CHAPTER 3

COST-VOLUME-PROFIT ANALYSIS
TRUE/FALSE
1. To perform cost-volume-profit analysis, a company must be able to separate costs
into fixed and variable components.
Answer: True/False
2. It is assumed in C! analysis t"at t"e unit sellin# price, unit variable costs, and
unit fixed costs are $no%n and constant.
Answer: True/False
&. In C! analysis, variable costs include direct variable costs, but do not include
indirect variable costs.
Answer: True/False
'. In C! analysis, an assumption is made t"at t"e total revenues are linear %it"
respect to output units, but t"at total costs are non-linear %it" respect to output
units.
Answer: True/False
(. If t"e sellin# price per unit is )2* and t"e contribution mar#in percenta#e is &*+,
t"en t"e variable cost per unit must be ),.
Answer: True/False
,. T"e sellin# price per unit is )&*, variable cost per unit )2*, and fixed cost per unit is
)&. -"en t"is company operates above t"e brea$even point, t"e sale of one more
unit %ill increase net income by )..
Answer: True/False
.. If t"e sellin# price per unit of a product is )(*, variable costs per unit are )'*, and
total fixed costs are )(*,***, a company must sell ,,*** units to ma$e a tar#et
operatin# income of )1*,***.
Answer: True/False
&-1
/. 0n increase in t"e tax rate %ill increase t"e brea$even point.
Answer: True/False
1. If variable costs per unit increase, t"en t"e brea$even point %ill decrease.
Answer: True/False
1*. If a company increases fixed costs, t"en t"e brea$even point %ill be lo%er.
Answer: True/False
11. Companies t"at are substitutin# fixed costs for variable costs receive a #reater per
unit return above t"e brea$even point.
Answer: True/False
12. 0 company %it" a "i#" de#ree of operatin# levera#e is at lesser ris$ durin#
do%nturns in t"e economy.
Answer: True/False
1&. If a company "as a de#ree of operatin# levera#e of 2.*, t"at means a 2*+ increase
in sales %ill result in a '*+ increase in variable costs.
Answer: True/False
1'. In multiproduct situations %"en sales mix s"ifts to%ard t"e product %it" t"e
lo%est contribution mar#in, t"e brea$even 2uantity %ill decrease.
Answer: True/False
1(. If a company3s sales mix is 2 units of product 0 for every & units of product 4,
and t"e company sells 1,*** units in total of bot" products, only 2** units of
product 0 %ill be sold.
Answer: True/False
1,. T"ere is no uni2ue brea$even point %"en t"ere are multiple cost drivers.
Answer: True/False
&-2
1.. -"en t"ere are multiple cost drivers t"e simple C! formula of 5 6 7FC 8
9I:/C;< can still be used.
Answer: True/False
1/. =ervice sector companies %ill never report #ross mar#in on an income
statement.
Answer: True/False
11. For merc"andisin# firms, contribution mar#in %ill al%ays be a lesser amount
t"an #ross mar#in.
Answer: True/False
2*. If >o"nson3s ;anufacturin# presented a Financial 0ccountin# Income =tatement
emp"asi?in# #ross mar#in s"o%in# operatin# income of )1/,***, a Contribution
Income =tatement emp"asi?in# contribution mar#in %ould s"o% a different
operatin# income.

Answer: True/False
MULTIPLE CHOICE
1. Cost-volume-profit analysis is used !@I;0@IAB by mana#ement:
a. as a plannin# tool
b. for control purposes
c. to prepare external financial statements
d. to attain accurate financial results
2. Cost-volume-profit analysis assumes all of t"e follo%in# CDCC!T:
a. all costs are variable or fixed
b. units manufactured e2ual units sold
c. total variable costs remain t"e same over t"e relevant ran#e
d. total fixed costs remain t"e same over t"e relevant ran#e
&. -"ic" of t"e follo%in# items is E9T an assumption of C! analysisF
a. Total costs can be divided into a fixed component and a component t"at
is variable %it" respect to t"e level of output.
b. -"en #rap"ed, total costs curve up%ard.
c. T"e unit-sellin# price is $no%n and constant.
d. 0ll revenues and costs can be added and compared %it"out ta$in# into
account t"e time value of money.
&-&
'. -"ic" of t"e follo%in# items is E9T an assumption of C! analysisF
a. Costs may be separated into separate fixed and variable components.
b. Total revenues and total costs are linear in relation to output units.
c. <nit sellin# price, unit variable costs, and unit fixed costs are $no%n and
remain constant.
d. !roportion of different products %ill remain constant %"en multiple
products are sold.
(. 9peratin# income calculations use:
a. net income
b. income tax expense
c. cost of #oods sold and operatin# costs
d. nonoperatin# revenues and nonoperatin# expenses
,. -"ic" of t"e follo%in# statements about net income 7EI: is T@<CF
a. EI 6 operatin# income plus nonoperatin# revenue.
b. EI 6 operatin# income plus operatin# costs.
c. EI 6 operatin# income less income taxes.
d. EI 6 operatin# income less cost of #oods sold.
