net sales C. Increase in total but decrease as a percentage of net sales D. 30.Cost-volume-profit analysis is a key factor in many decisions, including choice of product lines, pricing of products, marketing strategy, and use of productive facilities: A calculation used in a CVP analysis is the breakeven point. Once the breakeven point has been reached, operating income will increase by the A. Sales price unit for each additional unit sold B. C. Fixed cost per unit for each additional unit sold D. Gross margin per unit for each additional unit sold 31.Marston Enterprises sells three chemicals: petrol, septine and tridol. Petrol is the company’s most profitable product; tridol is the least profitable. Which one of the following events will definitely decrease the firm’s overall breakeven point for the upcoming accounting period? A. The installation of new computer-controlled machinery and subsequent layoff of assembly-line workers B. A decrease in tridol’s selling price C. D. An increase in petrol’s raw material cost 32.Cook Company sells three chemicals; Simpol, Plutex and Coplex. Simpol is the most profitable product while Coplex is the lease compatible. Which of the following events will definitely decrease the firm’s overall BEP for the upcoming account period A. An increase in the overall market of Plutex B. A decrease in Coplex’s selling price C. D. An increase in SImpol raw materials 33.A company manufactures a single product. Estimated cost data regarding this product and other information for the product and the companies are as follows: Sales price per unit P40 Total variable production cost per unit P22 Sales commission (on sales) 5% Fixed costs and expenses: Manufacturing overhead P5,598,720 General and administrative P3,732,480 Effective income tax rate 40% The number of units the company must sell in the coming year in order to reach its breakeven point is A. 388,800 units C. B. 518,400 units D. 972,000 units 34.Fely Company reported the following for the year just ended: Budgeted sales P 3,000,000 Break-even sales 2,100,000 Budgeted contribution margin 1,800,000 Cashflow break-even 600,000 The company’s margin of safety is C. P1,200,000 B. P 2,400,000 D. P1,500,000

35.The contribution margin ratio always increases when the A. Breakeven point increases B. Breakeven point decreases C. D. Variable costs as a percentage of net sales increase 36.The following information pertains to Nova Company’s cost-volume-profit relationships: Breakeven point in unit sold 1,000 Variable costs per unit P 500 Total fixed costs P150, 000 How much will be contributed to profit before income taxes by the 1,001st unit sold? A. P650 B. P500 D. P 0 37.The following data refers to cost volume profit relationships of Trilogy Co. Breakeven point in unit sold 1,000 Variable costs per unit P 250 Total fixed costs P 75, 000 How much will be contributed to operating income by the 1,001st unit sold? A. P250 B. P325 D. Zero 38.A retail company determines its selling price by marking up variable costs by 60%. In addition, the company uses frequent selling price markdown to stimulate sales. If the markdown average 10%, what is the company contribution margin ratio? A. 27.5& C. 37.5% B. D. 41.7% 39.Which of the following would decrease unit contribution margin the most? A. C. A 15% decrease in variable costs B. A 15% increase in variable costs D. A 15% decrease in fixed costs Questions 40 and 41 are based on the following information. Lan Pala Tropical Stuff Toys manufactures and sells dolls. The following information relates to the operating results for the last quarter: Stuff toys sold 19,375 Breakeven point in number of toys 15,500 Breakeven point in peso sales P65,875 Total fixed costs P47,275 40.What was Lan’s variable cost per doll? A. P4.25 B. P3.05 D. P0.96 41.What was the margin of safety percentage for the last quarter of Lan? (rounded to the nearest percent) A. C. 28% B. 25% D. 72% 42.For a profitable company, the amount by which sale can decline before losses occur is known as the A. Variable sales ratio C. Sales volume variance B. D. Marginal income rate 43.Bulacan Gold, Inc. manufactures and sells key rings embossed with college names and slogans. Last year, the key rings sold for P75 each, and the variable costs to manufacture them were P22.50 per unit. The company needed to sell 20,000 key rings to break-even. The profit last year was P50,400. The company expects the following for the coming year: - The selling price of the key rings will be P90 - Variable manufacturing costs per unit will increase by one-third - Fixed cost will increase by 10% - The income tax rate will remain unchanged

