C

o
s
t
V
o
l
u
m
e
P
r
o
f
i
t
A
n
a
l
y
s
i
s

C
o
s
t
v
o
l
u
m
e
p
r
o
f
i
1

t analysis is
used
PRIMARILY
by
management:

c
o
s
t
s

as a planning
tool

a
r
e
f
i
x
e
d
.

for control
purposes

to prepare
external
financial
statements

c
a
l
c
u
l
a
t
i
o
n

to attain
accurate
financial
results
A
A
58)
One of the
first steps to
take when
using CVP
analysis to
help make
decisions is:

o
f
t
h
e

finding out
where the
total costs
line intersects
with the total
revenues line
on a graph.

d
e
g
r
e
e
o
f

identifying
which costs
are variable
and which

o
p
e
2

rating
leverage for
the company.

W
h
i
c
h

estimating
how many
products will
have to be
sold to make
a decent
profit.
A
B
59)

o
f
t
h
e

Cost-volumeprofit
analysis
assumes all
of the
following
EXCEPT:

f
o
l
l
o
w
i
n
g

all costs are

variable or
fixed

i
t
e
m
s

units
manufacture
d equal units
sold

i
s

total variable
costs remain
the same
over the
relevant
range

N
O
T
a
n
a
s
s
u
m
p
t
i

total fixed
costs remain
the same
over the
relevant
range
A
3

on of CVP
analysis?

C
o
s
t
s

Total costs
can be
divided into
a fixed
component
and a
component
that is
variable with
respect to the
level of
output.

m
a
y
b
e
s
e
p
a
r
a
t
e
d

When
graphed,
total costs
curve
upward.

The unitselling price

is known and
constant.

i
n
t
o
s
e
p
a
r
a
t
e

All revenues
and costs can
be added and
compared
without
taking into
account the
time value of
money.
A
B
61)

f
i
x
e
d

Which of the
following
items is NOT
an
assumption
of CVP
analysis?

a
n
d
v
a
4

riable
components.

o
n
l
y

Total
revenues and
total costs are
linear in
relation to
output units.

f
a
c
t
o
r
s

Unit selling
price, unit
variable
costs, and
unit fixed
costs are
known and
remain
constant.

t
h
a
t
c
a
n
i
n
f
l
u
e
n
c
e

Proportion of
different
products will
remain
constant
when
multiple
products are
sold.
A
C
62)

a
c
h
a
n
g
e

A revenue
driver is
defined as:

any factor
that affects
costs and
revenues

i
n
s
e
l
l
i
n
g

any factor
that affects
revenues
5

price

r
e
v
e
n
u
e
.

only factors
that can
influence a
change in
demand
A
B
63)

N
I

Operating
income
calculations
use:

=
o
p
e
r
a
t
i
n
g

net income

income tax
expense

cost of goods
sold and
operating
costs

i
n
c
o
m
e

nonoperating
revenues and
nonoperating
expenses
A
C
64)

p
l
u
s
o
p
e
r
a
t
i
n
g

Which of the
following
statements
about net
income (NI)
is TRUE?

NI =
operating
income plus
nonoperating

c
o
s
6

ts.

S
e
l
l
i
n
g

NI =
operating
income less
income taxes.

p
r
i
c
e
,

NI =
operating
income less
cost of goods
sold.
A
C
65)

v
a
r
i
a
b
l
e

Which of the
following is
true about
the
assumptions
underlying
basic CVP
analysis?

c
o
s
t

Only selling
price is
known and
constant.

p
e
r
u
n
i
t
,

Only selling
price and
variable cost
per unit are
known and
constant.

f
i
x
e
d

Only selling
price,
variable cost
per unit, and
total fixed
costs are
known and
constant.

c
o
s
t
p
7

er unit, and
total fixed
costs are
known and
constant.
A
C
66)

r
e
v
e
n
u
e
s

The
contribution
income
statement:

m
i
n
u
s

reports gross
margin

p
r
o
d
u
c
t

is allowed for
external
reporting to
shareholders

c
o
s
t
s

categorizes
costs as
either direct
or indirect

can be used
to predict
future profits
at different
levels of
activity
A
D
67)
Contribution
margin
equals:

revenues
minus period
costs

revenues
minus
variable costs

b
r
e
a
k
e
v
e
n

revenues
minus fixed
costs
A
C
68)

p
o
i
n
t

The selling
price per unit
less the
variable cost
per unit is
the:

w
i
l
l

fixed cost per

unit

d
e
c
r
e
a
s
e

gross margin

margin of
safety

contribution
margin per
unit
A
D
112

t
h
e
b
r
e
a
k
e
v
e
n

In CVP
analysis,
focusing on
target net
income
rather than
operating
income:

p
o
i
n
t

will increase
the
9

will not
change the
breakeven
point

p
l
a
n
n
e
d

does not
allow
calculation of
breakeven
point
A
C
113

o
p
e
r
a
t
i
n
g
i
n
c
o
m
e

To determine
the effect of
income tax
on a decision,
managers
should
evaluate:

b
y
:

target
operating
income

d
i
v
i
d
i
n
g

contribution
margin

target net
income

n
e
t

selling price
A
C
114

o
p
e
r
a
t
i

If the tax rate

is t, it is
possible to
calculate
10

ng income by
t

B
)

dividing net
operating
income by 1t

multiplying
net operating
income by t

multiplying
net operating
income by 1t
A
B
115

If Springfield
Realtor plans
an operating
income of
$105,000 and
the tax rate is
30%, then
Springfield's
planned net
income
should be:

$31,500

$73,500

$136,500

$178,500
A
B
Explanati
on:
11

$105,000 ($105,000 .
3) = $73,500

T
h
e

116

T
e
s
s
m
e
r

Assume only
the specified
parameters
change in a
cost-volumeprofit
analysis. If
the
contribution
margin
increases by
$2 per unit,
then
operating
profits will:

C
o
m
p
a
n
y
h
a
s

also increase
by $2 per
unit

f
i
x
e
d

increase by
less than $2
per unit

c
o
s
t
s

decrease by
$2 per unit

o
f

be
indeterminab
le
A
A
117

$
4
0
0
,
0
0
0
a
n
d
12

variable
costs are 75%
of the selling
price. To
realize
profits of
$100,000
from sales of
500,000 units,
the selling
price per
unit:

(
$
4
0
0
,
0
0
0
+
$
1
0
0
,
0
0
0
)

must be $1.00

must be $1.33

must be $4.00

/
is
indeterminab
le
A
C
Explanati
on:

.
2
5
=
$
2
,
0
0
0
,
0
0
0

C)

i
n
s
a
l
e
s
/
13

500,000 units
= $4 per unit

i
n
c
r
e
a
s
e

118

The
breakeven
point
decreases if:

b
o
t
h

the variable
cost per unit
increases

t
h
e

total fixed
costs
decrease

f
i
x
e
d

the
contribution
margin per
unit
decreases

c
o
s
t
s

the selling
price per unit
decreases
A
B
119

a
n
d
t
h
e

(CPA
adapted,
November
1992) The
strategy
MOST likely
to reduce the
breakeven
point would
be to:

c
o
n
t
r
i
b
u
t
i
o
n
14

margin

decrease both
the fixed
costs and the
contribution
margin

l
e
v
e
r
a
g
e

decrease the
fixed costs
and increase
the
contribution
margin

S
a
l
e
s
m
i
x

increase the
fixed costs
and decrease
the
contribution
margin
A
C
120

A
s
s
u
m
e

________ is
the process
of varying
key estimates
to identify
those
estimates
that are the
most critical
to a decision.

o
n
l
y
t
h
e

The graph
method

s
p
e
c
i
f
i
e

A sensitivity
analysis

The degree of
operating
15

d parameters
change in a
CVP
analysis. The
contribution
margin
percentage
increases
when:

r
e
d
u
c
i
n
g
i
t
s

total fixed
costs increase

t
o
t
a
l

total fixed
costs
decrease

f
i
x
e
d

variable costs
per unit
increase

variable costs
per unit
decrease
A
D
122

c
o
s
t
s

Which of the
following
will increase
a company's
breakeven
point?