.. -"ic" of t"e follo%in# is true about t"e assumptions underlyin# basic C!
analysisF
a. 9nly sellin# price is $no%n and constant.
b. 9nly sellin# price and variable cost per unit are $no%n and constant.
c. 9nly sellin# price, variable cost per unit, and total fixed costs are $no%n
and constant.
d. =ellin# price, variable cost per unit, fixed cost per unit, and total fixed
costs are $no%n and constant.
/. T"e contribution income statement:
a. reports #ross mar#in
b. is allo%ed for external reportin# to s"are"olders
c. cate#ori?es costs as eit"er direct or indirect
d. can be used to predict future profits at different levels of activity
1. Contribution mar#in e2uals:
a. revenues minus period costs
b. revenues minus product costs
c. revenues minus variable costs
d. revenues minus fixed costs
&-'
1*. =c"uppener Company sells its only product for )1/ per unit, variable production
costs are ), per unit, and sellin# and administrative costs are )& per unit. Fixed
costs for 1*,*** units are )1*,***. T"e contribution mar#in is:
a. )12 per unit
b. )1 per unit
c. )11 per unit
d. )/ per unit
11. T"e contribution income statement "i#"li#"ts:
a. #ross mar#in
b. products costs and period costs
c. different product lines
d. variable and fixed costs
12. Fixed costs e2ual )12,***, unit contribution mar#in e2uals )2*, and t"e number
of units sold e2ual 1,,**. 9peratin# income is:
a. )12,***
b. )2*,***
c. )&2,***
d. )'*,***
1&. If sellin# price per unit is )&*, variable costs per unit are )2*, total fixed costs are
)1*,***, t"e tax rate is &*+, and t"e company sells (,*** units, net income is:
a. )12,***
b. )1',***
c. )2/,***
d. )'*,***
1'. 0t t"e brea$even point of 2** units, variable costs total )'** and fixed costs total
),**. T"e 2*1st unit sold %ill contribute GGGGGGGGGGG to profits.
a. )1
b. )2
c. )&
d. )(
1(. T"e brea$even point is t"e activity level %"ere:
a. revenues e2ual fixed costs
b. revenues e2ual variable costs
c. contribution mar#in e2uals variable costs
d. revenues e2ual t"e sum of variable and fixed costs
&-(
1,. 4rea$even point is:
a. total costs divided by variable costs per unit
b. contribution mar#in per unit divided by revenue per unit
c. fixed costs divided by contribution mar#in per unit
d. t"e sum of fixed and variable costs divided by contribution mar#in per unit
1.. =ales total )2**,*** %"en variable costs total )1(*,*** and fixed costs total
)&*,***. T"e brea$even point in sales dollars is:
a. )2**,***
b. )12*,***
c. ) '*,***
d. ) &*,***
1/. T"e brea$even point in C! analysis is defined as:
a. %"en fixed costs e2ual total revenues
b. fixed costs divided by t"e contribution mar#in per unit
c. revenues less variable costs e2ual operatin# income
d. %"en t"e contribution mar#in percenta#e e2uals total revenues divided by
variable costs
11. -"ic" of t"e follo%in# statements about determinin# t"e brea$even point is
F0A=CF
a. 9peratin# income is e2ual to ?ero.
b. Contribution mar#in - fixed costs is e2ual to ?ero.
c. @evenues e2ual fixed costs plus variable costs.
d. 4rea$even revenues e2ual fixed costs divided by t"e variable cost per unit.
2*. -"at is t"e brea$even point in units, assumin# a productHs sellin# price is )1**,
fixed costs are )/,***, unit variable costs are )2*, and operatin# income is
)&2,***F
a. 1** units
b. &** units
c. '** units
d. (** units
21. If unit outputs exceed t"e brea$even point:
a. t"ere is a loss
b. total sales revenue exceeds total costs
c. t"ere is a profit
d. 4ot" total sales revenue exceeds total costs and t"ere is a profit.
22. Io% many units %ould "ave to be sold to yield a tar#et operatin# income of
)22,***, assumin# variable costs are )1( per unit, total fixed costs are )2,***,
and t"e unit sellin# price is )2*F
a. ',/** units
&-,
b. ','** units
c. ',*** units
d. &,,** units
2&. If t"e brea$even point is 1** units and eac" unit sells for )(*, t"en:
a. sellin# 12( units %ill result in a profit
b. sales of )',*** %ill result in a loss
c. sales of )(,*** %ill result in ?ero profit
d. 0ll of t"ese ans%ers are correct.
