334296235-Chapter-04-5e

Chapter 4—Cost-Volume-Profit Analysis: A Managerial Planning Tool TRUE/FALSE 1. The break-even point is where total sales revenue equals total cost. ANS: OBJ: STA: KEY:

T PTS: 1 DIF: Difficulty: Easy LO: 4-1 NAT: BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point Bloom's: Knowledge NOT: 1 min.

2. The contribution margin ratio can be calculated by subtracting the variable cost ratio from one. ANS: OBJ: STA: KEY:

T PTS: 1 DIF: Difficulty: Easy LO: 4-1 NAT: BUSPROG: Analytic AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Knowledge NOT: 1 min.

3. Variable expense per unit consists only of direct materials, direct labor, and variable overhead. ANS: OBJ: STA: Costs

F PTS: 1 DIF: Difficulty: Easy LO: 4-1 NAT: BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-28-Variable and Fixed KEY: Bloom's: Knowledge NOT: 1 min.

4. The break-even point in sales dollars is equal to the break-even units multiplied by cost. ANS: F The break-even point in sales dollars is equal to the break-even units multiplied by price. PTS: NAT: STA: KEY:

1 DIF: Difficulty: Easy OBJ: LO: 4-1 | LO: 4-4 BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point Bloom's: Knowledge NOT: 1 min.

5. If variable expenses decrease and the price increases, the break-even point decreases. ANS: OBJ: STA: KEY:

T PTS: 1 DIF: Difficulty: Easy LO: 4-1 | LO: 4-5 NAT: BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point Bloom's: Knowledge NOT: 1 min.

6. Most firms would like to earn operating income equal to the break-even point. ANS: OBJ: STA: KEY:

F PTS: 1 DIF: Difficulty: Easy LO: 4-2 NAT: BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point Bloom's: Knowledge NOT: 1 min.

7. In the equation to determine the number of units that must be sold to earn a target income, targeted income is subtracted from fixed expense in the numerator.

ANS: F In the equation to determine the number of units that must be sold to earn a target income, targeted income is added to fixed expense in the numerator. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Knowledge NOT: 1 min. 8. If one increases variable costs per unit, the break-even point will decrease. ANS: F If one increases variable costs per unit, the break-even point will increase. PTS: NAT: STA: KEY:

1 DIF: Difficulty: Easy OBJ: LO: 4-2 BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point Bloom's: Knowledge NOT: 1 min.

9. The impact on a firm's income resulting from a change in the number of units sold can be assessed by multiplying the unit contribution margin by the change in units sold assuming that fixed costs remain the same. ANS: OBJ: STA: KEY:

T PTS: 1 DIF: Difficulty: Easy LO: 4-2 NAT: BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis Bloom's: Knowledge NOT: 1 min.

10. To find the number of units to sell to earn a targeted income, it is acceptable to simply adjust the break-even units equation by adding target income to the variable cost. ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Knowledge NOT: 1 min. 11. To determine the number of units that must be sold to earn a target operating income, one can use the equation for operating income and replace the operating income term with the target operating income. ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Knowledge NOT: 1 min. 12. The contribution margin income statement provides a good check to determine if the sale of a certain number of units really results in operating income of the given amount. ANS: OBJ: STA: KEY:

T PTS: 1 DIF: Difficulty: Easy LO: 4-2 NAT: BUSPROG: Analytic AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Knowledge NOT: 1 min.

13. If fixed costs increase, the break-even point decreases.

ANS: F If fixed costs increase, the break-even point also increases. PTS: NAT: STA: KEY:


14. The profit-volume graph shows the relationship between profits and units sold. ANS: OBJ: STA: KEY:

T PTS: 1 DIF: Difficulty: Easy LO: 4-3 NAT: BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis Bloom's: Knowledge NOT: 1 min.

15. The profit-volume graph shows the relationship between operating income and the number of units sold. ANS: OBJ: STA: KEY:


16. The linear equation for revenue is price multiplied by fixed cost. ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Knowledge NOT: 1 min. 17. The linear equation for total cost is (Unit variable cost  Units) + Fixed cost. ANS: OBJ: STA: KEY:


18. The cost-volume profit graph depicts the relationships among cost, volume, and profits, by plotting the total revenue line and the total cost line on the graph. ANS: OBJ: STA: KEY:


19. It is possible to calculate the break-even point for individual products in a multiple product firm by separating the common and direct fixed expenses. ANS: OBJ: STA: KEY:


20. If a multi-product company simply wants to know the overall break-even point, it is easiest to use the break-even in sales revenue approach. ANS: OBJ: STA: KEY:


21. In a multi-product firm, if the sales mix changes, the break-even points for each product will not change. ANS: F In a multi-product firm, if the sales mix changes, the break-even points for each product will change. PTS: NAT: STA: KEY:


22. Direct fixed expenses are the fixed costs that are not traceable to the segments and would remain even if one of the segments was eliminated. ANS: OBJ: STA: Costs

F PTS: 1 DIF: Difficulty: Easy LO: 4-4 NAT: BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-28-Variable and Fixed KEY: Bloom's: Knowledge NOT: 1 min.

23. Common fixed expenses are the fixed costs that are traceable to the segments and would be avoided if the segment did not exist. ANS: F Common fixed expenses are the fixed costs that are not traceable to the segments and would remain even if one of the segments was eliminated. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-28-Variable and Fixed Costs KEY: Bloom's: Knowledge NOT: 1 min. 24. If the break-even point increases, the margin of safety increases. ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Knowledge NOT: 1 min. 25. Operating leverage is the use of fixed cost to extract higher percentage changes in profits as sales activity changes. ANS: OBJ: STA: KEY:


26. The margin of safety measures the units sold or the revenue earned above the break-even volume. ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Knowledge NOT: 1 min. 27. Managers can use CVP analysis to handle risk and uncertainty. ANS: OBJ: STA: KEY:

T PTS: 1 DIF: Difficulty: Easy LO: 4-5 NAT: BUSPROG: Analytic AICPA: FN-Risk Analysis | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis Bloom's: Knowledge NOT: 1 min.

MATCHING Given the following numbers from Webster Company, match the correct value with its appropriate term. Webster Company sells a product for $20. Unit cost information is as follows: Direct materials Direct labor Variable overhead Fixed overhead

$7 $3 $4 $1

Webster normally produces 50,000 units and the fixed overhead rate is based on this amount. Fixed selling and administrative expense is $37,000. a. $6 b. 30% c. $14 d. 70% e. $290,000 f. 14,500 1. 2. 3. 4. 5. 6.

Variable cost per unit Contribution margin per unit break-even point (in units) Variable cost ratio Contribution margin ratio break-even point (in dollars)

1. ANS: OBJ: STA: Costs 2. ANS: OBJ: STA: KEY: 3. ANS: OBJ: STA:

C PTS: 1 DIF: Difficulty: Moderate LO: 4-1 NAT: BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-28-Variable and Fixed KEY: Bloom's: Analysis NOT: 1 min. A PTS: 1 DIF: Difficulty: Moderate LO: 4-1 NAT: BUSPROG: Analytic AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Analysis NOT: 1 min. F PTS: 1 DIF: Difficulty: Moderate LO: 4-1 NAT: BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point

KEY: 4. ANS: OBJ: STA: Costs 5. ANS: OBJ: STA: KEY: 6. ANS: OBJ: STA: KEY:

Bloom's: Analysis NOT: 1 min. D PTS: 1 DIF: Difficulty: Moderate LO: 4-1 NAT: BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-28-Variable and Fixed KEY: Bloom's: Analysis NOT: 1 min. B PTS: 1 DIF: Difficulty: Moderate LO: 4-1 NAT: BUSPROG: Analytic AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Analysis NOT: 1 min. E PTS: 1 DIF: Difficulty: Moderate LO: 4-1 NAT: BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point Bloom's: Analysis NOT: 1 min.

Match each item with the correct statement below. a. horizontal-axis of CVP graph b. vertical-axis of CVP graph c. slope of revenue line d. slope of cost line e. point where the total revenue line and the total cost line intersect 7. 8. 9. 10. 11.

variable cost per unit the selling price per unit measured in dollars measured in units sold break-even point

7. ANS: OBJ: STA: KEY: 8. ANS: OBJ: STA: KEY: 9. ANS: OBJ: STA: KEY: 10. ANS: OBJ: STA: KEY: 11. ANS: OBJ: STA: KEY:

D PTS: 1 DIF: Difficulty: Easy LO: 4-3 NAT: BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis Bloom's: Knowledge NOT: 1 min. C PTS: 1 DIF: Difficulty: Easy LO: 4-3 NAT: BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis Bloom's: Knowledge NOT: 1 min. B PTS: 1 DIF: Difficulty: Easy LO: 4-3 NAT: BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis Bloom's: Knowledge NOT: 1 min. A PTS: 1 DIF: Difficulty: Easy LO: 4-3 NAT: BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis Bloom's: Knowledge NOT: 1 min. E PTS: 1 DIF: Difficulty: Easy LO: 4-3 NAT: BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis Bloom's: Knowledge NOT: 1 min.

Match each item with the correct statement below. a. break-even point b. Common fixed expenses c. Contribution margin d. Direct fixed expenses

e. f. g. h.

