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True/False Questions
1. To estimate what the profit will be at various levels of activity, a manager can simply
take the number of units to be sold over the break-even point and multiply that number
by the unit contribution margin.
Answer: True Level: Medium LO: 1
2. Incremental analysis is generally the simplest and most direct approach to decision
making.
Answer: True Level: Easy LO: 1
3. To facilitate decision-making, fixed expenses should be expressed on a per-unit basis.
Answer: False Level: Medium LO: 1
4. One assumption in CVP analysis is that inventories do not change.
Answer: True Level: Easy LO: 1
5. On a CVP graph for a profitable company, the total expense line will be steeper than
the total revenue line.
Answer: False Level: Medium LO: 2
6. If sales volume increases, and all other factors remain unchanged, the contribution
margin ratio will decrease.
Answer: False Level: Medium LO: 3
7. The break-even point for a capital intensive, automated company will tend to be
higher than for a less capital intensive company while the margin of safety will tend to
be lower.
Answer: True Level: Medium LO: 5,7
8. An increase in the number of units sold will decrease a company's break-even point.
Answer: False Level: Medium LO: 5
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9. Assuming that the unit contribution margin is positive, a 10% decrease in selling price
will increase the break-even point in terms of unit sales more than will a 10% increase
in the variable expense.
Answer: True Level: Hard LO: 5
10. The break-even point is the point where total contribution margin equals total variable
expenses.
Answer: False Level: Medium LO: 5
11. The break-even point can usually be determined by simply adding together all of the
expenses from the income statement.
Answer: False Level: Medium LO: 5
12. Two companies with the same margin of safety in dollars will also have the same total
contribution margin.
Answer: False Level: Medium LO: 7
13. If a company has high operating leverage, then profits will be very sensitive to
changes in sales.
Answer: True Level: Easy LO: 8
14. Operating leverage will decrease as the company's margin of safety increases.
Answer: True Level: Hard LO: 7,8
15. The overall contribution margin ratio for a company producing three products may be
obtained by adding the contribution margin ratios for the three products and dividing
the total by three.
Answer: False Level: Hard LO: 9
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Multiple Choice Questions
16. Which of the following is correct? The break-even point occurs on the CVP graph
where:
A) total profit equals total expenses.
B) total profit equals total fixed expenses.
C) total contribution margin equals total fixed expenses.
D) total variable expenses equal total contribution margin.
Answer: C Level: Medium LO: 1,2
17. If a company decreases its total fixed expenses while increasing the variable expense
per unit, the total expense line relative to its previous position on a cost-volume-profit
graph will:
A) shift upward and have a steeper slope.
B) shift upward and have a flatter slope.
C) shift downward and have a steeper slope.
D) shift downward and have a flatter slope.
Answer: C Level: Medium LO: 2
18. East Company manufactures and sells a single product with a positive contribution
margin. If the selling price and the variable expense per unit both increase 5% and
fixed expenses do not change, what is the effect on the contribution margin per unit
and the contribution margin ratio?
Contribution Contribution
margin per unit margin ratio
A) No change No change
B) Increase Increase
C) Increase No change
D) Increase Decrease
Answer: C Level: Medium LO: 3,4 Source: CMA, adapted
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19. Mossfeet Shoe Company is a single product firm. Mossfeet is predicting that a price
increase next year will not cause unit sales to decrease. What effect would this price
increase have on the following items for next year?
Contribution Break-even
Margin Ratio Point
A) Increase Decrease
B) Decrease Decrease
C) Increase No effect
D) Decrease No effect
Answer: A Level: Medium LO: 3,5
20. The contribution margin ratio is equal to:
A) Total manufacturing expenses/Sales.
B) (Sales - Variable expenses)/Sales.
C) 1 - (Gross Margin/Sales).
D) 1 - (Contribution Margin/Sales).
Answer: B Level: Medium LO: 3
21. The contribution margin ratio always increases when the:
A) break-even point increases.
B) break-even point decreases.
C) variable expenses as a percentage of net sales decrease.
D) variable expenses as a percentage of net sales increase.
Answer: C Level: Hard LO: 3 Source: CPA, adapted
22. In the middle of the year, the price of Lake Corporation's major raw material increased
by 8%. How would this increase affect the company's break-even point and margin of
safety?
Break-even point Margin of safety
A) Increase Increase
B) Increase Decrease
C) Decrease Decrease
D) Decrease Increase
Answer: B Level: Easy LO: 5,7
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23. A $2.00 increase in a product's variable expense per unit accompanied by a $2.00
increase in its selling price per unit will:
A) decrease the degree of operating leverage.
B) decrease the contribution margin.
C) have no effect on the break-even volume.
D) have no effect on the contribution margin ratio.
Answer: C Level: Hard LO: 5,8
24. The break-even point in unit sales is found by dividing total fixed expenses by:
A) the contribution margin ratio.
B) the variable expenses per unit.
C) the sales price per unit.
D) the contribution margin per unit.
Answer: D Level: Easy LO: 5
25. Which of the following would not affect the break-even point?
A) number of units sold
B) variable expense per unit
C) total fixed expenses
D) selling price per unit
Answer: A Level: Medium LO: 5 Source: CMA, adapted
26. If a company increases its selling price by $2 per unit due to an increase in its variable
labor cost of $2 per unit, the break-even point in units will:
A) decrease.
B) increase.
C) not change.
D) change but direction cannot be determined.
Answer: C Level: Medium LO: 5
27. To obtain the dollar sales volume necessary to attain a given target profit, which of the
following formulas should be used?
A) (Fixed expenses + Target net profit)/Total contribution margin
B) (Fixed expenses + Target net profit)/Contribution margin ratio
C) Fixed expenses/Contribution margin per unit
D) Target net profit/Contribution margin ratio
Answer: B Level: Easy LO: 6
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28. Salinas Corporation has a degree of operating leverage of 8. This means that a 1%
change in sales dollars at Salinas will generate an 8% change in:
A) variable expenses.
B) fixed expenses.
C) contribution margin.
D) net operating income.
Answer: D Level: Medium LO: 8
29. In calculating the break-even point for a multi-product company, which of the
following assumptions are commonly made?
I. Selling prices are constant.
II. Variable expenses are constant per unit.
III. The sales mix is constant.
A) I and II
B) I and III
C) II and III
D) I, II, and III
Answer: D Level: Easy LO: 9
30. The following information relates to the break-even point at Pezzo Corporation:
Sales dollars ...................... $120,000
Total fixed expenses ......... $30,000
If Pezzo wants to generate net operating income of $12,000, what will its sales dollars
have to be?
A) $132,000
B) $136,000
C) $168,000
D) $176,000
Answer: C Level: Hard LO: 1,3,5,6
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31. The following information relates to Snowbird Corporation:
Sales at the break-even point ......... $312,500
Total fixed expenses ...................... $250,000
Net operating income .................... $150,000
What is Snowbird's margin of safety?
A) $62,500
B) $187,500
C) $100,000
D) $212,500
Answer: B Level: Hard LO: 1,3,5,7
32. The “Dog Hut” hot dog stand expects the following operating results for next year:
Sales ............................................... $280,000
Net operating income .................... $21,000
Contribution margin ratio .............. 70%
What is Dog Hut's break-even point next year in sales dollars?