2'. If brea$even point is 1** units, eac" unit sells for )&*, and fixed costs are )1,***,
t"en on a #rap" t"e:
a. total revenue line and t"e total cost line %ill intersect at )&,*** of revenue
b. total cost line %ill be ?ero at ?ero units sold
c. revenue line %ill start at )1,***
d. 0ll of t"ese ans%ers are correct.
2(. -"en fixed costs are )1**,*** and variable costs are 2*+ of t"e sellin# price,
t"en brea$even sales are:
a. )1**,***
b. )12(,***
c. )(**,***
d. indeterminable
TIC F9AA9-IEJ IEF9@;0TI9E 0!!AIC= T9 5<C=TI9E= /1 TI@9<JI /':
@uben intends to sell "is customers a special round-trip airline tic$et pac$a#e. Ie
is able to purc"ase t"e pac$a#e from t"e airline carrier for )1(* eac". T"e round-
trip tic$ets %ill be sold for )2** eac" and t"e airline intends to reimburse @uben
for any unsold tic$et pac$a#es. Fixed costs include )(,*** in advertisin# costs.
2,. -"at is t"e contribution mar#in per tic$et pac$a#eF
a. )(*
b. )1**
c. )1(*
d. )2**
2.. Io% many tic$et pac$a#es %ill @uben need to sell to brea$ evenF
a. &' pac$a#es
b. (* pac$a#es
c. 1** pac$a#es
d. 1(* pac$a#es
&-.
2/. Io% many tic$et pac$a#es %ill @uben need to sell in order to ac"ieve ),*,*** of
operatin# incomeF
a. &,. pac$a#es
b. '&' pac$a#es
c. 1,1** pac$a#es
d. 1,&** pac$a#es
21. For every )2(,*** of tic$et pac$a#es sold, operatin# income %ill increase by:
a. ),,2(*
b. )12,(**
c. )1/,.(*
d. an indeterminable amount
TIC F9AA9-IEJ IEF9@;0TI9E 0!!AIC= T9 5<C=TI9E= &* 0EK &1:
T"e follo%in# information is for Eic"ols Company:
=ellin# price )1(* per unit
ariable costs )1* per unit
Total fixed costs )&**,***
&*. T"e number of units t"at Eic"ols Company must sell to reac" tar#eted operatin#
income of )1*,*** is:
a. (,*** units
b. ,,(** units
c. &,&&' units
d. ',&&' units
&1. If tar#eted operatin# income is )12*,***, t"en tar#eted sales revenue is:
a. )1,*(*,***
b. ).**,***
c. )(**,***
d. ).(*,***
&2. In C! analysis, focusin# on tar#et net income rat"er t"an operatin# income:
a. %ill increase t"e brea$even point
b. %ill decrease t"e brea$even point
c. %ill not c"an#e t"e brea$even point
d. does not allo% calculation of brea$even point
&&. To determine t"e effect of income tax on a decision, mana#ers s"ould evaluate:
a. tar#et operatin# income
b. contribution mar#in
c. tar#et net income
d. sellin# price
&-/
&'. If t"e tax rate is t, it is possible to calculate planned operatin# income by:
a. dividin# net operatin# income by t
b. dividin# net operatin# income by 1 t
c. multiplyin# net operatin# income by t
d. multiplyin# net operatin# income by 1 t
&(. If =prin#field @ealtor plans an operatin# income of )1*(,*** and t"e tax rate is
&*+, t"en =prin#field3s planned net income s"ould be:
a. )&1,(**
b. ).&,(**
c. )1&,,(**
d. )1./,(**
&,. 0ssume only t"e specified parameters c"an#e in a cost-volume-profit analysis. If
t"e contribution mar#in increases by )2 per unit, t"en operatin# profits %ill:
a. also increase by )2 per unit
b. increase by less t"an )2 per unit
c. decrease by )2 per unit
d. be indeterminable
&.. T"e Tessmer Company "as fixed costs of )'**,*** and variable costs are .(+ of
t"e sellin# price. To reali?e profits of )1**,*** from sales of (**,*** units, t"e
sellin# price per unit:
a. must be )1.**
b. must be )1.&&
c. must be )'.**
d. is indeterminable
&/. T"e brea$even point decreases if:
a. t"e variable cost per unit increases
b. total fixed costs decrease
c. t"e contribution mar#in per unit decreases
d. t"e sellin# price per unit decreases
&1. T"e strate#y ;9=T li$ely to reduce t"e brea$even point %ould be to:
a. increase bot" t"e fixed costs and t"e contribution mar#in
b. decrease bot" t"e fixed costs and t"e contribution mar#in
c. decrease t"e fixed costs and increase t"e contribution mar#in
d. increase t"e fixed costs and decrease t"e contribution mar#in
'*. GGGGGGGGGG is t"e process of varyin# $ey estimates to identify t"ose estimates
t"at are t"e most critical to a decision.