Margin of safety Operating leverage Degree of operating leverage Sales mix

12. Fixed costs that are directly traceable to a given segment and, consequently, disappear if the segment is eliminated. 13. The relative combination of products (or services) being sold by an organization. 14. Sales revenue minus total variable cost or price minus unit variable cost. 15. The use of fixed costs to extract higher percentage changes in profits as sales activity changes. 16. The point where total sales revenue equals total cost. 17. A measure of the sensitivity of profit changes to changes in sales volume. 18. Fixed expenses that cannot be directly traced to individual segments and that are unaffected by the elimination of any one segment. 19. The units sold or expected to be sold or sales revenue earned or expected to be earned above the breakeven volume. 12. ANS: D PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling |AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-28-Variable and Fixed Costs KEY: Bloom's: Knowledge NOT: 1 min. 13. ANS: H PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling |AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis KEY: Bloom's: Knowledge NOT: 1 min. 14. ANS: C PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Reporting |AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30Contribution Margin KEY: Bloom's: Knowledge NOT: 1 min. 15. ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling |AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis KEY: Bloom's: Knowledge NOT: 1 min. 16. ANS: A PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point KEY: Bloom's: Knowledge NOT: 1 min. 17. ANS: G PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling |AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis KEY: Bloom's: Knowledge NOT: 1 min. 18. ANS: B PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling |AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-28-Variable and Fixed Costs KEY: Bloom's: Knowledge NOT: 1 min. 19. ANS: E PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-5 NAT: BUSPROG: Analytic

STA: AICPA: FN-Decision Modeling |AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Knowledge NOT: 1 min. COMPLETION 1. The difference between sales and variable expenses is called the ______________________. ANS: contribution margin. PTS: NAT: STA: KEY:

1 DIF: Difficulty: Easy OBJ: LO: 4-1 BUSPROG: Analytic AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Knowledge NOT: 1 min.

2. The ________________________ is the point where total revenue equals total cost. ANS: break-even point PTS: NAT: STA: KEY:


3. The ______________________ is the proportion of each sales dollar that must be used to cover variable costs. ANS: variable cost ratio PTS: NAT: STA: KEY:

1 DIF: Difficulty: Easy OBJ: LO: 4-1 BUSPROG: Analytic AICPA: FN-Measurement | IMA: Cost Management | ACBSP: APC-33-Incremental analysis Bloom's: Knowledge NOT: 1 min.

4. The _________________________ is the proportion of each sales dollar available to cover fixed costs and provide for profit. ANS: contribution margin ratio PTS: NAT: STA: KEY:

1 DIF: Difficulty: Moderate OBJ: LO: 4-1 BUSPROG: Analytic AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Knowledge NOT: 1 min.

5. ___________________________________ is the income statement format that is based on the separation of costs into fixed and variable components. ANS: Contribution margin income statement PTS: NAT: STA: KEY:

1 DIF: Difficulty: Easy OBJ: LO: 4-1 BUSPROG: Analytic AICPA: FN-Reporting | IMA: Reporting | ACBSP: APC-30-Contribution Margin Bloom's: Knowledge NOT: 1 min.

6. ______________ gives us a way to determine how many units must be sold, or how much sales revenue must be generated to earn a particular target income. ANS: CVP analysis PTS: NAT: STA: KEY:

1 DIF: Difficulty: Moderate OBJ: LO: 4-2 BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis Bloom's: Knowledge NOT: 1 min.

7. Assuming that fixed costs remain unchanged, the _____________________ can be used to find the profit impact of a change in sales revenue. ANS: contribution margin ratio PTS: NAT: STA: KEY:

1 DIF: Difficulty: Moderate OBJ: LO: 4-2 BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Knowledge NOT: 1 min.

8. The amount of income an organization is trying to achieve during a particular period is known as the _____________. ANS: target income PTS: NAT: STA: target

1 DIF: Difficulty: Easy OBJ: LO: 4-2 BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales KEY: Bloom's: Knowledge NOT: 1 min.

9. A ________________________ visually portrays the relationship between profits and units sold. ANS: profit-volume graph PTS: NAT: STA: KEY:

1 DIF: Difficulty: Moderate OBJ: LO: 4-3 BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis Bloom's: Knowledge NOT: 1 min.

10. The _________________________ depicts the relationships among cost, volume, and profits by plotting the total revenue line and the total cost line on a graph. ANS: cost-volume-profit graph PTS: NAT: STA: KEY:

1 DIF: Difficulty: Easy OBJ: LO: 4-3 BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis Bloom's: Knowledge NOT: 1 min.

11. ______________________ are those fixed costs that can be traced to each segment and would be avoided if the segment did not exist.

ANS: Direct fixed expenses PTS: NAT: STA: KEY:

1 DIF: Difficulty: Moderate OBJ: LO: 4-4 BUSPROG: Analytic AICPA: FN-Reporting | IMA: Cost Management | ACBSP: APC-28-Variable and Fixed Costs Bloom's: Knowledge NOT: 1 min.

12. Fixed costs that are not traceable to the segments and would remain even if one of the segments was eliminated are known as _____________________________. ANS: common fixed expenses PTS: NAT: STA: KEY:

1 DIF: Difficulty: Moderate OBJ: LO: 4-4 BUSPROG: Analytic AICPA: FN-Reporting | IMA: Cost Management | ACBSP: APC-28-Variable and Fixed Costs Bloom's: Knowledge NOT: 1 min.

13. __________ is the relative combination of products being sold by a firm. ANS: Sales mix PTS: NAT: STA: KEY:

1 DIF: Difficulty: Easy OBJ: LO: 4-4 BUSPROG: Analytic AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-31-Break-even point Bloom's: Knowledge NOT: 1 min.

14. The _________________ is the units sold or the revenue earned above the break-even volume. ANS: margin of safety PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling |AICPA: FN-Risk Analysis | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Knowledge NOT: 1 min. 15. If the break-even volume for a company is 600 units and the company is currently selling 1,000 units than the 400 units would represent the company’s ____________________. ANS: margin of safety PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling |AICPA: FN-Risk Analysis | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Knowledge NOT: 1 min. 16. _____________________ is the use of fixed costs to extract higher percentage changes in profits as sales activity changes. ANS: Operating leverage PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic

OBJ: LO: 4-5

STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Knowledge NOT: 1 min. 17. The _________________________________ can be measured for a given level of sales by taking the ratio of contribution margin to operating income. ANS: degree of operating leverage (DOL) DOL PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Knowledge NOT: 1 min. 18. The quantity at which two systems produce the same operating income is referred to as the ___________________. ANS: indifference point PTS: NAT: STA: KEY:

1 DIF: Difficulty: Moderate OBJ: LO: 4-5 BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis Bloom's: Knowledge NOT: 1 min.

19. The “what-if” process of altering certain key variables to assess the effect on the original outcome is also called a __________________. ANS: sensitivity analysis PTS: NAT: STA: KEY:

1 DIF: Difficulty: Easy OBJ: LO: 4-5 BUSPROG: Analytic AICPA: FN-Risk Analysis | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis Bloom's: Knowledge NOT: 1 min.

20. A company’s mix of fixed costs relative to variable costs is referred to as its _______________. ANS: cost structure PTS: NAT: STA: Costs

1 DIF: Difficulty: Easy OBJ: LO: 4-5 BUSPROG: Analytic AICPA: FN-Measurement | IMA: Cost Management | ACBSP: APC-28-Variable and Fixed KEY: Bloom's: Knowledge NOT: 1 min.

MULTIPLE CHOICE 1. The break-even point is when a. the company is operating at a loss. b. total revenue equals total cost. c. the company is earning a small profit. d. total sales equal variable costs. e. total sales equals operating income.

ANS: OBJ: STA: KEY:

B PTS: 1 DIF: Difficulty: Easy LO: 4-1 NAT: BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point Bloom's: Knowledge NOT: 1 min.

2. Total contribution margin divided by total sales is the a. indifference point. b. margin of safety. c. sales ratio. d. target income. e. contribution margin ratio. ANS: OBJ: STA: KEY:

E PTS: 1 DIF: Difficulty: Easy LO: 4-1 NAT: BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Knowledge NOT: 1 min.

3. At the break-even point, a. total revenue equals variable cost. b. total fixed cost equals variable cost. c. total contribution margin equals total fixed cost. d. total sales equals total fixed cost. e. total margin of safety equals variable cost. ANS: OBJ: STA: KEY:

C PTS: 1 DIF: Difficulty: Moderate LO: 4-1 NAT: BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-31-Break-even point Bloom's: Knowledge NOT: 1 min.

4. If variable costs per unit decrease, sales volume at the break-even point will a. decrease. b. stay constant. c. double. d. increase. ANS: OBJ: STA: KEY:

A PTS: 1 DIF: Difficulty: Easy LO: 4-1 | LO: 4-5 NAT: BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-31-Break-even point Bloom's: Knowledge NOT: 1 min.

5. Contribution margin ratio can be calculated in all of the following ways except a. fixed costs/Contribution margin per unit. b. 1  Variable cost ratio. c. contribution margin per unit/price. d. total contribution margin/Total sales. e. All of these are correct. ANS: OBJ: STA: KEY:

A PTS: 1 DIF: Difficulty: Moderate LO: 4-1 NAT: BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Knowledge NOT: 1 min.

6. Assume the following information:

Variable cost ratio Total fixed costs

80% $60,000

What volume of sales dollars is needed to break even? a. $75,000 b. $300,000 c. $48,000 d. $12,000 ANS: B SUPPORTING CALCULATIONS: ($60,000/0.2) = $300,000 PTS: NAT: STA: KEY:

1 DIF: Difficulty: Moderate OBJ: LO: 4-1 BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point Bloom's: Application NOT: 1 min.