A) $120,000
B) $181,300
C) $196,000
D) $250,000
Answer: D Level: Hard LO: 1,3,5
33. The following information relates to Zinc Corporation for last year:
Sales ........................................................... $500,000
Net operating income ................................ $25,000
Degree of operating leverage .................... 5
Sales at Zinc are expected to be $600,000 next year. Assuming no change in cost
structure, this means that net operating income for next year should be:
A) $30,000
B) $45,000
C) $50,000
D) $125,000
Answer: C Level: Hard LO: 1,3,8
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34. The following information pertains to Nova Co.'s cost-volume-profit relationships:
Breakeven point in units sold ...................... 1,000
Variable expenses per unit .......................... $500
Total fixed expenses .................................... $150,000
How much will be contributed to net operating income by the 1,001st unit sold?
A) $650
B) $500
C) $150
D) $0
Answer: C Level: Medium LO: 1,5
35. Barnes Corporation expected to sell 150,000 games during the month of November.
The following budgeted data are based on that level of sales:
Revenue (150,000 games) ..................................... $2,400,000
Variable expenses .................................................. 1,425,000
Fixed manufacturing overhead expenses .............. 250,000
Fixed selling & administrative expenses ............... 500,000
Net operating income ............................................ 225,000
Barnes' actual sales during November were 180,000 games. What should the actual net
operating income during November have been?
A) $450,000
B) $270,000
C) $420,000
D) $510,000
Answer: C Level: Medium LO: 1 Source: CMA, adapted
36. Carver Company produces a product which sells for $40. Variable manufacturing
costs are $18 per unit. Fixed manufacturing costs are $5 per unit based on the current
level of activity, and fixed selling and administrative costs are $4 per unit. A selling
commission of 15% of the selling price is paid on each unit sold. The contribution
margin per unit is:
A) $7
B) $17
C) $22
D) $16
Answer: D Level: Easy LO: 1
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37. Tice Company is a medium-sized manufacturer of lamps. During the year a new line
called “Horolin” was made available to Tice's customers. The break-even point for
sales of Horolin is $200,000 with a contribution margin of 40%. Assuming that the
profit for the Horolin line during the year amounted to $100,000, total sales during the
year would have amounted to:
A) $300,000
B) $420,000
C) $450,000
D) $475,000
Answer: C Level: Hard LO: 3,5,6 Source: CPA, adapted
38. Black Company's sales are $600,000, its fixed expenses are $150,000, and its variable
expenses are 60% of sales. Based on this information, the margin of safety is:
A) $90,000
B) $190,000
C) $225,000
D) $240,000
Answer: C Level: Medium LO: 3,5,7
39. Variable expenses for Alpha Company are 40% of sales. What are sales at the breakeven
point, assuming that fixed expenses total $150,000 per year:
A) $250,000
B) $375,000
C) $600,000
D) $150,000
Answer: A Level: Easy LO: 3,5
40. Minist Company sells a single product at a selling price of $15.00 per unit. Last year,
the company's sales revenue was $225,000 and its net operating income was $18,000.
If fixed expenses totaled $72,000 for the year, the break-even point in unit sales was
A) 15,000
B) 9,900
C) 14,100
D) 12,000
Answer: D Level: Hard LO: 3,5
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41. Winger Corp. sells a product for $5 per unit. The fixed expenses are $210,000 and the
unit variable expenses are 60% of the selling price. What sales would be necessary in
order for Winger Corp. to realize a profit of 10% of sales?
A) $700,000
B) $525,000
C) $472,500
D) $420,000
Answer: A Level: Hard LO: 3,6 Source: CPA, adapted
42. Sales in East Company declined from $100,000 per year to $80,000 per year, while net
operating income declined by 300 percent. Given these data, the company must have
had an operating leverage of:
A) 15
B) 2.7
C) 30
D) 12
Answer: A Level: Hard LO: 3,8
43. Darth Company sells three products. Sales and contribution margin ratios for the three
products follow:
Product
X Y Z
Sales in dollars ............................... $20,000 $40,000 $100,000
contribution margin ratio ............... 45% 40% 15%
Given these data, the contribution margin ratio for the company as a whole would be:
A) 25%
B) 75%
C) 33.3%
D) it is impossible to determine from the given data
Answer: A Level: Medium LO: 3,9
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44. Sunnripe Company manufactures and sells two types of beach towels, standard and
deluxe. Sunnripe expects the following operating results next year for each type of
towel:
Standard Deluxe
Sales ............................................... $450,000 $50,000
Variable expenses (total) ............... $360,000 $20,000
Sunnripe expects to have a total of $57,600 in fixed expenses next year. What is
Sunnripe's break-even point next year in sales dollars?
A) $72,000
B) $144,000
C) $192,000
D) $240,000
Answer: D Level: Hard LO: 3,9
45. Cindy, Inc. sells a product for $10 per unit. The variable expenses are $6 per unit, and
the fixed expenses total $35,000 per period. By how much will net operating income
change if sales are expected to increase by $40,000?
A) $16,000 increase
B) $5,000 increase
C) $24,000 increase
D) $11,000 decrease
Answer: A Level: Medium LO: 3
46. Birney Company has prepared the following budget data:
Sales .............................................................. 150,000 units
Selling price .................................................. $25 per unit
Variable expenses ......................................... $15 per unit
Fixed manufacturing expenses ..................... $800,000
Fixed selling and admin. expenses ............... $700,000
An advertising agency claims that an aggressive advertising campaign would enable
the company to increase its unit sales by 20%. What is the maximum amount that the
company can pay for advertising and obtain a net operating income of $200,000?
A) $100,000
B) $200,000
C) $300,000
D) $550,000
Answer: A Level: Hard LO: 4,6 Source: CPA, adapted
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47. During last year, Thor Lab supplied hospitals with a comprehensive diagnostic kit for
$120. At a volume of 80,000 kits, Thor had fixed expenses of $1,000,000 and net
operating income of $200,000. Because of an adverse legal decision, Thor's liability
insurance expenses this year will be $1,200,000 more than they were last year.
Assuming that the volume and other costs are unchanged, what should be the sales
price this year if Thor is to make the same $200,000 net operating income?
A) $120
B) $135
C) $150
D) $240
Answer: B Level: Medium LO: 4,6 Source: CPA, adapted
48. How much will a company's net operating income change if it undertakes an
advertising campaign given the following data:
Cost of advertising campaign ...................................... $25,000
Variable expense as a percentage of sales ................... 42%
Increase in sales ........................................................... $60,000
A) $200 increase
B) $25,200 increase
C) $15,000 increase
D) $9,800 increase
Answer: D Level: Hard LO: 4
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49. Sun Company's tentative budget for next year is as follows:
Sales ........................................................... $600,000
Variable expenses ...................................... 360,000
Fixed expenses:
Manufacturing ........................................ 90,000
Selling and administrative ...................... 110,000
Net operating income ............................. $40,000
Mr. Johnston, the marketing manager, has proposed an aggressive advertising
campaign costing an additional $50,000 that he predicts will result in a 30% unit sales
increase. Assuming that Johnston's proposal is incorporated into the budget, what
should be the increase in the budgeted net operating income for next year?