a. T"e #rap" met"od
&-1
b. 0 sensitivity analysis
c. T"e de#ree of operatin# levera#e
d. =ales mix
'1. 0ssume only t"e specified parameters c"an#e in a C! analysis. T"e contribution
mar#in percenta#e increases %"en:
a. total fixed costs increase
b. total fixed costs decrease
c. variable costs per unit increase
d. variable costs per unit decrease
'2. -"ic" of t"e follo%in# %ill increase a companyHs brea$even pointF
a. increasin# variable cost per unit
b. increasin# contribution mar#in per unit
c. reducin# its total fixed costs
d. increasin# t"e sellin# price per unit
'&. 0ssume t"ere is a reduction in t"e sellin# price and all ot"er C! parameters
remain constant. T"is c"an#e %ill:
a. increase contribution mar#in
b. reduce fixed costs
c. increase variable costs
d. reduce operatin# income
''. 0ssume t"ere is an increase in advertisin# expenditures and all ot"er C!
parameters remain constant. T"is c"an#e %ill:
a. reduce operatin# income
b. reduce contribution mar#in
c. increase variable costs
d. increase sellin# price
'(. T"e mar#in of safety is t"e difference bet%een:
a. bud#eted expenses and brea$even expenses
b. bud#eted revenues and brea$even revenues
c. actual operatin# income and bud#eted operatin# income
d. actual contribution mar#in and bud#eted contribution mar#in
',. Trail"ound Company operates on a contribution mar#in of &*+ and currently "as
fixed costs of )2**,***. Eext year, sales are proLected to be )1,***,***. 0n
advertisin# campai#n is bein# evaluated t"at costs an additional )&*,***. Io%
muc" %ould sales "ave to increase to Lustify t"e additional expenditureF
a. ),*,***
b. )1*,***
c. )1**,***
d. )&**,***
&-1*
TIC F9AA9-IEJ IEF9@;0TI9E 0!!AIC= T9 5<C=TI9E= '.
TI@9<JI (1:
Eancy3s Eic"e sells a sin#le product. /,*** units %ere sold resultin# in )/*,*** of
sales revenue, )2*,*** of variable costs, and )1*,*** of fixed costs.
'.. T"e contribution mar#in percenta#e is:
a. 12.(+
b. 2(.*+
c. &..(+
d. .(.*+
'/. T"e brea$even point in total sales dollars is:
a. )'*,***
b. )1&,&&'
c. )1**,***
d. Eone of t"ese ans%ers are correct.
'1. To ac"ieve )1**,*** in operatin# income, sales must total:
a. )''*,***
b. )1,*,***
c. )1&*,***
d. Eone of t"ese ans%ers are correct.
(*. If variable costs decrease by )1 per unit, t"e ne% brea$even point is:
a. 1,(&1 units.
b. '12 units.
c. )11,.,( in total sales dollars.
d. Eone of t"ese ans%ers are correct.
(1. If a c"an#e is made in one parameter of C! analysis, it is an example of
a. sensitivity analysis
b. incremental bud#etin#
c. operatin# levera#e
d. multiple cost drivers
&-11
TIC F9AA9-IEJ IEF9@;0TI9E 0!!AIC= T9 5<C=TI9E= (2
TI@9<JI (':
C"eaney ;anufacturin# produces a sin#le product t"at sells for )2**. ariable
costs per unit e2ual )(*. T"e company expects total fixed costs to be )12*,***
for t"e next mont" at t"e proLected sales level of 2,*** units. In an attempt to
improve performance, mana#ement is considerin# a number of alternative actions.
Cac" situation is to be evaluated separately.
(2. -"at is t"e current brea$even point in terms of number of unitsF
a. /** units
b. 1** units
c. 2,'** units
d. Eone of t"ese ans%ers are correct.
(&. =uppose t"at mana#ement believes t"at a )2',*** increase in t"e mont"ly
advertisin# expense %ill result in a considerable increase in sales. =ales must
increase by "o% muc" to Lustify t"is additional expenditureF
a. &2* units
b. '/* units
c. 1,* units
d. Eone of t"ese ans%ers are correct.
('. =uppose t"at mana#ement believes t"at a 2*+ reduction in t"e sellin# price %ill
result in a 2*+ increase in sales. If t"is proposed reduction in sellin# price is
implemented:
a. operatin# income %ill decrease by )&,,***
b. operatin# income %ill increase by )&,,***
c. operatin# income %ill decrease by )/*,***
d. operatin# income %ill increase by )'',***
((. -"ic" of t"e follo%in# statements is F0A=CF
a. Ier decision %ill determine t"e ris$ s"e faces.
b. Contribution mar#in %ill vary dependin# upon t"e option c"osen.
c. 9ne of t"e options %ill allo% ;ars"a to brea$ even, even if s"e doesnHt sell
any li#"ts.
d. 9peratin# income %ill be t"e #reatest for 9ption &.