i
n
c
r
e
a
s
i
n
g

increasing
variable cost
per unit

t
h
e

increasing
contribution
margin per
unit

s
e
l
16

ling price per

unit
A
A

A
s
s
u
m
e

123

t
h
e
r
e

Assume
there is a
reduction in
the selling
price and all
other CVP
parameters
remain
constant.
This change
will:

i
s
a
n
i
n
c
r
e
a
s
e

increase
contribution
margin

reduce fixed
costs

i
n

increase
variable costs

a
d
v
e
r
t
i
s
i
n
g

reduce
operating
income
A
D
124

e
x
p
e
n
d
i
t
17

ures and all

other CVP
parameters
remain
constant.
This change
will:

a
c
t
u
a
l
o
p
e
r
a
t
i
n
g

reduce
operating
income

reduce
contribution
margin

i
n
c
o
m
e

increase
variable costs

increase
selling price
A
A
125

a
n
d
b
u
d
g
e
t
e
d

The margin
of safety is
the difference
between:

budgeted
expenses and
breakeven
expenses

o
p
e
r
a
t
i
n
g

budgeted
revenues and
breakeven
revenues

i
n
c
o
18

me

$
3
0
0
,
0
0
0

actual
contribution
margin and
budgeted
contribution
margin
A
B
126

Trailhound
Company
operates on a
contribution
margin of
30% and
currently has
fixed costs of
$200,000.
Next year,
sales are
projected to
be $1,000,000.
An
advertising
campaign is
being
evaluated
that costs an
additional
$30,000. How
much would
sales have to
increase to
justify the
additional
expenditure?

C
)

$60,000

$90,000

$100,000
19

$30,000 / .3
= $100,000

t
o
t
a
l

163

In
multiproduct
situations,
when sales
mix shifts
toward the
product with
the highest
contribution
margin then:

v
a
r
i
a
b
l
e
c
o
s
t
s

total
revenues will
decrease

w
i
l
l

breakeven
quantity will
increase

i
n
c
r
e
a
s
e

total
contribution
margin will
decrease

operating
income will
increase
A
D
164

b
y
5
0
%

If a company
has a degree
of operating
leverage of
2.0 and sales
increase by
25%, then:

20

total variable
costs will not
change

M
u
l
t
i
p
l
e

profit will
increase by
20%

profit will
increase by
50%
A
D
165

c
o
s
t
d
r
i
v
e
r
s
:

If a company
would like to
increase its
degree of
operating
leverage it
should:

increase its
inventories
relative to its
receivables

h
a
v
e

increase its
receivables
relative to its
inventories

o
n
l
y
o
n
e

increase its
variable costs
relative to its
fixed costs

r
e
v
e
n
u
e

increase its
fixed costs
relative to its
variable costs
A
D

d
21

river
1
7
5

can utilize
the simple
CVP formula

p
e
o
p
l
e

have no
unique
breakeven
point

are the result

of multiple
products
A
C
167

1
3
0
p
e
o
p
l
e

A nonprofit
organization
aids the
unemployed
by
supplementi
ng their
incomes by
$3,200
annually,
while they
seek new
employment
skills. The
organization
has fixed
costs of
$240,000 and
the budgeted
appropriatio
n for the year
totals
$800,000.
How many
individuals
can receive
financial
assistance
this year?

1
0
0
p
e
o
p
l
e

7
5
p
e
o
p
l
e
22

A
A
Explanati
on:

$
8
0
0
,
0
0
0

A)

$
3
,
2
0
0
N
$
2
4
0
,
0
0
0
=
0
;
$
5
6
0
,
0
0
0
=
$
3
,
2
0
23

0N; N = 175
people
168

$
4
8
0
,
0
0
0

Helping
Hands is a
nonprofit
organization
that supplies
electric fans
during the
summer for
individuals
in need.
Fixed costs
are $200,000.
The fans cost
$20.00 each.
The
organization
has a
budgeted
appropriatio
n of $480,000.
How many
people can
receive a fan
during the
summer?

$
2
0
N
$
2
0
0
,
0
0
0
=
0
;
$
2
8
0
,
0
0
0

12,000 people

14,000 people

24,000 people

34,000 people
A
B
Explanati
on:

$
2
0
N
;

B)

N
=
24

14,000
people

2
2
,
5
0
0

169

Mount
Carmel
Company
sells only two
products,
Product A
and Product
B.