A) $12,000
B) $22,000
C) $72,000
D) $130,000
Answer: B Level: Hard LO: 4 Source: CPA, adapted
50. Last year, variable expenses were 60% of total sales and fixed expenses were 10% of
total sales. If the company increases its selling prices by 10%, but if fixed expenses,
variable costs per unit, and unit sales remain unchanged, the effect of the increase in
selling price on the company's total contribution margin would be:
A) a decrease of 2%
B) an increase of 5%
C) an increase of 10%
D) an increase of 25%
Answer: D Level: Hard LO: 4 Source: CIMA, adapted
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51. Moruzzi Corporation is a single-product company that expects the following operating
results for next year:
Sales ........................................................... $320,000
Contribution margin per unit ..................... $0.20
Contribution margin ratio .......................... 25%
Degree of operating leverage .................... 8
How many units would Moruzzi have to sell next year to break-even?
A) 50,000
B) 200,000
C) 280,000
D) 350,000
Answer: D Level: Hard LO: 5
52. Mason Company's selling price was $20.00 per unit. Fixed expenses totaled $54,000,
variable expenses were $14.00 per unit, and the company reported a profit of $9,000
for the year. The break-even point for Mason Company is:
A) 10,500 units
B) 4,500 units
C) 8,500 units
D) 9,000 units
Answer: D Level: Medium LO: 5
53. Given the following data:
Selling price per unit ................................. $2.00
Variable production cost per unit .............. $0.30
Fixed production cost ................................ $3,000
Sales commission per unit ......................... $0.20
Fixed selling expenses ............................... $1,500
The break-even point in dollars is:
A) $6,000
B) $4,500
C) $2,647
D) $4,000
Answer: A Level: Easy LO: 5
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54. Hollis Company sells a single product for $20 per unit. The company's fixed expenses
total $240,000 per year, and variable expenses are $12 per unit of product. The
company's break-even point is:
A) $400,000
B) $600,000
C) 20,000 units
D) 12,000 units
Answer: B Level: Easy LO: 5
55. Darwin, Inc., sells a particular textbook for $20. Variable expenses are $14 per book.
At the current volume of 50,000 books sold per year the company is just breaking
even. Given these data, the annual fixed expenses associated with the textbook total:
A) $300,000
B) $1,000,000
C) $1,300,000
D) $700,000
Answer: A Level: Medium LO: 5
56. Singapore Candy Cane Company is a single product firm with the following cost
structure for next year:
Selling price per unit ................................. $1.20
Variable expenses per unit ........................ $0.72
Total fixed expenses for the year .............. $64,800
What is the company's break-even point next year in sales dollars?
A) $90,000
B) $108,000
C) $135,000
D) $162,000
Answer: D Level: Medium LO: 5
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57. Garcia Veterinary Clinic expects the following operating results next year:
Sales (total) .................................... $600,000
Variable expenses (total) ............... $120,000
Fixed expenses (total) .................... $300,000
What is Garcia's break-even point next year in sales dollars?
A) $240,000
B) $375,000
C) $400,000
D) $420,000
Answer: B Level: Medium LO: 5
58. Frank Company manufacturers a single product that has a selling price of $20.00 per
unit. Fixed expenses total $45,000 per year, and the company must sell 5,000 units to
break even. If the company has a target profit of $13,500, sales in units must be:
A) 6,000
B) 5,750
C) 6,500
D) 7,925
Answer: C Level: Hard LO: 6
59. Spencer Company expects to sell 60,000 units next year. Variable production costs are
$4 per unit, and variable selling costs are 10% of the selling price. Fixed expenses are
$115,000 per year, and the company has set a target profit of $50,000. Based on this
information, the unit selling price should be:
A) $7.00
B) $10.75
C) $7.50
D) $6.75
Answer: C Level: Hard LO: 6
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60. Company X sold 25,000 units of product last year. The contribution margin per unit
was $2, and fixed expenses totaled $40,000 for the year. This year fixed expenses are
expected to increase to $45,000, but the contribution margin per unit will remain
unchanged at $2. How many units must be sold this year to earn the same net
operating income as was earned last year:
A) 22,500
B) 27,500
C) 35,000
D) 2,500
Answer: B Level: Medium LO: 6
61. A product sells for $10 per unit and has variable expenses of $6 per unit. Fixed
expenses total $45,000 per month. How many units of the product must be sold each
month to yield a monthly profit of $15,000?
A) 6,000 units
B) 3,750 units
C) 15,000 units
D) 10,000 units
Answer: C Level: Easy LO: 6
62. The Breiden Company sells rodaks for $6.00 per unit. Fixed expenses total $37,500
per month and variable expenses are $2.00 per unit. How many rodaks must be sold
each month to realize a profit before income taxes of 15% of sales (to the nearest
whole unit):
A) 9,375 units
B) 11,029 units
C) 12,097 units
D) 9,740 units
Answer: C Level: Hard LO: 6 Source: CMA, adapted
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63. Chibu Corporation is a single product firm with the following cost formula for all of
its costs for next year:
Y = $225,000 + $30X
Chibu sells its product for $120 per unit. What would Chibu's total sales dollars have
to be next year in order to generate $270,000 of net operating income?
A) $618,750
B) $660,000
C) $1,080,000
D) $1,980,000
Answer: B Level: Hard LO: 6
64. Gamma Company has sales of $120,000, a contribution margin of $48,000, and a net
operating income of $12,000. The company's degree of operating leverage is:
A) 2.5
B) 4.0
C) 10.0
D) 4.8
Answer: B Level: Easy LO: 8
65. Alpha Company reported the following data for its most recent year: sales, $500,000;
variable expenses, $300,000; and fixed expenses, $150,000. The company's degree of
operating leverage is:
A) 10
B) 2
C) 4
D) 2.5
Answer: C Level: Medium LO: 8
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66. Mason Enterprises has prepared the following budget for the month of July:
Selling Variable Unit
price per unit cost per unit sales
Product A ............... $10.00 $4.00 15,000
Product B ............... $15.00 $8.00 20,000
Product C ............... $18.00 $9.00 5,000
Assuming that total fixed expenses will be $150,000 and the sales mix remains
constant, the break-even point would be closest to:
A) $276,008
B) $235,292
C) $294,545
D) $141,278
Answer: C Level: Hard LO: 9 Source: CMA, adapted
67. The unit contribution margins of Product X and Product Y are $10 and $9,
respectively. Total fixed expenses will be the same regardless of which product is
produced and sold. Which of the following statements will always be true:
A) Product X has a higher contribution margin ratio than Product Y.
B) if total sales are $300,000 no matter which product is sold, it is more profitable to
sell Product X than Product Y.
C) less units would be required to break even if only Product X is sold than if only
Product Y is sold.
D) responses A, B, and C are all correct.