(,. In a company %it" lo% operatin# levera#e:
a. fixed costs are "i#" and variable costs are lo%
b. lar#e c"an#es in sales volume result in small c"an#es in net income
c. t"ere is a "i#"er possibility of net loss t"an a "i#"er-levera#ed firm
d. less ris$ is assumed t"an in a "i#"ly levera#ed firm
(.. Fixed costs:
a. are considered variable costs over t"e lon# run
b. provide less operatin# levera#e
&-12
c. reduce t"e ris$ of loss
d. are #rap"ed as a steeply sloped line
(/. -"en a #reater proportion of costs are fixed costs, t"en:
a. a small increase in sales results in a small decrease in operatin# income
b. %"en demand is lo% t"e ris$ of loss is "i#"
c. %"en demand is "i#" t"e brea$even point is increased
d. a decrease in sales reduces t"e cost per unit
TIC F9AA9-IEJ IEF9@;0TI9E 0!!AIC= T9 5<C=TI9E= (1
TI@9<JI ,2:
T"e follo%in# information is for 4arnett Corporation:
i. !roduct D: @evenue )1*.** ariable Cost )2.(*
ii. !roduct B: @evenue )1(.** ariable Cost )(.**
iii. Total fixed costs )(*,***
(1. -"at is t"e brea$even point assumin# t"e sales mix consists of t%o units of
!roduct D and one unit of !roduct BF
a. 1,*** units of B and 2,*** units of D
b. 1*12.( units of B and 2,*2( units of D
c. 2*12.( units of B and ',*2( units of D
d. 2,*** units of B and ',*** units of D
,*. -"at is t"e operatin# income, assumin# actual sales total 1(*,*** units, and t"e
sales mix is t%o units of !roduct D and one unit of !roduct BF
a. )1,2**,***
b. )1,2(*,***
c. )1,.(*,***
d. Eone of t"ese ans%ers are correct.
,1. If t"e sales mix s"ifts to one unit of !roduct D and t%o units of !roduct B, t"en
t"e %ei#"ted-avera#e contribution mar#in %ill:
a. increase per unit
b. stay t"e same
c. decrease per unit
d. be indeterminable
,2. If t"e sales mix s"ifts to one unit of !roduct D and t%o units of !roduct B, t"en
t"e brea$even point %ill:
a. increase
b. stay t"e same
&-1&
c. decrease
d. be indeterminable
,&. In multiproduct situations, %"en sales mix s"ifts to%ard t"e product %it" t"e
"i#"est contribution mar#in t"en:
a. total revenues %ill decrease
b. brea$even 2uantity %ill increase
c. total contribution mar#in %ill decrease
d. operatin# income %ill increase
,'. If a company "as a de#ree of operatin# levera#e of 2.* and sales increase by 2(+,
t"en
a. total variable costs %ill increase by (*+
b. total variable costs %ill not c"an#e
c. profit %ill increase by 2*+
d. profit %ill increase by (*+
,(. If a company %ould li$e to increase its de#ree of operatin# levera#e it s"ould:
a. increase its inventories relative to its receivables
b. increase its receivables relative to its inventories
c. increase its variable costs relative to its fixed costs
d. increase its fixed costs relative to its variable costs
&-1'
,,. ;ultiple cost drivers:
a. "ave only one revenue driver
b. can utili?e t"e simple C! formula
c. "ave no uni2ue brea$even point
d. are t"e result of multiple products
,.. 0 nonprofit or#ani?ation aids t"e unemployed by supplementin# t"eir incomes by
)&,2** annually, %"ile t"ey see$ ne% employment s$ills. T"e or#ani?ation "as
fixed costs of )2'*,*** and t"e bud#eted appropriation for t"e year totals
)/**,***. Io% many individuals can receive financial assistance t"is yearF
a. 1.( people
b. 1&* people
c. 1** people
d. .( people
,/. Ielpin# Iands is a nonprofit or#ani?ation t"at supplies electric fans durin# t"e
summer for individuals in need. Fixed costs are )2**,***. T"e fans cost )2*.**
eac". T"e or#ani?ation "as a bud#eted appropriation of )'/*,***. Io% many
people can receive a fan durin# t"e summerF
a. 12,*** people
b. 1',*** people
c. 2',*** people
d. &',*** people
,1. Jross mar#in is:
a. sales revenue less variable costs
b. sales revenue less cost of #oods sold
c. contribution mar#in less fixed costs
d. contribution mar#in less variable costs
.*. 1'1. In t"e merc"andisin# sector:
a. only variable costs are subtracted to determine #ross mar#in
b. fixed over"ead costs are subtracted to determine #ross mar#in
c. fixed over"ead costs are subtracted to determine contribution mar#in
d. all operatin# costs are subtracted to determine contribution mar#in
.1. 1(*. In t"e manufacturin# sector:
a. only variable costs are subtracted to determine #ross mar#in
b. fixed over"ead costs are subtracted to determine #ross mar#in
c. fixed over"ead costs are subtracted to determine contribution mar#in
d. all operatin# costs are subtracted to determine contribution mar#in
.2. 1(1. To determine contribution mar#in use:
a. only variable manufacturin# costs
b. only fixed manufacturin# costs
&-1(
c. bot" variable and fixed manufacturin# costs
d. bot" variable manufacturin# costs and variable nonmanufacturin# costs
.&. 1(2. M<ncertaintyM may be defined as:
a. t"e possibility t"at an actual amount %ill be t"e same as an expected
amount
b. t"e possibility t"at an actual amount %ill be eit"er "i#"er or lo%er t"an t"e
expected amount
c. t"e possibility t"at a bud#eted amount %ill be "i#"er t"an t"e estimated
amount
d. t"e possibility t"at t"e bud#eted amount %ill be lo%er t"an t"e estimated
amount
.'. 1(&. Cvents, as distin#uis"ed from actions, %ould include:
a. personnel policy options
b. decisions on time sc"edules
c. decisions on direct material vendors
d. a financial recession
.(. Cxpected monetary value may be defined as:
a. t"e probability t"at eac" outcome %ill occur
b. t"e probability t"at eac" outcome %ill not occur
c. t"e %ei#"ted avera#e of t"e outcomes %it" t"e probability of eac"
outcome servin# as t"e %ei#"t
d. t"e avera#e of all possible outcomes
&-1,
EXERCISES AND PROBLEMS
.,. Jilley, Inc., sells a sin#le product. T"e companyHs most recent income statement is
#iven belo%.
=ales 7',*** units: )12*,***
Aess variable expenses 7,/,*** :
Contribution mar#in (2,***
Aess fixed expenses 7'*,*** :
Eet income ) 12,***
Required:
a. Contribution mar#in per unit is ) GGGGGGGGGGGGGGG per unit
b. If sales are doubled to )2'*,***,
total variable costs %ill e2ual ) GGGGGGGGGGGGGGG
c. If sales are doubled to )2'*,***,
total fixed costs %ill e2ual ) GGGGGGGGGGGGGGG
d. If 1* more units are sold, profits %ill increase by ) GGGGGGGGGGGGGGG
e. Compute "o% many units must be sold to brea$ even. N GGGGGGGGGGGGGGG
f. Compute "o% many units must be sold
to ac"ieve profits of )2*,***. N GGGGGGGGGGGGGGG
&-1.
... 4lan$ins"ip, Inc., sells a sin#le product. T"e companyHs most recent income
statement is #iven belo%.
=ales )2**,***
Aess variable expenses 712*,*** :
Contribution mar#in /*,***
Aess fixed expenses 7(*,*** :
Eet income ) &*,***
Required:
a. Contribution mar#in ratio is GGGGGGGGGG +
b. 4rea$even point in total sales dollars is ) GGGGGGGGGGGGGGG
c. To ac"ieve )'*,*** in net income, sales must total ) GGGGGGGGGGGGGGG
d. If sales increase by )(*,***, net income %ill increase by ) GGGGGGGGGGGGGGG
./. In 2**', Jrant Company "as sales of )/**,***, variable costs of )2**,***, and
fixed costs of )&**,***. In 2**(, t"e company expects annual property taxes to
decrease by )1(,***.
Required:
a. Calculate operatin# income and t"e brea$even point for 2**'.
b. Calculate t"e brea$even point for 2**(.
.1. 4er"annan3s Cellular sells p"ones for )1**. T"e unit variable cost per p"one is
)(* plus a sellin# commission of 1*+. Fixed manufacturin# costs total )1,2(*
per mont", %"ile fixed sellin# and administrative costs total )2,(**.
Required:
a. -"at is t"e contribution mar#in per p"oneF
b. -"at is t"e brea$even point in p"onesF
c. Io% many p"ones must be sold to earn pretax income of ).,(**F
&-1/
/*. T"e Ioliday Card Company, a producer of specialty cards, "as as$ed you to
complete several calculations based upon t"e follo%in# information:
Income tax rate &*+
=ellin# price per unit ),.,*
ariable cost per unit )(.2/
Total fixed costs )',,2**.**
Required:
a. -"at is t"e brea$even point in cardsF
b. -"at sales volume is needed to earn an after-tax net income of )1&,*2/.'*F
c. Io% many cards must be sold to earn an after-tax net income of )1/,'/*F
/1. @oyer Corporation #at"ered t"e follo%in# information:
ariable costs )1'(,***
Income tax rate '*+
Contribution-mar#in ratio &*+
Required:
a. Compute total fixed costs assumin# a brea$even volume in dollars of
)1,&(*,***.
b. Compute sales volume in dollars to produce an after-tax net income of
)1*/,***.
/2. 0lex ;iller, Inc., sells car batteries to service stations for an avera#e of )&* eac".
