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Financial and Managerial Accounting: The Basis for Business Decisions, 12/e

Cost-Volume-Profit Analysis

# Multiple Choice Quiz

Consider the following:
Total of Total of Total of
Units Cost A Cost B Cost C
1,000 \$10,000 \$10,000 \$10,000
2,000 10,000 20,000 14,000
3,000 10,000 30,000 18,000
4,000 10,000 40,000 22,000

 1 Which of the following are true about the each of the costs? A) Cost A is a fixed cost. B) Cost B is a variable cost. C) Cost C is a variable cost. D) Cost B is a semivariable cost. E) A and B are true.

 2 At the point at which the total revenue line intersects the total fixed cost line in a graphic presentation of break-even point, the area above this intersection is which of the following? A) Profit area B) Profit area and variable costs beyond variable costs at break even C) Operating income D) Variable costs E) Margin of safety 3 The selling price of Product A is \$15. The variable costs to manufacture and sell the product are \$6. What is the contribution margin ratio? A) 60% B) 40% C) 35% D) 50% E) 80% 4 Target operating income is \$450,000 and fixed costs are \$60,000. The sales price per unit is \$15, with a contribution margin of 40%. How many sales units are required to achieve the target operating income? A) 100,000 units B) 85,000 units C) 30,000 units D) 34,000 units E) None of the above. 5 Target operating income is \$450,000 and fixed costs are \$60,000. The sales price per unit is \$15, with a contribution margin of 40%. What is the sales volume in dollars required to achieve the target operating income? A) \$1,400,000 B) \$750,000 C) \$510,000 D) \$474,000 E) \$1,275,000 6 The contribution margin ratio is 40%. Operating income is \$320,000. What is the margin of safety? A) \$800,000 B) \$128,000 C) \$672,000 D) Cannot be computed from information provided E) None of the above 7 Product A sells for \$24 and has a contribution margin ratio of 25%. Sales are expected to decline by 10,000 units over the next accounting period. What will be the loss in operating income? A) \$240,000 B) \$250,000 C) \$25,000 D) \$60,000 E) \$75,000 8 Fixed costs of \$50,000 are expected to increase 20%. The contribution margin per unit of \$6 on a sales price of \$18 is expected to decrease by 25%. With a projected operating income of \$300,000, what must be the projected sales? A) \$1,081,081 B) \$1,400,000 C) \$1,440,000 D) \$720,000 E) \$1,240,000 9 The current sales price is \$80 per unit. Variable costs are expected to increase from \$65.00 to \$67.50 per unit. Fixed costs of \$300,000 will not change. How many additional sales units are required in order to maintain an operating income of \$360,000? A) 8,000 B) 8,800 C) 10,800 D) 12,000 E) 2,800 10 Operating income is \$240,000, fixed costs are \$54,000, and 52,000 units are sold. What is the contribution margin per unit to the nearest cent? A) \$5.50 B) \$4.65 C) \$4.62 D) Cannot be determined from the information provided E) None of the above 11 Rock-a-Way Gravel purchases raw gravel in 20-ton lots from which it manufactures 4 grades of gravel, which consists of its sales mix. The gravel grades are: 5 tons of Decorative Stone, 8 tons of Road Stone, 4 tons of Pea Gravel, and 3 tons of Construction Gravel. The contribution margin ratio on each product is, respectively, 50%, 40%, 60%, and 75%. What is the average contribution margin ratio for every 20 tons of gravel sold? A) 56.25% B) 51.75% C) 75.0% D) Greater than 75% E) Less than 50%

Consider the following:
Total Total
Date Units Produced Cost of A
January 10,000 \$14,000
February 12,600 15,040
March 13,400 15,360
April 11,500 14,360

 12 What is the fixed cost component of the cost? Use the high-low method of analysis to determine your answer. A) \$10,000 B) \$14,000 C) \$ 8,000 D) \$12,000 E) \$ 9,500 13 Which of the following is not an assumption underlying cost-volume-profit analysis? A) Sales price per unit is assumed to be constant. B) Fixed costs are assumed to remain constant at all levels of sales within a relevant range of activity. C) Variable costs are assumed to remain constant as a percentage of sales revenue. D) If more than one product is sold, the proportion of the various products sold is assumed to remain constant. E) All the above are true. 14 The sales volume in units can be determined by dividing a denominator into the total of fixed costs plus the target operating income. What is the denominator? A) Unit contribution margin B) Margin of safety C) Contribution margin ratio D) Unit sales price E) Sales 15 Operating income can be determined by multiplying the contribution margin ratio by what other factor? A) Unit contribution margin B) Margin of safety C) Variable costs per unit D) Unit sales price E) Change in sales volume 16 A change in operating income can be determined by multiplying the contribution margin ratio by what other factor? A) Unit contribution margin B) Margin of safety C) Variable costs per unit D) Unit sales price E) Change in sales volume