Answer: C Level: Hard LO: 9
68. A company sells two products--J and K. The sales mix is expected to be $3.00 of sales
of Product K for every $1.00 of sales of Product J. Product J has a contribution margin
ratio of 40% whereas Product K has a contribution margin ratio of 50%. Annual fixed
expenses are expected to be $120,000. The overall break-even point for the company
in dollar sales is expected to be closest to:
A) $196,000
B) $200,000
C) $253,000
D) $255,000
Answer: C Level: Hard LO: 9 Source: CIMA, adapted
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Use the following to answer questions 69-71:
A cement manufacturer has supplied the following data:
Tons of cement produced and sold 220,000
Sales revenue $924,000
Variable manufacturing expense $297,000
Fixed manufacturing expense $280,000
Variable selling and administrative expense $165,000
Fixed selling and administrative expense $82,000
Net operating income $100,000
69. What is the company's unit contribution margin?
A) $4.20
B) $0.45
C) $1.90
D) $2.10
Answer: D Level: Easy LO: 1
70. The company's contribution margin ratio is closest to:
A) 40.0%
B) 50.0%
C) 60.0%
D) 10.7%
Answer: B Level: Easy LO: 3
71. If the company increases its unit sales volume by 5% without increasing its fixed
expenses, then total net operating income should be closest to:
A) $5,000
B) $123,100
C) $105,000
D) $102,500
Answer: B Level: Medium LO: 1
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Use the following to answer questions 72-74:
A tile manufacturer has supplied the following data:
Boxes of tiles produced and sold ............................. 580,000
Sales revenue ............................................................ $2,842,000
Variable manufacturing expense .............................. 1,653,000
Fixed manufacturing expense .................................. 784,000
Variable selling and administrative expense ............ 145,000
Fixed selling and administrative expense ................ 128,000
Net operating income ............................................... $132,000
72. What is the company's unit contribution margin?
A) $0.23
B) $4.90
C) $3.10
D) $1.80
Answer: D Level: Easy LO: 1
73. The company's contribution margin ratio is closest to:
A) 29.4%
B) 4.7%
C) 63.3%
D) 36.7%
Answer: D Level: Easy LO: 3
74. If the company increases its unit sales volume by 5% without increasing its fixed
expenses, then total net operating income should be closest to:
A) $6,600
B) $184,200
C) $134,422
D) $138,600
Answer: B Level: Medium LO: 1
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Use the following to answer questions 75-78:
Drake Company's income statement for the most recent year appears below:
Sales (26,000 units) ................................... $650,000
Less: Variable expenses ............................ 442,000
Contribution margin .................................. 208,000
Less: Fixed expenses ................................. 234,000
Net operating loss ...................................... $ (26,000)
75. The unit contribution margin is:
A) $17.00
B) $8.00
C) $1.00
D) $9.00
Answer: B Level: Easy LO: 1
76. The break-even point in sales dollars is:
A) $731,250
B) $676,000
C) $675,000
D) $720,000
Answer: A Level: Medium LO: 5
77. If the company desires a net operating income of $20,000, the number of units needed
to be sold is:
A) 28,500
B) 31,000
C) 31,750
D) 26,500
Answer: C Level: Medium LO: 6
78. The sales manager is convinced that a $60,000 expenditure on advertising will
increase unit sales by fifty percent without any other increase in fixed expenses. If the
sales manager is correct, the company's net operating income would increase by:
A) $44,000
B) $34,000
C) $30,000
D) $49,000
Answer: A Level: Medium LO: 4
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Use the following to answer questions 79-81:
Roberts Company bases its budget on the following data:
Sales .................................. 3,600 units
Selling price ...................... $50 per unit
Variable expense ............... $15 per unit
Fixed expenses .................. $40,530
79. If the company wants to increase its total contribution margin by 40%, it will need to
increase its sales by about:
A) $48,840
B) $72,000
C) $50,400
D) $34,188
Answer: B Level: Hard LO: 1
80. If the company wants its margin of safety to equal $40,000, it will need to sell about:
A) 1,158 units
B) 1,958 units
C) 2,300 units
D) 800 units
Answer: B Level: Hard LO: 7
81. If the company's fixed expenses decrease by 20%, the break-even point will change
from its previous level by about a:
A) 232 unit increase
B) 510 unit decrease
C) 232 unit decrease
D) 510 unit increase
Answer: C Level: Hard LO: 4,5
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Use the following to answer questions 82-83:
The following data were supplied by Reader Corporation:
Sales .................................. $600,000
Variable expenses .............. $420,000
Fixed expenses .................. $141,000
82. The contribution margin is:
A) $420,000
B) $54,000
C) $474,000
D) $180,000
Answer: D Level: Easy LO: 1
83. The break-even point in sales dollars is:
A) $470,000
B) $180,000
C) $420,000
D) $561,000
Answer: A Level: Easy LO: 5
Use the following to answer questions 84-86:
A manufacturer of premium wire strippers has supplied the following data:
Units produced and sold .................................................. 560,000
Sales revenue ................................................................... $4,704,000
Variable manufacturing expense ..................................... 2,436,000
Fixed manufacturing expense ......................................... 1,200,000
Variable selling and administrative expense ................... 616,000
Fixed selling and administrative expense ....................... 272,000
Net operating income ...................................................... $180,000
84. The company's margin of safety in units is closest to:
A) 384,762
B) 263,704
C) 61,017
D) 522,740
Answer: C Level: Medium LO: 7
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85. The company's unit contribution margin is closest to:
A) $2.95
B) $5.45
C) $7.30
D) $4.05
Answer: A Level: Easy LO: 1
86. The company's degree of operating leverage is closest to:
A) 9.18
B) 3.11
C) 2.07
D) 26.13
Answer: A Level: Medium LO: 8
Use the following to answer questions 87-89:
A company that makes organic fertilizer has supplied the following data:
Bags produced and sold .............................................. 240,000
Sales revenue ............................................................... $1,896,000
Variable manufacturing expense ................................. $804,000
Fixed manufacturing expense ..................................... $520,000
Variable selling and administrative expense ............... $180,000
Fixed selling and administrative expense ................... $270,000
Net operating income .................................................. $122,000
87. The company's margin of safety in units is closest to:
A) 140,000
B) 202,238
C) 125,714
D) 32,105
Answer: D Level: Medium LO: 7
88. The company's unit contribution margin is closest to:
A) $4.10
B) $3.80
C) $4.55
D) $7.15
Answer: B Level: Easy LO: 1
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89. The company's degree of operating leverage is closest to:
A) 1.97
B) 15.54
C) 1.25
D) 7.48
Answer: D Level: Medium LO: 8
Use the following to answer questions 90-92:
The following data was provided by Truxton Corporation:
Sales .......................................................... 10,000 units
Selling price .............................................. $30 per unit
Contribution margin ratio .......................... 30%
Margin of safety percentage ...................... 40%
90. The variable expense per unit is:
A) $21
B) $9
C) $12
D) $18
Answer: A Level: Hard LO: 3
91. The break-even level in sales dollars is:
A) $180,000
B) $90,000
C) $210,000
D) $54,000
Answer: A Level: Hard LO: 5
92. Net operating income at sales of 10,000 units is:
A) $0
B) $36,000
C) $90,000
D) $300,000
Answer: B Level: Hard LO: 4
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Use the following to answer questions 93-95:
A manufacturer of cedar shingles has supplied the following data:
Bundles of cedar shakes produced and sold .................... 280,000
Sales revenue ................................................................... $2,072,000
Variable manufacturing expense ..................................... $1,134,000
Fixed manufacturing expense ......................................... $436,000
Variable selling and administrative expense ................... $238,000
Fixed selling and administrative expense ....................... $164,000
Net operating income ...................................................... $100,000
93. The company's break-even in unit sales is closest to:
A) 130,149
B) 81,081
C) 25,038
D) 240,000
Answer: D Level: Medium LO: 5
94. The company's contribution margin ratio is closest to:
A) 66.2%
B) 73.0%
C) 27.0%
D) 33.8%
Answer: D Level: Easy LO: 3
95. The company's degree of operating leverage is closest to:
A) 2.80
B) 7.00
C) 2.29
D) 20.72
Answer: B Level: Medium LO: 8
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Use the following to answer questions 96-98:
A manufacturer of tiling grout has supplied the following data:
Kilograms produced and sold .......................................... 300,000
Sales revenue ................................................................... $1,950,000
Variable manufacturing expense ..................................... $960,000
Fixed manufacturing expense ......................................... $266,000
Variable selling and administrative expense ................... $360,000
Fixed selling and administrative expense ....................... $232,000
Net operating income ...................................................... $132,000
96. The company's break-even in unit sales is closest to:
A) 43,774
B) 237,143
C) 76,615
D) 80,606
Answer: B Level: Medium LO: 5
97. The company's contribution margin ratio is closest to:
A) 67.7%
B) 74.2%
C) 32.3%
D) 25.8%
Answer: C Level: Easy LO: 3
98. The company's degree of operating leverage is closest to:
A) 14.77
B) 2.65
C) 4.77
D) 2.27
Answer: C Level: Medium LO: 8
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Use the following to answer questions 99-100:
Clarkson Industries produces an electronic calculator that sells for $75 per unit. Variable
expenses are $45 per unit and fixed expenses are $150,000.
