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COST- VOLUME- PROFIT ANALYSIS- THEORIES 1. How may the following be used in calculating the break-even points in unit? FIXED COSTS C.M. PER UNIT FIXED COSTS C.M. PER UNIT a. Denominator Numerator c. Numerator Not used b. Denominator Not used d. Numerator Denominator  D 2. The contribution margin increases when sales volume remains the same and a. Variable cost per unit decreases c. Fixed cost decreases b. Variable cost per unit increases d. Fixed cost increases  A 3. The peso amount of sales needed to attain profit is calculated by dividing the contribution margin ratio into a. Fixed cost c. Desired profit plus fixed cost b. Desired profit d. Desired profit less fixed cost  C 4. At break-even point, fixed cost is always a. Less than the contribution margin c. More than the contribution margin b. Equal to the contribution margin d. More than the variable costs  B 5. The contribution margin ratio always increases when the a. Break-even point increases b. Break- even point decreases c. Variable costs as a percentage of net sales decrease d. Variable costs as a percentage of net sales increase  C 6. If the costs attendant to a product increases while variable costs and sales price remains constant, what will happen to (1) contribution margin and (2) break-even point CONT. MARGIN BREAK-EVEN POINT CONT.MARGIN BREAK-EVEN POINT a. Increase Decrease c. Unchanged Increase b. Decrease Increase d. Unchanged Unchanged  C 7. If the fixed costs for a product decrease and the variable costs (as a percentage of sales pesos) decrease, what will be the effect on the contribution margin ratio and the break-even point, respectively? C.M. RATIO BREAK-EVEN POINT C.M. RATIO BREAK-EVEN POINT a. Increased Decreased c. Decreased Decreased b. Decreased Increased d. Increased Increased  A

8. Which of the following would case the break-even point to change? a. Sales increased b. Total production decreased c. Total variable costs increase as a function of higher production d. Fixed costs increased  D 9. The method of cost accounting that lends itself to break-even analysis is a. Variable c. Absolute b. Standard d. Absorption  A 10. Each of the following would affect the break-even point except a change in the a. Number of units sold c. Total fixed cost b. Variable cost per unit d. Sales price per unit  A 11. In setting earnings objectives, management must consider all of these items except a. Sales volume attainable in the present plant b. The break-even point c. Indices in industrial production d. Earnings or losses for a given sales volume level.  C 12. To obtain the break-even point stated in terms of pesos of sales, total fixed costs are divided by which of the following? a. Variable cost per unit b. (sales price per unit –variable cost per unit)/ sales price per unit c. Fixed cost per unit d. Variable cost per unit/ sales price per unit  B 13. Cost-volume-earnings analysis allow management to determine relative profitability of a product by a. Highlighting potential bottlenecks in the production process b. Keeping fixed costs to an absolute minimum c. Determining the contribution margin per unit and projected profits at various level of production d. Assigning costs to a product in a manner that maximizes the contribution margin  C 14. Cost-volume-earnings analysis includes some inherent, simplifying assumptions. Which of the following is not one of these assumptions? a. Costs and revenues are predictable and are linear over the relevant range b. Variable costs fluctuate proportionately with volume c. Changes in beginning and ending inventory levels are insignificant in amount d. Sales mix will change as fixed costs increase beyond the relevant range  D

15. If the company’s variable costs are 70% of sales, which formula represent the computation of peso sales that will yield a profit equal to 10% of the contribution margin where S equals sales in pesos for the period and FC equals total fixed cost for the period? a. .2/FC b. FC/ .2 c. .27/ FC d. FC / .27  D 16. A company increased the selling price for its product from P1.00 to P1.10 a unit when total fixed costs increased from P400,000 to P480,000 and variable cost per unit remain unchanged. How would these changes affect the break-even point? a. The break-even point in units would be increased. b. The break-even point in units would be decreased. c. The break-even point in units would remain unchanged. d. The effect cannot be determined.  D 17. Margin of safety reveals the amount by which sales could decrease before losses occur is computed by a. Subtracting variable costs from sales. b. Adding variable costs and fixed costs. c. Subtracting break-even sales from actual sales. d. Adding contribution margin and fixed costs.  C 18. In a sales mix break-even problem, total fixed costs divided by the package contribution margin is to arrive at the a. Total units to break-even. b. Units to break-even for a particular product in the mix. c. Total break-even sales pesos. d. Composite break-even point in units.  D 19. Margin of safety ratio is computed by dividing excess of actual or budgeted sales from breakeven sales or it can be determined by a. Dividing contribution margin ratio by variable cost ratio. b. Dividing profit ratio by contribution margin ratio. c. Dividing contribution margin ratio by profit ratio. d. Dividing variable cost ratio by contribution margin ratio.  B 20. In a break-even chart, when the costs and profit line intersects with the sales line, it reveals the a. Break-even point c. Point of desired sales b. Point of profit d. Point of total costs  C

