202 7.2
Cost-Volume-Profit Analysis
Questions and Answers
- 1.
Which of the following statements is TRUE if the sales price per unit increases while the variable cost per unit and total fixed costs remain constant?
- A.
The contribution margin increases and the breakeven point decreases.
- B.
The contribution margin decreases and the breakeven point decreases.
- C.
The contribution margin increases and the breakeven point increases .
- D.
The contribution margin decreases and the breakeven point increases.
Correct Answer
A. The contribution margin increases and the breakeven point decreases.Explanation
When the sales price per unit increases while the variable cost per unit and total fixed costs remain constant, the contribution margin increases. The contribution margin is the difference between the sales price per unit and the variable cost per unit, so an increase in the sales price per unit will lead to a higher contribution margin. Additionally, since the contribution margin is the amount that contributes towards covering the fixed costs, an increase in the contribution margin will result in a decrease in the breakeven point, which is the point at which total revenue equals total costs. Therefore, the correct statement is that the contribution margin increases and the breakeven point decreases.Rate this question:
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- 2.
Which of the following statements is TRUE if the variable cost per unit decreases while the sales price per unit and total fixed costs remain constant?
- A.
The contribution margin increases and the breakeven point decreases.
- B.
The contribution margin decreases and the breakeven point decreases.
- C.
The contribution margin increases and the breakeven point increases.
- D.
The contribution margin decreases and the breakeven point increases.
Correct Answer
A. The contribution margin increases and the breakeven point decreases.Explanation
If the variable cost per unit decreases while the sales price per unit and total fixed costs remain constant, the contribution margin will increase. This is because the contribution margin is calculated by subtracting the variable cost per unit from the sales price per unit. As the variable cost per unit decreases, the difference between the sales price per unit and the variable cost per unit (i.e., the contribution margin) will increase. Additionally, the breakeven point will decrease because the contribution margin per unit is higher, meaning that fewer units need to be sold in order to cover the fixed costs.Rate this question:
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- 3.
Which of the following statements is TRUE if the fixed costs increase while the sales price per unit and variable costs per unit remain constant?
- A.
The contribution margin increases and the breakeven point decreases.
- B.
The contribution margin decreases and the breakeven point increases.
- C.
The contribution margin stays the same and the breakeven point decreases.
- D.
The contribution margin stays the same and the breakeven point increases.
Correct Answer
D. The contribution margin stays the same and the breakeven point increases.Explanation
If the fixed costs increase while the sales price per unit and variable costs per unit remain constant, the contribution margin (sales price per unit minus variable costs per unit) will stay the same. However, the breakeven point (the point at which total revenue equals total costs) will increase because the higher fixed costs need to be covered by a larger number of units sold.Rate this question:
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- 4.
If the sale price per unit decreases and variable costs remain the same, what will be the effect on the contribution margin ratio?
- A.
It will increase.
- B.
It will decrease.
- C.
It will remain the same.
- D.
It is impossible to determine with the given information.
Correct Answer
B. It will decrease.Explanation
If the sale price per unit decreases while the variable costs remain the same, the contribution margin ratio will decrease. The contribution margin ratio is calculated by subtracting the variable costs from the sale price per unit and dividing it by the sale price per unit. Since the sale price per unit is decreasing, the numerator of the ratio will decrease, resulting in a lower contribution margin ratio.Rate this question:
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- 5.
Which of the following statements is TRUE if the variable cost per unit increases while the sale price per unit and total fixed costs remain constant?
- A.
Breakeven point in units increases.
- B.
Breakeven point in units decreases.
- C.
Breakeven point in units remains the same.
- D.
Contribution margin ratio increases.
Correct Answer
A. Breakeven point in units increases.Explanation
When the variable cost per unit increases while the sale price per unit and total fixed costs remain constant, the breakeven point in units increases. This means that the company needs to sell more units in order to cover its fixed costs and start making a profit. The higher variable cost per unit reduces the contribution margin per unit, making it more difficult for the company to reach the breakeven point. Therefore, the breakeven point in units increases.Rate this question:
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- 6.
Which of the following statements is TRUE if total fixed costs decrease while the sale price per unit and variable costs per unit remain constant?
- A.
Contribution margin increases.
- B.
Contribution margin decreases.
- C.
Breakeven point in units decreases.
- D.
Breakeven point in units increases.
Correct Answer
C. Breakeven point in units decreases.Explanation
If total fixed costs decrease while the sale price per unit and variable costs per unit remain constant, the breakeven point in units will decrease. The breakeven point is the point at which total revenue equals total costs, and it is calculated by dividing total fixed costs by the contribution margin per unit. When fixed costs decrease, the contribution margin per unit becomes a larger proportion of the sale price per unit, resulting in a smaller breakeven point in units.Rate this question:
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- 7.
Which of the following statements is TRUE if both fixed expenses and the sale price per unit increase while variable costs per unit are unchanged?
- A.
Breakeven point in units could increase, decrease, or remain the same.
- B.
Breakeven point in units increases.
- C.
Breakeven point in units decreases.
- D.
Breakeven point in units remains unchanged.
Correct Answer
A. Breakeven point in units could increase, decrease, or remain the same.Explanation
If both fixed expenses and the sale price per unit increase while variable costs per unit remain unchanged, the breakeven point in units could increase, decrease, or remain the same. This is because the breakeven point is the point at which the total revenue equals total expenses, and it is affected by the relationship between fixed expenses, variable costs, and the sale price per unit. If the increase in fixed expenses and sale price per unit is greater than the increase in variable costs per unit, the breakeven point could increase. If the increase in fixed expenses and sale price per unit is less than the increase in variable costs per unit, the breakeven point could decrease. And if the increases are equal, the breakeven point would remain unchanged.Rate this question:
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- 8.