99. The break-even point for Clarkson Industries is:
A) 2,000 units
B) 3,333 units
C) 10,000 units
D) 5,000 units
Answer: D Level: Easy LO: 5
100. The contribution margin ratio is:
A) 20%
B) 66.6%
C) 60%
D) 40%
Answer: D Level: Easy LO: 3
Use the following to answer questions 101-103:
Kerensky Corporation, a wholesale company, has provided the following data:
Sales per period ......................................... 1,000 units
Selling price .............................................. $35 per unit
Variable production cost ........................... $15 per unit
Selling expenses ........................................ $5,000 plus 5% of selling price
Administrative expenses ........................... $3,000 plus 10% of selling price
101. The contribution margin ratio is closest to:
A) 57%
B) 58%
C) 42%
D) 62%
Answer: C Level: Medium LO: 3
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102. The margin of safety percentage is closest to:
A) 46%
B) 60%
C) 42%
D) 62%
Answer: A Level: Medium LO: 7
103. The number of units needed to achieve a target net operating income of $20,000 is
closest to:
A) 1,404 units
B) 542 units
C) 1,898 units
D) 1,361 units
Answer: C Level: Medium LO: 4
Use the following to answer questions 104-105:
Mark Corporation produces two models of calculators. The Business model sells for $60, and
the Math model sells for $40. The variable expenses are given below:
Business Math
Model Model
Variable production costs per unit .................................. $15 $16
Variable selling and administrative expenses per unit .... $9 $6
The fixed expenses are $75,000 per month. The expected monthly sales of each model are:
Business, 1,000 units; Math, 500 units.
104. The contribution margin ratio for the Business model is:
A) 40 percent
B) 75 percent
C) 85 percent
D) 60 percent
Answer: D Level: Medium LO: 3
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105. The break-even point for the expected sales mix is (round to nearest whole unit):
A) 833 of each
B) 1,667 Business and 833 Math
C) 1,667 of each
D) 833 Business and 1,667 Math
Answer: B Level: Hard LO: 5
Use the following to answer questions 106-108:
Next year, Coma Paint Company expects to sell 18,000 gallons of paint. Coma is budgeting
the following operating results for next year:
Sales .............................................. $270,000
Variable expenses .......................... 108,000
Contribution margin ...................... 162,000
Fixed expenses .............................. 90,000
Net operating income .................... $ 72,000
106. What is Coma's break-even point next year in sales dollars?
A) $49,500
B) $90,000
C) $108,000
D) $150,000
Answer: D Level: Medium LO: 5
107. How many gallons of paint would Coma have to sell next year in order to double its
projected net operating income of $72,000?
A) 22,800 gallons
B) 25,200 gallons
C) 26,000 gallons
D) 36,000 gallons
Answer: C Level: Medium LO: 6
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108. Assume that Coma wants to sell 20,000 gallons next year. What minimum selling
price would Coma have to charge for each gallon in order to still obtain its projected
net operating income of $72,000?
A) $11.00
B) $13.50
C) $14.00
D) $14.10
Answer: D Level: Hard LO: 5,6
Use the following to answer questions 109-111:
The following budgeted income statement was prepared by Fullton Corporation:
Sales (100 units at $100 a unit) ....................... $10,000
Cost of goods sold:
Direct labor (variable) .................................. $1,500
Direct materials ............................................ 1,400
Variable factory overhead ............................ 1,000
Fixed factory overhead ................................. 500 4,400
Gross margin ................................................... 5,600
Selling expenses:
Variable ........................................................ 600
Fixed ............................................................. 1,000
Administrative expenses:
Variable ........................................................ 500
Fixed ............................................................. 1,000 3,100
Net operating income ...................................... $ 2,500
109. How many units would have to be sold to break even?
A) 50
B) 58
C) 68
D) 75
Answer: A Level: Medium LO: 5 Source: CPA, adapted
110. What would the net operating income be if sales increase by 25%?
A) $3,125
B) $3,750
C) $4,000
D) $5,000
Answer: B Level: Medium Source: CPA, adapted
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111. What would be the sales at the break-even point if fixed factory overhead increases by
$1,700?
A) $6,700
B) $8,400
C) $8,666
D) $9,200
Answer: B Level: Medium LO: 4,5 Source: CPA, adapted
Use the following to answer questions 112-113:
Barnes Corporation's income statement for last year appears below:
Sales ...................................................... $1,500,000
Cost of sales:
Direct materials .................................. $250,000
Direct labor (variable) ........................ 150,000
Variable overhead .............................. 75,000
Fixed overhead ................................... 100,000 575,000
Gross margin ......................................... 925,000
Selling, general, and administrative:
Variable .............................................. 200,000
Fixed ................................................... 250,000 450,000
Net operating income ............................ $ 475,000
112. The break-even point last year was:
A) $146,341
B) $636,364
C) $729,730
D) $181,818
Answer: B Level: Medium LO: 5 Source: CMA, adapted
113. The management of Barnes Corporation anticipates a 10 percent increase in total sales,
a 12 percent increase in total variable expenses, and a $45,000 increase in total fixed
expenses next year. The break-even point for next year is:
A) $729,027
B) $862,103
C) $214,018
D) $474,000
Answer: A Level: Medium LO: 4,5 Source: CMA, adapted
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Use the following to answer questions 114-117:
Holger Incorporated, which produces and sells a single product, has provided the following
data:
Sales .................................. 2,000 units
Selling price ...................... $60 per unit
Variable expense ............... $40 per unit
Fixed expense .................... $20,000
Consider each of the following questions independently.