T"e variable cost of eac" battery is )2* and mont"ly fixed manufacturin# costs
total )1*,***. 9t"er mont"ly fixed costs of t"e company total )/,***.
Required:
a. -"at is t"e brea$even point in batteriesF
b. -"at is t"e mar#in of safety, assumin# sales total ),*,***F
c. -"at is t"e brea$even level in batteries, assumin# variable costs increase by
2*+F
d. -"at is t"e brea$even level in batteries, assumin# t"e sellin# price #oes up by
1*+, fixed manufacturin# costs decline by 1*+, and ot"er fixed costs decline
by )1**F
&-11
/&. Furniture, Inc., sells lamps for )&*. T"e unit variable cost per lamp is )22. Fixed
costs total )1,,**.
Required:
a. -"at is t"e contribution mar#in per lampF
b. -"at is t"e brea$even point in lampsF
c. Io% many lamps must be sold to earn a pretax income of )/,***F
d. -"at is t"e mar#in of safety, assumin# 1,(** lamps are soldF
&-2*
/'. 5uery Company sells pillo%s for )2(.** eac". T"e manufacturin# cost, all
variable, is )1* per pillo%. T"e company is plannin# on rentin# an ex"ibition
boot" for bot" display and sellin# purposes at t"e annual crafts and art
convention. T"e convention coordinator allo%s t"ree options for eac"
participatin# company. T"ey are:
1. payin# a fixed boot" fee of )(,*1*, or
2. payin# an )',*** fee plus 1*+ of revenue made at t"e convention, or
&. payin# 2*+ of revenue made at t"e convention.
Required:
a. Compute t"e brea$even sales in pillo%s of eac" option.
b. -"ic" option s"ould 5uery Company c"oose, assumin# sales are expected to
be /** pillo%sF/(. Oaren Iefner, a florist, operates
retail stores in several s"oppin# malls. T"e avera#e sellin# price of an
arran#ement is )&* and t"e avera#e cost of eac" sale is )1/. 0 ne% mall is
openin# %"ere Oaren %ants to locate a store, but t"e location mana#er is not
sure about t"e rent met"od to accept. T"e mall operator offers t"e follo%in#
t"ree options for its retail store rentals:
1. payin# a fixed rent of )1(,*** a mont", or
2. payin# a base rent of )1,*** plus 1*+ of revenue received, or
&. payin# a base rent of )',/** plus 2*+ of revenue received up to a
maximum rent of )2(,***.
Required:
a. For eac" option, compute t"e brea$even sales and t"e mont"ly rent paid at
brea$-even.
b. 4e#innin# at ?ero sales, s"o% t"e sales levels at %"ic" eac" option is
preferable up to (,*** units.
/(. Burus ;anufacturin# Company produces t%o products, D and B. T"e follo%in#
information is presented for bot" products:
X Y
=ellin# price per unit )&, )2'
ariable cost per unit 2/ 12
Total fixed costs are )2&',***.
Required:
a. Calculate t"e contribution mar#in for eac" product.
b. Calculate brea$even point in units of bot" D and B if t"e sales mix is & units
of D for every unit of B.
c. Calculate brea$even volume in total dollars if t"e sales mix is 2 units of D
for every & units of B.

&-21
/,. 4ob3s Textile Company sells s"irts for men and boys. T"e avera#e sellin# price
and variable cost for eac" product are as follo%s:
Men B!"#
=ellin# !rice )2/./* =ellin# !rice )2'.**
ariable Cost )2*.'* ariable Cost )1,./*
Fixed costs are )&/,'**.
Required:
a. -"at is t"e brea$even point in units for eac" type of s"irt, assumin# t"e sales
mix is 2:1 in favor of menHs s"irtsF
b. -"at is t"e operatin# income, assumin# t"e sales mix is 2:1 in favor of menHs
s"irts, and sales total 1,*** s"irtsF
/.. ;ount Carmel Company sells only t%o products, !roduct 0 and !roduct 4.
!roduct 0 !roduct 4 Total
=ellin# price )'* )(*
ariable cost per unit )2' )'*
Total fixed costs )/'*,***

;ount Carmel sells t%o units of !roduct 0 for eac" unit it sells of !roduct 4.
;ount Carmel faces a tax rate of &*+.
Required:
a. -"at is t"e brea$even point in units for eac" product assumin# t"e sales mix
is 2 units of !roduct 0 for eac" unit of !roduct 4F
b. -"at is t"e brea$even point if ;ount Carmel3s tax rate is reduced to 2(+,
assumin# t"e sales mix is 2 units of !roduct 0 for eac" unit of !roduct 4F
c. Io% many units of eac" product %ould be sold if ;ount Carmel desired an
after-tax net income of ).&,(**, facin# a tax rate of &*+F
//. 4allpar$ Concessions currently sells "ot do#s. Kurin# a typical mont", t"e stand
reports a profit of )1,*** %it" sales of )(*,***, fixed costs of )21,***, and
variable costs of )*.,' per "ot do#.