21. Break-even analysis assumes linearity over the relevant range with respect to Total Costs Total Revenues Total Costs Total Revenues a. Yes no c. no yes b. Yes yes d. no no  B 22. How would the following be used in calculating the expected sales level expressed in units? Contribution Estimated Contribution Estimated Margin/Unit Operating Loss Margin/Unit Operating Loss a. Denominator Numerator c. Not used Denominator b. Numerator Numerator d. Numerator Denominator  A 23. In cost-volume –earnings analysis, which of the following should be subtracted from fixed cost in the numerator? a. Predicted operating loss. c. Unit contribution margin. b. Predicted operating profit. d. Variable costs.  A 24. Break-even analysis assumes over the relevant range that a. Total costs are unchanged. c. Variable costs are non-linear. b. Selling prices are unchanged. d. Fixed costs are non-linear.  B 25. In using cost-volume-profit analysis to calculate the expected sales level expressed in units, a predicted operating loss would be a. Added to fixed costs in the numerator. b. Added to fixed costs in the denominator. c. Subtracted from fixed costs in the numerator. d. Subtracted from fixed costs in the denominator.  C 26. The major objective of preparing a scatter diagram is to a. Derive an equation to predict future costs b. Perform regression analysis on the results c. Determine the relevant range d. Find the high and low points to use for the high-low method of estimating costs 27. ESSAY QUESTIONS 1. Certain terms are fundamental to cost-volume-earnings analysis. Explain the meaning of each of the following terms. a. Fixed Cost d. Break-even Point b. Variable Costs e. Relevant Range c. Margin of Safety f. Sales Mix

2. Several assumptions are implicit in cost-volume-profit analysis. What are these assumptions? A company is presently using break-even analysis. The president has requested an explanation of this analytical tool. a. What is the break-even point and how it is computed? b. What are the major uses of break-even analysis?

MULTIPLE CHIOCE PROBLEMS

1. During October 2004 , Adam Company had sales of P5,000,000, variable costs of P3,000,000 and fixed costs amounting to P1,500,000 for product M. Assume that cost behavior and unit selling price unchanged during November 2004. In order for Adam to realize operating income of P300,000 from product M for November, sales would have to be a. P3, 750, 000 b. P4, 050, 000 c. P4,500,000 d. P4,800,000  C.

Desired Sales= (1, 500, 000 + 300, 000) / 40% * = 4, 500, 000 CMR *= (5, 000, 000 – 3, 000, 000)/ 5, 000, 000 = 40%*

2. Wilson Company prepared the following preliminary forecast concerning product G for 2004 assuming no expenditure for advertising: Selling price per unit P 10.00 Variable costs P600, 000 Unit sales 100,000 Fixed costs 300,000 Based on a marketed study in December 2003, Wilson estimated that it could increase the unit selling price by 15% and increase the unit sales by 10% if P100,000 were spent on advertising. Assuming that Wilson incorporates these changes in its 2004 forecast, what should be the operating income from product G? a. P175, 000 b. P190, 000 c. P205, 000 d. P365,000  C.

Sales (100, 000 x 110%) x (10 x 115%) Variable cost [110, 000 x (600, 000/ 100, 000)] Contribution margin Fixed costs: (300, 000 + 100, 000) Operating income

1, 265, 000 660, 000 605, 000 400, 000 205, 000

3. Singer, Inc. sells product R for P5 per unit. The fixed costs amounted to P210, 000 and the variable costs are 60% of the selling price. What would be the amount of sales if Singer is to realize a profit of 10% of sales?

a. P700, 000  A.

b.

P525, 000

c.

P472, 500

d.