For the company to break-even the coming year, the company should sell A. 21,600 C. 21,250 B. 2,600 44.A company has revenues of P500,000, variable costs of P300,000, and pretax profit of P150,000. If the company increased the sales price per unit by 10%, reduced fixed costs by 20%, and left variable cost per unit unchanged, what would be the new breakeven point in pesos? A. C. P110,000 B. P100,000 D.P125,000 45.Mela Corporation has a contribution margin ratio of 0.26. It aims to have a profit of P320,000 with a sales volume of P2million. Its total fixed costs amount to A. C. P230,777 B. P83,200 D.P520,000 46.Asian Corporation, a manufacturing company, is operatin g at 90% capacity. Since there is no other use of the 10% idle capacity, an offer for a new order at P8.20 per unit requiring 15% capacity is being considered. If the order will be accepted, the 5% additional capacity will be sub-contracted at the cost of P7.80 per unit. The variable cost per unit of production of Asian Corporation follows: Materials P4.00 Labor 1.75 Variable Overhead 1.75 Total P7.50 What is the expected contribution margin per unit on the new order? A. P0.40 C. P0.50 B. D.P0.55 47.Last year, the contribution margin ratio of Lamesa Company was 30%. This year, fixed costs are expected to be P120,OOO, the same as last year and revenues are forecasted at P550,000, a 10% increase over last year. For the company to increase operating income by P15,000 in the coming year, the contribution margin ratio must be A. 20% C. 40% B. D. 70% 48.A company increased the selling price of its product from P1.00 to P1.10 a unit when total fixed costs increased from P400,000 to P480,000 and variable cost per unit remained unchanged. How will these changes affect the breakeven point? A. The breakeven point in units will be increased. B. The breakeven point in units will be decreased. C. The breakeven point in units will remain unchanged. D. 49.Two companies produce and sell the same product in a competitive industry. Thus, the selling price of the product of each company is the same. Company 1 has a contribution margin ratio of 40% and fixed costs of P25 million. Company 2 is more automated, making its fixed costs 40% higher than those of Company 1. Company 2 comparison, Company 1 will have the breakeven point in terms of pesos sales volume and will have the peso profit potential once the indifference point in peso sales volume is exceeded. List A List B List A List B A. C. Higher Lesser B. Lower Greater D. Higher Greater Sales with profit 50.In using cost-volume-profit analysis to calculate expected unit sales, which of the following should be deducted to fixed cost in the numerator? A. C. Unit contribution margin. B. Predicted operating income. D. Variable costs.

51.Ipil-ipil Company would like to market a new product at a selling price of P15 per unit. Fixed costs for his product are P1,000,000 for less than 500,000 units of output and P1,500,000 for 500,000 or more units of output. The contribution margin percentage is 20%. How many units of this product must be sold to earn a target operating income of P1 million? A. 754,900 C. 825, 530 B. D. 785,320 52.Merchandiser, Inc. sells Product O to retailers for P200. The unit variable cost is P40 with a selling commission of 10%. Fixed manufacturing costs total P1,000,000 per month while fixed selling and administrative costs total P420,000. The income tax rate is 30%. The target sales if after tax income is P123,200 would be A. 10,950 units C. 13,750 units B. 15,640 units 53.Nette & Company has sales of P400,000 with variable costs of P300,000, fixed costs of P120,000 and an operating loss of P20,000. By how much would Ne tte need to increases its sales in order to achieve a target operating income of 10% of sales? A. C. P500,000 B. P462,000 D. P800,000 Questions 54 and 55 are based on the following information. Laguna Marketing Company is expected an increase of fixed costs by P78,750 upon moving their place of business to the downtown area. Likewise, it is anticipating that the selling price per unit and the variable expenses will not change. At the present, the sales volume necessary to breakeven is P750,000 but with the expected increase in final sales, the sales volume necessary to breakeven would go up to P975,000. Based on these projections, 54. What is the profit-volume ratio of Laguna Marketing? A. C. 45% B. 40% D. 65% 55.What would be the total fixed costs of Laguna Marketing after the increase of P78,750? A. C. P2,183,750 B. P262,500 D. P 300,000 56.Variable cost per unit is P3.50. Contribution margin is 30%. Breakeven sales is P1 million. To sell an additional 50,000 units as the same price and contribution margin, how much will fixed costs increase to have a gross margin equal to 10% of the sales value of the additional cost of 50,000 units to be sold? A. P67,500 C. P57,500 B. D. P 125,000 57.Birney Company is planning its advertising campaign for 2011 and has prepared the following budget data based on a zero advertising expenditures: Normal plant capacity 200,000 units Sales 150,000 units Selling price P25 per unit Variable manufacturing cost P15 per unit Fixed costs: Manufacturing P800,000 Selling and administration P700,000 An advertising agency claims that an aggressive advertising campaign would enable Birney to increase its unit sales by 20%. What is the maximum amount that Birney can pay for advertising and obtain an operating profit of P200,000 A. C. P300,000 B. P200,000 D. P550,000 Questions 58 through 60 are based on the following information. Brucell Electronics Co. is developing a new product, surge projectors for high-voltage electric flows. The cost information below relates to the product.

Direct materials Direct labor Distribution

Unit Costs P3.25 4.00 .75