7. Which of the following equations is true? a. Contribution margin = Sales revenue  Variable cost ratio b. Contribution margin ratio = Contribution margin/Variable costs c. Contribution margin = Fixed costs d. Contribution margin ratio = 1  Variable cost ratio ANS: OBJ: STA: KEY:

D PTS: 1 DIF: Difficulty: Easy LO: 4-1 NAT: BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Knowledge NOT: 1 min.

8. If the selling price per unit increases, the break-even point in units will a. decrease. b. increase. c. remain the same. d. remain the same; however, contribution per unit will decrease. ANS: OBJ: STA: KEY:

A PTS: 1 DIF: Difficulty: Moderate LO: 4-1 NAT: BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point Bloom's: Knowledge NOT: 1 min.

9. Patricia Company produces two products, X and Y, which account for 60% and 40%, respectively, of total sales dollars. Contribution margin ratios are 50% for X and 25% for Y. Total fixed costs are $120,000. What is Patricia's break-even point in sales dollars? a. $300,000 b. $328,767 c. $342,856 d. $375,000 ANS: A SUPPORTING CALCULATIONS: Average CM rate = (0.6)(0.5) + (0.4)(0.25) = 0.40 $120,000/0.4 = $300,000 PTS: 1

DIF: Difficulty: Moderate

OBJ: LO: 4-1 | LO: 4-4

NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point KEY: Bloom's: Application NOT: 2 min. 10. Clean Company sells its product for $80. In addition, it has a variable cost ratio of 60% and total fixed costs of $8,000. What is the break-even point in sales dollars for Baker Company? a. $4,800 b. $32,000 c. $20,000 d. $8,000 ANS: C SUPPORTING CALCULATIONS: $8,000/0.4 = $20,000 PTS: NAT: STA: KEY:

1 DIF: Difficulty: Easy OBJ: LO: 4-1 BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point Bloom's: Application NOT: 1 min.

11. Sarah Smith, a sole proprietor, has the following projected figures for next year: Selling price per unit Contribution margin per unit Total fixed costs

$150.00 $ 45.00 $630,000

What is the contribution margin ratio? a. 0.300 b. 1.429 c. 0.429 d. 3.333 ANS: A SUPPORTING CALCULATIONS: $45/$150 = .300 PTS: NAT: STA: KEY:

1 DIF: Difficulty: Easy OBJ: LO: 4-1 BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Application NOT: 1 min.

12. The ratio of fixed expenses to the contribution margin ratio is the a. indifference point. b. break-even point in units. c. fixed cost ratio. d. break-even point in sales. e. sensitivity analysis. ANS: OBJ: STA: KEY:

D PTS: 1 DIF: Difficulty: Easy LO: 4-1 NAT: BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point Bloom's: Knowledge NOT: 1 min.

13. If the contribution margin per unit decreases, the break-even point in units a. will increase.

b. will decrease. c. will remain the same. d. cannot be determined from the information given. ANS: OBJ: STA: KEY:


14. The income statement for Thomas Manufacturing Company for 2011 is as follows: Sales (10,000 units) Variable expenses Contribution margin Fixed expenses Operating income

$120,000 72,000 $ 48,000 36,000 $ 12,000

What is the contribution margin per unit? a. $7.20 b. $1.20 c. $4.80 d. $120,000 ANS: C SUPPORTING CALCULATIONS: $48,000/10,000 = $4.80 PTS: NAT: STA: KEY:


15. Dirth Company sells only one product at a regular price of $7.50 per unit. Variable expenses are 60% of sales and fixed expenses are $30,000. Management has decided to decrease the selling price to $6.00 in hopes of increasing its volume of sales. What is the contribution margin ratio when the selling price is reduced to $6 per unit? a. 25% b. 40% c. 75% d. 60% ANS: A SUPPORTING CALCULATIONS: ($6.00  $4.50)/$6.00 = 25% PTS: NAT: STA: KEY:

1 DIF: Difficulty: Moderate OBJ: LO: 4-1 BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Application NOT: 1 min.

16. If the contribution margin ratio increases, the break-even point in sales dollars will a. increase. b. decrease. c. remain the same. d. double.

ANS: OBJ: STA: KEY:

B PTS: 1 DIF: Difficulty: Moderate LO: 4-1 NAT: BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point Bloom's: Knowledge NOT: 1 min.

17. Dirth Company sells only one product at a regular price of $7.50 per unit. Variable expenses are 60% of sales and fixed expenses are $30,000. Management has decided to decrease the selling price to $6.00 in hopes of increasing its volume of sales. What is the sales dollars level required to break even at the old price of $7.50? a. $75,000 b. $12,000 c. $18,000 d. $50,000 ANS: A SUPPORTING CALCULATIONS: $30,000/0.4 = $75,000 PTS: NAT: STA: KEY:


18. If fixed costs increase, the break-even point in units will a. increase. b. decrease. c. remain the same. d. remain the same; however, contribution per unit will decrease. ANS: OBJ: STA: KEY:


19. Total variable cost divided by price is a. variable cost ratio. b. revenue ratio. c. contribution ratio. d. sales ratio. e. degree of operating leverage. ANS: A PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-23-Financial Statement Analysis KEY: Bloom's: Knowledge NOT: 1 min. 20. Which statement is true about cost-volume profit (CVP) analysis? a. CVP analysis is a powerful tool for planning and decision making. b. CVP analysis allows managers to do sensitivity analysis by examining the impact of various prices or cost levels on profit. c. CVP analysis shows how revenues, expenses, and profits behave as volume changes. d. CVP analysis can be used in both single-product and multi-product firms. e. All of these statements are true.

ANS: OBJ: STA: KEY:

E PTS: 1 DIF: Difficulty: Moderate LO: 4-1 NAT: BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis Bloom's: Knowledge NOT: 1 min.

21. Melody Company sells a product for $14, variable costs are $10 per unit, and total fixed costs are $5,040. What is the break-even point in units? a. 640 b. 1,260 c. 210 d. 360 e. 504 ANS: B $5,040/($14  $10) = 1,260 PTS: NAT: STA: KEY:


22. Melody Company sells a product for $14, variable costs are $10 per unit, and total fixed costs are $5,040. What is the per unit contribution margin? a. $14 b. $10 c. $24 d. $10 e. $4 ANS: E $14  $10 = $4 PTS: NAT: STA: KEY:


23. If the contribution margin ratio increases a. the variable cost ratio decreases. b. the break-even point increases. c. fixed costs must have decreased. d. price must have decreased. e. more units must be sold to break even. ANS: A PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Knowledge NOT: 1 min. 24. Stepford Company makes dolls. The price is $10 and the variable expense per unit is $6. What is the contribution margin ratio? a. 62.5% b. 37.5% c. 55%

d. 40% e. 60% ANS: D ($10  $6)/$10 = 40% PTS: NAT: STA: KEY:


25. The contribution margin is a. the difference between sales and variable costs. b. the difference between target income and operating income. c. the difference between operating income and margin of safety. d. equal to sales. e. when total sales equals total costs. ANS: OBJ: STA: KEY:

A PTS: 1 DIF: Difficulty: Easy LO: 4-1 NAT: BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Knowledge NOT: 1 min.

Figure 4-1. Foster Company makes power tools. The budgeted sales are $420,000, budgeted variable costs are $147,000, and budgeted fixed costs are $227,500. 26. Refer to Figure 4-1. What is the budgeted operating income? a. $273,000 b. $227,500 c. $45,500 d. $374,500 e. $567,000 ANS: C $420,000  $147,000  $227,500 = $45,500 PTS: NAT: STA: KEY:

1 DIF: Difficulty: Easy OBJ: LO: 4-1 BUSPROG: Analytic AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis Bloom's: Knowledge NOT: 1 min.

27. Refer to Figure 4-1. What is the variable cost ratio? a. 54% b. 35% c. 89% d. 19% e. 50% ANS: B $147,000/$420,000 = 35% PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-23-Financial Statement

Analysis

KEY: Bloom's: Knowledge

NOT: 1 min.

28. Refer to Figure 4-1. What is the break-even point in sales dollars? a. $350,000 b. $420,000 c. $650,000 d. $780,000 e. $567,000 ANS: A $227,500/0.65 = $350,000 PTS: NAT: STA: KEY:


29. Refer to Figure 4-1. What is the contribution margin? a. $90,000 b. $183,000 c. $36,000 d. $273,000 e. $374,500 ANS: D $420,000  $147,000 = $273,000 PTS: NAT: STA: KEY:

1 DIF: Difficulty: Easy OBJ: LO: 4-1 BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Knowledge NOT: 1 min.

30. Refer to Figure 4-1. What is the contribution margin ratio? a. 35% b. 65% c. 54% d. 89% e. 50% ANS: B $273,000/$420,000 = 65% PTS: NAT: STA: KEY:


Figure 4-2. Pauley Company provides home health care. Pauley charges $35/hour for professional care. Variable costs are $21/hour and fixed costs are $78,000. Next year, Pauley expects to charge out 12,000 hours of home health care. 31. Refer to Figure 4-2. What is the break-even point in hours? (round to the nearest whole hour) a. 2,229 b. 1,393

c. 3,714 d. 5,571 e. 12,000 ANS: D $78,000/$14 = 5,571 PTS: NAT: STA: KEY:


32. Refer to Figure 4-2. What is the break-even point in sales dollars? a. $130,000 b. $195,000 c. $252,000 d. $420,000 e. $342,000 ANS: B $78,000/0.40 = $195,000 PTS: NAT: STA: KEY:


33. Refer to Figure 4-2. What is the contribution margin ratio? a. 67% b. 60% c. 40% d. 33% e. 50% ANS: C 100%  60% = 40% or $14/$35 = 40% PTS: NAT: STA: KEY:


34. Refer to Figure 4-2. What is the contribution margin per hour? a. $21 b. $35 c. $14 d. $56 e. $6.50 ANS: C $35  $21 = $14 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin

KEY: Bloom's: Knowledge

NOT: 1 min.