114. If the dollar contribution margin per unit is increased by 10% and if total fixed
expense is decreased by 20%, net operating income is expected to:
A) increase by $2,000
B) increase by $12,000
C) increase by $8,000
D) increase by $16,000
Answer: C Level: Hard LO: 4
115. If the sales volume decreases by 25% and the variable expense per unit increases by
15%, net operating income is expected to:
A) decrease by $19,000
B) decrease by $1,000
C) increase by $1,750
D) decrease by $15,000
Answer: A Level: Hard LO: 4
116. If the company's fixed expenses increased by $8,000, how many units must be sold to
reach a target net operating income of $36,000:
A) 1,400 units
B) 2,200 units
C) 2,400 units
D) 3,200 units
Answer: D Level: Hard LO: 6
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117. If the company's sales volume in units decreases by 30%, and if it desires a targeted
net operating income of $29,000, then the selling price should be:
A) $58.85
B) $60.75
C) $64.50
D) $75.00
Answer: D Level: Hard LO: 4,6
Use the following to answer questions 118-119:
Given the following data:
Total Per Unit
Sales ................................................ $30,000 $10
Less variable expenses .................... 18,000 6
Contribution margin ........................ 12,000 $ 4
Less fixed expenses ......................... 9,000
Net operating income ...................... $ 3,000
118. If sales decrease by 500 units, by how much would fixed expenses have to be reduced
to maintain current net operating income?
A) $5,000
B) $3,000
C) $1,500
D) $2,000
Answer: D Level: Easy LO: 4
119. The company has an opportunity to secure a special order of 800 units if it is willing to
drop the selling price on these units to $9. In addition to the usual variable expenses,
the costs of securing the special order would be $1,000. The company's regular sales
would not be affected by the special order. If the special order is accepted, the
company's overall net operating income will:
A) increase $2,400
B) increase $1,400
C) increase $2,200
D) decrease $2,200
Answer: B Level: Easy LO: 4
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Use the following to answer questions 120-122:
Junior Bodway, Inc., has provided the following budgeted data:
Sales .................................. 10,000 units
Selling price ...................... $50 per unit
Variable expense ............... $30 per unit
Fixed expense .................... $180,000
120. What is the company's break-even point in sales dollars?
A) $450,000
B) $180,000
C) $300,000
D) $500,000
Answer: A Level: Easy LO: 5
121. How many units would the company have to sell in order to have a net operating
income of $40,000?
A) 20,000 units
B) 9,000 units
C) 11,000 units
D) 7,333 units
Answer: C Level: Easy LO: 6
122. At the budgeted sales level of 10,000 units, what is the company's degree of operating
leverage?
A) 10.0
B) 6.0
C) 22.5
D) 5.0
Answer: A Level: Easy LO: 8
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Use the following to answer questions 123-125:
Pricher Corporation's income statement for last year appears below:
Sales .......................................................... $2,000,000
Cost of goods sold:
Direct materials ...................................... $500,000
Direct labor (variable) ............................ 150,000
Variable manufacturing overhead .......... 50,000
Fixed manufacturing overhead ............... 600,000 1,300,000
Gross margin ............................................. 700,000
Selling and administrative expenses:
Variable .................................................. 100,000
Fixed ....................................................... 300,000 400,000
Net operating income ................................ $ 300,000
123. The break-even point last year was:
A) $1,500,000
B) $2,571,429
C) $1,250,000
D) $900,000
Answer: A Level: Medium LO: 5
124. The degree of operating leverage last year was:
A) 0.33
B) 2.33
C) 4.00
D) 3.33
Answer: C Level: Easy LO: 8
125. If fixed selling and administrative expenses increase by $60,000 and sales remain at
the $2,000,000 level, what is the margin of safety in sales dollars:
A) $300,000
B) $200,000
C) $500,000
D) $400,000
Answer: D Level: Medium LO: 7
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Use the following to answer questions 126-127:
Highjinks Inc. has provided the following budgeted data:
Sales .................................. 20,000 units
Selling price ...................... $100 per unit
Variable expense ............... $70 per unit
Fixed expense .................... $450,000
126. What is the company's margin of safety as a percentage of sales?
A) 50%
B) 25%
C) 75%
D) 100%
Answer: B Level: Medium LO: 7
127. How many units would the company have to sell in order to have a net operating
income equal to 5% of total sales dollars?
A) 18,000 units
B) 20,000 units
C) 15,333 units
D) 14,286 units
Answer: A Level: Hard LO: 7
Use the following to answer questions 128-129:
Douglas Corporation produces and sells two models of vacuum cleaners, Standard and
Deluxe. Company records show the following data relating to these two products:
Standard Deluxe
Selling price per unit ....................................................... $140 $155
Variable production costs per unit .................................. $110 $116
Variable selling and admin. expense per unit ................. $15 $12
Expected monthly sales in units ...................................... 600 1,200
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The company's total monthly fixed expense is $15,000.
128. The break-even in sales dollars for the expected sales mix is closest to:
A) $140,000
B) $85,000
C) $107,000
D) $98,000
Answer: D Level: Medium LO: 9
129. If the expected monthly sales in units were divided equally between the two models
(900 Standard and 900 Deluxe), the break-even level of sales would be:
A) the same as with the expected sales mix.
B) higher than with the expected sales mix.
C) lower than with the expected sales mix.
D) cannot be determined with the available data.
Answer: B Level: Medium LO: 9
Essay Questions
130. Baker Company has a product that sells for $20 per unit. The variable expenses are
$12 per unit, and fixed expenses total $30,000 per year.
Required:
a. What is the total contribution margin at the break-even point?
b. What is the contribution margin ratio for the product?
c. If total sales increase by $20,000 and fixed expenses remain unchanged, by how
much would net operating income be expected to increase?
d. The marketing manager wants to increase advertising by $6,000 per year. How
many additional units would have to be sold to increase overall net operating
income by $2,000?
Level: Medium LO: 1,3,4
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Answer:
a. At the break-even, the total contribution margin equals total fixed expenses.
Therefore, the total contribution margin would be $30,000.
b. Contribution margin ratio =Unit contribution margin ÷ Selling price
= ($20 - $12) ÷ $20 = 40%
c. Increase in sales ....................................... $20,000
CM ratio .................................................. 40%
Increase in net operating income ............. $8,000
d. Increase in advertising expenses ................... $6,000
Desired increase in net operating income ..... 2,000
Total required contribution margin ............... $8,000
÷ Contribution margin per unit ...................... $8
Required unit sales ........................................ 1,000
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131. Candice Corporation has decided to introduce a new product. The product can be
manufactured using either a capital-intensive or labor-intensive method. The
manufacturing method will not affect the quality or sales of the product. The estimated
manufacturing costs of the two methods are as follows:
Capital Labor
-intensive -intensive
Variable manufacturing cost per unit ..................... $14.00 $17.60
Fixed manufacturing cost per year ......................... $2,440,000 $1,320,000
The company's market research department has recommended an introductory selling
price of $30 per unit for the new product. The annual fixed selling and administrative
expenses of the new product are $500,000. The variable selling and administrative
expenses are $2 per unit regardless of how the new product is manufactured.