Fixed costs divided by weighted-average contribution margin per unit equals:
- A.
Contribution margin ratio.
- B.
Margin of safety ratio.
- C.
Break-even sales in dollars.
- D.
Break-even sales in units.
Correct Answer
D. Break-even sales in units.Explanation
The formula for calculating break-even sales in units is fixed costs divided by the weighted-average contribution margin per unit. This calculation helps determine the number of units that need to be sold in order to cover all fixed costs and reach the break-even point. The break-even point is the level of sales where total revenue equals total costs, resulting in neither profit nor loss. Therefore, the correct answer is break-even sales in units.Rate this question:
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- 9.
Contribution margin less fixed costs yields:
- A.
Operating income.
- B.
Sales.
- C.
Variable costs.
- D.
None of the above.
Correct Answer
A. Operating income.Explanation
Contribution margin is the amount left from sales revenue after deducting variable costs. Fixed costs are expenses that do not change with the level of production or sales. Subtracting fixed costs from the contribution margin gives us the operating income, which represents the profit or loss generated from the core operations of a business. Therefore, the correct answer is operating income.Rate this question:
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- 10.
Vango Industries sells two products, Basic models and Deluxe models. Basic models sell for $40 per unit with variable costs of $30 per unit. Deluxe models sell for $48 per unit with variable costs of $40 per unit. Total fixed costs for the company are $76,000. Vango Industries typically sells three Basic models for every Deluxe model. What is the breakeven point in total units?
- A.
6,909 units
- B.
8,000 units
- C.
13,818 units
- D.
4,000 units
Correct Answer
B. 8,000 unitsExplanation
The breakeven point is the point at which the company's total revenue equals its total costs, resulting in neither profit nor loss. To calculate the breakeven point, we need to determine the contribution margin per unit for each product. The contribution margin is the difference between the selling price and the variable cost per unit. For Basic models, the contribution margin is $40 - $30 = $10 per unit, and for Deluxe models, it is $48 - $40 = $8 per unit. Since the company typically sells three Basic models for every Deluxe model, the weighted average contribution margin per unit is (3*$10 + $8)/4 = $9.50. To cover the fixed costs of $76,000, the company needs to sell $76,000/$9.50 = 8,000 units. Therefore, the breakeven point in total units is 8,000 units.Rate this question:
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- 11.
Reynold Coffee sells three large coffees for every two small ones. A small coffee sells for $4 per cup, with a variable cost of $2 per cup. A large coffee sells for $5 per cup with a variable cost of $3 per cup. What is the weighted- average contribution margin?
- A.
$2.00
- B.
$0.40
- C.
$7.20
- D.
$0.50
Correct Answer
A. $2.00Explanation
The weighted-average contribution margin is calculated by finding the contribution margin for each product (large coffee and small coffee) and then taking the weighted average based on the sales mix. The contribution margin for a small coffee is $2 per cup ($4 selling price - $2 variable cost), and the contribution margin for a large coffee is $2 per cup ($5 selling price - $3 variable cost). Since the sales mix is three large coffees for every two small ones, the weighted-average contribution margin is $2 per cup.Rate this question:
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- 12.
A company’s margin of safety can be stated:
- A.
In units.
- B.
In dollars.
- C.
As a percentage of sales.
- D.
As any of the above.
Correct Answer
D. As any of the above.Explanation
The company's margin of safety can be stated in units, dollars, or as a percentage of sales. This means that the margin of safety can be expressed in different ways depending on the specific context or preference of the company. It allows flexibility in how the margin of safety is communicated and analyzed.Rate this question:
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- 13.
A company’s margin of safety is computed as:
- A.
Expected sales – actual sales.
- B.
Actual sales – expected sales.
- C.
Expected sales – sales at breakeven.
- D.
Sales at breakeven – expected sales.
Correct Answer
B. Actual sales – expected sales.Explanation
The margin of safety is a financial metric that measures the difference between the actual sales and the expected sales. It represents the cushion or buffer that a company has in case of a decrease in sales. By subtracting the expected sales from the actual sales, we can determine the amount by which the company has exceeded its expected sales, indicating a positive margin of safety.Rate this question:
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- 14.
Total predicted sales (in units) minus total break-even sales in units divided by total predicted sales (in units) yields:
- A.
Contribution margin ratio.
- B.
Contribution margin per unit.
- C.
Margin of safety percentage.
- D.
Percent of sales mix.
Correct Answer
C. Margin of safety percentage.Explanation
The formula provided is for calculating the margin of safety percentage. The margin of safety is a measure of how much sales can decrease before a company starts incurring losses. It is calculated by subtracting the break-even sales from the predicted sales, dividing it by the predicted sales, and expressing it as a percentage. Therefore, the correct answer is margin of safety percentage.Rate this question:
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- 15.
The Sweet Factory produces and sells specialty fudge. The selling price per pound is $20, variable costs are $12 per pound, and total fixed costs are $6,000. How many pounds of fudge must The Sweet Factory sell to breakeven?
- A.
15,000
- B.
300
- C.
750
- D.
188
Correct Answer
C. 750Explanation
To calculate the breakeven point, we need to find the number of pounds of fudge that will generate enough revenue to cover the total fixed costs and variable costs. The contribution margin per pound is the selling price ($20) minus the variable cost ($12), which is $8. The breakeven point can be calculated by dividing the total fixed costs ($6,000) by the contribution margin per pound ($8), resulting in 750 pounds of fudge. Therefore, The Sweet Factory must sell 750 pounds of fudge to breakeven.Rate this question:
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