35. Refer to Figure 4-2. What is the variable cost ratio? a. 50% b. 40% c. 33% d. 67% e. 60% ANS: E $21/$35 = 60% PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-23-Financial Statement Analysis KEY: Bloom's: Application NOT: 1 min. 36. Refer to Figure 4-2. What is the budgeted operating income? a. $342,000 b. $174,000 c. $168,000 d. $90,000 e. $420,000 ANS: D ($35  12,000)  ($21  12,000)  $78,000 = $90,000 PTS: NAT: STA: KEY:

1 DIF: Difficulty: Moderate OBJ: LO: 4-1 BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis Bloom's: Application NOT: 1 min.

Figure 4-3. Paney Company makes calendars. Information on cost per unit is as follows: Direct materials Direct labor Variable overhead Variable marketing expense

$1.50 1.20 0.90 0.40

Fixed marketing expense totaled $13,000 and fixed administrative expense totaled $35,000. The price per calendar is $10. 37. Refer to Figure 4-3. What is the contribution margin per unit? a. $6.30 b. $5.00 c. $6.40 d. $6.00 e. $5.40 ANS: D $10  $4 = $6 PTS: 1

DIF: Difficulty: Easy

OBJ: LO: 4-1

NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 1 min. 38. Refer to Figure 4-3. What is the variable product expense per unit? a. $5.00 b. $4.00 c. $3.60 d. $1.30 e. $4.60 ANS: C $1.50 + $1.20 + $0.90 = $3.60 PTS: NAT: STA: Costs

1 DIF: Difficulty: Moderate OBJ: LO: 4-1 BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-28-Variable and Fixed KEY: Bloom's: Application NOT: 1 min.

39. Refer to Figure 4-3. What is the variable cost per unit? a. $5.00 b. $4.00 c. $3.70 d. $1.30 e. $4.60 ANS: B $1.50 + $1.20 + $0.90 + $0.40 = $4.00 PTS: NAT: STA: Costs

1 DIF: Difficulty: Moderate OBJ: LO: 4-1 BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-28-Variable and Fixed KEY: Bloom's: Application NOT: 1 min.

40. Refer to Figure 4-3. What is the break-even point in units? a. 2,167 b. 5,833 c. 8,000 d. 12,000 e. 2,800 ANS: C ($13,000 + $35,000)/$6 = 8,000 PTS: NAT: STA: KEY:


41. Refer to Figure 4-3. What is the break-even point in sales dollars? a. $120,000 b. $80,000 c. $58,330 d. $21,670 e. $28,000

ANS: B break-even sales = 8,000  $10 = $80,000 PTS: NAT: STA: KEY:


42. Refer to Figure 4-3. What is the variable expense ratio? a. 40% b. 36% c. 50% d. 60% e. 46% ANS: A $4/$10 = 40% PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-23-Financial Statement Analysis KEY: Bloom's: Application NOT: 1 min. 43. Refer to Figure 4-3. What is the contribution margin ratio? a. 36% b. 40% c. 50% d. 60% e. 44% ANS: D $6/$10 = 60% PTS: NAT: STA: KEY:

1 DIF: Difficulty: Moderate OBJ: LO: 4-1 BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Application NOT: 1 min.

44. Refer to Figure 4-3. How many units must be sold to yield targeted income of $36,000? a. 6,000 b. 5,833 c. 8,167 d. 14,000 e. 12,000 ANS: D ($13,000 + $35,000 + $36,000)/$6 = 14,000 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Application NOT: 1 min. Figure 4-7.

A company provided the following data: Selling price per unit Variable cost per unit Total fixed costs

$60 $40 $400,000

45. Refer to Figure 4-7. What is the break-even point in units? a. 20,000 b. 10,000 c. 6,667 d. 13,333 e. 12,000 ANS: A $400,000/($60 per unit  $40 per unit) = 20,000 units PTS: NAT: STA: KEY:


46. Refer to Figure 4-7. How many units must be sold to earn a profit of $40,000? a. 8,500 b. 23,333 c. 22,000 d. 2,000 e. 20,000 ANS: C ($400,000 + $40,000)/($60 per unit  $40 per unit) = 22,000 units PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Application NOT: 2 min. Figure 4-8. A company provided the following data: Sales Variable costs Fixed costs Expected production and sales in units 47. Refer to Figure 4-8. What is the break-even point in sales dollars? a. $498,000 b. $400,000 c. $171,429 d. $112,500 e. $150,000 ANS: B Contribution margin ratio = ($540,000  $378,000)/$540,000 = 30%

$540,000 $378,000 $120,000 40,000

break-even point = $120,000/30% = $400,000 PTS: NAT: STA: KEY:


48. Refer to Figure 4-8. How much sales in dollars is necessary to generate a profit of $30,000? a. $528,000 b. $500,000 c. $214,286 d. $100,000 e. $150,000 ANS: B ($540,000  $378,000)/($540,000) = 30% ($120,000 + $30,000)/30% = $500,000 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Application NOT: 2 min. Figure 4-4. Yerke Company makes jungle gyms and tree houses for children. For jungle gyms, the price is $120 and variable expenses are $90 per unit. For tree houses, the price is $200 and variable expenses are $100. Total fixed expenses are $253,750. Last year, Yerke sold 12,000 gyms and 4,000 tree houses. 49. Refer to Figure 4-4. Using the lowest whole numbers, what is the sales mix of gyms and tree houses? a. 4:1 b. 3:1 c. 3:2 d. 2:3 e. 1:4 ANS: OBJ: STA: KEY:

B PTS: 1 DIF: Difficulty: Easy LO: 4-4 NAT: BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis Bloom's: Application NOT: 1 min.

50. Refer to Figure 4-4. Now suppose that Yerke expects tree house demand to increase from 4,000 to 8,000 units. What is the new contribution margin ratio (rounded to two decimal places)? a. 38% b. 62% c. 40% d. 60% e. 50% ANS: A The new sales mix is 3:2. A package with 3 gyms and 2 tree houses has contribution margin of $290 [($30  3) + ($100  2)]. Thus, the contribution margin ratio is $290/$760 or 38%. PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic

OBJ: LO: 4-1 | LO: 4-4

STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 5 min. 51. Refer to Figure 4-4. Now suppose that Yerke expects tree house demand to increase from 4,000 to 8,000 units. What is the number of jungle gyms sold at break-even? a. 1,750 b. 668 c. 2,625 d. 1,002 e. 875 ANS: C $253,750/$290 = 875 packages 875 packages  3 = 2,625 PTS: NAT: STA: KEY:

1 DIF: Difficulty: Moderate OBJ: LO: 4-1 | LO: 4-4 BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point Bloom's: Application NOT: 5 min.

52. Refer to Figure 4-4. Now suppose that Yerke expects tree house demand to increase from 4,000 to 8,000 units. What is the number of tree houses sold at break-even? a. 1,750 b. 668 c. 2,625 d. 1,002 e. 875 ANS: A $273,750/$290 = 875 packages 875  2 = 1,750 PTS: NAT: STA: KEY:


53. Refer to Figure 4-4. Now suppose that Yerke expects tree house demand to increase from 4,000 to 8,000 units. What is the sales revenue at break-even? a. $411,250 b. $253,700 c. $1,076,250 d. $665,000 e. $140,000 ANS: D ($120  2,625) + ($200  1,750) = $665,000 PTS: NAT: STA: KEY:

1 DIF: Difficulty: Moderate OBJ: LO: 4-1 | LO: 4-4 BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point Bloom's: Application NOT: 5 min.

Figure 4-5.

Standlar Company makes wireless speakers. The standard model price is $360 and variable expenses are $210. The deluxe model price is $500 and variable expenses are $300. The superior model price is $1,600 and variable expense per unit is $600. Total fixed expenses are $300,000. Generally, Standlar sells 8 standard models and 4 deluxe models for every superior model sold. 54. Using the sales mix stated in the facts from Figure 4-5 to form a package, what is the total package contribution margin? a. $2,000 b. $1,110 c. $3,000 d. $900 e. $1,200 ANS: C ($150  8) + ($200  4) + ($1,000  1) = $3,000 PTS: NAT: STA: KEY:

1 DIF: Difficulty: Moderate OBJ: LO: 4-1 | LO: 4-4 BUSPROG: Analytic AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Application NOT: 2 min.

55. Refer to Figure 4-5. What is the number of standard models sold at break-even? a. 100 b. 800 c. 180 d. 1,000 e. 250 ANS: B $300,000/$3,000 = 100 packages 100  8 = 800 PTS: NAT: STA: KEY:

1 DIF: Difficulty: Challenging OBJ: LO: 4-1 | LO: 4-4 BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point Bloom's: Application NOT: 2 min.

56. Refer to Figure 4-5. What is the number of deluxe models sold at break-even? a. 250 b. 500 c. 400 d. 100 e. 1,000 ANS: C $300,000/$3,000 = 100 packages 100  4 = 400 PTS: NAT: STA: KEY:


57. Refer to Figure 4-5. What is the number of superior models sold at break-even?

a. b. c. d. e.