Selling price
Variable cost per unit
Total fixed costs

u
n
i
t
s

Product A
$40
$24

Product B
$50
$40

Mount
Carmel sells
two units of
Product A for
each unit it
sells of
Product B.
Mount
Carmel faces
a tax rate of
30%. Mount
Carmel
desires a net
after-tax
income of
$73,500. The
breakeven
point in units
would be:

o
f
P
r
o
d
u
c
t
A
a
n
d
4
5
,
0
0
0
u
n
i
t
s

21,750 units
of Product A
and 43,500
units of
Product B

o
f
p
r
o
d
u
25

ct B

D
e
s
i
r
e
d

43,500 units
of Product A
and 21,750
units of
Product B

p
r
e
t
a
x

45,000 units
of Product A
and 22,500
units of
Product B
A
D
Explanati
on:

n
e
t
i
n
c
o
m
e

D)

$
7
3
,
5
0
0
/
(
1
.
0
.
3
)
=
$
26

105,000
Weighted
contribution
margin [2
($40 - $24)] +
[1 ($50 $40)] = $42
Breakeven
point in
composite
units is
($105,000 +
$840,000) /
$42 = 22,500
22,500
composite
units is (2
22,500) =
45,000 units
of A and
(1 22,500)
= 22,500
units of B

I
n
t
h
e
m
e
r
c
h
a
n
d
i
s
i
n
g

170

s
e
c
t
o
r
:

Gross margin
is:

sales revenue
less variable
costs

sales revenue
less cost of
goods sold

contribution
margin less
fixed costs

contribution
margin less
variable costs
A
B
27

only variable
costs are
subtracted to
determine
gross margin

d
e
t
e
r
m
i
n
e

fixed
overhead
costs are
subtracted to
determine
gross margin

g
r
o
s
s

fixed
overhead
costs are
subtracted to
determine
contribution
margin

m
a
r
g
i
n

all operating
costs are
subtracted to
determine
contribution
margin
A
A
172

f
i
x
e
d
o
v
e
r
h
e
a
d

In the
manufacturin
g sector:

only variable
costs are
subtracted to
determine
gross margin

c
o
s
t
s
a
r
e

fixed
overhead
costs are
subtracted to

s
28

ubtracted to
determine
contribution
margin

d
e
f
i
n
e
d

all operating
costs are
subtracted to
determine
contribution
margin
A
B
173

a
s
:

t
h
e

To determine
contribution
margin use:

p
o
s
s
i
b
i
l
i
t
y

only variable
manufacturin
g costs

only fixed
manufacturin
g costs

t
h
a
t

both variable
and fixed
manufacturin
g costs

a
n

both variable
manufacturin
g costs and
variable
nonmanufact
uring costs
A
D
174

a
c
t
u
a
l
a
m
o
u
n
t

"Uncertainty"
may be
29

will be the
same as an
expected
amount

d
e
c
i
s
i
o
n
s

the
possibility
that an actual
amount will
be either
higher or
lower than
the expected
amount

o
n
t
i
m
e

the
possibility
that a
budgeted
amount will
be higher
than the
estimated
amount

s
c
h
e
d
u
l
e
s

the
possibility
that the
budgeted
amount will
be lower than
the estimated
amount
A
B
175

d
e
c
i
s
i
o
n
s

Events, as
distinguished
from actions,
would
include:

o
n
d
i
r
e
c
t

personnel
policy
options
30

material
vendors

b
e
t
h
e

a financial
recession
A
D
176

e
x
p
e
c
t
e
d

Expected
monetary
value may be
defined as:

m
o
n
e
t
a
r
y

the
probability
that each
outcome will
occur

the
probability
that each
outcome will
not occur

v
a
l
u
e

the weighted
average of
the outcomes
with the
probability of
each
outcome
serving as
the weight

f
o
r
t
h
e

the average
of all possible
outcomes
A
C
177

f
o
l
l
o
w
i
n
g

What would

d
a
31

ta using the
probability
method?
Probability
Cash Inflows

0
.
2
0
(
$
1
0
0
,
0
0
0
)
+

$20,000

0
.
3
0
(
$
8
0
,
0
0
0
)

$94,000

$53,000

$30,000
A
C
Explanati
on:

C)

0
.
1
5
(
$
6
0
,
0
0
0
)
=
$
5
32

3,000
178

$
2
0
0
,
0
0
0

Lobster
Liquidators
will make
$500,000 if
the fishing
season
weather is
good,
$200,000 if
the weather
is fair, and
would
actually lose
$50,000 if the
weather is
poor during
the season. If
the weather
service gives
a 40%
probability of
good
weather, a
25%
probability of
fair weather,
and a 35%
probability of
poor
weather,
what is the
expected
monetary
value for
Lobster
Liquidators?

B
)

$500,000

$232,500

$267,500
33

0.40($500,000
)+
0.25($200,000
) + 0.35($5,0000) =
$232,500

34