P420,000

Sales = Variable costs + fixed costs + profit Let x = number of units 5x = .6 (5x) + 210, 000 + .1(5x) 5x = 3.5x + 210, 000 1.5x = 210, 000 = x= 140, 000 units Sales = 140, 000 x 5 = 700, 000

4. Lindsay Corporation reported the following results from sales of 5,000 units of product A for the month of September 2004: Sales P200, 000 Fixed costs P60, 000 Variable costs 120,000 Operating income 20,000 Assume that Lindsay increases the selling price of product A by 10% on October 1, 2004. How many units of product A would have to be sold in October 2004 in order to generate an operating income of P20, 000? a. 4,000 b. 4,300 c. 4,500 d. 5,000  A.

Unit selling price (200, 000 / 5, 000) x 110% Variable cost per unit (120, 000/ 5000) Contribution margin per unit Desired sales (units) = (60, 000 + 20, 000)/ 20

44. 00 24. 00 20. 00 4, 000

5. Warfield Company is planning to sell 100,000 units of product T for P12 a unit. The fixed cost amounts to P280, 000. In order to realize a profit of P200, 000, what would be the variable costs? a. P480, 000 b. P720, 000 c. P900, 000 d. P920,000  B.

Variable costs = sales – fixed costs – profit (100, 000 x 12) – 280, 000 – 200, 000 =

720, 000

6. Thomas Company sells products X, Y, and Z. Thomas sells three units of X for each unit of Z, and two units of Y for each unit of X. The contribution margins are P1.00 per unit of X, P1.50 per unit of Y, and P3.00 per unit of Z. Fixed costs are P600, 000. How many units of X would Thomas sell at the break-even point? a. 40,000 b. 120,000 c. 360,000 d. 400,000  B.

Sales mix x CM per unit = weighted cm per unit PRODUCT X 3 1.00 Y 6 1.50 Z 1 3.00

3.00 9.00 3.00

Package contribution margin Break even units of x =(600, 000/ 15) x 3 =

15.00 120, 000

7. Anthony Company has projected cost of goods sold of P4, 000, 000, including fixed costs of P800, 000. Variable costs are expected to be 75% of net sales. What will be the projected net sales? a. P4, 266, 667 b. P4, 800, 000 c. P5, 333, 333 d. P6,400,000  A.

Net sales = (4, 000, 000 – 800, 000)/ 75% =

4, 266, 667

8. Day Company is a medium-sized manufacturer of lamps. During 2004, a new line called “Twilight” was made available to Day’s customers. The break-even point for sales of twilight is P400, 000 with a contribution margin of 40%. Assuming that the operating profit for the Twilight line for 2004 amounted to P200,000, total sales for 2004 amounted to a. P600, 000 b. P840, 000 c. P900, 000 d. P950,000  C.

Total sales = ( 400, 000 x 40%) + ( 200, 000/ 40%) =

900, 000

9. The Insulation Corporation sells two products, Dee and Wee. Insulation sells these products at a rate of 2 units of Dee to 3 units of Wee. The contribution margin is P4 per unit for Dee and P2 per unit for Wee. Insulation’s fixed costs are P240, 000. What would be the total units sold at the break-even point? a. 140,000 b. 150,000 c. 168,000 d. 180,000  B.

Total units sold: (300, 000 * x 2) + (30, 000* x3) = 150, 000 Package contribution margin = (2x 4) + (2x 3) = 14.00** Composite break even units = (420, 000/ 14**) = 30, 000*

10. The Ship Company is planning to produce two products, Alt and Tude. Ship is planning to sell 100,000 units of Alt at P4 a unit and 200,000 units of Tude at P3 a unit. Variable costs are 70% of sales for Alt and 80% of sales for Tude. In order to realize a total profit of P160,000, total fixed costs would be a. P80, 000 b. P90, 0000 c. P420, 000 d. P600,000  A.

Total sales = (100, 000 x 4) + (200, 000 x3) = Total variable costs = (400, 000 x 70%) + (600, 000 X 80%) Contribution margin Less: Desired profit Total fixed costs

1, 000, 000 720, 000 240, 000 160, 000 80, 000

11. The Seahawk Company is planning to sell 200,000 units of product B. The fixed costs are P400, 000 and the variable costs are 60% of the selling price. In order to realize a profit of P100,000, the selling price per unit would have to be a. P3.75 b. P4.17 c. P5.00 d. P6.25  D.