200 800 400 1,600 100

ANS: E $300,000/$3,000 = 100 packages 100  1 = 100 PTS: NAT: STA: KEY:


58. Refer to Figure 4-5. What is the overall sales revenue at break-even? a. $778,800 b. $387,200 c. $648,000 d. $550,000 e. $480,000 ANS: C ($360  800) + ($500  400) + ($1,600  100) = $648,000 PTS: NAT: STA: KEY:


59. Melody Company sells a product for $14, variable costs are $10 per unit, and total fixed costs are $5,040. If Melody wants to earn an operating profit of $880, how many units must it sell? a. 1,480 b. 1,260 c. 1,040 d. 62 e. 247 ANS: A ($5,040 + $880)/($14  $10) = 1,480 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Application NOT: 1 min. 60. The formula used to calculate the number of units needed in order to earn a target income is a. (Fixed costs + Variable costs)/Sales. b. (Fixed costs + Target income)/Sales. c. (Fixed costs + Target income)/Contribution margin per unit. d. (Fixed costs + Variable costs)/Contribution margin per unit. e. (Fixed costs + Target income)/Contribution margin ratio. ANS: C OBJ: LO: 4-2

PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic

STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Knowledge NOT: 1 min. 61. The formula that can be used to calculate sales dollars necessary in order to earn a target income is a. (Fixed costs + Contribution margin)/(Contribution margin ratio). b. (Fixed costs + Target income)/(Contribution margin ratio). c. (Fixed costs + Variable costs)/(1  Variable cost ratio). d. (Fixed costs + Target income )/(1  Sales ratio). e. All of these are correct. ANS: B PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Knowledge NOT: 1 min. 62. Assume the following information: Selling price per unit Contribution margin ratio Total fixed costs

$150 40% $225,000

How many units must be sold to generate a profit of $45,000? a. 3,000 units b. 2,500 units c. 4,500 units d. 3,750 units ANS: C SUPPORTING CALCULATIONS: ($225,000 + $45,000)/($150  0.4) = 4,500 units PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Application NOT: 1 min. 63. Which is the equation for operating income? a. (Price  Units sold)  (Unit variable cost  Units sold)  Fixed cost b. (Price  Units sold) + (Unit variable cost  Units sold) + Fixed cost c. (Price + Units sold)  (Unit variable cost + Units sold)  Fixed cost d. (Price  Units sold) + (Unit variable cost  Units sold) + Fixed cost e. (Price  Units sold) + (Unit variable cost  Units sold)  Fixed cost ANS: A PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement |AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-33Incremental analysis KEY: Bloom's: Knowledge NOT: 1 min. 64. Rachel Company sells office chairs at $350 each, incurs variable cost per unit of $100, and has a total fixed expense of $30,000. How many units must be sold to achieve a target operating income of $55,000? a. 200 b. 340

c. 180 d. 450 e. 275 ANS: B Units = ($30,000 + $55,000)/($350  100) = 340 units PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Application NOT: 1 min. 65. A graph that depicts the relationships among cost, volume and profits (operating income) is the a. Cost graph. b. Volume graph. c. Cost-volume-profit graph. d. Profit-volume graph. e. break-even graph. ANS: OBJ: STA: KEY:

C PTS: 1 DIF: Difficulty: Easy LO: 4-3 NAT: BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis Bloom's: Knowledge NOT: 1 min.

66. A profit-volume graph differs from a cost-volume-profits graph in that a profit-volume graph displays only a. costs associated with units produced. b. operating income associated with expected sales. c. revenues and costs associated with sales volume. d. revenues expected at targeted sales levels. e. All of these are correct. ANS: OBJ: STA: KEY:

B PTS: 1 DIF: Difficulty: Moderate LO: 4-3 NAT: BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis Bloom's: Knowledge NOT: 1 min.

67. On a cost-volume-profit graph, the break-even point is where a. the revenue line intersects the profit line. b. the revenue line intersects the total cost line. c. the fixed cost line intersects the variable cost line. d. the contribution margin line intersects the fixed cost line. e. All of these are correct. ANS: B PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis | ACBSP: APC-31-Break-even point KEY: Bloom's: Knowledge NOT: 1 min. 68. Which of the following is not an assumption used to prepare a cost-volume-profit graph? a. linear costs within the relevant range b. units produced equals units sold c. constant sales mix

d. constant cost fluctuation e. All of these are assumptions used in preparing cost-volume-profit graphs. ANS: OBJ: STA: KEY:

D PTS: 1 DIF: Difficulty: Moderate LO: 4-3 NAT: BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis Bloom's: Knowledge NOT: 1 min.

69. Which of the following is not an assumption of a cost-volume-profit analysis? a. Selling price and costs can be accurately identified. b. Selling price and costs remain constant within the relevant range. c. Inventory levels can increase or decrease. d. Selling price and costs behave in a linear manner. ANS: OBJ: STA: KEY:

C PTS: 1 DIF: Difficulty: Moderate LO: 4-3 NAT: BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis Bloom's: Knowledge NOT: 1 min.

70. A profit-volume graph visually portrays the relationship between a. total sales and fixed cost. b. profits and units sold. c. total sales and margin of safety. d. total sales and variable costs. e. profits and degree of operating leverage. ANS: OBJ: STA: KEY:

B PTS: 1 DIF: Difficulty: Easy LO: 4-3 NAT: BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis Bloom's: Knowledge NOT: 1 min.

71. The profit-volume graph a. is difficult to interpret. b. fails to reveal how costs change as sales volume changes. c. can be only plotted using the break-even point. d. can be only plotted using fixed costs. e. shows the relationship between operating income and variable costs. ANS: OBJ: STA: KEY:


72. The cost-volume-profit graph a. plots three separate lines. b. plots the total revenue line and the total cost line. c. the vertical axis is measured in units sold and the horizontal axis in dollars. d. All of these are correct. ANS: OBJ: STA: KEY:


73. Fixed expenses that cannot be directly traced to individual segments are called

a. b. c. d. e.

cost structure. direct fixed expenses. operating leverage. common fixed expenses. indifference point.

ANS: OBJ: STA: KEY:

D PTS: 1 DIF: Difficulty: Easy LO: 4-4 NAT: BUSPROG: Analytic AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-28-Variable and Fixed Costs Bloom's: Knowledge NOT: 1 min.

74. Sales mix is the relative combination of a. inputs required to produce a product. b. outputs produced by a firm. c. products sold by a firm. d. distribution channels used by a firm. e. resources used to produce a product. ANS: C PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-25-Managerial Characteristics/Terminology KEY: Bloom's: Knowledge NOT: 1 min. 75. Sales mix can be expressed in terms of a. units but not revenues. b. either revenues or units. c. revenues but not units. d. neither units nor revenue. ANS: B PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-25-Managerial Characteristics/Terminology KEY: Bloom's: Knowledge NOT: 1 min. 76. In order for the break-even computation to be meaningful to management, sales mix should be computed using the a. expected mix. b. most desirable mix. c. least desirable mix. d. traditional mix. e. average mix over the past 5 years. ANS: A PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-25-Managerial Characteristics/Terminology KEY: Bloom's: Knowledge NOT: 1 min. 77. If sales remain the same and the margin of safety increases, which of the following is true? a. The break-even point has decreased. b. The common fixed costs have increased. c. The break-even point has remained constant. d. Variable costs have increased.

ANS: OBJ: STA: target

A PTS: 1 DIF: Difficulty: Moderate LO: 4-1 | LO: 4-4 NAT: BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales KEY: Bloom's: Knowledge NOT: 1 min.

78. Information about the Harmon Company's two products includes: Unit selling price Unit variable costs: Manufacturing Selling Total Monthly fixed costs are as follows: Manufacturing Selling and administrative Total

Product X $9.00

Product Y $9.00

$5.25 .75 $6.00

$6.75 .75 $7.50

$ 82,500 45,000 $127,500

What is the total monthly sales volume in units required to break even when the sales mix in units is 70% Product X and 30% Product Y? a. 8,333 units b. 50,000 units c. 16,667 units d. 56,667 units ANS: B SUPPORTING CALCULATIONS: Average CM per unit = [0.7  ($9.00  $6.00)] + [0.3  ($9.00  $7.50)] = $2.55 $127,500/$2.55 = 50,000 units PTS: NAT: STA: KEY:


79. Product 1 has a contribution margin of $6.00 per unit, and Product 2 has a contribution margin of $7.50 per unit. Total fixed costs are $300,000. Sales mix and total volume varies from one period to another. Which of the following is true? a. At a sales volume in excess of 25,000 units of 1 and 25,000 units of 2, operations will be profitable. b. The ratio of net profit to total sales for 2 will be larger than the ratio of net profit to total sales for 1. c. Variable costs are $1.50 more for 2 than for 1. d. The ratio of contribution margin to total sales always will be larger for 1 than for 2. ANS: OBJ: STA: KEY:

A PTS: 1 DIF: Difficulty: Moderate LO: 4-4 NAT: BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis Bloom's: Application NOT: 1 min.