Required:
a. Calculate the break-even point in units if Candice Corporation uses the:
1. capital-intensive manufacturing method.
2. labor-intensive manufacturing method.
b. Determine the unit sales volume at which the net operating income is the same for
the two manufacturing methods.
c. Assuming sales of 250,000 units, what is the degree of operating leverage if the
company uses the:
1. capital-intensive manufacturing method.
2. labor-intensive manufacturing method.
d. What is your recommendation to management concerning which manufacturing
method should be used?
Level: Hard LO: 1,4,5,8
Answer:
a.
1. Capital-intensive:
Break-even in units = Fixed expenses ÷ Unit contribution margin
= ($2,440,000 + $500,000) ÷ ($30 - $14 – $2)
= $2,940,000 ÷ $14 per unit
= 210,000 units
2. Labor-intensive:
Break-even in units = Fixed expenses ÷ Unit contribution margin
= ($1,320,000 + $500,000) ÷ ($30 – $17.60 – $2)
= $1,820,000 ÷ $10.40 per unit
= 175,000 units
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b. Profit = Sales - Variable expenses - Fixed expenses
Capital-intensive:
Profit = $30Q – $16Q – $2,940,000
= $14Q – $2,940,000
Labor-intensive:
Profit = $30Q – $19.60Q – $1,820,000
= $10.40Q – $1,820,000
The profits are equal when:
$14Q – $2,940,000 = $10.40Q – $1,820,000
$3.60Q = $1,120,000
Q = $1,120,000 ÷ $3.60
Q = 311,111
c.
1. Capital-intensive:
Sales (250,000 × $30) ................................ $7,500,000
Variable expenses (250,000 × $16) ........... 4,000,000
Contribution margin ................................... 3,500,000
Fixed expenses ........................................... 2,940,000
Net operating income ................................. $ 560,000
Degree of operating leverage = Contribution margin ÷ Net operating income
= $3,500,000 ÷ $560,000 = 6.25
2. Labor-intensive:
Sales (250,000 × $30) ................................ $7,500,000
Variable expenses (250,000 × $19.60) ...... 4,900,000
Contribution margin ................................... 2,600,000
Fixed expenses ........................................... 1,820,000
Net operating income ................................. $ 780,000
Degree of operating leverage = Contribution margin ÷ Net operating income
= $2,600,000 ÷ $780,000 = 3.33
d. The decision hinges upon the expected sales of the new product. If management is
confident that sales will be in excess of 311,111 units, then the capital-intensive
method should be used. If sales are likely to fall below this number, then the laborintensive
method should be used. Management should also be aware that net
operating income will be more volatile with the capital-intensive method since it
has higher operating leverage.
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132. Delphi Company has developed a new product that will be marketed for the first time
during the next fiscal year. Although the Marketing Department estimates that 35,000
units could be sold at $36 per unit, Delphi's management has allocated only enough
manufacturing capacity to produce a maximum of 25,000 units of the new product
annually. The fixed expenses associated with the new product are budgeted at
$450,000 for the year. The variable expenses of the new product are $16 per unit.
Required:
a. How many units of the new product must Delphi sell during the next fiscal year in
order to break even on the product?
b. What is the profit Delphi would earn on the new product if all of the
manufacturing capacity allocated by management is used and the product is sold
for $36 per unit?
c. What is the degree of operating leverage for the new product if 25,000 units are
sold for $36 per unit?
d. The Marketing Department would like more manufacturing capacity to be devoted
to the new product. What would be the percentage increase in net operating
income for the new product if its unit sales could be expanded by 10% without any
increase in fixed expenses and without any change in the unit selling price and unit
variable expense?
e. Delphi's management has stipulated that the new product must earn a profit of at
least $125,000 in the next fiscal year. What unit selling price would achieve this
target profit if all of the manufacturing capacity allocated by management is used
and all of the output can be sold at that selling price?
Level: Hard LO: 4,5,6,8 Source: CMA, adapted
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Answer:
a. Break-even in units = Fixed expenses ÷ Unit contribution margin
= $450,000 ÷ $20 = 22,500
b.
Sales (25,000 × $36) .................................. $900,000
Variable expenses (25,000 × $16) ............. 400,000
Contribution margin ................................... 500,000
Fixed expenses ........................................... 450,000
Net operating income ................................. $ 50,000
c. Degree of operating leverage = Contribution margin ÷ Net operating income
= $500,000 ÷ $50,000 = 10
d. Percentage increase in net operating income
= Degree of operating leverage × Percentage change in sales
= 10 × 10% =100%
Or,
Sales (25,000 × 1.1 × $36) ......................... $990,000
Variable expenses (25,000 × 1.1 × $16) .... 440,000
Contribution margin ................................... 550,000
Fixed expenses ........................................... 450,000
Net operating income ................................. $100,000
Percentage increase in net operating income
= ($100,000 – $50,000) ÷ $50,000= 100%
e. Sales = Variable expenses + Fixed expenses + Target profit
25,000P = ($16 × 25,000) + $450,0000 + $125,000
where P is the selling price
25,000P = $400,000 + $450,000 + $125,000
P = $975,000 ÷ 25,000 = $39
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302 Garrison, Managerial Accounting, 12th Edition
133. Parkins Company produces and sells a single product. The company's income
statement for the most recent month is given below:
Sales (6,000 units at $40 per unit) ............. $240,000
Less manufacturing costs:
Direct materials ...................................... $48,000
Direct labor (variable) ............................ 60,000
Variable factory overhead ...................... 12,000
Fixed factory overhead ........................... 30,000 150,000
Gross margin ............................................. 90,000
Less selling and other expenses:
Variable selling and other expenses ....... 24,000
Fixed selling and other expenses ............ 42,000 66,000
Net operating income ................................ $ 24,000
There are no beginning or ending inventories.
Required:
a. Compute the company's monthly break-even point in units of product.
b. What would the company's monthly net operating income be if sales increased by
25% and there is no change in total fixed expenses?
c. What dollar sales must the company achieve in order to earn a net operating
income of $50,000 per month?
d. The company has decided to automate a portion of its operations. The change will
reduce direct labor costs per unit by 40 percent, but it will double the costs for
fixed factory overhead. Compute the new break-even point in units.