Unit selling price = (1, 250, 000* / 200, 000) = Desired sales = (400, 000 + 100, 000)/ (100%-60%) =1, 250, 000*

6. 25

Items 12 and 13 are based on the following information: Taylor, Inc. produces only two products, Acdom and Belnom. These account for 60% and 40% of the total sales pesos of Taylor, respectively. Variable costs (as a percentage of sales pesos) are 60% for Acdom and 85% for Belnom. Total fixed costs amount to P150,000. There are no other costs. 12. What is Taylor’s break-even point in pesos? a. P150, 000 b. P214, 286 c. P300, 000  D.

d.

P500,000

Break even sales = ( 150, 000 / 30%) 500,000 Composite CM ratio = 60% x 40%) + (40% x 15%) = 30%*

13. Assuming that the total fixed costs of Taylor increases by 30%, what amount of sales pesos would be necessary to generate a net income of P9, 000? a. P204, 000 b. P464, 000 c. P659, 000 d. P680,000  D.

Desired sales = [(150, 000 x 130%) + 9, 000] / 30% =

680, 000

14. Tice Company is a medium-sized manufacturer of lamps. During the year, a new line called “Horolin” was introduced. The break even point for the sales of Horolin is P200, 000 with a contribution margin of 40%. Assuming that the profit for the Horolin line during the year amounted to P100,000, total sales during the year would have amounted to a. P300, 000 b. P420, 000 c. P450, 000 d. P475,000  C.

Total sales = [( 200, 000 x 40%) + 100, 000] / 40% =

450, 000

15. Information concerning Label Company’s Product A is as follows: Sales P300, 000 Variable Costs 240,000 Fixed Costs

40,000

Assuming that Label increased sales of Product A by 20%, what should be the net income from product A? a. P20, 000 b. P24, 000 c. P32, 000 d. P80,000

 C.

Net income = (300, 000 x 120%) – (360, 000 x 80%) – 40, 000 = 32, 000

16. Dallas Company wishes to market a new product for P1.50 a unit. Fixed costs to manufacture this product are P100, 000 for less than 500,000 units and P150,000 for 500,000 units or more. The contribution margin is 20%. How many units must be sold to realize net income from this product of P100, 000? a. 333,333 b. 500,000 c. 666,667 d. 833,333  D.

Desired sales ( units) = (150, 000 + 100, 000)/ (1.50 x 20%) =

833, 333

17. Jarvis Company has fixed cost of P200,000. It has two products that it can sell, Tetra and Min. Jarvis sells these products at the rate of two units of Tetra to one unit of Min. the contribution margin is P1 per unit of Tetra and P2 per unit of Min. How many units of Min would be sold at break-even point? a. 44,444 b. 50,000 c. 88,888 d. 100,000  B.

Break even units of Min: ( 200, 000 / 4.00 *) x 1 = 50, 000 Package Contribution Margin = (2 x 1) + (1 x 2) = 4. 00*

Items 18, 19 and 20 are based on the following information: FULL TON COMPANY Financial Project for Product USA For the year ended December 31, 2004 Sales Manufacturing Cost: Direct Labor Direct Materials Variable Factory Overhead Fixed Factory Overhead Selling Expenses: Variable Fixed Administrative Expenses: Variable Fixed Operating Income

P10,000 P1,500 1,400 1,000 500

4,000

P 600 1,000 500 1,000

3,000 P 2,500

18. How many units of product USA would have to be sold to break-even? a. 50 b. 58 c. 68 d. 75  A.

Break even units = [(300 + 1, 000 + 1, 000) / (100-50*)] = 50 UNITS

19. What would the operating income be if sales increased by 25%? a. P3, 125 b. P3, 750 c. P4, 000 d. P5, 000  B.

Operating income = (10, 000 x 125%) – (12, 500 x 50%) – 2, 500 = 3, 750

20. What would be the sales at the break-even point if fixed factory overhead increases by P1, 700? a. P6, 700 b. P8, 400 c. P6, 667 d. P9, 200  B.

Break even sales = (2, 500 + 1, 700)/ 50% =

8, 400

21. The Oliver Company plans to market a new product. Based on its market studies, Oliver estimates that it can sell 5,500 units in 2004. The selling price will be P2.00 per unit. Variable costs are estimated to be 40% of the selling price. Fixed costs are estimated to be P6,000. What is the break-even point? a. 3,750 units b, 5,000 units c. 5,500 units d. 7,500 units  B.