80. The following data pertain to the three products produced by Alberts Corporation:

Selling price per unit Variable costs per unit Contribution margin per unit

A $5.00 4.00 $1.00

B $7.00 5.00 $2.00

C $6.00 3.00 $3.00

Fixed costs are $90,000 per month. 60% of all units sold are Product A, 30% are Product B, and 10% are Product C. What is the monthly break-even point for total units? a. 45,000 units b. 36,000 units c. 60,000 units d. 180,000 units ANS: C SUPPORTING CALCULATIONS: Average CM per unit = (0.6  $1) + (0.3  $2) + (0.1  $3) = $1.50 $90,000/$1.50 = 60,000 units PTS: NAT: STA: KEY:


81. If actual sales equal break-even sales a. the margin of safety is negative. b. the margin of safety is positive. c. it is impossible to say anything about the margin of safety. d. the margin of safety equals zero. e. the margin of safety is negative or positive. ANS: D PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Knowledge NOT: 1 min. 82. The units sold or expected to be sold or sales revenue earned or expected to be earned above the breakeven volume is called a. variable cost ratio. b. degree of operating leverage. c. break-even point. d. margin of safety. e. contribution margin ratio. ANS: D PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Knowledge NOT: 1 min. 83. The margin of safety in dollars is a. expected sales minus expected profit. b. expected sales minus sales at break-even. c. costs at break-even minus expected profit.

d. expected costs minus costs at break-even. e. expected profit minus actual profit. ANS: B PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Knowledge NOT: 1 min. 84. ____ can be measured for a given level of sales by taking the ratio of contribution margin to operating income. a. Contribution margin ratio b. Degree of operating leverage c. Break-even point d. Sensitivity analysis e. Contribution margin ANS: B PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Knowledge NOT: 1 min. 85. Which of the following can be considered a measure of risk in cost-volume-profit analysis? a. margin of safety b. contribution margin c. break-even point d. sales mix ANS: OBJ: STA: target

A PTS: 1 DIF: Difficulty: Moderate LO: 4-5 NAT: BUSPROG: Analytic AICPA: FN-Risk Analysis | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales KEY: Bloom's: Knowledge NOT: 1 min.

86. Sales can decline by how much before losses are incurred? a. contribution margin ratio b. variable cost ratio c. sales ratio d. common fixed costs e. margin of safety ANS: OBJ: STA: target

E PTS: 1 DIF: Difficulty: Moderate LO: 4-5 NAT: BUSPROG: Analytic AICPA: FN-Risk Analysis | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales KEY: Bloom's: Knowledge NOT: 1 min.

87. Firm X and Firm Y are competitors within the same industry. Firm X produces its product using large amounts of direct labor. Firm Y has replaced direct labor with investment in machinery. Projected sales for both firms are 15% less than in the prior year. Which statement regarding projected profits is true? a. Firm X will lose more profit than Firm Y. b. Firm Y will lose more profit than Firm X. c. Firm X and Firm Y will lose the same amount of profit. d. Neither Firm X nor Firm Y will lose profit. ANS: B This would be true because the company would not have to pay the direct labor employees for hours they do not work. The return on the investment of the machine would be significantly less.

PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 4-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Analysis NOT: 4 min. 88. Operating leverage is a. the difference between sales and variable expense. b. the use of fixed costs to extract higher percentage changes in profits as sales activity changes. c. the portion of each sales dollar available to cover fixed costs and provide for profit. d. visually portrays the relationship between profits and units sold. e. none of these ANS: OBJ: STA: KEY:

B PTS: 1 DIF: Difficulty: Moderate LO: 4-5 NAT: BUSPROG: Analytic AICPA: FN-Risk Analysis | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis Bloom's: Knowledge NOT: 1 min.

89. A "what-if" technique that examines the impact of changes in underlying assumptions on an answer is a. margin of safety. b. sales mix. c. indifference point. d. cost structure. e. sensitivity analysis. ANS: OBJ: STA: KEY:

E PTS: 1 DIF: Difficulty: Moderate LO: 4-5 NAT: BUSPROG: Analytic AICPA: FN-Risk Analysis | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis Bloom's: Knowledge NOT: 1 min.

90. Biggers Company expects the following results for the next accounting period: Sales Variable costs Fixed costs Expected production and sales in units

$240,000 $135,000 $ 40,000 3,000

The sales manager believes sales could be increased by 400 units if advertising expenditures were increased by $10,000. If advertising expenditures are increased and sales increase by 400 units, the effect on operating income will be a(n) a. decrease of $4,000. b. increase of $22,000. c. increase of $4,000. d. increase of $30,000. e. cannot be determined from data given. ANS: OBJ: STA: KEY:

C PTS: 1 DIF: Difficulty: Moderate LO: 4-5 NAT: BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis Bloom's: Application NOT: 2 min.

91. Degree of operating leverage is calculated as a. Variable costs/Sales b. Total sales/Common fixed costs

c. Fixed costs/Variable costs d. Contribution margin/Operating income e. Operating income/Contribution margin ANS: OBJ: STA: KEY:

D PTS: 1 DIF: Difficulty: Easy LO: 4-5 NAT: BUSPROG: Analytic AICPA: FN-Risk Analysis | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis Bloom's: Knowledge NOT: 1 min.

92. Operating leverage is the relative mix of a. revenues earned and manufacturing costs. b. fixed and variable costs. c. high-volume and low-volume products. d. manufacturing costs and period costs. e. revenues earned and variable costs. ANS: B PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Knowledge NOT: 1 min. Figure 4-6. Shorter Company had originally expected to earn operating income of $130,000 in the coming year. Shorter's degree of operating leverage is 2.4. Recently, Shorter revised its plans and now expects to increase sales by 20% next year. 93. Refer to Figure 4-6. What is the percent change in operating income expected by Shorter in the coming year? a. 8.33% b. 48.0% c. 20.0% d. 54.17% e. 30.0% ANS: B Percent change in operating income = 2.4  20% = 48% PTS: NAT: STA: KEY:

1 DIF: Difficulty: Easy OBJ: LO: 4-5 BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis Bloom's: Application NOT: 1 min.

94. Refer to Figure 4-6. What is Shorter's revised expected operating income for the coming year? a. $192,400 b. $156,000 c. $312,000 d. $130,000 e. $62,400 ANS: A $130,000 + (0.48  $130,000) = $192,400 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis

KEY: Bloom's: Application

NOT: 1 min.

PROBLEM 1. Dance Unlimited plans to sell 10,000 ballet shoes at $50 each in the coming year. Unit variable cost is $30 and total fixed cost equals $65,000. Required: A.) Calculate the break-even in ballet shoes. B.) Calculate the break-even in sales dollars. ANS: A.) $65,000/($50-$30) = 3,250 ballet shoes B.) 3,250 x $50 = $162,500 PTS: NAT: STA: KEY:


2. Shamrock Inc. plans to sell 3,000 Irish sweaters for $200 each in the coming year. Product costs include: Direct materials per sweater $40 Direct labor per sweater 10 Variable overhead per sweater 15 Total fixed factory overhead 20,000 Variable selling expenses are $5 per sweater and fixed selling and administrative expenses total $12,000. Required: A.) Calculate the total variable cost per unit. B.) Calculate the total fixed expenses for the year. C.) Prepare a contribution margin income statement for Shamrock Inc. for the coming year. ANS: A.) Total variable cost per unit = $40 + $10 + $15 + 5 = $70 B.) Total fixed expense = $20,000 + $12,000 = $32,000 C.)

Sales Total variable expenses Total contribution margin Total fixed expense Operating income

Shamrock Inc. Contribution Margin Income Statement For the Coming Year 600,000 210,000 390,000 32,000 358,000

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement |AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-28Variable and Fixed Costs | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 5 min. 3. Newman Company expects to produce and sell 2,000 units next month. Data on costs follows: Per unit costs: Selling price Variable manufacturing costs Variable selling costs Total costs: Fixed manufacturing costs Fixed selling costs

$40 $10 $ 6

$16,000 $ 8,000

Required: A. What is the variable cost per unit? B. What is contribution margin per unit? C. What is the variable cost ratio? D. What is the contribution margin ratio? ANS: A. B. C. D.

Variable cost per unit = $10 + $6 = $16 Contribution margin per unit = $40  $16 = $24 Variable cost ratio = $16/$40 = 0.4 or 40% Contribution margin ratio = $24/$40 = 0.6 or 60%

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-28-Variable and Fixed Costs | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 2 min. 4. McCallen Company expects to produce and sell 500 units next month. Data on costs follows: Per unit costs: Selling price Variable manufacturing costs Variable selling costs Total costs: Fixed manufacturing costs Fixed selling costs Required: A. What is the variable cost per unit? B. What is contribution margin per unit? C. What is the variable cost ratio? D. What is the contribution margin ratio?

$8 $2.75 $0.25

$1,000 $ 125

ANS: A. B. C. D.

Variable cost per unit = $2.75 + $0.25 = $3 Contribution margin per unit = $8  $3 = $5 Variable cost ratio = $3/$8 = 0.375 or 37.5% Contribution margin ratio = $5/$8 = 0.625 or 62.5%

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-28-Variable and Fixed Costs | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 2 min. 5. Fry Company Projected Income Statement For the Current Year Ending December 31 Sales (12,000 units) Less variable costs: Variable manufacturing costs Variable selling costs Total variable costs Contribution margin Less fixed costs: Fixed manufacturing costs Fixed selling and administrative costs Total fixed costs Operating income

$240,000 $60,000 36,000 96,000 $144,000 $85,000 35,000 120,000 $ 24,000

Required: A. Determine the break-even point in sales dollars. B. The sales manager believed the company could increase sales by 1,000 units if advertising expenditures were increased by $15,000. By how much will operating income increase or decrease if the advertising is increased as suggested? C. What is the maximum amount the company could pay for advertising if the advertising would increase sales by 1,000 units? ANS: A.

