Exercises & Questions on Chapter 2 (CVP Analysis)

Exercises & Questions on Chapter 2 (CVP Analysis) 1. If the contribution margin is not sufficient to cover fixed expenses: A) Total profit equals total expenses. B) Contribution margin is negative. C) A loss occurs. D) Variable expenses equal contribution margin. Answer: C 2. Which of the following would not affect the break-even point? A) Number of units sold B) Variable expense per unit C) Total fixed expense D) Selling price per unit Answer: A 3. If the degree of operating leverage is 4, then a one percent change in quantity sold should result in a four percent change in: A) Unit contribution margin. B) Revenue. C) Variable expense. D) Net operating income. Answer: D 4. Which of the following is an assumption underlying standard CVP analysis? A) In multiproduct companies, the sales mix is constant. B) In manufacturing companies, inventories always change. C) The price of a product or service is expected to change as volume changes. D) Fixed expenses will change as volume increases. Answer: A 5. Sorin Inc., a company that produces and sells a single product, has provided its contribution format income statement for January. Sales (4,200 units) Variable expenses Contribution margin Fixed expenses Net operating income $ $ 155,400 100,800 54,600 42,400 12,200 If the company sells 4,600 units, its total contribution margin should be closest to: A) $54,600 B) $59,800 C) $69,400 D) $13,362 Page 1 of 7 Answer: B Explanation: Selling price per unit = Sales ÷ Quantity sold = $155,400 ÷ 4,200 units = $37 per unit Variable expenses per unit = Variable expenses ÷ Quantity sold Variable expenses per unit = $100,800 ÷ 4,200 units = $24 per unit Unit CM = Selling price per unit – Variable expenses per unit = $37 per unit – $24 per unit = $13 per unit Total CM = Unit CM × Quantity sold = $13 per unit × 4,600 units = $59,800 6. A Corporation has provided the following contribution format income statement. Assume that the following information is within the relevant range. Sales (3,000 units) Variable expenses Contribution margin Fixed expenses Net operating income $ $ 180,000 108,000 72,000 62,400 9,600 The contribution margin ratio is closest to: A) 67% B) 40% C) 33% D) 60% Answer: B Explanation: CM ratio = Contribution margin ÷ Sales = $72,000 ÷ $180,000 = 40% 7. Pioneer Corporation has provided the following contribution format income statement. Assume that the following information is within the relevant range. Sales (4,000 units) Variable expenses Contribution margin Fixed expenses Net operating income $ $ Page 2 of 7 240,000 156,000 84,000 81,900 2,100 The break-even point in dollar sales is closest to: A) $234,000 B) $237,900 C) $156,000 D) $0 Answer: A Explanation: CM ratio = Contribution margin ÷ Sales = $84,000 ÷ $240,000 = 35% Dollar sales to break even = Fixed expenses ÷ CM ratio = $81,900 ÷ 35% = $234,000 8. Mishoe Corporation has provided the following contribution format income statement. Assume that the following information is within the relevant range. Sales (1,000 units) Variable expenses Contribution margin Fixed expenses Net operating income $ $ 50,000 32,500 17,500 12,250 5,250 The break-even point in unit sales is closest to: A) 0 units B) 895 units C) 700 units D) 650 units Answer: C Explanation: Selling price per unit ($50,000 ÷ 1,000 units) Variable cost per unit ($32,500 ÷ 1,000 units) Unit contribution margin $ 50.00 32.50 $ 17.50 Unit sales to break even = Fixed expenses ÷ Unit CM = $12,250 ÷ $17.50 per unit = 700 units 9. Casio Corporation has provided the following contribution format income statement. Assume that the following information is within the relevant range. Sales (7,000 units) Variable expenses Contribution margin Fixed expenses Net operating income $ $ Page 3 of 7 210,000 136,500 73,500 67,200 6,300 The