Revision Module 7

Module 7 – Cost-Volume-Profit Analysis
Revision materials
TRUE/FALSE
1. Cost-volume-profit analysis may be used for multi-product analysis when the

proportion of different products remains constant.
2. It is assumed in CVP analysis that the unit selling price, unit variable costs, and unit fixed
costs are known and constant.
3. If the selling price per unit is $20 and the contribution margin percentage is 30%, then the
variable cost per unit must be $6.
4. Breakeven point is that quantity of output where total revenues equal total costs.
5. Selling price per unit $30, variable cost per unit $20, and fixed cost per unit $3. When this
company operates above the breakeven point, the sale of one more unit will increase net
income by $7.
6. Sensitivity analysis is a “what-if” technique that managers use to examine how a result will
change if the originally predicted data are not achieved or if an underlying assumption
changes.
7. If a company increases fixed costs, then the breakeven point will be lower.
8. In multiproduct situations when sales mix shifts toward the product with the lowest
contribution margin, the breakeven quantity will decrease.
9. When the operating budget is used as a control device, managers are more likely to be
motivated to budget higher sales than actually anticipated.
10. For merchandising firms, contribution margin will always be a lesser amount than gross
margin.
MULTIPLE CHOICE
1. Which of the following is NOT an assumption of CVP analysis?

a. Total costs can be divided into a fixed component and a component that is
variable with respect to the level of output.
b. When graphed, total costs curve upward.
c. The unit-selling price is known and constant.
d. All revenues and costs can be added and compared without taking into account the
time value of money.
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 2 THROUGH 4.

Kaiser’s Kraft Korner sells a single product. 7,000 units were sold resulting in $70,000 of
sales revenue; $28,000 of variable costs; and $12,000 of fixed costs.
2. Contribution margin per unit is

a. $4.00.
b. $4.29.
c. $6.00.
d. none of the above.
3. Breakeven point in units is

a. 2,000 units.
b. 3,000 units.
c. 5,000 units.
d. none of the above.
4. If sales increase by $25,000, operating income will increase by

a. $10,000.
b. $15,000.
c. $22,200.
d. impossible to compute.
5. At the breakeven point of 200 units, variable costs total $400 and fixed costs total $600.
The 201st unit sold will contribute ___________ to profits.
a. $1
b. $2
c. $3
d. $5
6. Sales total $200,000 when variable costs total $150,000 and fixed costs total $30,000.
The breakeven point in sales dollars is
a. $200,000.
b. $120,000.
c. $ 40,000.
d. $ 30,000.
7. When fixed costs are $100,000 and variable costs are 20% of the selling price, then
breakeven sales are
a. $100,000.
b. $125,000.
c. $500,000.
d. unable to be determined.

Stephanie’s Bridal Shoppe sells wedding dresses. The average selling price of each dress is
$1,000, variable costs $400, and fixed costs $90,000.
8. What is the Bridal Shoppe's operating income when 200 dresses are sold?
a. $30,000
b. $80,000
c. $200,000
d. $100,000
9. How many dresses are sold when operating income is zero?

a. 225 dresses
b. 150 dresses
c. 100 dresses
d. 90 dresses
10. How many dresses must the Bridal Shoppe sell in order to yield after-tax net income of
$18,000, assuming the tax rate is 40%?
a. 200 dresses
b. 170 dresses
c. 150 dresses
d. 145 dresses
11. In multiproduct situations, when sales mix shifts toward the product with the highest
contribution margin then
a. total revenues will decrease.
b. breakeven quantity will increase.
c. total contribution margin will decrease.
d. operating income will increase.
The following information is for Barnett Corporation:
Product X: Revenue $10.00

Variable Cost $2.50
Product Y: Revenue $15.00
Variable Cost $5.00
Total fixed costs $50,000
12. What is the breakeven point, assuming the sales mix consists of two units of Product X
and one unit of Product Y?
a. 1,000 units of Y and 2,000 units of X
b. 1012.5 units of Y and 2,025 units of X
c. 2012.5 units of Y and 4,025 units of X
d. 2,000 units of Y and 4,000 units of X
13. What is the operating income, assuming actual sales total 150,000 units, and the sales
mix is two units of Product X and one unit of Product Y?
a. $1,200,000
b. $1,250,000
c. $1,750,000
d. none of the above
14. If the sales mix shifts to one unit of Product X and two units of Product Y, then the
weighted-average contribution margin will
a. increase per unit.
b. stay the same.
c. decrease per unit.
d. not be determined.
15. If the sales mix shifts to one unit of Product X and two units of Product Y, then the
breakeven point will
a. increase.
b. stay the same.
c. decrease.
d. not be determined.
Solutions
True/False
1. Answer: True
2. Answer: False
It is assumed in CVP analysis that the unit selling price, unit variable costs, and total
fixed costs are known and constant.
3. Answer: False
Then the variable cost per unit must be $14.
4. Answer: True
5. Answer: False
The sale of one more unit will increase net income by $10.
6. Answer: True
7. Answer: False
If a company increases fixed costs, then the breakeven point will be higher.
8. Answer: False
Described is the financial budget part of the master budget, not the operating budget.
9. Answer: False
In multiproduct situations when sales mix shifts toward the product with the lowest
contribution margin, the breakeven quantity will increase.
10. Answer: True

True, because all variable costs are subtracted to compute contribution margin, but only
COGS is subtracted to compute gross margin.
MCQs
1. B
2. C
($70,000 - $28,000) / 7,000 units = $6 per unit
3. A
10X – 4X – 12,000 = 0; X = 2000 units
4. B
[($70,000 - $28,000) / $70,000] x $25,000 = $15,000
5. C
$1,000 - $400 - $600 = 0; Sales ($1,000 / 200) – Variable costs ($400 / 200) = $3 CM
6. B
($200,000- 150,000) / $200,000 = 25% CM%; $30,000 / 0.25 = $120,000 BE sales
7. B
$100,000 / (1- 0.20) = $125,000 in BE sales
8. A
200($1,000) - 200($400) - $90,000 = $30,000
9. B
$1,000N - $400N - $90,000 = 0; $600N = $90,000; N = 150 dresses
10. A
$1,000N - $400N - $90,000 = $18,000/(1 - 0.4); $600N - $90,000 = $30,000; N = 200
units
11. D
12. D
N = units of product Y; and 2N = units of product X;
($10.00 - $2.50)2N + ($15.00 - $5.00)N - $50,000 = 0
$15N + $10N = $50,000
$25N = $50,000
N = 2,000 units
Product Y = 2,000 units; Product X = 4,000 units
13. A
Product X Product Y Total
Sales units 100,000 50,000 150,000
Revenue $1,000,000 $750,000 $1,750,000
Variable costs 250,000 250,000 500,000
Contribution margin $750,000 $500,000 $1,250,000
Fixed costs 50,000
$1,200,000
14. A
15. C

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Module 7 – Cost-Volume-Profit Analysis

1. Cost-volume-profit analysis may be used for multi-product analysis when the

1. Which of the following is NOT an assumption of CVP analysis?

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 2 THROUGH 4.

2. Contribution margin per unit is

3. Breakeven point in units is

4. If sales increase by $25,000, operating income will increase by

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 8 THROUGH 10.

9. How many dresses are sold when operating income is zero?

Product X: Revenue $10.00

10. Answer: True

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