Level: Medium LO: 4,5,6
Chapter 6 Cost-Volume-Profit Relationships
Garrison, Managerial Accounting, 12th Edition 303
Answer:
a. The company's income statement in contribution format would be:
Sales ........................................................... $240,000 $40 100%
Less variable expenses:
Direct materials ...................................... $48,000
Direct labor ............................................. 60,000
Variable factory overhead ...................... 12,000
Variable selling and other expenses ....... 24,000 144,000 24 60%
Contribution margin .................................. 96,000 $16 40%
Less fixed expenses:
Fixed factory overhead ........................... 30,000
Fixed selling and other expense ............. 42,000 72,000
Net operating income ................................ $ 24,000
The break-even point in units would be:
$72,000 ÷ $16 = 4,500 units.
b. 6,000 × 125% = 7,500 units
Sales (7,500 units at $40) ................................................ $300,000
Less variable expenses (7,500 units at $24) .................... 180,000
Contribution margin ........................................................ 120,000
Less fixed expenses ......................................................... 72,000
Net operating income ...................................................... $ 48,000
c. ($72,000 + $50,000) ÷ 0.40 = $305,000
d. Direct labor costs are presently $10 per unit ($60,000 ÷ 6,000 units) and will
decrease by $4 per unit ($10 × 40%). Therefore, the company’s new cost structure
will be:
Selling price ..................................................... $40 100%
Less variable expenses ($24 – $4) ................... 20 50%
Contribution margin ........................................ $20 50%
(2 × $30,000 + $42,000) ÷ $20 per unit = 5,100 units
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304 Garrison, Managerial Accounting, 12th Edition
134. Zoran Corporation manufactures and sells a single product; cordless telephones. Zoran
is considering upgrading its current manufacturing facilities with more modern
equipment. Relevant cost data under the current facility and the upgraded facility is
provided below:
Current Upgraded
Manufacturing costs:
Direct materials cost per unit ................. $20.00 $20.00
Direct labor cost per unit ........................ $18.00 $10.00
Variable overhead cost per unit .............. $34.00 $24.00
Fixed overhead cost in total ................... $43,000 $160,000
Selling and administrative expenses:
Variable expense per unit ....................... $5.00 $5.00
Fixed expense in total ............................. $12,000 $12,000
Under either system, Zoran will sell the cordless phones for $125 per phone.
Required:
a. What is the break-even point (in number of phones) of each option?
b. At what level of sales (in number of phones) will it start being more profitable for
Zoran to have the upgraded facilities?
Level: Hard LO: 4,5
Answer:
a.
Current:
($43,000 + $12,000) ÷ ($125 – $20 – $18 – $34 – $5) = 1,146 phones (rounded)
Upgraded:
($160,000 + $12,000) ÷ ($125 – $20 – $10 – $24 – $5) = 2,606 phones (rounded)
b. CM per phone on current system: $125 – $20 – $18 – $34 – $5 = $48
CM per phone on upgraded system: $125 – $20 – $10 – $24 – $5 = $66
$48Q – $55,000 = $66Q – $172,000
$117,000 = $18Q
Q = 6,500 phones
Chapter 6 Cost-Volume-Profit Relationships
Garrison, Managerial Accounting, 12th Edition 305
135. Penury Company offers two products. At present, the following represents the usual
results of a month's operations:
Product K Product L
Per Per Combined
Amount Unit Amount Unit Amount
Sales revenue ..................... $120,000 $1.20 $80,000 $0.80 $200,000
Variable expenses .............. 60,000 0.60 60,000 0.60 120,000
Contribution margin .......... $ 60,000 $0.60 $20,000 $0.20 80,000
Fixed expenses .................. 50,000
Net operating income ........ $ 30,000
Required:
a. Find the break-even point in terms of dollars.
b. Find the margin of safety in terms of dollars.
c. The company is considering decreasing product K's unit sales to 80,000 and
increasing product L's unit sales to 180,000, leaving unchanged the selling price
per unit, variable expense per unit, and total fixed expenses. Would you advise
adopting this plan?
d. Refer to (c) above. Under the new plan, find the break-even point in terms of
dollars.
e. Under the new plan in (c) above, find the margin of safety in terms of dollars.
Level: Medium LO: 5,7,9
Chapter 6 Cost-Volume-Profit Relationships
306 Garrison, Managerial Accounting, 12th Edition
Answer:
a. CM ratio = Contribution margin ÷ Sales revenue
= $80,000 ÷ $200,000 = 40%
Break-even in dollars = Fixed expenses ÷ CM ratio
= $50,000 ÷ 0.40 = $125,000
b. Margin of safety = Sales revenue - Sales at break-even
= $200,000 – $125,000 = $75,000
c. Product K Product L
Units ................................ 80,000 180,000
Amount
Per
Unit Amount
Per
Unit
Combined
Amount
Sales revenue ................... $96,000 $1.20 $144,000 $0.80 $240,000
Variable expense ............. 48,000 0.60 108,000 0.60 156,000
Contribution margin ........ $48,000 $0.60 $ 36,000 $0.20 84,000
Fixed expense .................. 50,000
Net operating income ...... $ 38,000
Yes, the new arrangement is more profitable.
d. CM ratio = Contribution margin ales revenue
= $84,000 ÷ $240,000 = 35%
Break-even point dollars = Fixed expense ÷ CM ratio
= $50,000 ÷ 0.35 = $142,857
e. Margin of safety = Sales revenue – Sales at break-even
= $240,000 – $142,857 = $97,143
Chapter 6 Cost-Volume-Profit Relationships
Garrison, Managerial Accounting, 12th Edition 307
136. Lobo, International has two divisions, Manufacturing and Retail which had the
following operating results over the last two years:
Manufacturing Division Retail Division
Year 1 Year 2 Year 1 Year 2
Sales (in units) ......................... 5,000 6,500 2,000 2,400
Sales (in dollars) ...................... $400,000 $520,000 $250,000 $300,000
Less cost of goods sold ............ 290,000 353,000 160,000 192,000
Gross margin ............................ 110,000 167,000 90,000 108,000
Less selling and administrative
expenses ............................... 50,000 59,000 52,000 56,000
Net operating income ............... $ 60,000 $108,000 $ 38,000 $ 52,000
Assume that the cost structure in each division above did not change over the two
years. Use the high-low method as needed to estimate variable and fixed expenses.
Required:
a. Calculate the break-even point in sales dollars for each division.
b. Calculate the degree of operating leverage for the Manufacturing Division for each
year.
Level: Hard LO: 5,8
Answer:
a. Total expenses, Year 1, Manuf. = $290,000 + $50,000 = $340,000
Total expenses, Year 2, Manuf. = $353,000 + $59,000 = $412,000
Total expenses, Year 1, Retail = $160,000 + $52,000 = $212,000
Total expenses, Year 2, Retail = $192,000 + $56,000 = $248,000
Manufacturing:
Variable expenses per unit using the high-low method:
($412,000 – $340,000) ÷ (6,500 – 5,000) = $48 per unit
Variable expenses = $48 × 5,000 = $240,000
Fixed expenses = $340,000 – $240,000 = $100,000
CM ratio = ($400,000 – $240,000) ÷ $400,000 = 40%
Break-even sales = $100,000 ÷ 0.40 = $250,000
Chapter 6 Cost-Volume-Profit Relationships
308 Garrison, Managerial Accounting, 12th Edition
Retail:
Variable expenses per unit using the high-low method:
($248,000 – $212,000) ÷ (2,400 – 2,000) = $90 per unit;
Variable expenses = $90 × 2,000 = $180,000
Fixed expenses = $212,000 – $180,000 = $32,000
CM ratio = ($250,000 – $180,000) ÷ $250,000 = 28%
Break-even sales = $32,000 ÷ 0.28 = $114,286
b. Year 1: ($400,000 – ($48 × 5,000)) ÷ $60,000 = 2.67 (rounded)
Year 2: ($520,000 – ($48 × 6,500)) ÷ $108,000 = 1.93 (rounded)
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