number of units that must be sold to achieve a target profit of $31,500 is closest to: A) 42,000 units B) 16,400 units C) 35,000 units D) 9,400 units Answer: D Explanation: Selling price per unit ($210,000 ÷ 7,000 units) Variable cost per unit ($136,500 ÷ 7,000 units) Unit contribution margin $ 30.00 19.50 $ 10.50 Unit sales to attain a target profit = (Target profit + Fixed expenses) ÷ Unit CM = ($31,500 + $67,200) ÷ $11 per unit = $98,700 ÷ $10.50 per unit = 9,400 units 10. Stockmaster Corporation has provided the following contribution format income statement. Assume that the following information is within the relevant range. Sales (8,000 units) Variable expenses Contribution margin Fixed expenses Net operating income $ $ 320,000 192,000 128,000 121,600 6,400 The margin of safety in dollars is closest to: A) $6,400 B) $16,000 C) $121,600 D) $128,000 Answer: B Explanation: CM ratio = Contribution margin ÷ Sales = $128,000 ÷ $320,000 = 40% Dollar sales to break even = Fixed expenses ÷ CM ratio = $121,600 ÷ 40% = $304,000 Margin of safety in dollars = Total budgeted (or actual) sales - Break-even sales = $320,000 − $304,000 = $16,000 Page 4 of 7 11. Leader Corporation has provided the following contribution format income statement. Assume that the following information is within the relevant range. Sales (9,000 units) Variable expenses Contribution margin Fixed expenses Net operating income $ $ 270,000 202,500 67,500 63,750 3,750 The margin of safety percentage is closest to: A) 75% B) 1% C) 6% D) 24% Answer: C Explanation: CM ratio = Contribution margin ÷ Sales = $67,500 ÷ $270,000 = 25% Dollar sales to break even = Fixed expenses ÷ CM ratio = $63,750 ÷ 25% = $255,000 Margin of safety in dollars = Total budgeted (or actual) sales - Break-even sales = $270,000 − $255,000 = $15,000 Margin of safety percentage = Margin of safety in dollars ÷ Total budgeted (or actual) sales = $15,000 ÷ $270,000 = 6% 12. The February contribution format income statement of A Corporation appears below: Sales Variable expenses Contribution margin Fixed expenses Net operating income $ $ The degree of operating leverage is closest to: A) 0.27 B) 6.79 C) 3.70 Page 5 of 7 211,200 96,000 115,200 84,100 31,100 D) 0.15 Answer: C Explanation: Degree of operating leverage = Contribution margin ÷ Net operating income = $115,200 ÷ $31,100 = 3.70 13. Alfa Corporation's operating leverage is 10.8. If the company's sales increase by 14%, its net operating income should increase by about: A) 151.2% B) 14.0% C) 77.1% D) 10.8% Answer: A Explanation: Percentage change in net operating income = Degree of operating leverage × Percentage change in sales = 10.8 × 14% = 151.2% 14. Sunrise Corporation manufactures and sells two types of beach towels, standard and deluxe. Sunrise expects the following operating results next year: Standard $ 450,000 $ 360,000 Total sales Total variable expenses Deluxe $ 50,000 $ 20,000 Sunrise expects to have a total of $57,600 in fixed expenses next year. What is Sunrise's overall break-even point next year in sales dollars? A) $72,000 B) $144,000 C) $192,000 D) $240,000 Answer: D Explanation: Total sales Total variable expenses Total contribution margin Standard $ 450,000 360,000 $ 90,000 Deluxe $ 50,000 20,000 $ 30,000 CM ratio = Contribution margin ÷ Sales = $120,000 ÷ $500,000 = 0.24 Page 6 of 7 Total $ 500,000 380,000 $ 120,000 Dollar sales to break even = Fixed expenses ÷ CM ratio = $57,600 ÷ 0.24 = $240,000 15. The following data pertains to activity and maintenance cost for two recent periods: Activity level (units) Maintenance cost 8,000 $ 34,000 $ 7,000 31,500 Maintenance cost is a mixed cost with both fixed and variable components. Using the high-low method, the cost formula for maintenance cost is: A) Y = $4.25 X B) Y = $14,000 + $2.50 X C) Y = $2,500 + $4.25 X D) Y = $4.50 X Page 7 of 7