Eext year, t"e company plans to start sellin# nac"os for )& per unit. Eac"os %ill
"ave a variable cost of )*..2 and ne% e2uipment and personnel to produce nac"os
%ill increase mont"ly fixed costs by )/,/*/. Initial sales of nac"os s"ould total
(,*** units. ;ost of t"e nac"o sales are anticipated to come from current "ot do#
purc"asers, t"erefore, mont"ly sales of "ot do#s are expected to decline to
)2*,***.
&-22
0fter t"e first year of nac"o sales, t"e company president believes t"at "ot do#
sales %ill increase to )&&,.(* a mont" and nac"o sales %ill increase to .,(** units
a mont".
Required:
a. Ketermine t"e mont"ly brea$even sales in dollars before addin# nac"os.
b. Ketermine t"e mont"ly brea$even sales durin# t"e first year of nac"os sales,
assumin# a constant sales mix of 1 "otdo# and 2 units of nac"os.
1*. =tep"anie3s =tuffed 0nimals reported t"e follo%in#:
@evenues )1,***
ariable manufacturin# costs ) 2**
ariable nonmanufacturin# costs ) 2&*
Fixed manufacturin# costs ) 1(*
Fixed nonmanufacturin# costs ) 1'*
Required:
a. Compute contribution mar#in.
b. Compute #ross mar#in.
c. Compute operatin# income.
CRITICAL THIN$IN%
11. Cxplain %"en a mana#er %ould use cost-volume-profit analysis and sensitivity
analysis.
12. -"at is meant by t"e term brea$even pointF -"y s"ould a mana#er be concerned
about t"e brea$even pointF
&-2&
1&. 0uto Tires "as been in t"e tire business for four years. It rents a buildin# but
o%ns all of its e2uipment. 0ll employees are paid a fixed salary except for t"e
busy season 70pril P >une:, %"en temporary "elp is "ired by t"e "our. <tilities
and ot"er operatin# c"ar#es remain fairly constant durin# eac" mont" except
t"ose in t"e busy season.
=ellin# prices per tire avera#e ).( except durin# t"e busy season. 4ecause a lar#e
number of customers buy tires prior to %inter, discounts run above avera#e durin#
t"e busy season. 0 1(+ discount is #iven %"en t%o tires are purc"ased at one
time. Kurin# t"e busy mont"s, sellin# prices per tire avera#e ),*.
T"e president of 0uto Tires is some%"at displeased %it" t"e companyHs
mana#ement accountin# system because t"e cost be"avior patterns displayed by
t"e mont"ly brea$even c"arts are inconsistentQ t"e busy mont"sH c"arts are
different from t"e ot"er mont"s of t"e year. T"e president is never sure if t"e
company "as a satisfactory mar#in of safety or if it is Lust above t"e brea$even
point.
Required:
a. -"at is %ron# %it" t"e accountantHs computationsF
b. Io% can t"e information be presented in a better format for t"e presidentF
1'. Kolp" and Cvan started t"e KC @estaurant in 2*D&. T"ey rented a buildin#,
bou#"t e2uipment, and "ired t%o employees to %or$ full time at a fixed mont"ly
salary. <tilities and ot"er operatin# c"ar#es remain fairly constant durin# eac"
mont".
Kurin# t"e past t%o years, t"e business "as #ro%n %it" avera#e sales increasin#
1+ a mont". T"is situation pleases bot" Kolp" and Cvan, but t"ey do not
understand "o% sales can #ro% by 1+ a mont" %"ile profits are increasin# at an
even faster pace. T"ey are afraid t"at one day t"ey %ill %a$e up to increasin#
sales but decreasin# profits.
Required:
Cxplain %"y t"e profits "ave increased at a faster rate t"an sales. <se t"e terms
variable costs and fixed costs in your response.
1(. -"at effect, and %"y, %ould a decrease in t"e tax rate "ave on a company3s
brea$even pointF
1,. Freddie3s company "as mostly fixed costs and alerie3s company "as mostly
variable costs. -"ic" company "as t"e #reatest ris$ of a net lossF Cxplain %"y
1.. =uppose a company decided to automate a production line. Cxplain %"at effects
t"is %ould "ave on a company3s cost structure usin# C! terminolo#y. Could
t"ese c"an#es "ave any possible ne#ative effect on t"e firmF

1/. !ennsylvania alve Company ma$es t"ree types of valves: =peedy Flo%, =ure
Flo%, and Fine Flo%. Cac" of t"e t"ree products "as a different contribution
&-2'
mar#in, and t"e proportions of t"e t"ree products sold "ave remained steady over
t"e years. Io% could !ennsylvania valve compute a brea$even point #iven t"is
situationF
&-2(