$120,000/($20  $8) = 10,000 units x $20 = $200,000

B.

(1,000  $12)  $15,000 = $3,000 decrease

C.

1,000  $12 = $12,000

PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 4-1 | LO: 4-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Evaluation NOT: 3 min.

6. Music Now plans to sell 6,000 MP3 players at $60 each in the coming year. Variable cost per unit is $12 and total fixed cost is $24,000. Required: A.) Calculate the variable cost ratio. B.) Calculate the contribution margin ratio. C.) Calculate the break-even point in sales dollars. D.) If Music Now has a target profit of $90,000, how many MP3 players will they have to sell? ANS: A.) $12/$60 = 20% B.) ($60-$12)/$60 = 80% C.) $24,000/80% = $30,000 D.) ($24,000 + $90,000)/($60 - $12) = 2,375 MP3 players PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-1 | LO: 4-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin | ACBSP: APC-31-Break-even point | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Application NOT: 4 min. 7. A company provided the following information: Sales Variable costs Fixed costs

$500,000 $100,000 $200,000

Required: A. What is the contribution margin ratio? B. What is the level of sales in dollars necessary to generate a profit of $40,000? C. What is the contribution margin ratio if the sales price is increased by 10%? D. Using the information in part C, what level of sales in dollars is necessary to generate a profit of $40,000? ANS: A.

($500,000  $100,000)/$500,000 = 80%

B.

($200,000 + $40,000)/80% = $300,000

C.

($500,000  1.1) = $550,000 ($550,000  $100,000)/$550,000 = 81.82%

D.

($200,000 + $40,000)/81.82% = $293,327 rounded

PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 4-1 | LO: 4-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Application NOT: 4 min.

8. Aaron Company provided the following data for next month: Selling price per unit Variable manufacturing costs per unit Fixed manufacturing costs per unit Variable selling costs per unit Fixed selling costs per unit Expected production and sales

$400 $100 $ 80 $ 60 $ 40 1,800 units

Required: A. What is contribution margin per unit? B. What is the contribution margin ratio? C. What is the break-even point in units? D. What are the sales in dollars needed to obtain an operating income of $20,000? ANS: A.

$400  ($100 + $60) = $240

B.

$400  ($100 + $60) = $240 $240/$400 = 0.60 or 60%

C.

$400  ($100 + $60) = $240 Fixed costs = ($80 + $40)  1,800 = $216,000 $216,000/$240 per unit = 900 units

D.

($216,000 + $20,000)/60% = $393,333 rounded

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-1 | LO: 4-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling |AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin | ACBSP: APC-31-Break-even point | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Application NOT: 5 min. 9. Thomas Corporation developed the following income statement using a contribution margin approach: Thomas Corporation Projected Income Statement For the Current Year Ending December 31 Sales Less variable costs: Variable manufacturing costs Variable selling costs Total variable costs Contribution margin Less fixed costs: Fixed manufacturing costs Fixed selling and administrative costs Total fixed costs Operating income

$750,000 $280,000 120,000 $400,000 $350,000 $130,000 80,000 $210,000 $140,000

The projected income statement was based on sales of 100,000 units. Thomas has the capacity to produce 120,000 units during the year. Required: A. Determine the break-even point in units. B. The sales manager believes the company could increase sales by 8,000 units if advertising expenditures were increased by $22,000. By how much will income increase or decrease if this plan is put into effect? C. What is the maximum amount the company could pay for advertising if the sales would really increase by 8,000 units? ANS: A.

$210,000/($7.50  $4.00) = 60,000 units

B.

(8,000  $3.50)  $22,000 = $6,000 increase

C.

8,000  $3.50 = $28,000

PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 4-1 | LO: 4-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Evaluation NOT: 4 min. 10. The following information was extracted from the accounting records of MVP Corporation: Selling price per unit Variable cost per unit Total fixed costs

$60 $20 $480,000

Required: A. What is MVP's break-even point in units? B. How many units must be sold to earn operating income of $80,000? C. What is MVP's break-even point in units if the selling price increases by 20% and the variable costs decrease by 20%? D. Using the information in part C, what sales level in dollars is needed to earn an operating income of $80,000? ANS: A.

$480,000/($60 per unit  $20 per unit) = 12,000 units

B.

($480,000 + $80,000)/($60  $20) = 14,000 units

C.

($60  1.2) = $72 new sales price ($20  .8) = $16 new variable cost ($72  $16) = $56 new contribution margin $480,000/$56 = 8,572 units (rounded)

D.

($480,000 + $80,000)/$56 = 10,000 units

(10,000  $72) = $720,000 PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 4-1 | LO: 4-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Application NOT: 5 min. 11. Information for Crisby Company is as follows: Sales Variable costs Fixed costs

$500,000 $100,000 $200,000

Required: A. What is the break-even point in sales dollars? B. What sales (in dollars) are needed to generate operating income of $40,000? ANS: A.

($500,000  $100,000)/$500,000 = 80% $200,000/80% = $250,000

B.

($500,000  $100,000)/$500,000 = 80% ($200,000 + $40,000)/0.80 = $300,000

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1 | LO: 4-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Application NOT: 3 min. 12. The Noble Company manufactures two products. Information about the two products are as follows: Selling price per unit Variable costs per unit Contribution margin per unit

Product A $80 $45 $35

Product B $30 $15 $15

The company expects fixed costs to be $189,000. The firm expects 60% of its sales (in units) to be Product A (a sales mix of 3:2). Required: A. Calculate the contribution margin per package. B. Determine the break-even point in units for Products A and B. C. Determine the level of sales (in dollars) necessary to generate operating income of $135,000. ANS: A.

Product A = $35  3 = $105 Product B = $15  2 = 30

Contribution margin per package = $105 + $30 = $135 B.

$189,000/$135 per package = 1,400 packages Product A units = 1,400  3 = 4,200 units Product B units = 1,400  2 = 2,800 units

C.

($189,000 + $135,000)/$135 = 2,400 packages Product A sales = 2,400  3  $80 = $576,000 Product B sales = 2,400  2  $30 = $144,000 Total sales = $576,000 + $144,000 = $720,000

PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 4-1 | LO: 4-2 | LO: 4-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin | ACBSP: APC-31-Break-even point | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Application NOT: 5 min. 13. Travel On Inc. sells luggage. They sell a duffle bag, a carry-on suitcase and a deluxe suitcase. The price and variable cost for each type of luggage is listed below.

Duffle bag Carry-on Deluxe

Price Variable Cost $100 $25 $180 $40 $300 $120

The total fixed costs for Travel On Inc. equals $60,000. For every 8 duffle bags Travel On Inc sells it sells 3 carry-on suitcases and 1 deluxe suitcase. Required: A.) Calculate the package contribution margin. B.) Calculate the break-even point in units for duffle bags, carry-on suitcases and deluxe suitcases. C.) If Travel On Inc. has a target income for the coming year of $300,000, how many packages will company have to sell? D.) Based on your answer in Part C, prepare a contribution margin income statement for the coming year. E.) What is the company’s margin of safety in packages? ANS: A.) Price

Duffle bag Carry-on Deluxe

$100 $180 $300

Variable Cost

$25 $40 $120

Unit contribution Sales mix Package contribution margin margin $75 $140 $180

8 3 1

$600 $420 $180 $1,200

B.) $60,000/1,200 = 50 packages 50 packages x 8 = 400 duffle bags 50 packages x 3 = 150 carry-on suitcases 50 packages x 1 = 50 deluxe suitcases C.) ($60,000 + $300,000)/1,200 = 300 packages D.) Travel On Inc. Contribution Margin Income Statement For the Coming Year Sales Total variable expenses Total contribution margin Total fixed expense Operating income

$ $ $

492,000 132,000 360,000 60,000 300,000

E.) 300 packages - 50 packages = 250 packages is the company’s margin of safety PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 4-1 | LO: 4-2 | LO: 4-4 | LO: 4-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling |AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin | ACBSP: APC-31-Break-even point | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Application NOT: 10 min. 14. The Lauren Company manufactures two products. Information about the two product lines for the year is as follows: Selling price per unit Variable costs per unit Contribution margin per unit

Product X $70 $30 $40

Product Y $100 $40 $ 60

The company expects fixed costs to be $144,000. The firm expects 60% of its sales (in units) to be Product X. Required: Determine the break-even point in units for both Product X and Product Y. ANS: Form a package with 3 units of Product X and 2 units of Product Y. Contribution margin from Product X: $40  3 = $120 Contribution margin from Product Y: $60  2 = $120 Total Package contribution margin = $120 + $120 = $240 per package break-even packages = $144,000/$240 per package = 600 packages Product X: 600 packages  3 = 1,800 units Product Y: 600 packages  2 = 1,200 units PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic

OBJ: LO: 4-1 | LO: 4-4

STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point KEY: Bloom's: Application NOT: 5 min. 15. The Young Manufacturing Company produces the following three products: Hammers $40 $28 $12

Selling price per unit Variable costs per unit Contribution per unit

Screwdrivers $16 $12 $ 4

Saws $50 $30 $20

Fixed costs are $76,000 per year. 50% of all sales in units are hammers, 30% are screwdrivers, and 20% are saws. Required: Calculate the following values: A. break-even point in total units. B. Number of hammers that will be sold at break-even. C. Total sales in units to obtain a target income of $19,000. ANS: A.