Break even units = [ 6, 000 /(2-(2 x 40%)] =

5, 000 units

22. The Breiden Company sells rodaks for P6.00 per unit. Variable costs are P2.00 per unit. Fixed costs are P37, 500. How many rodaks must be sold to realize a profit before income taxes of 15% of sales? a. 9,375 units b. 9,740 units c. 11,029 units d. 12,097 units  D.

Let x = unit sales 6x = 37, 500 + 2x + .15(6x) 6x = 37, 500 + 2.9 x

3.1x = 37, 500 x=

12, 097 units

23. At break-even point of 400 units sold, the variable costs were P400 and the fixed costs were P200. What will the 401st unit sold contribute to profit before income taxes? a. P0.00 b. P0.50 c. P1.00 d. P1.50  B.

Contribution margin per unit = (200/ 400 break even units) = 0.50

24. Oxford Company had sales amounting to P3, 000, 000, variable costs amounting to P1, 800, 000 and fixed costs amounting to P800, 000 for product Brum. What would be the amount of sales pesos at the break-even point?

a. P2, 000, 000  A.

b.

P2, 400, 000

c.

P2, 600, 000

d.

P2,760,000

CM ratio = (3, 000, 000 – 1, 800, 000)/ 3, 000, 000 = 40% Break even sales = (800, 000 / 40%) = 2, 000, 00

25. In planning its operations for 2004 based on a sales forecast of P6,000,000, Wallace, Inc. prepared the following estimated data:

Cost and Expenses Materials Labor Overhead Selling Expenses Administrative Expenses Total

Variable P1, 600, 000 1,400,000 600,000 240,000 60,000 P3, 900,000

Fixed

P 900,000 360,000 140,000 P1, 400,000

What would be the amount of sales pesos at the break-even point? a. P2, 250, 000 b. P3, 500, 000 c. P4, 000,000 d.  C.

P5,300,000

CM ratio = (6, 000, 000 – 3, 900, 000)/ 6, 000, 000 = 35% Break even sales = (1, 400, 000 / 35%) = 4, 000, 000

26. The following data pertains to Nova Company’s cost-volume-profit relationships: Break-even point in units 1,000 Variable costs per unit P500 Total fixed costs P150, 000 How much will be contributed to profit before income taxes by the 1001 st unit sold? a. P650 b. P500 c. P150 d. None  C.

Contribution margin per unit = ( 150, 000 / 1, 000 units) = 150

Items 27 and 28 are based on the following data: The following information pertains to Rica Company: Sales (50,000 units) Factory Overhead: Variable Fixed

P1, 000, 000 40,000 70,000

Materials and Labor P300, 000 Selling and General Expenses: Variable 10,000 Fixed 60,000

27. How much was Rica’s break-even point in number of units?

a. 9,848  C.

b.

18,571

c.

10,000

d.

Selling price per unit ( 1, 000, 000 / 50, 000) = Variable cost per unit: (300, 000 + 40, 000 + 10, 000)/ 50, 000= Contribution margin per unit* Break even point in units = (70, 000 + 60, 000) / 13* =

28. What was Rica’s contribution margin ratio? a. 66% b. 65% c. 59%  B.

26,000

Contribution margin Ratio = ( 13/ 20) =

d.

20 7 13 10, 000

35%

65%

Items 29 and 30 are based on the following data pertaining to two types of products manufactured by Korn Corporation:

Product Y Product Z

Sales Price Per Unit P120 500

Variable Costs Per Unit P70 200

Fixed costs total P300, 000 annually. The expected mix in units is 60% for product Y and 40% for product Z. 29. How much is Korn’s break-even sales in units? a. 857 b. 1,111 c. 2,000  C.

Break even sales in units = ( 300, 000/ 150*)=

2,495

d.

P544,000

2, 000

30. How much is Korn’s break-even sales in pesos? a. P300, 000 b. P420, 000 c. P475, 000  D.

d.

Product Y sales at break even: (2, 000 x 60% ) x 120 = Product Z sales at break even: (2, 000 x 40%) x 500 = Break even sales

144, 000 400, 000 544, 000