Ave. CM/unit = ($12  0.5) + ($4  0.3) + ($20  0.2) = $11.20 $76,000/$11.20 = 6,786 packages of hammers, screwdrivers, and saws

B.

6,786  0.5 = 3,393 hammers

C.

($76,000 + $19,000)/$11.20 = 8,482 packages

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-1 | LO: 4-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Application NOT: 5 min. 16. Income statements for two different companies in the same industry are as follows: Sales Less: Variable costs Contribution margin Less: Fixed costs Operating income

Company A $400,000 300,000 $100,000 50,000 $ 50,000

Company B $400,000 200,000 $200,000 150,000 $ 50,000

Required: A. Calculate the degree of operating leverage for each firm. B. Calculate the margin of safety in dollars for each firm. C. Determine the operating income for each firm if sales increase by 20%. ANS: A.

Company A: $100,000/$50,000 = 2 Company B: $200,000/$50,000 = 4

B.

Company A: break-even sales = $50,000/($100,000/$400,000) = $200,000 Margin of safety = $400,000  $200,000 = $200,000 Company B: break-even sales = $150,000/($200,000/$400,000) = $300,000 Margin of safety = $400,000  $300,000 = $100,000

C.

Company A: Increase in net income = (.20  2)  $50,000 = $20,000 Net income = $50,000 + $20,000 = $70,000 Company B: Increase in net income = (.20  4)  $50,000 = $40,000 Net income = $50,000 + $40,000 = $90,000

PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 4-1 | LO: 4-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Application NOT: 5 min. 17. Newman Company expects to produce and sell 2,000 units next month. Data on costs follows: Per unit costs: Selling price Variable manufacturing costs Variable selling costs Total costs: Fixed manufacturing costs Fixed selling costs

$40 $10 $ 6

$16,000 $ 8,000

Required: A. What is the break-even point in units? B. What is the break-even point in sales dollars? C. What is the expected operating income for next month? D. What is the margin of safety in dollars? ANS: A.

break-even units = ($16,000 + $8,000)/$24 = 1,000 units

B.

break-even sales dollars = 1,000  $40 = $40,000 OR break-even sales dollars = $24,000/0.6 = $40,000

C.

Expected operating income = $80,000  $32,000  $24,000 = $24,000

D.

Margin of safety = $80,000  $40,000 = $40,000

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 4-1 | LO: 4-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point | ACBSP: APC-32-Margin of safety/sales target | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Application NOT: 5 min. 18. McCallen Company expects to produce and sell 500 units next month. Data on costs follows: Per unit costs: Selling price Variable manufacturing costs Variable selling costs Total costs: Fixed manufacturing costs Fixed selling costs

$8 $2.75 $0.25

$1,000 $ 125

Required: A. What is the break-even point in units? B. What is the break-even point in sales dollars? C. What is the expected operating income for next month? D. What is the margin of safety in dollars? E. What is the break-even point in units if fixed manufacturing costs increase by $500? F. What is the break-even point in units if variable manufacturing costs decrease by $0.75? ANS: A.

break-even units = $1,125/$5 = 225 units

B.

break-even sales dollars = $8  225 = $1,800 OR break-even sales dollars = $1,125/0.625 = $1,800

C.

Expected operating income = $4,000  $1,500  $1,125 = $1,375

D.

Margin of safety in dollars = $4,000  $1,800 = $2,200

E.

($1,000 + $500 + $125)/$5 = 325 units

F.

($1,000 + $125)/($8  $2  $.25) = $1,125/$5.75 = 196 units (rounded)

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-1 | LO: 4-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point | ACBSP: APC-32-Margin of safety/sales target | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Application NOT: 5 min. 19. At a monthly sales volume of $25,000, a company incurs variable costs of $19,000 and fixed costs of $6,000. Required: Determine each of the following values: A. Variable cost ratio

B. C. D.

Contribution margin ratio Monthly break-even dollar sales volume Monthly margin of safety in dollars

ANS: A.

Variable cost ratio = $19,000/$25,000 = 0.76

B.

Contribution margin ratio = 1.00  0.76 = 0.24

C.

Monthly break-even dollar sales volume = $6,000/0.24 = $25,000

D.

Monthly sales volume Monthly break-even sales volume Monthly margin of safety

$25,000 25,000 $ -0-

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-1 | LO: 4-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin | ACBSP: APC-31-Break-even point | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Application NOT: 3 min. 20. Arnold Corporation has the following information for the current year: Selling price per unit Variable costs per unit Fixed costs

$10 $ 6 $1,000

Required: Prepare a cost-volume-profit graph identifying the following items: A. Total costs line B. Total fixed costs line C. Total variable costs line D. Total revenues line E. break-even point in sales dollars, indicate the amount F. break-even point in units, indicate the amount G. Profit area H. Loss area ANS:

PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 4-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis | ACBSP: APC-31-Break-even point KEY: Bloom's: Knowledge NOT: 5 min. 21. The following information has been provided for Walsh Corporation: Sales price per unit Variable costs per unit Fixed costs

$20 $10 $500

Required: Prepare a cost-volume-profit graph identifying the following items: A.) Total cost line B.) Total fixed cost line C.) Total variable cost line D.) Total revenue line E.) Loss area F.) Profit area G.) Compute the break-even point in units H.) Compute the break-even point in sales dollars ANS: Units Sold

Revenue 10 20 30 40 50 60 70 80 90 100

Fixed Costs Total Variable Cost Total Cost 200 500 100 600 400 500 200 700 600 500 300 800 800 500 400 900 1000 500 500 1000 1200 500 600 1100 1400 500 700 1200 1600 500 800 1300 1800 500 900 1400 2000 500 1000 1500

Break-even point = 50 units Break-even point = $1,000 PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 4-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis | ACBSP: APC-31-Break-even point KEY: Bloom's: Knowledge NOT: 5 min. 22. Place Corporation had the following income statement for the current year: Sales Variable expenses Contribution margin Fixed expenses Operating income

$25,000 15,000 $10,000 4,000 $ 6,000

Required: A. Calculate the operating leverage ratio. B. If sales increase by 20%, what will be the percentage change in income? C. If sales increase by $15,000, how much will income increase? ANS: A.

$10,000/$6,000 = 1.6667

B.

1.6667  0.2 = 0.33333, or 33.33% increase

C.

$15,000  .4 = $6,000

PTS: 1

DIF: Difficulty: Moderate

OBJ: LO: 4-5

NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Application NOT: 3 min. ESSAY 1. Explain why cost-volume-profit analysis can be useful to managers. ANS: Cost-volume-profit (CVP) analysis is a powerful tool for planning and decision making. Because CVP analysis emphasizes the interrelationships of costs, quantity sold, and price, it brings together all of the financial information of the firm. CVP analysis can be a valuable tool to identify the extent and magnitude of the economic trouble a division is facing and to help pinpoint the necessary solution. CVP analysis can address many other issues as well, such as the number of units that must be sold to break even, the impact of an increase in price on profit. Additionally, CVP analysis allows managers to do sensitivity analysis by examining the impact of various prices or cost levels on profit. PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 4-1 | LO: 4-3 NAT: BUSPROG: Communication STA: AICPA: FN-Decision Modeling |AICPA: FN-Risk Analysis | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis KEY: Bloom's: Comprehension NOT: 5 min. 2. What are the assumptions underlying cost-volume-profit analysis? ANS: Some of the assumptions are as follows: 1.

The analysis assumes a linear revenue function and a linear cost function.

2.

The analysis assumes that price, total fixed costs, and unit variable costs can be accurately identified and remain constant over the relevant range.

3.

The analysis assumes that what is produced is actually sold.

4.

For multiple-product analysis, the sales mix is assumed to be known.

5.

The selling prices and costs are assumed to be known with certainty.

PTS: NAT: STA: KEY:

1 DIF: Difficulty: Moderate OBJ: LO: 4-3 BUSPROG: Communication AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-29-CVP Analysis Bloom's: Knowledge NOT: 5 min.

3. How can a multi-product firm determine its break-even point? ANS: The firm can determine its break-even point by finding the break-even point in sales dollars, or it can form packages and determine the break-even point for each package, realizing that the sales mix must be determined as well. PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Communication

OBJ: LO: 4-4

STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-31-Break-even point KEY: Bloom's: Comprehension NOT: 3 min. You Decide 4. As a cost accountant at A&E Company you have been given a set of data and have been asked to perform a break-even analysis as well as a sensitivity analysis. Why are these analyses important? ANS: A break-even analysis is important to a company for several reasons. First it tells a company at what level they will have zero profit. Determining either how many units they have to sell to cover total costs or how much in sales dollars need to be generated to cover total costs. Companies want to turn a profit and this information will guide them to the levels of output necessary. This also tells management if their desired targeted income is achievable in a given time period. A sensitivity analysis, also known as the “what-if” technique, shows the impact of changes in various components of the break-even analysis. This gives management a wealth of useful information in order to make decisions regarding such things as whether or not an increase in either fixed or variable costs will make the break-even point unattainable. It will also display the affect of a change in the sales price or the sales mix. One poor decision can dramatically affect a business and these analyses are crucial in assisting management in making sound and logical decisions. PTS: NAT: STA: KEY:

1 DIF: Difficulty: Moderate OBJ: LO: 4-1 | LO: 4-5 BUSPROG: Analytic AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-31-Break-even point Bloom's: Comprehension NOT: 5 min.

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